Building Equity Valuation models

- Persistent systems
Equity Research Analysis
This is an analysis typically done by Equity Analysts or Brokerage houses

It looks to evaluate the attractiveness of a company

Basis this, decisions are taken relating to buying / holding / selling stock of that
company

Objective of the financial model is therefore to answer

1. What is the Intrinsic value of the stock
• To do this we calculate Intrinsic value using Fundamental approach
2. Is the intrinsic value > Current market price and by what %
Schema of Valuation model
Sequence of steps
Select a
company

Take Collect
investment historical
decision data

Forecast
Calculate
revenue and
value
cost drivers

Forecast
Balance Sheet
and Cash Flow
Sourcing Historical data
➢ Listed companies publish historical data on their websites in the form of
Annual Reports

➢ Unlisted companies do not publish such information. However, they may

provide the same on demand to potential investors (E.g., angel funds,
individual investors etc.)

➢ We will focus on Listed companies for now, since their valuation is of interest
to most if not all financial institutions and stock-market investors

➢ Annual reports and other historical information can usually be found under
the “Investors” or “Investor information” links
➢ Located in either the top or bottom navigation bar on websites
Key sections of interest in AR’s
1. Chairman’s speech
• Vision and mission of the company → “Why we exist”

2. Director’s report
• Operational highlights for the year → “Hit’s and Misses”

3. Management discussion and analysis (MDA)

• A paragraph on each line item in the FS’s → “Cause and effect”

4. Industry report
• Sector view of expected demand and supply → “Outlook”

5. Financial statements (IS/BS/CFS)

• Data for current and previous year → “Specific details”
How sections help an analyst
1. Chairman’s speech → Strategic direction, new opportunity areas

2. Director’s report → Areas for operational efficiency improvement

3. MDA → Key drivers for each item, basis for building forward assumptions

4. Industry report → Economic outlook (E.g., Bullish / Stable / Recessionary)

5. Financial statements (IS/BS/CFS) → Modelling building blocks

The case
It is the 1st quarter of 2019

You are working as a Financial Analyst with a large Mutual Fund

The Fund Manager has approached you and asked you to evaluate a technology
company called Persistent Systems (https://www.persistent.com/)

You have been given a 2-week deadline to submit a buy / not buy
recommendation
Your initial tasks
1. Download the case material from your Learning Platform (1 excel + 5 AR’s)
2. Go through key sections of the 2018 report to understand what the company
does and its outlook
3. Add missing historical information for the period 2013-2018 in the excel
• Update Income statement (IS), Balance sheet (BS) and Cash Flow Statement (CFS) sheets
• These missing rows of data are marked in dark yellow (as shown below)

E.g. Fill this row

with data from the
Annual Reports