Purpose of Valuation

Transaction Planning

Statutory Compliance
 Key drivers of Valuation
Macro factors Industry and sector
1)Economic scenario 1)Economy- Boom vs Bust
2)Investment patterns in sector 2)Emerging vs Dying sector
3)Government Role 3)Manufacturing vs Service
4)Fin. Inst Banks role 4)Structured vs Traditional

Micro factors Regulations

1)Nature of Product/Service 1)SEBI Takeover regulations
2)Business life cycles 2) Banking mergers-RBI role
3)Seasonal nature 3)Stock exchange guidelines
4)Growing vs Maturity 4) Companies Act
 Valuation Who does/needs
CA(Chartered Accountant) Firms
Valuation Firms/companies/specialists
Merchant Bankers
PE investors
Venture Capitalists
Banks/FIIs
Corporate Houses and Finance professionals
Large Brokerage Houses
Portfolio managers
Real Estate Firms
Jewellery /Precious metals/Precious stone dealers
 Business valuation methods
Historical cost
Current cost
Economic valuation
Asset valuation
Market valuation
Major categories of Equity valuation models

PRESENT VALUE MODELS (DCF)

Estimate intrinsic value as the present value of expected future benefits

MULTIPLIER MODELS

Estimate intrinsic value based on multiple of some fundamental variable

ASSET BASED MODELS

Estimate intrinsic value based on estimated values of Assets and Liabilities

 Present value models
The simplest present value model is the
dividend discount model
Price=PV of Future dividends + PV of Terminal
Value
In practice FCFE models are often used
FCFE=CFO FCinv +Net borrowing
Value=PV of all future FCFEs
 Multiplier Models
Price multiple is a ratio that compares a companys share price
with some monetary flow/value for evaluation purposes.
Price-Earnings ratio(P/E)
Trailing
Forward/leading/Estimated
(Companies with relatively low P/E ratios tend to outperform
companies with high P/E ratios.)
Price-to-Book ratio(P/Bv)
Bv= (A-L)/No of shares outstanding
Price to sales ratio(P/S)
Price to cash flow ratio(P/Cf)
 Asset based valuation
This valuation method uses estimates of the
market/fair value of entitys assets and liabilities
and is generally suitable for companies that have
low proportion of intangible or off the books
assets.
Commonly used for valuing private enterprises.
Some intangible assets are not reported, asset
based value could be considered as floor value.
Asset values are hard to estimate in hyper
inflationary environment
 Relative valuation of Siemens
Step 1: Selecting peers

We analysed the possible peers and based on companies having same risk related
profiles, working capital requirements, EBITDA margins, growth rate,etc we narrowed
down to 6 Peers for our analysis.
 Position of Siemens across various fields

Like its peers ABB and Schneider Electric, Siemens is well positioned throughout
the control levels of the industrial automation hierarchy. Arguablly ,its software
and automation positions are even better than Schneider electrics in some
respects, with capabilities throughout manufacturing execution systems((MES))
itself as well as next computer-aided-design and product life cycle management
systems and the operational level too (with DCS and SCADA systems). Siemens also
supplies Programmable Logic Controllers and has established positions in the
Human machine interface market too.
Step 2:Multiplier selection
Selecting the multiples

Enterprise value=value of net operating assets(value of

operating assets-value of operating liabilities)
EBITDA is usually positive when EPS is not and is useful for
valuing capital intensive companies and for companies with
different financial leverage
P/E and other equity multiples are investor friendly. Also EPS
is primary determinant of investment value.
We used both EV/EBIT and P/E ratio for our analysis.
Step 3: Gathering Data

The table below shows the calculation of Enterprise value from available data:-
 Step 4:Drawing conclusions

Data gathered from annual reports to obtain required ratios

 Drawing conclusions continued

The trailing P/E of Siemens is 16.8x which lies below the minimum range of
20.4x, hence it is highly undervalued
The leading P/E is also below the minimum range
The EV/EBITDA tells a different story as the ratio of Siemens lies between
the minimum and maximum and very close to the mean and median
value.So we can say that it is fairly valued, being slightly tilted towards
undervalue
So,the general consensus is that the Siemens is undervalued
The same idea could be got about the share prices that Siemens should be
trading at i.e (Mean P/E * EPS=) 154 whereas it is currently trading at 107,
so a good strategy would be to go long in this company