Valuation of Plant & Machinery

BASIC PRINCIPLES OF VALUATION

PLANT & MACHINERY IN INDIA
Mukund V. Puranik – PVAI(India)
Philosophy of PME (Plant, Machinery & Equipment)

• Specific utility of assets

• Estimation in monetary terms the worth of existing PME in

consideration with the contribution to the profitability, market
situation, type of PME & standard of maintenance

• Determination of such worth is a valuation

• PME valuation is largely qualitative and heavily dependent on

valuer’s judgement and justification
• Purpose of valuation.

• Whether condition of machinery can really satisfy the purpose

of valuation.

• Assessment - whether any buyer can buy the existing set up as

per valuation report or financial institutes can offer loan to
existing owner for further expansion as per valuation report.
 Purpose of Valuation
• Market: Value by comparing asset with identical or similar.

• Insurance: Amount at which machinery can be insured based

on policy. This will call current replacement cost.

• Bank Finance: To get finance for existing or new project.

• Lease Finance: To take or offer plant on lease.

• Liquidation: The net amount that can be realized if business is

terminated and assets sold piecemeal on as is where is basis.
• Take – Over: To know the total investment required

• Merger: To know the exact investment with other plant

• Sale /Purchase: Sale or purchase the plant against the return

• Rating: CRISIL or MOODY rating, Stock market rating etc

• Insolvency: Recovery of loan by selling assets

• Scrap: To work out the scrap value of junk machinery

 Phases of Valuation Procedures

• Phase I: Terms of reference

• Phase II: Strategy of valuation

• Phase III: Physical verification (survey & inspection)

• Phase IV: Data collection & valuation analysis under

different approaches to value

• Phase V: Reconciliation
 International Valuation Std. 105

 Market Approach: Direct sales comparison method (Rule of

thumb)

 Income Approach: Capitalization of earnings

method(Discounted future earning)

 Cost Approach: Replacement cost new method (Book value

method)
 Main Factors To Be Considered
• Availability of reliable information needed

•Appropriateness of method in view of nature of asset & purpose of

valuation should be given emphasis.

•Respective strength and weakness of possible approach and method

Observable market information in all these methods is preferred.

Price information from an active market is generally strongest evidence
 Role & Function of a valuer
1)Valuer has to be fully conversant with the process and types of
machinery & equipment.

2)Valuer has to personally visit the site and carry out survey

3) Valuer has to take necessary photographs with date & Selfie.

Photo of valuer at site works as evidence of presence.

4) Description wherever necessary to be added in the form of

notes to prepare proper valuation report with required
photographs and justification.
5) The inventory of various equipment's /machines in different
departments and getting detailed information from concerned staff/
Manager of each section to know in detail about the working,
productivity, accuracy, accident history etc.

6) Valuer needs to get maximum information from people from

capital purchase, finance and other related managers to get the
complete perspective of the company.

7) Valuer has to note down the specific contradictions also supporting

details in relation to the purpose of valuation which will help valuer in
final report.
 Depreciation
• It is usual wear & tare of normal working of machine/equipment.
There are 3 types of Computing Depreciations used in practice.

A)Observed deterioration

B) Straight Line Method

C) Written Down Value Method (Decline & Balance)

• Scrap value is one of the most important consideration in

computation of depreciation irrespective of method & more
important in case of high value machine
 Observed Deterioration
Condition Depreciation
New (N) 0 5
Excellent (E) 6 10
Very Good (VG) 11 20
Good (G) 21 50
Fair (F) 51 60
Poor (P) 61 90
Scrap (S) 91 100
• As per the companies act 2013, depreciation is calculated on useful
life of the asset. Schedule II of companies act 2013 provides useful life
of the asset. Till date valuer used to calculate depreciation as per
schedule IV of companies act 1956. From 1st April 2014 depreciation
has to be worked as per schedule II of companies act 2013

• Income Tax website gives the depreciation rates & useful life for
various assets. There are many handbooks giving different rates but it
is advisable to follow income tax guidelines for valuer’s safety

• Calculations can be validated from IT site ready calculator

• Valuer can always deviate from std. depreciation rates but he should
justify such change
 RBI Wholesale Price Index (WPI)
• Published by Economic Advisor Ministry Of Commerce & Industry.

• WPI captures price movement in more comprehensive way.

• Widely used by Government, Banks, Industry & Business Circles.

• Important monetary and fiscal policies are linked to the WPI

• It is in use since 1939 & published regularly from 1947.

• Current WPI has a base year 2004-2005 launched on 14.09.2010

• The current WPI in India is with base year 2004 – 2005 = 100.
• The WPI has a basket of 676 items with 5482 quotations in data bank

• This is published every month on RBI website

• Use of WPI leads to authentic valuation.

• Valuer should also be aware of 8 core industries Coal, Crude Oil,

Natural Gas, Refinery products, Fertilizer, Steel, Cement & Electricity and
IIP (Index of Industrial Production) since these are major contributors of
Indian economy.

• Machinery valuation related to these core industries will also be

affected by IIP.
 VALUATION REPORT
For Submission To
XXXXXXXXXXXXX (Client’s Name Location & Address)
Description Page No.
INDEX  
Cover Page
 
Summary of valuation report & valuation Certificate
 
Valuation approach
 
Notes to valuation report including Assumptions,
limitations in valuation, basis of valuation, Documents
pursued, observations during inspection.
 
Clauses of limited liabilities with terms and conditions.
 
List of plant & machinery – Data (Observed / Received)
 Listing of Data
No Description Invoice # Years Qty Acqn. cost Excise Total

Above list should be based on invoices forwarded by the bank as per

their available data or checking the details from the company officials. In
case of NPA above table & details may not be possible so valuer has to
use his own judgement supported by justifications.
 Calculations
Item Total A.V/W.Fdn IEC Life Age IR RV Dep. REP CMV

Total – As per invoice after clubbing.

A.V/W Fdn – Acquisition Value & Foundation Cost. (Total + Foundation)
I.E.C. – Installation, necessary fabrication, E&C expenses etc.
I.R. – Incremental Ratio. (From RBI wholesale price index)
R.V. – Reinstatement Value. (A.V/W.Fdn + IEC) X IR = RV
DEP – Depreciation charged.
REP – Repair charges.
C.M.V. – Computed Market value. [R.V. – (DEP + REP)] = CMV
 Summary of Valuation Report
1 Name of the client XXXXXXXXXXXXXXXXXXX
Address of machinery location XXXXXXXXXXXXXXXXXXXXXXXX
2 Intended user XXXXXXXXXXXXXXXXXXXX
3 Purpose of valuation Value of movable property to determine fair
market value, realizable value & distress
value
4 Date of inspection XXXXXXXXXXXXXXXXXXXXXXXX
5 Date of valuation XXXXXXXXXXXXXXXXXXXXXXXX
6 Persons present during valuation XXXXXXXXXXXXXXXXXXXXXXXX

VALUATION CERTIFICATE
It is certified that present valuation of immovable asset mentioned above is arrived as below.

Asset Fair Market Value Rs.

Plant & Machinery XXXXXXXXXXXXXXX.XXXXXXX
In Words XXXXXXXXXXXXXXXXXXXXXXXXXXXX
 Terms & Conditions Usually Applicable
1) The valuation is carried out at the request / order of XXXXXX

2) Any liability arising out of use of this report shall be maximum

50% of the professional fees actually received by us.

3) Appearance in the court of law / statutory authority will be

charged at actual cost incurred and professional time spent.

4) Valuation is our opinion based on document & information

provided, site visit, local information. Hence NO 3rd party
interest, pecuniary losses, liquidity damage, or any such losses
will be considered whatsoever if applied for any purpose.
5) Accuracy of valuation is limited to extent of information and
documents supplied by client.

6) No liability of any document of client whatsoever will be considered.

7) Government policies, International currency rates, natural calamities

& market forces will affect the valuation.

8) Valuer is not responsible for any hidden matters like lien, Income tax
attachment, court order, non payment of PF or any other outstandings

9) Use of this valuation report other than the purpose of valuation as

per order is a responsibility of client at their cost
 Difficulties in valuations
1: In sufficient data available for valuation & analysis.

2: Asset register is not available or never maintained especially in

NPA case.

3: Concerned Technical & commercial executives / staff not

available during inspection.

4: Insufficient information is normal phenomena.

5: Hidden liabilities & history are never disclosed.

6: Details of loan for purchase of machinery is not available.

7: Various pressures on valuer to either enhance or reduce the value.

8: Many a times for NPA cases electric supply is not available.

9: Change of technology affects valuation.

10: Tendency to give same work to different valuers in order to accept

the report nearest to client’s expectation.
 CASE 1 – Sample Photos
Bauxite Manufacturing Plant NPA case.
Valuation for Market & Distress value.
Location near Kolhapur (Maharashtra)
 CASE 2 – Sample Photos
Gear Manufacturing Plant (Production)
Valuation required by company
Location :- Near Satara (Maharashtra)
 CASE 3 – Sample Photographs

Hot Rolling Steel Plant (NPA Case)

Scrap Valuation by bank
Location :- Bellary Industrial Area (Karnataka)
THANK YOU