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COMPANY ANALYSIS
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Part-I (Business Analysis)

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Agenda
Business Analysis
1. Product & Services
2. Business Model & Strategies
3. Key Business Drivers
– Growth
– Value
4. Segment Analysis
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Business Analysis

1. Product & Services

2. Business Model & Strategies

3. Key Business Drivers

4. Segment Analysis
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Let’s discuss the concepts –

taking example of MUL
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1. Product & Services

Maruti’s presence in market segments
Brand Segment Capacity (CC) Launched in
M800 A1 796 Dec-83
Omni MPV 796 Nov-84
Alto A2 796/1061 Sep-00
WagonR A2 1061 Dec-99
Zen A2 993 May-93
Zen Estio A2  1061  Dec-06
Swift A2  1298  May-05
Swift- Diesel A2  1298  Jan-07
Baleno A3 1590 Dec-99
Esteem A3 1298 Nov-94
M1000 A3 1000 Apr-92
Versa MPV 1298 Oct-01
Gypsy UV 1298 Dec-85
Vitara UV 2700 Apr-03
Source: Maruti web site
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2. Business Model
Basic Revenue generation through
– Direct selling of vehicle in show room
– After sales service & maintenance
– Sale of spare parts
– Fleet management for corporate (N2N)
– Financing option
– Vehicle Insurance
– True Value stores, which buy, sell and exchange used
cars
n.b. The points in italics are operated through subsidiaries
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2. Key Strategies
• Offering Passenger vehicle to most of the
segments
• Services Business offers synergistic value
• Cross selling of allied products and services
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3. Key Business Drivers

Revenue (Growth) Divers

– Strong sales & service network
– Enjoys higher customer satisfaction
– Global hub for Compact cars

Value (Profit) Drivers

– Efficient operational practices
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4. Segment Analysis
A2 segment zooms
Segmental Revenue Performance for
due to following JFM-07
reasons: 50000
• Higher disposable 40000

Number of units
income with middle class 30000
people which constitute 20000
larger portion of total
10000
Indian population.
0
Jan-07 Feb-07 Mar-07
• These models are highly A1 MPV A2 A3 UV
acclaimed by customers. Source: Company Report
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4. Segment Analysis
Spares & Accessories Business
• During 2005-06 the company reported growth of 26% in their
spare & accessories business.
Services Revenue on a growth trajectory
Service Business
200
Enhancing all Rs in Million
150
100%

customer related 100

50%
0%
services in a 50
0 -50%
transparent manner AMJ 05 JAS 05 OND 05 JFM 06 AMJ 06 JAS 06 OND 06
under one roof.
Service Revenue YoY g,%

Source: BSE
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Thank You
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Part-II (Financials &

Projections)
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Agenda
Financials & Projections
1. Profit & Loss Account
2. Balance Sheet
3. Cash Flow Statement
4. Financial Ratios
i) Profitability
ii) Liquidity
iii) Efficiency
iv) Valuation
5. Key Assumptions
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1. Profit & Loss Account

Hyperlinked File: Profit & Loss Account-MUL

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2. Balance Sheet

Hyperlinked File: Balance Sheet-MUL

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3. Cash Flow Statement

Hyperlinked File: Cash Flow Statement-MUL

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4. Financial Ratios
i) Profitability

ii) Liquidity

iii)Efficiency

iv)Valuation
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i) Profitability Ratios
Hyperlinked File: Profitability Ratios -MUL
ROA EBIT / Total Asset
ROE PAT (after Pref. Div.) / Net Worth
ROCE EBIT / Capital Employed
DuPont Analysis-ROE Decomposition (1*2*3*4*5)
1. PAT/PBT (Tax Efficiency)
2. PBT/EBIT (Interest Burden)
3. EBIT/Sales (Operating Profit Margin)
4. Sales/Total Assets (Asset Turnover)
5. TA/NW (Financial Leverage)
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ii) Liquidity Ratios

Hyperlinked File: Liquidity Ratios - MUL

Current Ratio Current Assets / Current Liabilities

Acid Test Ratio Quick Assets / Current Liabilities
(Quick Asset= Current Asset-Inventory)
Debt Equity Total Debt / Owners’ fund
Ratio
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iii) Efficiency Ratios

Hyperlinked File: Efficiency Ratios - MUL

Activity Ratios
Asset Turnover Ratio Turnover / Total Assets
Working capital Turnover / Net working capital
Turnover Ratio
FA Turnover Ratio Turnover / Total Fixed Assets
CA Turnover Ratio Turnover / Total Current Assets
Debtor Velocity Credit Sales / Avg. A/c
Receivable
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iii) Efficiency Ratios

Hyperlinked File: Efficiency Ratios - MUL

Margin Ratios
EBITDA Margin EBITDA / Sales
Pre-Tax Margin PBT / Sales
Net Profit Margin PAT / Sales
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iv) Valuation Ratios

Hyperlinked File: Valuation Ratios - MUL
Adj. EPS PAT (excluding minority interest) /
Total Number of outstanding shares
Cash EPS (PAT+ Depreciation) / Total
Number of Outstanding shares
Dividend Per Share Total Dividend declared / Total
Number of Outstanding shares
Book Value Per Share Net Worth / Total Number of
Outstanding shares
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5. Key Assumptions

Hyperlinked File: Key Assumptions-MUL

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Thank You
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Part-III: Company Valuation

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Agenda
1. Valuation
– Valuation Methodology
– DCF
– Relative Valuation
2. Key Risks
3. Valuation Perspectives
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1. Company Valuation

i) Valuation Methodology

ii) Discounted Cash Flow

iii) Relative Valuation

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i) Valuation Methodologies
P/E
LEVERED P/CF
MARKET P/BV
CAPITALIZATION MULTIPLES
APPROACH EV/EBITDA
UN-LEVERED EV/EBIT
EV/REVENUE

VALUATION DISCOUNTED CASH

METHODOLOGIES FLOW APPROACH

ADJUSTED BOOK
VALUE APPROACH
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ii) Discounted Cash Flow (DCF)

Discounts the anticipated future cash flow

DPV= FV/ (1+K)n

Where,
DPV= Discounted Present Value
FV= Future Value
n= Number of years
K= Cost of Capital

WACC
Cost of Capital
- From which point of view?
- What model?
- Normalization of data
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ii) Discounted Cash Flow (DCF)

Cost of Capital
WACC=(E/V)*Ke+ (D/V)*Kd*(1-t)
Where,
E= equity
V= Value of the firm
(i.e. total market value of equity + total market value of debt)
D= total debt component
Ke= cost of equity
Kd= cost of debt
t= corporate tax rate
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ii) Discounted Cash Flow (DCF)

Dividend Discount Model
Different type of DDM
•Zero Growth Model
•Constant Growth Model
•Two-stage Model
•H-Model
(n.b. For detail refer Annexure-V attached to the Report)
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ii) Discounted Cash Flow (DCF)

Free Cash Flow to Firm
FCFF=
NOPLAT
+ Amortization/ Depreciation
- Inc /(Dec) in working capital
- Capital Expenditure
+Inc /(Dec) Deferred Taxes
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ii) Discounted Cash Flow (DCF)

Free Cash Flow to Equity holder
FCFE =

FCFF
- Interest (1-t)
+ Net Borrowing (from long term perspective)
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iii) Relative Valuation

• The value of an asset is arrived by
– Compared to the values of similar asset in the market
• Steps
1. Identify comparable assets and obtain market values of these
2. Convert these market values into standardized values
• since the absolute prices cannot be compared.
3. Compare the subject asset with standardized value or multiple
4. Take suitable multiples for the differences
5. Mention clearly the assumptions used
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2. Key Risks
a. Nature & types

b. Gravity
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a. Nature & types

• Over dependence on domestic market
• Competition hotting up in the growth engine
of compact cars
• Maruti does not own diesel engine technology
• Soaring metal Market may cast its spell on
margins
• Rising Bank interest rates will impact the
demand and operational cost
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b. Gravity

• Launch of newer models on a continuous

basis is a big challenge
• Fuel efficiency, Maintenance and Safety
rank very high in the buyers’ decision-
making matrix.
• Vendor development is crucial
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3. Valuation Perspectives
a. Challenges

b. Applicability to different industries

c. Preparing a valuation Report

d. Case Discussions
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a. Challenges
• DCF model is very sensitive to
– Growth rate projection and
– Weighted average cost of capital (WACC).
• Comparative Multiple:
No two companies have
– Same product profile and target segment.
– Same capital structure
– Similar management practices
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a. Challenges ...contd
• Cyclical Business
• Private Company
• Spin offs/ Selling of a division
• Firm with Negative Earnings
• Young & Start-up firm
• Financial Services Companies
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b. Applicability to different
industries
i) Pharmaceutical Industry
ii) Sugar Industry
iii) Information & Technology
iv) Logistics
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i) Pharmaceutical Industry
• Product Pipe line and patents
• R&D cost as a % of Sales
• Size and growth of therapeutic segment
• Contract manufacturing opportunity
• Generics opportunity
• Access to distribution networks
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ii) Sugar Industry

• Production capacity
• Cogen unit
• Flexible manufacturing system to produce
ethanol, alcohol
• Availability of raw material
• Governmental policies about levy sugar,
subsidies, minimum prices for farmers
• World scenario of sugar supply, consumption
and balance.
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iii) Information & Technology

• Revenue by geography
• Customer’s Industry Vertical/ Domain
• Revenue generated from various contract like
fixed price contract type or fixed time contract
• Services offering like application development
maintenance, enterprise solution & others.
• Revenue from repeat business & new business
• Business generation from off shore and onsite
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iv) Logistics
- Airways
• Occupancy Rate
• Frequency of congestion free air traffic
• Income generated per passenger per seat
• ATF as a % of total sale (prime operating
expense)
• Size & growth of the sector
• Competition among players
• Government regulation towards civil aviation
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Logistics
- Shipping
• Load factor (cargo handling)
• Bunker cost as a % of total sales (prime operating
expense)
• Cargo handling expenses as a % total sales
• Size & growth of the sector
• Government regulation towards the sector
• Export/ Import Factor of the country
• Aging factor of ships
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3(iii) Preparing a Valuation Report

• How to Write a Valuation Report?

• Process for preparing a Valuation Report

• Data Sources for Valuation Reports

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How to Write a Valuation

Report?
Don’ts
– Never start Valuation before understanding the business
– Never Start with Financials
– Don’t give too much focus on the past – leave that to the
historians
Do’s
– Be Brief and Concise
– Put Relevant Information form the point of view of Investment
– Should contain Graphs/Tables/Charts
– The Graphs/Tables/Charts should be analyzed and not described
in text
– Analyses should facilitate/enable in investment decision making
– Assumptions should be stated after being validated
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Process for Valuation Reports

• Follow the Deductive Logic Path to Understand the
Business of the company by going through
– Industry Reports
– Company Website
– Equity Research Reports
• Prepare a Plan on the Research Objective and
Approach
• Identify Time Schedules and Milestones
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Process for Valuation Reports

…Contd
• Identify the parameters to be taken
• Segmental Analysis
• Competitive Evaluation
• Future Prospects
• Earnings Outlook
• Decide the Valuation Methodology taking into account the Industry
in which the company is operating
• Study the Capital Structure of the Firm and Notes to Accounts
• Arrive at the Growth Rates and Discount Rates
• Calculate the Value of the company
• Validate the Values
• Prepare the report
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Data Sources for Equity

•
• News Items
Research
SEC Filings – 10K, 10Q, 8K

• Company Website
• Annual Reports
– Chairman’s Speech
– MD&A
– Balance Sheet
– P/l Account
– Cash Flow Statement
– Notes to Accounts
• Research Reports
• Company Press Releases
• Industry Associations/Forums
• Government Sources
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Process for Reports

PROCESS CYCLE

Understanding Business Identifying Key Parameters

Identifying Time Report

Preparation Predicting Growth Rates
schedule & Milestones
Deciding on Valuation
Plan of Action
Model

Content & Quality Check (Levels 3)

Delivery
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3(iv) Case Discussions on

• Sell side: Maruti Udyog

• Buy side : Valuation Attractive ( Gammon

India)

• Changing Gear in Auto

• ICRA valuation
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