A STUDY ON

CORPORATE VALUATION
WITH SPECIAL REFERENCE TO

Kesoram (HYDERABAD)
Submitted in Partial Fulfillment of the Award of the Degree
Of

MASTER OF BUSINESS ADMINISTRATION

Submitted By
STUDENT NAME MUHAMMED VAZIR UDDIN
M.B.A
H.T NO: 13201262055

Under The Guidance Of

Mrs. P. SANJEEVARANI
M.B.A (ASST.PROF)
DEPARTMENT OF MANAGEMENT STUDIES

PRIYADARSHINI COLLEGE OF BUSINESS MANAGEMENT

(AFFILIATED TO OSMANIA UNIVERSITY)

HYDERABAD
2012-2014

DECLARATION

I here declare that the project report entitled CORPORATE

VALUATION has been prepared by me in partial fulfillment of the
requirements for the award of the degree of MASTER OF BUSINESS
ADMINISTRATION

I also declare that this project work is a result of

my effort and it has not been submitted to any other university for the award
of any degree or diploma.

PLACE:
DATE:
(MUHAMMED VAZIR UDDIN)
H.NO-132012672055

ACKNOWLEDGMENT

With a profound sense of thankfulness, I acknowledge my

indebtedness to my company guide Mr MANOHAR

Faculty Guide

Mrs. P.SANJEEVARANI M.B.A., for their valuable guidance, timely

suggestions and constant encouragement. Their insightful criticisms and
patience throughout the duration of this project have been instrumental in
allowing this project to be completed.
My sincere thanks are to the name of Director, Mr. G. SRIDHER
REDDY (M.A) (P.hd)., name of HOD,SALEEMUNNISA (M.com,
M.B.A) and all the staff members of Department of management studies,
Priyadarshini College of Business Management, for their consistent
guidance in my project work.
Their continual support and careful attention to the details involved in
producing a document of this nature are very much appreciated.
(MUHAMMED VAZIR UDDIN)

CONTENTS
CHAPTER -I
INTRODUCTION
NEED OF THE STUDY
OBJECTIVES OF THE STUDY
SCOPE OF THE STUDY
LIMITATIONS OF THE STUDY
CHAPTER- II
THEORITICAL FRAME WORK
CHAPTER III

COMPANY PROFILE
CHAPTER- IV
DATA ANALYSIS & INTERPRETATION
CHAPTER V
FINDINGS, SUGGESTIONS & CONCLUSION
CHAPTER VI
BIBLIOGRAPHY

CHAPTER I
INTRODUCTION

CHAPTERS

PARTICULARS

PAGENO.

ABSTRACT

1.

INTRODUCTION
1.1 Introduction
1.2 RoleofValuation
1.3 ApproachestoValuation
1.4 StumblingBlocksinValuation

2.

INDUSTRY&COMPANYPROFILE

3.

REVIEWOFLITERATURE
3.1 DarksideofValuation
3.2 Internalizationandevolutionofcorporatevaluation
3.3 Investorprotectionandcorporatevaluation
3.4 Valuationofbankruptfirms
3.5 Technologicalinnovationapproachtovaluation
3.6 Thecostofdistress

4.

RESEARCHMETHODOLOGY
4.1 ProblemStatement
4.2 Objectives
4.3 Scopeofstudy
4.4 SampleSize
4.5 Valuationparameters
4.6 ResearchMethodology

5.

CONCLUSION

GLOSSARY
BIBLIOGRAPHY

Abstract
Valuationistheprocessofdeterminingtherealvalue(intrinsicvalue)asopposedtothe
observedmarketpriceofasecurity.
Intraditionalvaluationmodels,webeginbyforecastingearningsandcashflowsand
discountthesecashflowsbackatanappropriatediscountratetoarriveatthevalueofa
firmorasset.Thistaskissimplerwhenvaluingfirms withpositiveearnings,along
historyofperformanceandalargenumberofcomparablefirms.Inthisresearchproject,
welookatvaluationwhenoneormoreoftheseconditionsdonothold.Webeginby
lookingwaysofdealingwithfirmswithnegativeearnings,andnotethattheprocesswill
varydependinguponthereasonsforthelosses.
Therearevariousreasonsfortheearningsbecomingnegativeandthesereasonsvary
acrossfirms.
Forsomefirms,itistoomuchdebtthatcreatesthepotentialforfailuretomakedebt
paymentsanditsconsequences(bankruptcy,liquidation,reorganization).
For other firms, negative earnings may arise from the inability to meet operating
expenses.
This project stresses that while estimation of cash flows and discount rates is more
difficultforthesefirms,thefundamentalsofvaluationcontinuetoapply.
Theintrinsicvalue,orvaluedeterminedusingavaluationmethod,canthenbecompared
to the current market price to determine whether the security appears overvalued or
undervalued.

CHAPTER 1

INTRODUCTION

INTRODUCTION
Inthewakeofeconomicliberalization,companiesarerelyingmoreonthecapitalmarket,
acquisitionsandrestructuringarebecomingcommonplace,strategicalliancesaregaining
popularity, employee stock option plans are proliferating, and regulatory bodies are
strugglingwithtariffdetermination.Intheseexercisesacrucialissueis:howshouldthe
valueofacompanyoradivisionthereofisappraised.
Thegoalofsuchanappraisalisessentiallytoestimateafairmarketvalueofacompany.
Thefairmarketvalueisthepriceatwhichthepropertywouldchangehandsbetweena
willingbuyerandawillingsellerwhentheformerisnotunderanycompulsiontobuy
and the latter is not under any compulsion to sell, both parties having reasonable
knowledgeofrelevantfacts.Whentheassetbeingappraisedisacompany,theproperty
thebuyerandtheselleraretrading consists oftheclaims ofalltheinvestors ofthe
company; this includes outstanding equity shares, preference shares, debentures and
loans.

THEROLEOFVALUATION
Valuationisusefulinawiderangeoftasks.Theroleitplayshoweverisdifferentin
differentarenas.Thefollowingsectionlaysouttherelevanceofvaluationinportfolio
management,inacquisitionanalysis,andincorporatefinance.

VALUATIONANDPORTFOLIOMANAGEMENT
Therolethatvaluationplaysinportfoliomanagementisdeterminedinlargepartbythe
investment philosophy of the investor. Valuation plays a minimal role in portfolio
managementforapassiveinvestor,whereasitplaysalargerroleforanactiveinvestor.
Evenamongactiveinvestors,thenatureandtheroleofvaluationisdifferentfordifferent
typesofactiveinvestment.Markettimersusevaluationmuchlessthaninvestorswho
pickstocksandthefocusisonmarketvaluationratherthanonfirmspecificvaluation.
Amongsecurity selectors, valuation plays acentral role inportfolio management for
fundamentalanalystsandaperipheralrolefortechnicalanalysts.

VALUATIONINACQUISITIONANALYSIS
Valuation should play a central part in acquisition analysis. The bidding firm or
individualhastodecideonafairvalueforthetargetfirmbeforemakingabid,andthe
targetfirmhastodetermineareasonablevalueforitselfbeforedecidingtoacceptor
rejecttheoffer.Therearealsospecialfactorstoconsiderintakeovervaluation.Firstthe
effectsofsynergyonthecombinedvalueofthetwofirms(targetplusbiddingfirm)have
tobeconsideredbeforeadecisionismadeonthebid.Thosewhosuggestthatsynergyis
impossibletovalueand,thereforeshouldnotbeconsideredinquantitative terms are
wrong.Secondtheeffectsonvalueofchangingmanagementandrestructuringthetarget
firmwillhavetobetakenintoaccountindecidingonafairprice.Thisisofparticular
concern in hostile takeovers. Finally there is a significant problem with bias in the
takeovervaluations.Targetfirmsmaybeoveroptimisticinestimatingvalue,especially
whenthetakeoverishostileandtheyaretryingtoconvincetheirshareholdersthatthe

offerpriceistoolow.Similarlyifthebiddingfirmhasdecided,forstrategicreasons,to

do an acquisition, there may be strong pressure on the analyst to come up with an

estimateofvaluethatbacksuptheacquisition.

VALUATIONINCORPORATEFINANCE
Inrecentyears,managementconsultingfirmshavestartedofferingcompaniesadviceon
howtoincreasevalue.Thishasbeenpossiblebecauseofthefearofhostiletakeovers.
Companies have increasingly turned to value consultants to tell them how to
restructure,increasevalue,andavoidbeingtakenover.Theconsultantssuggestions have
oftenprovidedthebasisfortherestructuringofthesefirms.Thevalueofafirmcanbe
directlyrelatedtodecisionsthatitmakes:onwhichprojectsittakes,onhowitfinances
them,andonitsdividendpolicy.Understandingthisrelationshipiskeytomakingvalue
increasingdecisionsandtosensiblefinancialrestructuring.

APPROACHESTOVALUATION
Therearefourbroadapproachestoappraisingthevalueofacompanynamely
1. Adjustedbookvalueapproach
2. Stockanddebtapproach
3. Directcomparisonapproachand
4. Discountedcashflowapproach.

ADJUSTEDBOOKVALUEAPPROACH
Thesimplestapproachtovaluingafirmistorelyontheinformationfoundonitsbalance
sheet.Therearetwoequivalentwaysofusingthebalancesheetinformationtoappraise
thevalueofafirm.First,thebookvaluesofinvestorclaimsmaybesummeddirectly.
Second,theassetsofafirmmaybetotaledandfromthistotalnoninvestorclaims(like
accounts payable and provisions) may be deducted. The accuracy of the book value
approachdependsonhowwellthenetbookvaluesoftheassetsreflecttheirfairmarket
values.

STOCKANDDEBTAPPROACH
Whenthesecuritiesofafirmarepubliclytraded,itsvaluecanbeobtainedbymerely
addingthemarketvalueofallitsoutstandingsecurities.Thissimpleapproachiscalled
thestockandthedebtapproachbypropertytaxappraisers.Itisalsoreferredtoasthe
marketapproach.

DIRECTCOMPARISONAPPROACH
Onecanvalueanassetbylookingatthepriceatwhichacomparableassethaschanged
hands between a reasonably informed buyer and reasonably informed seller. This
approach referredtoas thedirectcomparisonapproach,is commonly appliedinreal

estate.

STEPSINAPPLYINGTHEDIRECTCOMPARISONMETHOD
Thecomparablecompanyapproachinvolvesvaluingacompanyonthebasisofhow
similar publicly held companies are valued. It is typically a top down approach and
involvesthefollowingsteps.
1. Analyzetheeconomy
2. Analyzetheindustry
3. Analyzethesubjectcompany
4. Selectcomparablecompanies
5. Analyzesubjectandcomparablecompanies
6. Analyzemultiples
7. Valuethesubjectcompany

DISCOUNTEDCASHFLOWAPPROACH
Valuing a firm using the discounted cash flow approach is conceptually identical to
valuing a capital project using the present value method. Valuing a firm using the
discountedcashflowapproachcallsforforecastingcashflowsoveranindefiniteperiod
oftimeforanentitythatisexpectedtogrow.
Valueofthefirm=presentvalueofcashflowduringanexplicitforecastperiod+
presentvalueofcashflowaftertheexplicitforecastperiod.
Duringtheexplicitforecastperiodwhichisoftenaperiodof5to15yearsthefirmis
expectedtoevolveratherrapidlyandhenceagreatdealofeffortisexpendedtoforecast
itscashflowonanannualbasis.Attheendoftheexplicitforecastperiod,thefirmis
expectedtoreachasteady stateand hence a simplified procedure is used to estimate its
continuingvalue.

Thus,thediscountedcashflowapproachtovaluingafirminvolvesthefollowingsteps:
1. Forecastthecashflowduringtheexplicitforecastperiod.
2. Establishthecostofcapital.
3. Determinethecontinuingvalueattheendoftheexplicitforecastperiod.
4. Calculatethefirmvalueandinterpretresults.

STUMBLINGBLOCKSINVALUATION
Followingarethestumblingblocksinvaluingyoungcompanieswithnegativeearnings
andnoorfewcomparablefirms.

NEGATIVEEARNINGS
Firmsthatarelosingmoneycurrentlycreateseveralproblemsfortheanalystswhoare
attempting to value them. While none of these problems are conceptual, they are
significantfromameasurementstandpoint:
1.Earningsgrowthratescannotbeestimatedorusedinvaluation:
Thefirstandmostobviousproblemisthatwecannolongerestimateanexpectedgrowth
ratetoearningsandapplyittocurrentearningstoestimatefutureearnings.Whencurrent
earningsarenegative,applyingagrowthratewilljustmakeitmorenegative.Infact,
even estimating an earnings growth rate becomes problematic, whether one uses
historicalgrowth,analystprojectionsorfundamentals.

2. Estimatinghistoricalgrowthwhencurrentearningsarenegativeisdifficult,and
thenumbers,evenifestimated,oftenaremeaningless.
3. Analternativeapproachtoestimatingearningsgrowthistouseanalystestimates
ofprojectedgrowthinearnings,especiallyoverthenext5years.Forfirmswith
negativeearningsinthecurrentperiod,thisestimateofagrowthratewillnotbe
availableormeaningful.Athirdapproachtoestimatingearningsgrowthistouse
fundamentalsandestimatethegrowthrateasfollows:
ExpectedgrowthrateinEBIT=ReturnonCapital*ReinvestmentRate

Thisapproachisalsodifficulttoapplyforfirmsthathavenegativeearnings,sincethe
twofundamentalinputsthereturnmadeoninvestments(returnonequityorcapital)and
thereinvestmentrate(orretentionratio)areusuallycomputedusingcurrentearnings.
When current earnings are negative, both these inputs become meaningless from the
perspectiveofestimatingexpectedgrowth.
Taxcomputationbecomesmorecomplicated:
Thestandardapproachtoestimatingtaxesistoapplythemarginaltaxrateonthepretax
operatingincometoarriveattheaftertaxoperatingincome:
AftertaxOperatingIncome=PretaxOperatingIncome(1taxrate)
Thiscomputationassumesthatearningscreatetaxliabilitiesinthecurrentperiod.While
thisisgenerallytrue,firmsthatarelosingmoneyhavetheoptiontocarrytheselosses
forwardintimeandapplythemtoearningsinfutureperiods.Thus,whenvaluingfirms
withnegativeearnings,wehavetokeeptrackofthenetoperatinglossesandrememberto
usethemtoshieldincomeinfutureperiodsfromtaxes.

TheGoingConcernAssumption:
Thefinalproblemassociatedwithvaluingcompaniesthathavenegativeearningsis
theveryrealpossibilitythatthesefirmswillgobankruptifearningsstaynegative,
andthattheassumptionofinfinitelivesthatunderliestheestimationofterminalvalue
maynotapplyinthesecases.

ABSENCEOFHISTORICALDATA
Invaluation,weoftenusedatafromyearspriortothecurrentyeartoestimateinputs
moreprecisely.Considerthefollowingareasinvaluationwherepastdataisuseful:

Inestimating riskparameters, suchas betas,weusestockreturns frompastperiods.

Many regression services use 5 years of data for beta estimates, and most services
require,attheminimum,twoyearsofdataforreliableestimates.Whenafirmhasbeen
listedforaperiodlessthan2years,itmaystillbepossibletoestimatebetas,butthebetas
areunlikelytobereliable.

For estimating variables that vary significantly from year to year, we often look at
averagesoverlongerperiods.Atypicalexampleisworkingcapital,anumberthattends
toincreasedramaticallyinsomeyearsanddropsignificantlyinothers.Invaluingfirms,
weoftengetbetterestimatesofexpectedworkingcapitalchangesovertimebylookingat
theaverageworkingcapitalasapercentofrevenuesoverthelastfewyears

Evenanalystswhodonotusehistoricalgrowthratestoestimatefuturegrowthmeasure
theirestimatesofexpectedgrowthagainstpastgrowthtocheckforreasonability.Thus,
ananalystwhoestimatesgrowthof40%forafirmoverthenext5yearsmaymodifythat
estimateafterfindingoutthatthefirmhasreportedearningsgrowthof5%overthelast5
years.Inconclusion,havingalonghistoryofpricesandearningsonafirmallowsus
accesstomoreinformationthanisavailableinthecurrentyear,andincreasesthecomfort
zoneonestimates.

ABSENCEOFCOMPARABLEFIRMS
Inadditiontousingdatafrompastperiods,analystsuseinformationoncomparablefirms
frequentlyinvaluation.Thus,thebetaofafirmmaybeestimatedbylookingatfirmsof
similar size in the same business. Estimates of capital expenditure requirements and
workingcapitalneedsareoftenbasedupontheaveragesforcomparablefirmsinthe
samebusiness.Theuseofcomparablefirmdatabecomesmucheasierwhentherearea
significantnumberofcomparablefirmsinthesamebusinessasthefirmbeingvalued.
Whenthefirmbeingvaluedisuniqueoriftheotherfirmsinthesectoraredifferentin
theirfundamentalbusinesscharacteristics,itisfarmoredifficulttousecrosssectional
informationinvaluation.

CHAPTER 2

INDUSTRY PROFILE

INTRODUCTION OF CEMENT:
The basic need of human being is food clothing and shelter love
and affection /possession is on never ending process for a human
being.

As the time passes on human beings their wants and wishes also
changed from ancient times to modern times and among them

the

living pattern and costruction works also have been changed from
temporary construction of house to permanent construction and the
basic material used in construction is Cement.
Cement the word derived from a latin word CEMENTTUM means
stone chipping such as we used in roman.
Cement the word as per oxford, it is commonly used is any
substance applied for soft stocking things. But cement means is most
vital and important material for modern constructions. It is a material
which sets and hardness when mixed with water. Cement is basically
used in construction as a building agent. In ancient times clay bricks
and stones have been used for construction works.
The Romans were using a binding or a cementing material that
would harden and water. The first systematic effort was made by
SMEATON who undertook the execution of

a new light house in

1756. He observed that

production obtained by during lime stone was the best cementing
material for work under water.

The construction in lost centuries was with Lime that was the
main equipment used for construction work. The ancient constructions
like Tajmahal, Qutubminar, Mysore Palace, Red fort, Charminar etc., the
evidence of lime construction.

THE INDIAN CEMENT INDUSTRY:

By staring priduction in 1914 the story of India cement industry
is a stage of continuous of growth.
India is the fourth largest cement producer after China, Japan
and U.S.A. so far annual production and demand has been growing a
pace at roughly 68 million tons with an installed capacity of 82 millions
tons.
In 1914 as the foundation of stable cement Industry was laid as
sun above. It was Indian Cement Company at Porbandar in Gujarat. In
1920, the cement marketing corporation was formed to promote the
sale and distribution of cement. A significant development was made in
1930 when all manufacturers mergers together to form the Associated
Cement Company Limited.
Cement Industry is the major Industry it has taken rapid strides
for a modest beginning at porbandar in 1914 to the 1980s with over
understanding out of the 60 units, 14 units are in the public sectors
remaining units are in private sector.
Indian endowed with cement grade lime stones (90 Billion tons )
and coal (190 Billion

tons ). The basic raw material required for

cement manufacture and self sufficient in manufacturing cement

making machineries. During nineties it had a particular impressive
expansion with a growth rate of 10%.

The strength and vitality of cement Industry can be gouged by

the intrest shown and support given by World Bank, considering the
excellent performance of the industry in utilizing loans and achieving
the objectives and targets. The World Bank is examine the feasibility of
providing a third line of credit for further upgrading Industry in varying
areas, which will make it global.
Therefore, India today totally installed capacity of over 30 million
tons, employing over a 100 thousand people directly and contributing
amount of rupees 8 billion to Indias GDP.

TECHNOLOGY:
Cement may be manufactured employing three alternative
technologies.

1.

The largely out molded well process technology.

2.

The more modern dry process that requires only 19% coal
utilization.

3.

The latest percallinator technology through which optimum

utilization may be achieved. Here the calcinatory or raw.

Material is partly or completed carried out before the feud enters the
rotator kin besides saving power, the adoption of this technology
enable in increase in installed capacity by 30-35%, the 30,000 tons per
day plants being setup in the country use this technology.

TECHNOLOGICAL CHANGES:
Continuous technological upgrading and assimilation of latest
technology has been going on in the cement industry. Presently 93% of

the total capacity in the industry is based on modern and environment

friendly dry process technology and only 7% of the capacity is based
on old wet and semi-dry process technology.
There is tremendous scope for waste heat recovery in cement
plants and there by reduction in emission level. One project for cogeneration of power utilizing waste heat in an Insian cement plant is
being implemented with Japanese assistance under Green Aid Plan.
The induction of advanced technology has helped the industry
immensely to conserve energy and fuel and to save materials
substantially.

India is also producing different varieties of cement like Ordinary

Portland Cement (OPC), Portland Puzzling Cement (PPC), Portland Blast
Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening
Portland Cement, Sulphate Resisting Portland Cement, White Cement
etc. production of these varieties of cement conform to the BIS
Specifications. Also, some cement plants have set up dedicated jetties
for promoting bulk transportation and export.

TOTAL PRODUCTION:
The cement industry comprises of 125 large cement plants with
an installed capacity of 148.28 million tons and more than 300 mini
cement plants with an estimated capacity of 11.10 million tons per
annum. The Cement Corporation of India, which is a Central Public
Sector Undertaking, has 10 units. There are 10 large cement plants

owned by various state Governments. The total installed capacity in

the country as a whole is 159.38 million tons.
Actual cement production in 2004-05 was 116.35 million tons as
against a production of 107.90 million tons in 2003-04, registering a
growth rate of 8.84%. Major players in cement production are Ambuja
cement, Aditya cement, J K Cement and L & T cement.
Apart from meeting the entire domestic demand, the industry is
also exporting cement and clinker. The export of cement during 200304 and 2005-06 was 5.14 million tons and 6.92 million tons
respectively. Export during April-May, 2005 was 1.35 million tons. Major
exporters were Gujarat Ambuja Cements Ltd. and L & T Ltd.
The planning commission for the formulation of X Five Year Plan
constituted a Working Group on Cement Industry for the development
of cement industry. The Working Group has identified following thrust
areas for improving demand for cement;
1.

Further push to housing developments programs;

2.

Promotion of concrete Highways and roads, and

3.

Use of ready-mix concrete in large infrastructure projects.

Cement industry has been decontrolled from price and distribution

on 1st march 1989 and de-licensed on 25 th July 1991. However, the
performance of the industry and prices of cement are monitored
regularly. Being a key infrastructure industry, the constraints faced
by the

Actual cement production in 2004-05 was 116.35 million tons as

against a production of 107.90 million tons in 2003-04, registering a
growth rate of 8.84%. Major players in cement production are Ambuja
cement, Aditya cement, J K Cement and L & T cement.
Apart from meeting the entire domestic demand, the industry is
also exporting cement and clinker. The export of cement during 200304 and 2005-06 was 5.14 million tons and 6.92 million tons
respectively. Export during April-May, 2005 was 1.35 million tons. Major
exporters were Gujarat Ambuja Cements Ltd. and L & T Ltd.
The planning commission for the formulation of X Five Year Plan
constituted a Working Group on Cement Industry for the development
of cement industry. The Working Group has identified following thrust
areas for improving demand for cement;
4.

Further push to housing developments programs;

5.

Promotion of concrete Highways and roads, and

6.

Use of ready-mix concrete in large infrastructure projects.

Cement industry has been decontrolled from price and distribution on

1st march 1989 and de-licensed on 25 th July 1991. However, the
performance of the industry and prices of cement are monitored
regularly. Being a key infrastructure industry, the constraints faced by
the industry are reviewed in the Infrastructure Coordination Committee
meetings held in the Cabinet Secretariat under the Chairmanship of
Secretary (Coordination). The 444 Committee on Infrastructure also
reviews its performance.

DISTRIBUTION SYSTEM:
Distribution of cement was entirely under Government control
until 1982. at present the Industry has to make an agreement towards
the levy quota which is to be sold compulsorily to the Government the

rest of the output or open market quota may be sold in the open
market evolved prices the output lifted by the Government is allocated
state wise.

NEED AND IMPORTANCE:

In India we see rapid industrial development in the last few
centuries. Indian industry is growing at considerable ratio which
reveals India is a developing country. And there are different industrial
sectors are playing a vital role for the economys development. They
are steel cement SOF. Information Technology Medical Science etc.
One among them was CEMENT INDUSTRY which plays a vital
role for the countrys development. In India cement industry is growing
rationally and marketing is the king pin of all activities particularly to
the business because of this changes in the external environment i.e.,
social, political, legal, technical and international environment and
changes in marketing. There is increased in the salaries in all most in
every market leading to competition is aspects of price, promotion etc.,
which help to increase the standard of living of people.
The manufacturers of Cement like Kesoram cement, India
limited, Orient limited, Ultratech etc. are providing cement and they
are distributing cement through wide network of dealers.
Kesoram cements are doing its business from decades and it is
continuously contributing to the national economy. In even Industry
now a days there is no special interest for particularly department like
production

or

manufacturing

but

know

days

management plays a vital for the companys success.

total

quality

Distribution channel which plays a vital role for the company

success. Distribution channels are link between the company and
consumers.

COMPANY PROFILE

PROFILE OF THE COMPANY

One among the industrial gains in the country today serving the nation
on the industrial front kesoram industries limited has a tenured and
extent full history dating hock to the twenties when the industrial
house of Birlas enquired it.With only a Textile mill under its banner in
1924,it grew from strength and spread its activities to newer fields like
Rayon pulp Transparent Paper.Spun pipes and Refectory Tyres oil mills
and refinery Extraction.
Looking to the wide gap between the demand and supply of
vital commodity cement which it plays on important role in Nation
Building, the government Private entrepreneurs to argument the
cement production Kesoram rose to the occasion and decided to set up
few cement plants in the country.
Kesoram cement is one of the prestigious units in the
renowned Kesoram industries group that is one of Indias leaden
industrial conglomerates, under the leadership of Mr.B.K.Birla, the
famous personality of Indian Industry, who owes branches all over
India.

Kesoram cement Industry is one of the leading manufactures of

cement in India Kesoram cement is a division of Kesoram Industries
limited. It is a dry process cement plant. It is located at Basant Nagar
in Karimnagar District of Andhra Pradesh with the plant capacity is 8.26
lakhs tones per annum. It is 8Kms away from the Ramagundam
Railway Station Lining Madras to New Delhi.

PLANTS SETUP:
The first cement point of Kesoram with a capacity of 2.1 lacks tones per annum
incorporating Humboldts suspension preheated system was committed during the year
1969.
The second unit was setup in the year 1971 with capacity of
2.1lacks tons which added to the above plant capacities.
The third plant with a capacity of 2.5lacks tons per anum,
which went on stream in the year 1978.
The coal for this company is obtained by singareni collieries
and the power is obtained from APSEB. The power demand capacity for
the factory is about 21M.W. Kesoram has got 20G sets of 4MN each
installed in the year1987.
Kesoram cement belongs to the Birla group companies one of
the industrial giants in the country.
Kesoram cement industries distinguished it self among the
cement factories in India by bagging the national productivity award
for two successive years i.e., in 1985-86 and 87. Kesoram cement also
got the FAPCCI award for best family planning effort in the state for
the year 1987-88.
Kesoram also bagged NCBCNS national award for energy
conservation for the year 1989-90. The Kesoram industries look for the
welfare of the employees and it provide various facilities which the
employees and it provide various facilities which the employee feels

satisfied with in the organization and after the work they fees satisfies
the worker and works families by providing various welfare schemes
and by providing recreational facilities of a glace.
The company set up Recreation Club for the purpose of
recrimination facilities two auditoriums are provided for playing indoor
games like chess, shuttle and caroms and for organizing cultural
functions and activities like drama, music, and dance centers etc.
It provides Library and reading rooms for the benefit of the
employees more than 5000 books are available in the library along
with other Newspapers and magazines.
They setup English and Telugu medium schools for the growth of
workers child. The company provides Dispensary with a qualified
medical offer and Medical staff for the benefit of the employees.
A House Journal in the name of Basant Nagar sam char is
brought out quarterly where an all important activities and information
of the plant is published.
The company provides cooperative stores where the supply
essential commodities like rice, wheat, sugar, kerosene etc. at cash
and credit basis.
They conduct games for twice a year on the occasion of 26 th
January Republic Day and 15th August Independence Day in order to
encourage the employees, outside of their workstation.
The family planning camps are held regularly with the help of the
District Medical and Health Authorities at the Government Hospital. It
has got on award for their excellent service.

Not only the employees of the factory are taken care, butthe
company plays a lot of attention towards the rural development
activities. Twelve villages are adopted and the company has extended
help in constructing temples, road, and giving programmers to the
farmers, Eye surgical camps health checkup schemes etc.

To keep the ecological balance, company has also undertaken

massive tree plantation in and around Basant Nagar and near by
villages there by eliminating the pollution and they have been
nominated by the government of India for VRUKSHAMITRA AWARD
but effort of an industrial unit in the state for rural development 199495 presented by CM in march 1996.

BRANDS:

Kesoram brands with namely Birla Supreme and Birla supreme

gold (53 grades) has made a niche with outstanding quality and
commands a premium in the market. The latest offering, Birla
Shakthi is also very well received and is the most sought offer brand
now.

KESORAMS CAREER:

Kesoram has an outstanding track record. Achieving 100%

capacity utilization in productivity and energy conservation. It has
provided its distinctions by bagging several awards of national and
state level are worthy.

AWARDS:

National productivity award for 1985-86.

National productivity award for 1986-87.

National award for energy conservation for 1980-90.

National award for mines safely 1985-86, 1986-87.

Prestigious

state

award

yajamanya

ratna

and

but

management award for the year 1980.

Best FAPCCI award for but family planning effort in the

state 1987-88.

FAPCCI award for best workers welfare 1995-96.

Best industrial productivity award of FAPCCI.

Best management award of state government 1993.

It has got Vanamitra award from the government of

Andhra Pradesh.

KESORAM GROUP OF INDUSTRIES

a)Textiles

Kesoram Industries Ltd,

42, Garden Reach Road
Calcutta-700034.

b)Rayon

Kesoram Rayon Triennia (P.O.),

Dist : Hoogly, West Bengal.

c)Spun Pipes

Kesoram Spun pipes & Foundries,

bansberia (P.O.), Dist: Hoogly,
West Bengal.

d)Cement

Kesoram Cement,
Basantnagar-506187,
Dist : Karimnagar, Andhra Pradesh

e)Cement

Vasavadatta Cement,
Sedam-585222,
Dist : Gulbargah, Karnataka.

f) Tyres

Birla Tyres,
Shivam Chambers,
53, Syed Amir Ali Avenue.
Calcutta-700029.

Product Profile
The main brands of cement manufactured are:
RAASI GOLD (53 Grade)
RAASI SUPER POWER
RAASI 43 Grade cement.
All the brands are known for its best quality standards.

Human Resources
The Plant has well qualified, highly motivated manpower of 649
employees on its rolls. Out of 649 employees, 92 are executive cadre
and remaining are in staff and workmen cadre. The KIL, KNR manpower
is known for their spirit and commitment.

Pollution Control
The Plant is commissioned for pollution free environment and installed
all the required pollution control equipment as per the statutory
requirement. A separate team will regularly monitor and maintain the
said equipment.

Safety
The Plant maintains high standards of safety and good housekeeping
methods in line with 5S techniques.

Contribution to the exchequer

KIL, KNR has been contributing around Rs.175.00 crores to the
exchequer in the form of taxes, royalty etc.

Township
KIL, KNR has a well planned township consisting of 378 quarters having
facilities like

School

Hospital

Temple

Guest House

Co-operative Stores

Recreation Club

Play Ground etc.

Rural Development
KIL, KNR as apart of Rural & Social Development Programme adopted 8
surrounding villages . The company extends the facilities like

Housing

Water

School

Old age pension

Roads etc;

By allocating a budget amount of about Rs.25.00 lakhs per

annum.

Industrial Relations
KIL,KNR is known for its best Industrial Relations practices in this region
and won many awards from Govt. of A.P. and Chamber of Industries.

Norms
Raw Mill Clinker Cement
Lime stone 96%
Iron ore 2.5%
Laterite 1.5%
Raw Mill 1.5 tonnes
Coal 20%
Clinker97%
Gypsum 3%

CHAPTER 3

LITERATURE REVIEW

Review of literature means examining and analyzing the various literatures available in
anyfieldeitherforreferencespurposesorforfurtherresearch.
Furtherresearchcanbedonebyidentifyingtheareaswhichhavenotbeenstudiedandin
turnundertakingresearchtoaddvaluetotheexistingliterature.
For the purpose of literature review various sources of information have been used.
Sourcesincludebooks,journalsaswellassomeliteraturepapers.

AswathDamodaran:TheDarkSideofValuation:Firmswithno
Earnings,noHistoryandnoComparables
Intraditionalvaluationmodels,webeginbyforecastingearningsandcashflowsand
discountthesecashflowsbackatanappropriatediscountratetoarriveatthevalueofa
firmorasset.Thistaskissimplerwhenvaluingfirms withpositiveearnings,along
historyofperformanceandalargenumberofcomparablefirms.Inthisproject,welook
atvaluationwhenoneormoreoftheseconditionsdonothold.Webeginbylooking
waysofdealingwithfirmswithnegativeearnings,andnotethattheprocesswillvary

dependinguponthereasonsforthelosses.Wewillarguethatwhileestimationofcash
flowsanddiscountratesismoredifficultforthesefirms,thefundamentalsofvaluation
continuetoapply.
The value of a firm is the present value of expected cash flows generated by it,
discountedbackatacompositecostofcapitalthatreflectsboththesourcesandcostsof
financingusedbyit.Thisgeneralstatementappliesnomatterwhatkindoffirmwelook
at,buttheeasewithwhichcashflowsanddiscountrates canbeestimatedcanvary
widelyacrossfirms.Atoneendofthecontinuum,wehavefirmswithalonghistory,
positive earnings and predictable growth, where growth rates in earnings can be
estimatedeasilyandusedtoforecastfutureearnings.Thetaskismadesimplerstillifthe
firmhascomparablefirms,whereby comparable we mean firms in the same line of
business,withsimilarcharacteristics.Theinformationonthesefirmscanthenbeusedto
estimateriskparametersanddiscountrates.Therealtestofvaluationisattheotherend
ofthecontinuum,wherewehaveyoungfirmswithnegativeearningsandlimited,and
noisy,information.Often,theproblemiscompoundedbecausethesearefirmsinsectors
wherethereareeithernocomparablefirms,orthecomparablefirmsareatthesamestage
inthelifecycleasthefirmbeingvalued.Here,theestimationofcashflowsanddiscount
ratesbecomesdifficult,toputitmildly,andvaluationoftenseemstobeastabinthe
dark.Alltoooften,wegiveupandassumethatthesearefirmsthatcannotbevalued
usingvaluationmodels.Thisprojectfocusesonfirmsthatdonotlendthemselveseasily
tovaluation,eitherbecausetheyhavenegativeearnings,orbecausetheyhaveashort
history

RossLevine,SergioL.Schmukler:INTERNATIONALIZATIONAND
THEEVOLUTIONOFCORPORATEVALUATION
Thispaperprovidesevidenceonthebonding,segmentation,andmarkettimingtheories
ofinternationalizationbydocumentingtheevolutionofTobin's qbefore, during, and
afterfirmsinternationalize.Usingnewdataon9,096firmsacross74countriesoverthe
period19892000,theyfindthatTobin'sqdoes not rise after internationalization, even
relative tofirms that donotinternationalize. Instead, q rises significantly one year
beforeinternationalizationandduringtheinternationalizationyear.But,then q falls
sharplyintheyearafterinternationalization,relinquishingtheincreasesoftheprevious
twoyears.Toaccountforthesedynamics,thispapershowsthatmarketcapitalization
rises one year before internationalization and remains high, while corporate assets
increase during internationalization. The evidence supports models stressing that
internationalizationfacilitatescorporateexpansion,butchallengesmodelsstressingthat
internationalization produces an enduring effect on q by bonding firms to a better
corporategovernancesystem.

Thispaperexaminestheevolutionofthecorporatevaluationoffirmsthatcrosslisted,
issueddepositaryreceipts,orraisedequitycapitalininternationalmarketsovertheperiod
19892000.Thispaperdocumentsthetimeseriespatternsofqbefore,during,andafter
internationalizationandcomparesthesepatternstofirmsthatneverinternationalizedand
also examines the individual components of q in assessing what happens during the
processofinternationalization.
Thepaperreportsfourkeyfindings:
First, international firms tend to have higher valuations than domestic firms. More
specifically,theaverage q offirmsthatatsomepointinthesampleinternationalizeis
higherthantheqoffirmsthatneverinternationalize.
Second, corporations do not experience an enduring increase in q after they
internationalize. This paper finds that (a) valuations are not higher after
internationalization and (b) valuations of firms that internationalize do not increase
relative to those of domestic firms (i.e., the relative q does not increase after
internationalization). Thus, although there are large cross firm differences in q, their
results are consistent with the view that these differences are not affected by
internationalization.
Third,intermsoftheyearbyyeardynamics,qrisesbeforeinternationalization,butthen
falls rapidly in the year after internationalization. They find that one year after
internationalizationtheqofinternationalfirmsisnotsignificantlyhigherthanitwastwo
years (or even three years) before they internationalized. Furthermore, the relative
Tobinsqofinternationalfirms(qdividedbytheaverageqofdomesticfirmsfromthe
same home country) follows the same pattern: rising in the year before
internationalization and during the internationalization year, but relinquishing these
increasesbytheyearafterinternationalization.

Finally,intermsofthecomponentsofq,afirms market capitalization tends to riseprior

tointernationalizationandremainshighthereafter,whilethefirms assets increase during
internationalizationasthefirmexpands.Thus,firmsthatinternationalizeexpandrelative
todomesticfirms

RafaelLaPorta,FlorencioLopezdeSilanes,AndreiShleifer,RobertVishny
:INVESTORPROTECTIONANDCORPORATEVALUATION
Thispaperpresentsamodeloftheeffectsoflegalprotectionofminorityshareholders
andofcashflowownershipbyacontrollingshareholderonthevaluationoffirmsand
then test this model using a sample of 371 large firms from 27 wealthy economies.
Consistent with the model, this paper finds evidence of higher valuation of firms in
countries withbetterprotectionofminorityshareholders,andweakerevidenceofthe
benefits of higher cash flow ownership by controlling shareholders for corporate
valuation.
Their empirical analysis evaluates the influence on corporate valuation of investor
protectionandownershipbythecontrollingshareholderusingcompanydatafrom27of
thewealthiesteconomiesaroundtheworld.TheyuseTobin'sQandthepricetocash
flowratiotomeasurecorporatevaluation.Theyusetheoriginofacountry'slawsandthe
indexofspecificlegalrulesasindicatorsofshareholderprotection.Tounderstandthe

effects of ownership, they focus on companies which have controlling shareholders,

therebyhopingtokeepthepowertoexpropriaterelativelyconstant.Thisrestrictionisin
line with theevidence and thetheoretical work(Zingales 1995,LLS 1999,Bebchuk
1999)suggestingthat,incountrieswithpoorinvestorprotection,itisefficientforthe
entrepreneurstoretaincontroloftheirfirms.Amongthesecompanies,theyconsidercash
flowownershipbythecontrollingshareholderasameasureofincentives.Thisfinding
provides support for the quantitative importance of the expropriation of minority
shareholders in many countries, as well as for the role of the law in limiting such
expropriation. They also find some evidence that higher incentives from cash flow
ownershipareassociatedwithhighervaluations.

Thispaperpresentedasimpletheoryoftheconsequencesofcorporateownershipfor
corporatevaluationindifferentlegalregimes.Theyhavealsotestedthistheoryusing
dataoncompaniesfrom27wealthycountriesaroundtheworld.Theresultsgenerally
confirmthecrucialpredictionofthetheory,namelythatpoorshareholderprotectionis
penalizedwithlowervaluations.Thisevidencesupportstheimportanceofexpropriation
ofminorityshareholdersbycontrollingshareholdersinmanycountries,andfortherole
of the law in limiting such expropriation. As such, it adds an important link to the
explanationoftheconsequencesofinvestorprotectionforfinancialmarketdevelopment.
Theevidenceismoremixedonsomeoftheotherimplicationsofthetheory.Onthe
incentiveeffectsofcashflowownership,theevidenceprovidessomesupportforthe
theory,andisconsistentwiththefindingsofClaessensetal.(1999b)onalargersample
ofcompaniesfromAsia.Theevidenceexpandstheirunderstandingoftheroleofinvestor
protectioninshapingcorporatefinance,byclarifyingtheroleswhichboththeincentives
andthelawplayindeliveringvaluetooutsideshareholders.

StuartC.Gilson;HarvardBusinessSchool,EdithS.Hotchkiss;Boston
College; RichardS.Ruback;HarvardBusinessSchool:Valuationof
BankruptFirms
This study compares the market value of firms that reorganize in bankruptcy with
estimates of value based on managements published cash flow projections. They
estimatefirmvaluesusingmodelsthathavebeenshowninothercontextstogenerate
relatively precise estimates of value. They find that these methods generally yield
unbiasedestimatesofvalue,butthedispersionofvaluationerrorsisverywideandthe
sampleratioofestimatedvaluetomarketvaluevariesfromlessthan20%togreaterthan
250%.Crosssectionalanalysisindicatesthatthevariationintheseerrorsisrelatedto
empiricalproxiesforclaimholdersincentives tooverstateorunderstatethefirms value.
Valuation plays a central role in Chapter 11 bankruptcy negotiations. The firms
estimatedvaluedeterminesthevalueoftheassetstobedividedamongprebankruptcy
claimants and drives projected payouts and recoveries. But bankruptcy is an
administrativeprocess.Thefactorsthatleadtoareliableestimateofvalueinamarket
processareabsentinbankruptcy.Thereisnoactivemarketforcontroloftheassetsofthe

bankruptfirmbecauseitisstronglydiscouragedbythestructureofChapter11.Thereis
no oversight from the capital markets because management has access to debtorin
possessionfinancing.Thesecuritiesofbankruptfirmsoftentradeinfrequentlyperhapsas
aresult;thereisverylimitedanalystcoverage.Thisabsenceofmarketforcesmakes
valuationmorecomplexandlessprecise.

Thisstudyexplorestherelationbetweenthemarketvalueof63publiclytradedfirms
emergingfromChapter11andthevaluesimpliedbythecashflowforecastsintheir
reorganizationplans.Theyestimatethevalueoftheforecastsusingthecapitalcashflow
approach. Kaplan and Ruback1995.show this approach yields relatively precise
estimates of value for a sample of highly leveraged transactions. They also use a
comparablecompaniesapproach.Inaddition,in28casestheyhaveestimatesofvalue
directlyprovidedbymanagementasrequiredunderfresh startaccounting. They find
that estimates ofvalueare generally unbiased, butthe estimated values are notvery
precise.Thedispersionofvaluationerrorsisverywideandthesampleratioofestimated
value to market value varies from less than 20% to greater than 250%. These large
valuationerrorscannotbewhollyattributedtotheirchoiceofmodelsorpotentialerrors
inourspecificassumptions,suchasthediscountrateorlongtermgrowthrate.
Theirexperimentaldesigncomparesthevaluecalculatedfrommanagementscashflow
forecaststotheactualmarketvalue.Thevalueimpliedbytheforecastsisestimatedusing
discountedcashflowandcomparablecompanymultiplemethods.Thesemethodsare
widely used by bankruptcy practitioners and investors .they also examine estimated
valuesbasedonPerformabalancesheetsforthereorganizedfirmincaseswherethefirm
implementsfreshstartaccounting.

Z.P.MATOLCSY;UNIVERSITYOFTECHNOLOGY,SYDNEYA.
WYATTUNIVERSITYOFMELBOURNE:WHATELSEDRIVESTHE
VALUEOFCOMPANIESATECHNOLOGICALINNOVATION
APPROACH

Theobjectiveofthisstudyistoprovideevidenceontherelationbetweenconstructs
based on technological areas within which companies invest and market values of
equities. These constructs are technological potential, technological complexity and
technological development period. They argue that they are lead indicators of future
earnings and earnings growth, and hence, they provide additional insight into future
earningsandearningsgrowthbeyondfirmspecificaccountingnumbers.Theirresultsare
basedonanaverageof1531UScompaniesfortheperiodof19902000.Theiroverall
resultsarethatthethreeconstructsbasedontechnologicalareas,wheninteractedwith
earnings,areassociatedwithmarketvalues.Theyalsoconductanumberofadditional

tests basedonanalysesoftechnologicalareas toevaluate therobustnessofthemain

results.
Thispaperprovidesasoundtheoreticalbasisforutilizingnonfirmspecificinformation
sources in valuation. The technological innovation conditions are derived from the
economicsofinnovationliterature.Basedonthisframework,theydefinetechnological
potentialasthestateoftechnological progressandknowledgewithinatechnological
area.Second,theyutilizeadatabase,theCHIResearchTechLine, which has limited
exposureinthevaluationliterature.Thisdataincludestheclasstowhichexaminershave
assigned the patent, citations to prior related patents and to scientific papers, patent
counts,andpatentrenewals.
Forourpurpose,the CHIResearchTechLine database enables the development of
quantitative constructs of differences in technological innovation conditions across
different technological areas. Then they are able to obtain high construct validity
measuring fundamental technology conditions in the economy (across different
technologyareas)inthiswaybecausetheunderlyingtechnologyclassificationemployed
toconstructthedatabase(IntellectualPropertyClassificationorIPC)coversvirtuallyall
technologies currently inexistence (Narin 1995).Further,the data byconstruction is
synchronouswithfinancialindicatorsintheeconomy(Narin1995),thereby,providinga
powerful tool for evaluating the nature of the information correlated with the data
employedbyinvestorstoforecastfutureearningsandpricethefirmsequity.
Theirresultsarebasedonanaverageof1531UScompaniesfortheperiodof19902000
theoverallresultsarethattechnologicalinnovationconditionsinconcertwithearnings
areassociatedwithmarketvaluesbasedontestsforindividualyears,pooled,andFama
McBethregressionestimates.Theyalsoconductanumberofadditionaltestsbasedon
analysesofspecificsectorsandalternativespecificationsoftheirmodelstoevaluatethe
robustnessofthemainresults.Thesesensitivitytestsconfirmtheirmainfindings.

Thisstudybuildsuponandextendspreviousliteraturethatexaminesthefactorsthatdrive
equity market value where that literature typically focuses on accountingbased
informationandsomenonfinancialmetrics.Inthispaper,theyexaminetheassociation
between market values and technological innovation conditions as a source of
informationaboutthefirmsexpectedfuturegrowth.
This study also introduces three technological innovation conditions: technological
potential, technological complexity, and technological development period. Their
constructsarebasedontechnologicalareasratherthanindustrydataorfirmleveldata.
Their contention is that financial analysts incorporate these technological innovation
conditions into their valuations because these are fundamental exogenous conditions
impactingthefirms future earnings andearningsgrowth.

AswathDamodaran:SternSchoolofBusiness:TheCostofDistress
Survival,TruncationRiskandValuation
TraditionalvaluationtechniquesbothDCFandrelativeshortchangetheeffectsof
financial distress on value. In most valuations, we ignore distress entirely and make
implicitassumptionsthatareoftenunrealisticabouttheconsequencesofafirmbeing
unabletomeetitsfinancialobligations.Eventhosevaluationsthatpurporttoconsiderthe
effect of distress do so incompletely. In this paper, they begin by considering how
distressisdealtwithintraditionaldiscountedcashflowmodels,andwhenthesemodels
valuedistresscorrectly.Thentheylookatwaysinwhichtheycanincorporatetheeffects
ofdistressintovalueindiscountedcashflowmodels.Atlasttheyconcludebylookingat
theeffect ofdistress onrelative valuations,andwaysofincorporating itseffect into

relativevalue.

Inbothdiscountedcashflowandrelativevaluation,theyimplicitlyassumethatthefirms
that theyarevaluing aregoingconcerns andthatanyfinancial distressthatthey are
exposedtoistemporary.Afterall,asignificantchunkofvalueineverydiscountedcash
flowvaluationcomesfromtheterminalvalue,usuallywellinthefuture.Inthispaper,
theywillarguethattheytendtoovervaluefirmssuchastheseintraditionalvaluation
models,largely becauseis difficult tocapturefullytheeffect ofsuchdistressinthe
expected cashflows andthediscountrate.Thedegree towhichtraditional valuation
models mis value distressed firms will vary, depending upon the care with which
expectedcashflowsareestimated,theeasewithwhichthesefirmscanaccessexternal
capitalmarketandtheconsequencesofdistress.Inthispaper,theywillbeginbylooking
attheunderlyingassumptionsofdiscountedcashflowvaluation.
Distressed firms, i.e., firms with negative earnings that are exposed to substantial
likelihoodoffailure,presentachallengetoanalystsvaluingthembecausesomuchof
conventionalvaluationisbuiltonthepresumptionthatfirmsaregoingconcerns.Inthis
paper,theyhaveexaminedhowbothdiscountedcashflowandrelativevaluationdeal
(sometimespartiallyandsometimesnotatall)withdistress.Withdiscountedcashflow
valuation,theysuggestedfourwaysinwhichtheycanincorporatedistressintovalue
simulationsthatallowforthepossibilitythatafirmwillhavetobeliquidated,modified
discounted cash flow models, where the expected cash flows and discount rates are
adjustedtoreflectthelikelihoodofdefault,separatevaluationsofthefirmasagoing
concernandindistressandadjustedpresentvaluemodels.Withrelativevaluation,they
canadjustthemultiplesfordistressoruseotherdistressedfirmsasthecomparablefirms.
atlastthispaperexaminetwoissuesthatmaycomeupwhengoingfromfirmvalueto
equityvalue.Thefirstrelatestotheshiftingdebtloadatthesefirms,asthetermsofdebt
getrenegotiatedanddebtsometimesbecomesequity.Thesecondcomesfromtheoption
Characteristicsexhibitedbyequity,especiallyinfirmswithsignificantfinancialleverage
andpotentialforbankruptcy.

CHAPTER 4
RESEARCH METHODOLOGY

RESEARCHPROPOSAL
PROBLEMSTATEMENT
Whycompanieswithnegativeearningshavemarketpriceofsharegreaterthanintrinsic
value.

OBJECTIVES

1. To analyze the parameters to evaluate or value a firm.

2. To analyze the valuation of the selected companies.
3. To compare the value of the firm with that of market value of share.
4. To find out the strategic actions for the differences existing between the value of
the selected companies as per research valuation and the market values of the
aforesaid companies.

SCOPEOFSTUDY
Itisessentialthatstrategicdecisionsforcompaniesarebasedonaccurateinformation.
Whetherwhilebuying,selling,merging,restructuringorraisingadditionalcapital,itis
imperativetoknowthevalueofacompany.Accuratevaluationhelpsinmakingprudent
investments and strategic decisions. Valuations are critical components of nearly all
financial transactions. The demand of corporations and industrial practitioners to
optimizevalueforcommercialpurposeshasdriventheneedtoutilizevaluationasa
strategiccorporatetool.Valuationortheestimateofthecurrentmarketvalueofanasset

is foundin all business andin all dimensions.Forthe purposeofvaluation, models

suggestedbyAshwatDamodaraninthebooknamedDarksideofvaluationhavebeen
used.

SAMPLESIZE
TheSamplesizeconsideredfortheresearchundertakenhasascopeoffivedifferent
industries. One company each to represent each industry with three comparable
companieswithinthesameindustrywhichsetsthemarketstandardsareconsideredto
validatetheindustrystandards.

SOURCESOFDATA
Thedatarelatingtothestudyistakenfromtwodatabasesnamelyprowessand
capitallineplus.

VALUATIONPARAMETERS

Thefollowingparametersareusedforvaluingthecompanies:
1. Netoperatingprofitlessadjustedtaxes(NOPLAT)
2. Returnoncapitalemployed(ROCE)
3. Growthrate
4. Weightedaveragecostofcapital
5. Freecashflow(FCFF)

RESEARCHMETHODOLOGY
Asperthesamplesizefivecompaniesrepresentingdifferentindustriesareanalyzedwith
theircomparablecompaniesonthebasisoffinancialstatements.
PROJECTIONOFSALESANDCOSTOFGOODSSOLD
Thesalesandthecostofgoodssoldofthesamplecompanyareprojectedfortenyears.
Sincethecostofgoodssoldishigherthansaleswhichconcludetonegativeearnings,the
averageofcostofgoodssoldisthebenchmarkusedforthecompanybeingevaluated.
ESTIMATINGGROWTH

Thevalueofafirmisthepresentvalueofexpectedfuturecashflowsgeneratedbythe
firm.Themostcriticalinputinvaluationisthegrowthratewhichisusedtoforecast
futurerevenuesandearnings.
Inthisresearchprojecttheaveragegrowthratesofbenchmarkscompaniesareconsidered
astheupperlimitandthegrowthrateofthevaluingcompanyisconsideredasthelower
limit.Thismarkstherangeofgrowthforthesamplecompany.Withintherangethree
distinguishinggrowthratesarechosenandfinancialstatements areforecastedforten
yearsusingthesegrowthrates.
Approachusedforvaluation:DISCOUNTEDCASHFLOW(DCF)

APPROACH
Thereareseveraltriedandtrueapproachestodiscountedcashflowanalysis.
1. Dividenddiscountmodel(DDM)approach
2. Freecashflowtofirm(FCFF)approach
3. Freecashflowtoequity(FCFE)approach
ForthepurposeofvaluationFCFFapproachisusedbecausethisapproachiscommonly
usedbyanalystsandvaluationexpertstodeterminethefairvalueofcompanies.

TheGeneralValuationModel
Oncethefreecashflowstothefirmhavebeenestimated,theprocessofcomputingvalue
followsafamiliarpath.Ifvaluingafirmorbusinesswithfreecashflowsgrowingata
constantrateforever,wecanusetheperpetualgrowthequation:
ValueofFirmwithFCFFgrowingatconstant
rate

E(FCFF 1)
=

(kcgn)

Firstofallweconsidercashflowsbeforedebtpaymentsinthismodel,andthendiscount
thesecashflowsbackatacompositecostoffinancing,i.e.,thecostofcapitaltoarriveat
thevalueofthefirm.Tovaluefirmswherefreecashflowstothefirmaregrowing
Thevalueofafirmisthepresentvalueofexpectedfuturecashflowsgeneratedbythe
firm.Themostcriticalinputinvaluationisthegrowthratewhichisusedtoforecast
futurerevenuesandearnings.
Inthisresearchprojecttheaveragegrowthratesofbenchmarkscompaniesareconsidered
astheupperlimitandthegrowthrateofthevaluingcompanyisconsideredasthelower
limit.Thismarkstherangeofgrowthforthesamplecompany.Withintherangethree
distinguishinggrowthratesarechosenandfinancialstatements areforecastedforten
yearsusingthesegrowthrates.
Approachusedforvaluation:DISCOUNTEDCASHFLOW(DCF)

APPROACH
Thereareseveraltriedandtrueapproachestodiscountedcashflowanalysis.
1. Dividenddiscountmodel(DDM)approach
2. Freecashflowtofirm(FCFF)approach
3. Freecashflowtoequity(FCFE)approach
ForthepurposeofvaluationFCFFapproachisusedbecausethisapproachiscommonly
usedbyanalystsandvaluationexpertstodeterminethefairvalueofcompanies.

TheGeneralValuationModel
Oncethefreecashflowstothefirmhavebeenestimated,theprocessofcomputingvalue
followsafamiliarpath.Ifvaluingafirmorbusinesswithfreecashflowsgrowingata
constantrateforever,wecanusetheperpetualgrowthequation:
E(FCFF 1)

ValueofFirmwithFCFFgrowingatconstant
rate

Firstofallweconsidercashflowsbeforedebtpaymentsinthismodel,andthendiscount
thesecashflowsbackatacompositecostoffinancing,i.e.,thecostofcapitaltoarriveat
thevalueofthefirm.Tovaluefirmswherefreecashflowstothefirmaregrowingata

Thevalueofafirmisthepresentvalueofexpectedfuturecashflowsgeneratedbythe
firm.Themostcriticalinputinvaluationisthegrowthratewhichisusedtoforecast
futurerevenuesandearnings.
Inthisresearchprojecttheaveragegrowthratesofbenchmarkscompaniesareconsidered
astheupperlimitandthegrowthrateofthevaluingcompanyisconsideredasthelower
limit.Thismarkstherangeofgrowthforthesamplecompany.Withintherangethree
distinguishinggrowthratesarechosenandfinancialstatements areforecastedforten
yearsusingthesegrowthrates.

Thevalueofafirmisthepresentvalueofexpectedfuturecashflowsgeneratedbythe
firm.Themostcriticalinputinvaluationisthegrowthratewhichisusedtoforecast
futurerevenuesandearnings.
Inthisresearchprojecttheaveragegrowthratesofbenchmarkscompaniesareconsidered
astheupperlimitandthegrowthrateofthevaluingcompanyisconsideredasthelower
limit.Thismarkstherangeofgrowthforthesamplecompany.Withintherangethree
distinguishinggrowthratesarechosenandfinancialstatements areforecastedforten
yearsusingthesegrowthrates.
Approachusedforvaluation:DISCOUNTEDCASHFLOW(DCF)

APPROACH
Thereareseveraltriedandtrueapproachestodiscountedcashflowanalysis.
4. Dividenddiscountmodel(DDM)approach
5. Freecashflowtofirm(FCFF)approach
6. Freecashflowtoequity(FCFE)approach
ForthepurposeofvaluationFCFFapproachisusedbecausethisapproachiscommonly
usedbyanalystsandvaluationexpertstodeterminethefairvalueofcompanies.

TheGeneralValuationModel
Oncethefreecashflowstothefirmhavebeenestimated,theprocessofcomputingvalue
followsafamiliarpath.Ifvaluingafirmorbusinesswithfreecashflowsgrowingata
constantrateforever,wecanusetheperpetualgrowthequation:
ValueofFirmwithFCFFgrowingatconstant
rate

E(FCFF 1)
=

(kcgn)

Firstofallweconsidercashflowsbeforedebtpaymentsinthismodel,andthendiscount
thesecashflowsbackatacompositecostoffinancing,i.e.,thecostofcapitaltoarriveat

thevalueofthefirm.Tovaluefirmswherefreecashflowstothefirmaregrowingata

ratehigherthanthatoftheeconomy,youcanmodifythisequationtoconsiderthepresent
valueofthecashflowsuntilthefirmisinstablegrowth.Tothispresentvalue,addthe
presentvalueoftheterminalvalue,whichcapturesallcashflowsinstablegrowth.
tN

Valueofhighgrowthbusiness=

t=1

E(FCFF t
t
(1+kc )

TerminalValueofBusinessN
N
(1+kc)

FREECASHFLOWSOFTHEFIRM
Freecashflowrepresentstheactualamountofcashthatacompanyhasleftfromits
operationsthatcouldbeusedtopursueopportunitiesthatenhanceshareholdervaluefor
example, developing new products, paying dividends to investors or doing share
buybacks.

ForecastingFreeCashFlows(FCFF)
Freecashflowsofthefirmareworkedoutbylookingatwhatsleftoverfromrevenues
after deducting operating costs, taxes, net investment and the working capital
requirements.Depreciationandamortizationarenotincludedsincetheyarenoncash
charges.
PARTICULARS

AMOUNT

SALES

XXX

LESS:COGS

XXX

EBIT

XXX

LESS:TAX

XXX

EBIT(1T)

XXX

LESS:CHANGEINCAPEX

XXX

LESS:CHANGEINWORKINGCAPITAL

XXX

FCFF

XXX

TERMINALVALUE
Theterminalvalueofasecurityisthepresentvalueatafuturepointofallfuturecash
flows.Itallowsfortheinclusionofthevalueoffuturecashflowsoccurringbeyonda
severalyearprojectionperiodwhilesatisfactorilymitigatingmanyoftheproblemsof
valuingsuchcashflows.Theterminalvalueiscalculatedinaccordancewithastreamof
projectedfuturefreecashflowsindiscountedcashflowanalysis.
Terminalvalue=finalprojectedyearcashflow/(WACCgrowthrate)
Once the terminal values and operating cash flows have been estimated, they are
discountedbacktothepresenttoyieldthevalueoftheoperatingassetsofthefirm.

ESTIMATINGCOSTOFCAPITAL
Havingprojectedthecompanys free cash flow for thenexttenfiveyears,wewantto
figure out what these cash flows are worth today. That means coming up with an
appropriatediscountratewhichwecanusetocalculatetheNetPresentValue(NPV)of
thecashflows.NPVcomparesthevalueofarupeetodaytothevalueofthesamerupee
in the future, taking inflation and returns into account. For this purpose we find of
WACC. WACC is the blend of the cost of equity and after tax cost of debt. An
assumptiontakenintheresearchvaluationisthattheaverageofROCEofthebenchmark
companiesistakenasWACCforthesampleprofile.
Tocalculatethepresentvaluecalculationofthefuturecashflows,weimplementthe
discountfactormodeltothecashflowsandtheterminalvalue.Theamountgeneratedby
each of these calculations will estimate the present value contribution of each year's

futurecashflow.Addingthesevaluestogetherestimatesthecompany'spresentvalue.

Tocomeupwithafairvalueofthecompanys equity we must deduct its net debt

from
itsvalue.
Fairvalueofequity=TotalEnterprisevalueTotalDebt
The arrived value of equity as per valuation is divided by the total number of
outstandingsharesofthecompanytoattaintheequityvaluepersharewhichisthe
concludingresult.Theconcludedresultmentionedaboveisthencomparedwithits
averageofhighandlowpriceandisanalyzedandinterpretedthatoff.

CHAPTER 5
GLOSSARY &
BIBLIOGRAPHY

GLOSSARY
CAPITALEXPENDITURE(CAPEX)
Those are the expenditures which are used by a company to acquire or upgrade
physicalassetssuchasequipments,property,industrialbuildingsetc.

FREECASHFLOWTOFIRM(FCFF)
Itmeasuresafirm'scashflowremainingafterallexpendituresrequiredtomaintainor
expandthebusinesshavebeenpaidoff.Itrepresentsthenetcashproducedbyafirm
duringagivenperiodonbehalfofshareholders.

NETOPERATINGPROFITAFTERTAXORNOPAT
Itisacompany'saftertaxoperatingprofitforallinvestors,includingshareholdersand
debtholders

RETURNONCAPITALEMPLOYED(ROCE)
ROCE is a commonly used measure for comparing the performance between
companiesandforassessingwhetheracompanygeneratesenoughreturnstopayfor
itscostofcapital.

RETURNONEQUITY(ROE)
Itshowstherateofreturnontheinvestmentforthecompanys common shareholders,
theonlyprovidersofcapitalwhodonothaveafixedreturn.

TERMINALVALUE
Itisthefuturediscountedvalueofallfuturecashflowsbeyondagivendate.
WEIGHTEDAVERAGECOSTOFCAPITAL(WACC)
TheWACCtakesintoaccounttherelativeweightsofeachcomponentofpreferred
equity,commonequityanddebtandpresentstheexpectedcostofnewcapitalfora
firm.

BIBLIOGRAPHY

BOOKS
1. Damodaranonvaluationbyashwathdamodaran
2. Valuation:measuring and managing the value of companies by tom
Copeland,timkollerandjackmurrin.
3. Darksideofvaluationbyashwathdamodaran
4. Companyvaluation:icfai,drniranjanswain
5. Valuationbygeogough.

WEBSITES
1. www.stern.nyu.edu/~adamodar
2. www.giddy.org

REFERANCES
1. Aswath Damodaran:-THE DARK SIDE OF VALUATION: FIRMS WITH NO
EARNINGS, NO HISTORY AND NO COMPARABLES
2. Ross Levine, Sergio L. Schmukler: -INTERNATIONALIZATION AND THE
EVOLUTION OF CORPORATE VALUATION
3. Rafael La Porta,Florencio Lopez-de-Silanes,Andrei Shleifer,Robert Vishny
:-INVESTOR PROTECTION AND CORPORATE VALUATION
4. Stuart C. Gilson; Harvard Business School, Edith S. Hotchkiss; Boston
College; Richard S. Ruback;Harvard Business School:-VALUATION OF
BANKRUPT FIRMS
5. Z. P. MATOLCSY; UNIVERSITY OF TECHNOLOGY, SYDNEY A. WYATT
*UNIVERSITY OF MELBOURNE:-WHAT ELSE DRIVES THE VALUE
OF COMPANIES A TECHNOLOGICAL INNOVATION APPROACH

6. AswathDamodaran:SternSchoolofBusiness:THECOSTOFDISTRESS
SURVIVAL,TRUNCATIONRISKANDVALUATION

DATABASE
1. Prowess
2. Capitallineplus.