VALUATION OF EDELWEISS

CAPITAL
SUBMITTED TO: PROF. PARESH SHAH

SUBMITTED BY:
PIYUSH GAUR (35)
KOMAL LALWANI (18)
NISHIDH SHAH (47)
ANIS VOHRA (56)
BHAVIK GANDHI (10)

 Edelweiss Capital is a financial services company

based in Mumbai, India.
Edelweiss Capital Limited provides investment
banking, institutional equities, private client
broking, asset management, wealth management,
insurance broking and wholesale financing services
to corporate, institutional and high net worth
individual clients.
It operates from 43 other offices in 19 Indian cities.

` in Crores

Net Profit Trends

60
50
40
30
20
10
0

27.06

Mar '07

34.2

28.78

Mar '08

58.73

26.37

Mar '09

Mar '10

Mar '11

` in Crores

Net Increase / Decrease in Cash

150
100
50
0
-50
-100
-150

111.69
2.93
Mar '07

Mar '08

Mar '09
-92.72

9.53
Mar '10

-20.21
Mar '11

EDELWEISS CAPITAL
VALUATION

ESTIMATION OF DISCOUNT RATES

COST OF DEBT
` in Crores

2010-11

2009-10

2008-09

2007-08

2006-07

Secured Loan

99.51

471.85

108.46

127.12

0.93

Unsecured Loan

3496.6

981.56

400.72

975.81

180

Total Debt

3596.11

1453.41

509.18

1102.93

180.93

Interest

300.11

137.22

97.82

77.32

2.13

Tax Rate

0.3

0.3

0.3

0.3

0.3

Cost of Debt (Kd) (%)

5.84

6.61

13.45

4.91

0.82

2010-11

2009-10

COST OF EQUITY
` in Crores
Risk Free Return

2008-09

2007-08

2006-07

0.0675

0.0625

0.0475

0.065

0.075

Return Generated by Market

0.21

0.15

0.27

0.17

0.2

Beta

0.68

1.64

0.95

1.78

1.91

Equity Risk Premium

0.1425

0.0875

0.2225

0.105

0.125

Cost of Equity (%)

9.7575

14.4125

21.185

18.755

23.95

COST OF CAPITAL
` in Crores

2010-11

2009-10

2008-09

2007-08

2006-07

Market Price Per Share

32.1

50.97

41.32

56.91

63

Number of Shares

75.2

37.54

37.47

37.47

4.49

Market Value of Share

2413.92

1913.414

1548.26

2132.418

282.87

Total Debt

3596.11

1453.41

509.18

1102.93

180.93

Total

6010.03

3366.824

2057.44

3235.348

463.8

Cost of Debt

5.84

6.61

13.45

4.91

0.82

Cost of Equity

9.7575

14.4125

21.185

18.755

23.95

Cost of Capital (%)

8.18

9.98

15.36

9.63

9.85

Cost of Capital can be calculated by:

(Market Value of Debt * Cost of Debt) + (Market Value of Equity * Cost of Equity)
Total Debt and Equity

Percentage

Cost of Capital & Interest Rate

30.00
20.00
10.00
0.00
2010-11

2009-10

2008-09

Overall Cost of Capital (%)

2007-08

2006-07

Interest Rate (%)

Percentages

Cost of Capital
30.00
20.00
10.00

0.00
2010-11
Cost of Debt

2009-10

2008-09

Cost of Equity

2007-08

2006-07

Cost of Capital (%)

NET INCOME APPROACH

Approach proposed by David Durand,
there exists direct relationship between the
Capital Structure and Valuation of the Firm
and Cost Capital.
V=S+B
Overall Cost of Capital = EBIT / V

ASSUMPTIONS TO NI APPROACH
There is no Corporate Taxation.
The cost of debt is less than the cost of
equity.
The use of debt does not change the risk
perception of the investors as a result of
both cost of debt and cost of equity remain
constant.
No hidden Cost exist, when more and
more debt introduced.

NET INCOME APPROACH

` in Crores

2010-11

2009-10

2008-09

2007-08

2006-07

Market Price Per Share

32.1

50.97

41.32

56.91

60

Number of Shares

75.2

37.54

37.47

37.47

4.49

Total Debt

3596.11

1453.41

509.18

1102.93

180.93

EBIT

363.91

181.25

133.27

117.97

39.66

Interest

300.11

137.22

97.82

77.32

2.13

Net Income

63.8

44.03

35.45

40.65

37.53

Cost of Capital (%)

8.18

9.98

15.36

9.63

9.85

Market Value of Equity Shares

522.19

439.31

544.61

391.38

369.50

Total Value of Company

4118.30

1892.72

1053.79

1494.31

550.43

Overall Cost of Capital (%)

8.84

9.58

12.65

7.89

7.21

 Increase in Debt has cause to increase in cost of capital

and value of Edelweiss Capital.
Rate of Interest is less than Equity Capitalization Rate.

NET OPERATING APPROACH

Approach proposed by David Durand, the
valuation of the firm and its Cost of Capital
are Independent of its Capital Structure.
The Market Value of debt is deducted from
the total value of the firm and the
difference is the Market Value of Stock.

ASSUMPTIONS TO NOI APPROACH

The overall Cost of Capital remains same for all
degree of debt equity mix.
The Market Capitalization Rate capitalizes the
Value of Firm as a whole.
The use of less costly debt funds increases the
risk of Shareholders.
There are no Corporate Taxes.
The Cost of Debt is constant.

NET OPERATING APPROACH

` in Crores

2010-11

2009-10

2008-09

2007-08

2006-07

Number of Shares

75.2

37.54

37.47

37.47

4.49

Total Debt

3596.11

1453.41

509.18

1102.93

180.93

Cost of Capital (%)

8.18

9.98

15.36

9.63

9.85

EBIT

363.91

181.25

133.27

117.97

39.66

Total Value of Company

4446.19

1816.57

867.49

1225.28

402.82

Market Value of total Debt

3596.11

1453.41

509.18

1102.93

180.93

Market Value of Equity Shares

850.08

363.16

358.31

122.35

221.89

Interest

300.11

137.22

97.82

77.32

2.13

Equity Capitalization Rate

7.51

12.12

9.89

33.22

16.91

 The market value of the firm remains unaffected by the change in

capital structure.
However, the with the increase in debt over previous years has
increased the equity capitalization rate and value of Edelweiss
Capital over a period of time.

TRADITIONAL APPROACH
The traditional approach is also known as the
intermediate approach as it is the mean between two
extreme approaches of net income approach on one
hand and net operating income on the another.
It believes in the existence of what may be called
Optimal Capital Structure.
By a judicious mix of debt and equity capital, it is
possible for the firm to minimize the overall cost of
capital and maximize the total value of the firm.

TRADITIONAL APPROACH
` in Crores

2010-11

2009-10

2008-09

2007-08

2006-07

EBIT

363.91

181.25

133.27

117.97

39.66

Interest

300.11

137.22

97.82

77.32

2.13

63.8

44.03

35.45

40.65

37.53

Cost of Equity (%)

9.7575

14.4125

21.185

18.755

23.95

Equity Shares

653.86

305.50

167.34

216.74

156.70

Market Value of Debt

3596.11

1453.41

509.18

1102.93

180.93

Market Value of Company

4249.97

1758.91

676.52

1319.67

337.63

8.56

10.30

19.70

8.94

11.75

Net Income

Overall Cost of Capital (%)

 Reduction in Interest rate is higher than reduction in cost

of equity.
In Year 2008-09, Increase in Interest Rate was higher
than Increase in Cost of Equity.

MODIGLIANI-MILLER APPROACH
the value of the firm and its cost of capital
independent of its capital structure, i.e.,
the total value of the firm remain
unchanged inspite of the debt equity mix
or the degree of leverage.
overall cost of capital is equal to the
capitalization rate of pure equity stream of
risk class.

MODIGLIANI-MILLER APPROACH
` in Crores

2010-11

2009-10

2008-09

2007-08

2006-07

Total Capital Employed

4919.12

2763.55

1865.29

2453.29

631.05

Equity Capital

1323.01

1310.14

1356.11

1350.36

450.12

Total Debt

3596.11

1453.41

509.18

1102.93

180.93

Net Operating Income

363.91

181.25

133.27

117.97

39.66

Interest

300.11

137.22

97.82

77.32

2.13

3596.11

1453.41

509.18

1102.93

180.93

Equity Earnings

63.8

44.03

35.45

40.65

37.53

Cost of Capital (%)

8.18

9.98

15.36

9.63

9.85

779.50

441.29

230.75

422.21

381.19

4375.61

1894.70

739.93

1525.14

562.12

8.32

9.57

18.01

7.74

7.06

Market Value of Debt

Market Value of Equity

Market Value of Company
Average Cost of Capital (%)

 At any degree of leverage, the company's overall cost of capital (ko) and the
Value of the firm (V) remains constant.
This means that it is independent of the capital structure.
The value of Edelweiss Capital is obtained by capitalizing the operating
earnings, discounted at an appropriate discount rate suitable for the risk
undertaken.

NET ASSETS VALUE METHOD

Net Assets Value = Total Assets (excluding
Miscellaneous Expenditure & Debit balance of Profit &
Loss account) Total Liabilities
OR
Net Assets Value = Share Capital + Reserves (excluding
revaluation reserves) Miscellaneous Expenditure
Debit Balance of Profit & Loss Account

NET ASSET VALUE METHOD

` in Crores

2010-11

2009-10

2008-09

2007-08

2006-07

Fixed Assets

3.75

3.1

4.6

7.68

1.29

Investments

1199.52

1153.61

1249.73

1059.23

247.93

Current Assets, Loans & Advances

3828.92

1786.22

682.81

1464.13

403.09

Total Assets

5032.19

2942.93

1937.14

2531.04

652.31

Current Liabilities

76.97

98.68

34.22

61.18

21.9

Provisions

36.09

80.71

39.38

18.18

0.31

Current Liabilities & Provisions

113.06

179.39

73.6

79.36

22.21

Unsecured Debt

3596.11

1453.41

509.18

1102.93

180.93

Total Debt

3709.17

1632.8

582.78

1182.29

203.14

Net Worth

1323.02

1310.13

1354.36

1348.75

449.17

Number of Equity Share

75.2

37.54

37.47

37.47

4.49

Value Per Share

17.59

34.90

36.15

36.00

100.04

Value Per Share as per Net Assets Value Method

Amount in `

150.00
100.00

100.04

50.00
0.00

17.59
2010-11

34.90
2009-10

36.15
2008-09

36.00
2007-08

2006-07

Net Worth as per Net Assets Value Method

` in Crores

1500

1323.02

1310.13

1354.36

1348.75

1000

500

449.17

0
2010-11

2009-10

2008-09

2007-08

2006-07

PROFIT EARNING CAPOTALIZATION

VALUE METHOD
PECV = Future Maintainable Profits After
Tax/Capitalization Rate OR
PECV = Future Maintainable Profits After Tax*
PE Multiple

PROFIT EARNING
CAPITALIZATION VALUE METHOD
` in Crores
Revenue

2010-11

2009-10

2008-09

2007-08

2006-07

439.61

233.53

189.88

187.65

75.31

75.7

52.28

56.61

69.68

35.65

PBDIT

363.91

181.25

133.27

117.97

39.66

Interest

300.11

137.22

97.82

77.32

2.13

PBDT

63.8

44.03

35.45

40.65

37.53

Depreciation

1.42

1.67

4.38

1.32

1.02

PBT

62.38

42.36

31.07

39.33

36.51

Tax

3.65

8.14

4.71

10.54

9.44

PAT

58.73

34.22

26.36

28.79

27.07

PE Ratio

10.70

15.00

10.40

19.10

9.95

PECV

628.4

513.3

274.1

549.9

269.4

EPS

0.78

4.56

3.52

3.84

6.03

Market Price of Equity

32.1

50.97

41.32

56.91

60

Expenditure

Profit Earning Capitalization Value

` in Crores

800.0
628.4

600.0

549.9

513.3

400.0
274.1

200.0

269.4

0.0
2010-11

2009-10

2008-09

2007-08

2006-07

Earning Per Share

Amount in `

6.03
4.56

3.52

3.84

0.78
2010-11

2009-10

2008-09

2007-08

2006-07

EBITDA MULTIPLE METHOD

Enterprise Value
=

EV/ EBITDA Multiple

------------------EBITDA
OR

Market Value of Equity + Market Value of Debt

Earnings before Interest, Taxes, Depreciation &
Amortization

EBITDA MULTIPLE METHOD

` in Crores

2010-11

2009-10

2008-09

2007-08

2006-07

Number of Shares

75.2

37.54

37.47

37.47

4.49

Market Price of Equity

32.1

50.97

41.32

56.91

60

Market Value of Equity

2413.92

1913.414

1548.26

2132.418

269.4

Market Value of Debt

3596.11

1453.41

509.18

1102.93

180.93

Enterprise Value

6010.03

3366.82

2057.44

3235.35

450.33

EBITDA

363.91

181.25

133.27

117.97

39.66

Cost of Capital (%)

16.52

18.58

15.44

27.43

11.35

` in Crores

Enterprise Value as per EBITDA Multiple Method

of Valuation
8000.00
6000.00
4000.00
2000.00
0.00

6010.03
3366.82
2057.44
2010-11

2009-10

2008-09

3235.35

2007-08

450.33
2006-07

Enterprise Value / EBITDA

Amount in `

30.00

20.00

27.43
16.52

18.58

15.44
11.35

10.00
0.00
2010-11

2009-10

2008-09

2007-08

2006-07

MATRIX
Methods
(` in Crores)

2010-11

2009-10 2008-09 2007-08 2006-07

Net Income Approach

4118.30

1892.72 1053.79 1494.31

550.43

Net Operating Approach

4446.19

1816.57

867.49 1225.28

402.82

Traditional Approach

4249.97

1758.91

676.52 1319.67

337.63

Modigliani-Miller
Approach

4375.61

1894.70

739.93 1525.14

562.12

NI Approach is based on income before interest.

NOI Approach is based on income after interest.
Traditional Approach takes into account only equity capitalization rate.
M&M Approach takes in to account overall capitalization rate.

CONCLUSION
Net Operating Income Approach is the best method for
Valuation of Edelweiss Capital.
It takes into account both i.e., Capitalization Rate and
Interest.
There are always fluctuations in the Interest Rate and
Cost of Fluctuations.
Net Worth is increasing, which indicates that companys
Assets increasing at faster rate than Debt.
Edelweiss Capital has a value of almost of ` 4200
Crores.
Company has good profitability ratios which indicates
sound management exist at Edelweiss Capital.