Posts Tagged ‘PE’

PEER COMPARISON: UNCOVERS UNDERVALUED STOCKS

Peer comparison is one of the most efficient and effective methods of equity analysis used by analysts and individual investors. It has proved to be most widely used and accepted method that quickly shows which stocks may be overvalued, and which might make good additions to one’s portfolio. While there are other methods of determining when a stock is worth buying, such as discounted cash flow or technical analysis, peer comparison analysis remains a key tool for uncovering undervalued stocks.

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Relative Valuation: Relative valuation often considered as starting point in peer comparison analysis; it is a method of valuing a firm by comparing standardized valuation, such as price-earnings (P/E), price-to-book value (P/B), enterprise value / EBITDA (EV/EBITDA), or others that seems relevant to the investment decision metrics with those of similar companies. Let’s see how each company stacks up to the rest in the table 1.

Now the question comes: How should a company’s metrics compare to those of its peers? In other words, how fair is it for the company to carry a higher or lower valuation than the industry average and by how much?

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However, by simply using these metrics, assuming that all of the companies used for comparison should be valued equally, then naturally investors would avoid/sell PQR. But this simple analysis could be incorrect as each company should be valued differently according to its unique circumstances.

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And to measure the qualitative aspects of the companies, we use tools such as leverage and profitability metrics.

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Operating Performance, Leverage and Profitability Metrics: An investor should look at several metrics before making a decision on how a firm stacks up to its peers, including ROE, return on assets (ROA), gross margin, operating margin, profit margin, debt/equity ratio and others that may be relevant for a firm’s particular circumstances or industry. Lower ROE than its peers is a sign that the company may not turn capital into profits as efficiently as its competitors, and should be valued at a lower multiple than its peers.

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In addition, the expected growth rate of the companies in question is highly significant. Acompany with even slightly higher-than-average profit growth expectations may be valued at significantly higher multiples than its peers. Ultimately, expected profit growth is the main focus, but for young companies and industries, expected sales growth can be heavily weighted also, because these firms may be unprofitable for the foreseeable future.

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In the table above, we have seen that metrics vary considerably. A higher ROE, ROA, gross margin, operating margin and profit margin indicate better operational efficiency that have a positive effect on valuation. A higher debt/equity ratio indicates more risk due to higher leverage, and thus lower valuation. The most important metric, expected earnings growth, will generally have the greatest impact on valuation and, as we can see PQR with a much higher expected earnings growth than the industry average, is indeed valued higher than the rest by P/E, P/S and EV/EBITDA based on its current stock price (see Table 1).

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Spotting Undervalued Stocks: The next step is to use these metrics in conjunction with current valuation ratios. To do this, analyze the operational performance, leverage, profitability to determine which companies should carry a higher-than-average valuation and compare those predictions with current actual valuations. If the current valuation is lower and seems reasonable based on this analysis, then the security may present a buying opportunity. However, while some investors use quantitative econometric analysis to precisely predict how a stock should be valued based on its metrics, the vast majority view this process as more of an art than a science. So, additionally some qualitative factors must also be taken into account.

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Qualitative Factors

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Some companies have advantages or disadvantages relative to their peers based on factors not found in their financial statements. Management quality and corporate governance are some of the most widely focused qualitative factors. Corporate governance must be designed to ensure that shareholders’ rights are upheld. Every company depends on its managers for leadership and vision, both of which can affect the bottom line in the long run. The best companies will have a stable management team and enough depth of talent to weather the loss of one or two key managers without causing a major disruption to the firm’s operations or strategy.

Another very popular qualitative aspect is through Porter’s five forces analysis.

These five forces are:

•Threat of new entry

•Threat of substitution

•Bargaining power of suppliers

•Bargaining power of buyers

•Competition in the industry

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The interaction of these five forces can affect a firm’s long-term prospects for sustainable growth. If the current valuation is lower after taking various valuation metrics and qualitative factors into account, then the stock may be undervalued.

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Conclusion: Peer comparison analysis is one of the most useful tools for fundamental analysis of a stock. Since the data necessary to conduct the analysis is generally public and readily accessible on financial websites, it is easy for individual investors to employ this method of analysis for knowing undervalued scrips. Moreover, since it takes quantitative as well as qualitative aspects of company operations hand in hand, it leaves minimal room for risk and ambiguity to the investors.

Fund Raising by PE and VCs to Increase by 30-40 percent in 2010

Fund Raising by PE and VCs to Increase by 30-40 percent in 2010

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Private equity (PE) players and venture capitalists (VCs) are back in the market to raise funds.

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Market experts believe that 2010 will see these players raising $13-15 billion, almost as equal to what PE players and VCs raised in 2008.

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PE players and VCs had raised $10-11 billion in 2009, though most of this was in the second half of 2009.

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Experts expect to see a 30-40 per cent rise in fund-raising this calendar year courtesy PE players and VCs.

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“Close to 45 funds are either preparing to enter the market or have already hit the road to raise funds.

While I feel that matching the level of 2007 is difficult, the year will be better than 2009,”

said Jagannadham Thunuguntla, equity head, SMC Capitals.

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Industry experts expect that this year will be governed by returns.

Many Industry experts are of view that LPs are going to focus on returns and returns will be more than 20 per cent, better than in 2009.

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“I think LPs are still trying to rework their portfolios.

It will be difficult for general partners to convince LPs to invest,” said Thunuguntla.

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Infrastructure, consumer services, education, healthcare, financial and clean technology will be the favoured sectors, say experts.

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One sector that is already in focus is infrastructure.

The players are in the process of raising close to Rs 8,541 crore ($1.78billion) worth of infrastructure funds.

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Investors will become company-specific rather than sector-specific.

Good sectors can have bad companies and so it makes sense to focus on companies,” said Thunuguntla.

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Fund-raising by VCs already seems to be gaining momentum.

Moreover Industry experts are of view that fund-raising will be more selective this year.

It will be better in 2010 than what was seen in 2008-09.

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However experts say that the number of funds that get allocation from LPs will come down significantly this year.

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QIPs Outstripped PE Funding & IPOs in Fund Raising Process ;)

QIP-investments-outpace-PEfunds

Qualified institutional placements (QIPs) have outstripped private equity (PE) funding since January by at least eight times, making it by far the most popular fund-raising route for firms this year.

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QIPs raised at least Rs. 21,209 crore since January this year, while PE funds invested only Rs. 2,574 crore in listed firms.

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QIPs have almost raised more than twice of initial public offerings.

A QIP is a private placement by a listed company of shares or securities convertible to equity with qualified institutional buyers approved by market regulator Securities and Exchange Board of India(SEBI).

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Data from Delhi-based investment bank SMC Capitals Ltd shows another 48 QIPs worth Rs.43,891 crore are in the pipeline.

But analysts do not expect a significant rise in the number of, or funds through, PE deals this year.

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Typically, PE investments take up to six months to complete, whereas a QIP can be done in up to four weeks, making the fund-raising process faster and more reliable since the institutional buyers are selected carefully.

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Also, in a QIP, the institutional buyers rarely seek a seat on the company board, or management control, a common practice in large PE deals.

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Since PE is perceptionally intrusive for promoters, QIP serves as a good alternative.

However this QIP structure is liked by investors and firms as in a QIP the window is shorter and money can be raised quickly.

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While real estate firms typically prefer QIPs for their need of capital at short notice, the companies currently waiting to do QIPs are across sectors, including telecom, entertainment, retail and information technology.

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In line for QIPs are Reliance Communications Ltd, Pyramid Saimira Theatre Ltd, Pantaloon Retail (India) Ltd  and few more.

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Some firms, though, have taken both routes for their funding needs.

Historically, PE investments in India have been in the form of private investments in public enterprises, or PIPEs, which also happen to the only firms eligible for QIPs.

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“Private equity investors have missed the boat,” Jagannadham Thunuguntla, head of SMC Capitals, said in a statement.

Companies that are in the pipeline for QIPs may also look for American depository receipts or global depository receipts for funds, he  added.

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VC/PE funds set their sight on Micro Finance companies :)

Venture Capitalists

Venture capitalists/PE (private equity) funds are now looking at investing in micro finance companies in India.

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According to observers, around Rs 1,000 crore is expected to be invested by venture capitalists/PE funds in the Indian micro finance space (MFIs) this year.

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In fact, of the 50 private equity deals worth $1 billion in banking and finance in the last 18 months, MFIs alone accounted for 20 deals amounting to $200 million.

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Apart from MFI focused funds, other venture capitalists and PE funds who consider opportunities in the financial services space are now adding micro finance to their portfolio.

Many venture capitalists are excited about investing in this space now.

Many MFIs especially south-based ones have the right professionals and processes in place. Early stage investors are keen to enter this space.

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The venture fund does early stage investment and primarily focuses in healthcare and technology.

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Many MFIs have also demonstrated scalability of the business and also boast of a good management structure, essential elements for VC/PE funding.

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PE Exits through Bulk & Block Deals: SMC Capitals

SMC Capital Equity Head

According to the SMC Capitals report, the capital market bounce starting April 2009 has seen several PE (Private Equity) funds selling their investments in the open market.

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The PE funds have sold from April 2009 till date, an amount to the tune of about Rs 1531 crore through bulk deals and block deals.

SMC Capitals report on PE funds selling investments :


1. The capital market bounce starting April 2009 has seen several PE (Private Equity) funds selling their investments in the open market.

2. The severe capital market correction of 2008 has resulted into several PIPE (Private Investment into Public Enterprises) investments into listed companies by PE funds, facing huge losses with severe wealth destruction.

3. However, the recent market bounce has given a fresh breather of life for several PE investments with impressive recovery of losses.

The PE funds have sold from April 2009 till date, an amount to the tune of about Rs 1531 crore through bulk deals and block deals.


4. The several prominent exits, either partial or full, by PE funds during this period are such as:

– ChrysCapital sale of their stake in Shriram Transport Company for an amount of about Rs 300 crore.

– Orient Global sale of their stake in India Infoline for an amount of about Rs 250 crore

– Warburg Pincus sale of their stake in Max India for an amount of Rs 246 crore

– TPG sale of their stake in Mahindra & Mahindra Finance for an amount of about Rs 123 crore.

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Also read full report on the attachment:

http://www.moneycontrol.com/news_html_files
/news_attachment/2009/SMS%20report%20on
%20PE%20Exits.pdf

According to the SMC Capitals report, the capital market bounce starting April 2009 has seen several PE (Private Equity) funds selling their investments in the open market. The PE funds have sold from April 2009 till date, an amount to the tune of about Rs 1531 crore through bulk deals and block deals.