Sebi may soon revisit start-up listing norms

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The Securities and Exchange Board of India (Sebi) may soon review its framework for listing of start-ups, including e-commerce firms, while incorporating suggestions from various stakeholders to make this platform much more vibrant.

The Institutional Trading Platform (ITP) is yet to see any start-up listing ever since an easier set of compliance and disclosure requirements was notified in August 2015.

These norms have been put in place to encourage Indian start-ups and entrepreneurs to remain within the country rather than go abroad for funds.

Under the rules, start-ups can list on the separate ITP of stock exchanges such as BSE and NSE.

The platform is open to only institutional investors and high networth individuals (HNIs), while retail investors have been excluded in order to safeguard small investors against a higher level of risks associated with this platform.

Many start-ups believe that the current listing norms are unattractive for them to list in India. Moreover, not a single company got listed on the relaxed ITP platform.

Now, Sebi is likely to review the ITP norms soon. It will also incorporate suggestions from various stakeholders to make this platform much more vibrant, sources said.

Sebi’s Primary Market Advisory Committee (PMAC) has also suggested that norms should be reviewed as the matter progresses.

Under the notified rule, minimum trading lot and the minimum application size have been kept at Rs 10 lakh so that only sophisticated and large investors come in.

For their listing, Sebi also relaxed the mandatory lock-in period for promoters and other pre-listing investors to six months, as against three years for other companies.

Besides, the disclosure requirements for these companies have been relaxed.

The companies can, however, graduate to the main platform later and the small investors can also invest at that time.

Earlier this month, Infibeam Incorporation made a stock market debut becoming the first e-commerce player in the country to get listed. The firm got listed on the main-board instead of institutional trading platform.

Source: http://www.business-standard.com/article/markets/sebi-may-soon-revisit-start-up-listing-norms-116041500531_1.html

How FIIs outsmart domestic investors

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Domestic investors have a lot to learn from their foreign institutional counterparts, who seem to have mastered the art of timing, raking in the moolah in the midst of market volatility.

On the other hand, domestic investors mostly buy when foreign institutional investors (FIIs) are booking profits at higher valuations, limiting their own upside.

For example, in the current rally, most of the FII purchases were in 2012 and the first half of 2013, when the price-to-earnings (PE) multiple of BSE 500 companies had hit a multi-year low.

In contrast, most of the accumulation by domestic investors, through mutual funds and insurance companies, occurred in 2015 when BSE 500 companies were trading at a multi-year PE high. FIIs accumulated India’s top-listed companies at an average valuation of around 16 times and offloaded it to domestic investors at around 24 times their value (see chart).


In all, FIIs’ stake in BSE 500 companies was up 550 basis points between March 2012 and March 2015, at an average PE of around 16 times the companies’ combined trailing 12-month net profits. FIIs stake peaked in the March 2015 quarter, coinciding with the peak in valuations of BSE 500 companies. One basis point is one-hundredth of a per cent.

The analysis is based on the end-of-quarter shareholding pattern, market capitalisation and quarterly net profit of BSE 500 companies, beginning the March 2006 quarter. The sample is based on the data for 358 companies where the data is comparable across the period.

Analysts attribute this to the steady nature of fund flows FIIs receive, while domestic institutional investors are at the mercy of inflows from retail investors, which tend to take place late in the cycle.

“When FIIs were buying in 2012-13, insurance companies and mutual funds were still facing redemption, forcing fund managers to sell their holdings even when the valuations were low. Inflows turned positive only in late 2014 and 2015, when domestic retail investors were convinced about the rally,” said Dhananjay Sinha, head, institutional equities, Emkay Global Financial Services.

In comparison, FIIs receive a significant portion of their funds from large institutional investors in Europe and the US, whose investment sentiment remains steady over a long period.

Others also point to differences in the investing styles of FIIs and their domestic counterparts.

“FII investments are largely fundamental and research-driven compared to domestic investors, most of whom tend to get swayed by market sentiment and herd mentality,” said G Chokkalingam, the founder and chief executive officer of Equinomics Research & Advisory.

This explains why a majority of domestic investors fail to make money in the market, he added.

A similar trend was visible in the rally before the global financial crisis, when FIIs were net sellers for nearly two years in the run-up to the September 2008 crash while domestic investors were buyers.

Despite the trends, some analysts differ.

Nitin Jain, the president and chief executive officer of global asset and wealth management firm Edelweiss Capital, said there is no evidence of domestic investors being less smart than their foreign counterparts.

“We should not paint all FIIs with the same brush. Investment flows from exchange-traded funds, which is retail money – as volatile and sentiment-driven as domestic retail and mutual funds flows. FIIs, on the other end of the spectrum, also get pension money and sovereign wealth funds, which are long-term and their investment style is similar to that of domestic insurance companies,” said Jain.

Source: http://www.business-standard.com/article/markets/how-fiis-outsmart-domestic-investors-116032800052_1.html

Mallya default singes top auditing companies

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Some of world’s top auditing firms, including Price Waterhouse, Grant Thornton, Deloitte LLP and Walker Chandiok & Co, are under scrutiny with a slew of regulators seeking answers on their valuation, auditing and due diligence of UB Group companies over the last few years.

Deloitte LLP conducted the financial and tax due diligence for Diageo of United Spirits Ltd (USL) which led to the $2.1 billion acquisition of the company, but could not detect the problems in annual accounts. These accounts, in turn, were prepared by PW, which was the auditor for USL between 2010 and 2011, and later by Walker & Chandiok & Co.

The accounts were disputed by Diageo in April 2015 after it found a Rs 2,100 crore hole and sought Vijay Mallya’s ouster from the USL board. Questions have also been raised by lenders on what basis Grant Thornton valued the Kingfisher brand at Rs 4,100 crore. This is now being probed by the Serious Fraud Investigation office (SFIO).

When contacted, a Grant Thornton spokesperson said the firm fully stood by its brand valuation report on Kingfisher. “We believe it was appropriate in the context of when it was done and the purpose for which it was done,” the spokesperson said.

PW declined comment but an external spokesperson said the firm had not received any communication from either the Securities and Exchange Board of India or the Enforcement Directorate. “Deloitte does not comment on client confidential matters,” its spokesperson said.

Diageo had invested in USL after the British company was given express representations that all of the receivables from Mallya entities were recoverable in full. The fund diversion worth Rs 2,100 crore from USL was later raised when KPMG, the new auditor appointed by Diageo, discovered discrepancies when it was finalising USL’s 2014 accounts. All the three years’ accounts will now have to be re-stated, according to listing norms.

In the same year, the new USL management called in PW UK for a forensic audit of the previous three years (which included auditing by its own India unit) and passed on the reports to the regulators including the Sebi, the ministry of corporate affairs and the Institute of Chartered Accountants of India.

The ICAI, sources said, had asked both PW and Walker Chandiok to explain the discrepancy. An ED official said it was surprising that none of the auditors or valuers for Diageo raised flags over the accounts manipulation or the Rs 4,000 crore diversion by USL to the British Virgin Islands in 2007.

While the auditors of USL are in the dock for cooking accounts, another marquee auditing firm — Grant Thornton is under investigation by the SFIO for its Rs 4,100 crore brand valuation of Kingfisher Airlines. It was based on this brand valuation in 2011 that Mallya raised Rs 9,100 crore from government-owned banks by offering the brand as collateral. The lenders are now holding a dud Kingfisher brand, which is finding no takers.

Sources in the ICAI said it was a redux of the Satyam scam, when some of the world’s top auditors overvalued assets before the Maytas and Satyam merger, which led to the unravelling of the scam. In the Satyam case, the ICAI had debarred two auditors from Price Waterhouse who were found guilty of professional misconduct. S Gopalakrishnan and T Srinivas were struck off the ICAI’s rolls and fined Rs 5 lakh each. A Central Bureau of Investigation court later convicted them of fraud.

Source: http://www.business-standard.com/article/current-affairs/mallya-default-singes-top-auditing-companies-116031900495_1.html

Indian start-ups get back to basics

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India’s start-ups have a new catchphrase – back to basics. Traditionally, these businesses have focused on fundamentals -invest to grow while ensuring one doesn’t burn money in chasing eyeballs that do not translate into revenue and profit.

The year 2015 was an aberration, with soaring valuations and nearly Rs 36,000 crore or $5 billion in venture capital and private equity money pumped into start-ups. Now, with a global reset by investors to tighten their belts and relook at how businesses are run, India has also been hit.

TREADING CAUTIOUSLY
  • Investors pumped $5 bn in start-ups in 2015
  • As global investors tighten belts, Indian start-ups are impacted
  • Investors seek to look at business value than valuation of business
  • Morgan Stanley writes down investment value in Flipkart by 27 per cent
  • Now, investors are focusing on business fundamentals
  • Start-ups shed jobs, cut down on high spends and focus on building sustainable business

Several entities that followed the burn-cash model have been forced to shed jobs and improve their business models. Among the more known names, Zomato, Housing and TinyOwl have shed jobs. Flipkart, the largest e-commerce company and the most highly valued start-up, saw investor Morgan Stanley mark down the value of its (minority) stake by 27 per cent. While factors such as growing competition and not meeting the growth targets could have influenced this, the message for the rest of the start-up system was clear – pull up your socks.

“One thing which certainly happened was that the valuations of B2C (business to consumer) companies weren’t justified. What you’re seeing is more in terms of right-sizing or to be fairly valued,” said Sanjay Nath, managing partner at Blume Ventures. “I wouldn’t use the term ‘bubble’, as that would signify India’s fundamentals are not strong. That’s definitely not the case.”

The fundamentals of India as a market are very strong, he adds. There’s a huge growth in smartphone sales, the uptake of third-generation (3G) technology data connectivity is growing and 4G services are coming in. Growth in tier-II and tier-III cities is very high, and as these are highly underpenetrated, the opportunities are immense.

“Recession is when good companies are built. I’m not saying there’s one, so these are good times,” says Shashank N D, co-founder and chief executive officer of Practo, a health care technology entity.

To grow fast and outdo the competition, several start-ups in the B2C space, especially the segments of foodtech and hyperlocal, began to offer discounts and cash-backs, despite making a loss on each such transaction. This unsustainable model of business is on the way out. Investors now are pressurizing companies in their portfolio to focus on operational efficiency, improve productivity, keep costs low and move to profitability.

“Suddenly, a view to profitability is coming in and the view of discounting and cash-backs is being rolled away slowly. It’s being done very subtly, which is why nobody is noticing it, but it’s happening,” said Ash Lilani, managing partner and co-founder at Saama Capital. “A lot of good investors are making sure their good companies are financed for the next 18-24 months. But, it’s rationalisation, it’s (about) coming back to earth.”

Start-ups have begun looking at ways to conserve cash, with the slump in funding the market is currently going through. Despite this, there’s a lot of optimism that the market will recover and investors will open their purse strings, though it is presumed the pace of investments would substantially reduce.

“The overall investment in the latter part of 2016 should catch up, as you can’t just not make investments and sit because the money is there. Unnecessary funding or crazy funding which was happening will slow down a bit but good companies will raise much more money this year,” said Shekhar Kirani, managing partner at Accel Partners India.

Rajan Anandan, managing director of Google India and prolific backer of start-ups as an angel investor, says the best is yet to come out of India. “If you think of this evolution as a series of (cricket) test matches, let’s say it’s a five-test series and we’re at the first test in the third day. We have to finish the first test, go to the second, then the third. It’s very early. There are going to be periods of ups and downs; it’s a bump in the road,” was the way he put it.

Source: http://www.business-standard.com/article/companies/indian-start-ups-get-back-to-basics-116030700027_1.htm

Uber valuation put at $62.5 bn after new investment

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Uber’s fund-raising efforts are showing no signs of slowing down. The company, based in San Francisco, is close to completing the raising of a $2.1-billion round of venture capital, according to people briefed on the company’s plans, the company’s single-largest round to date.

Once completed, the investment will value the company at $62.5 billion, according to three people briefed on the plans, securing Uber’s place as the world’s most valuable private start-up.

Tiger Global Management participated in the newest round, led by its partner Lee Fixel, as did T Rowe Price, said the people, who spoke on the condition of anonymity because the terms are still private.

Talks of the funding plans were previously reported by The New York Times in October. On Thursday, Bloomberg News reported the $62.5-billion valuation.

Uber declined to comment on any fund-raising talks, as did T Rowe Price. A Tiger Global spokeswoman declined to comment.
Competition is intensifying in the global ride-hailing market, as rivals like Lyft, Didi Kuaidi and other companies raise billions of dollars in to expand as quickly as possible. Lyft, another ride-hailing start-up, is in talks to raise a further $500 million in funding, according to four people briefed on the round, which could value the company at roughly $4 billion. Didi Kuaidi, to date, has raised more than $4 billion in private investment.

The participation of Tiger Global, however, is particularly interesting. Tiger Global is an investor in Ola and GrabTaxi, two of Uber’s largest competitors in India and Southeast Asia.

It is perhaps the first time a major institutional investor participated in the rounds of both Uber and its major competitors. And on Thursday, Ola and GrabTaxi announced a strategic partnership with Lyft, which is also based in San Francisco and is Uber’s major competitor in the United States.

source: http://www.business-standard.com/article/companies/uber-valuation-put-at-62-5-bn-after-new-investment-115120500045_1.html

Valuation of Business under DCF Method

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Valuation of Business under DCF Method

Valuation of enterprise is a complex assessment of the intrinsic value of a business enterprise, based on the strength of historic performance, present value and the future potential taking various factors in to account. Hence, the valuation of a business enterprise is both an art and a science. There are broadly three approaches to valuation, namely, Net Asset Approach, Income Approach and Market Approach.

First one is based on Net Assets of the enterprise, viz., the value of the Total Assets as per the Audited Balance Sheet less the Total Liabilities.

Second one is based on the income of the enterprise, viz., EBITDA (Earnings Before Interest, Depreciation and Amortization).

Third one is the market approach, factoring both of the above and the Discounted Cash Flow (DCF) of future earning potential of the business enterprise.

DCF method is recommended as the most appropriate method for valuation of most business enterprises, including start-ups and RBI acknowledges internationally accepted pricing methodology for valuation of shares. SEBI and other bodies also recognize the DCF method as acceptable method of valuation. An illustrative report of valuation on the basis of the DCF Method is given below for the information of the readers.

Valuation of Business of ATL Networks Limited

Background Information:

ATL Networks Limited is a leading telecom infrastructure and service provider with world class path breaking Optic Fiber Technology FTTH (Fiber-to-the-home). ATL Fiber Network offers the High speed Internet access and plethora of services. ATL Networks offers the most advanced technology of delivering the Internet at unbeatable prices.

Valuation Analysis Date:

As represented by the Management, we have taken note of the developments that have happened between Financial Years 2013-14 and 2014-15 and till May 15, 2015, which may have significant impact on the valuation of the entity. Hence, for the focus of valuation of our analysis, we have considered the valuation date to be 23 May 2015. The Management of ATL Networks Limited have provided us the Historical Financials till March 2015 and the provisional till May 15, 2015 and the Projected Consolidated Financials from 2015-16 for the next 10 years.

Valuation Analysis Methodology:

For the purpose of Valuation of business entity, we have used the guidelines as per the Accounting Standards and the latest amended pricing guidelines under the Foreign Exchange Management Act, Regulations issued by Reserve Bank of India as on May 4th 2010.

The Valuation Method suggested by these latest amended guidelines for valuation of business of an unlisted Company is Discounted Cash Flow method.

Discounted Cash Flow Method (DCF):

“The DCF method uses the Future Free Cash Flows of the Company (FFCFC) or equity holders discounted by Cost of Capital/Cost of Equity respectively to arrive at the present value. In General, the DCF method is strong and widely accepted valuation tool, as it concentrates on cash generation potential of a business.

Valuation Analysis:

As per the FEMA Regulations, we have considered the DCF method for valuation of ATL Networks Limited.

The Future Free Cash Flows to the Company, FFCFC have been calculated based on the financial projections for the period from 2015 to 2025 as provided by the Management. Based on the discussions, we understand that a heavy capital expenditure would be required in the initial years and the revenue will be dependent on the initial capacity building. The Company will break even only after 18 months.

The future growth percentage is promising based on market penetration solely in the Telecom Industry, in particular the growth in the broadband connections. Hence, the growth in the domestic market & competition in the domestic market alone is factored in the above valuation analysis.

Discounting Factor:

The Discounting Factor considered for arriving at the present value of free cash flows to the company is weighted average cost of capital. The cost of debt is post tax interest cost for debt and cost of equity is calculated based on Capital Asset Pricing Model (CAPM). We have considered domestic comparable companies to calculate the Beta utilized in the CAPM model to estimate the Cost of Equity.

Valuation of ATL Networks Limited using DCF method:

Under DCF Method, the sum of Present Value of Free Cash Flows of the entity in the explicit period is arrived at in Annexure – A. ATL Networks Limited, being an unlisted company and a company of moderate size, a liquidity discount and size of discount of 10% has been applied to derive the fair value of future earnings / cash flows.

Based on the method discussed above and subject to the assumptions and limitations stated separately in the annexure to the report and in our engagement letter, we have calculated the valuation of the business entity under the DCF Method of Valuation.

Sources of information

The valuation analysis is based on a review of the documentation provided by the Management. The sources of information include:

  1. Foreign Exchange Management Regulations 2000
  2. Audited consolidated financials for the period up to 31.03. 2015
  3. Provisional financial statement of the company as on 15.05.2015
  4. Projected financials received from the client for the 10 years from 2015-16
  5. Other industry related information from the World Wide Web and various publicly available sources, etc.
  6. Discussions with the Management of ATL Networks Limited
  7. Information from financial publications on Telecom industries, some of which are listed below.

 

http://articles.economictimes.indiatimes.com/2014-11-10/news/55955622_1_digital-india-broadband-growth-google-india

http://www.nextbigwhat.com/broadband-penetration-in-india-in-2012-297/

http://www.ibef.org/industry/telecommunications.aspx

http://www.trai.gov.in/WriteReadData/ConsultationPaper/Document/4.pdf

Caveats

Provision of valuation recommendations and considerations of issues described herein are the areas of our regular corporate advisory practice. The services do not represent accounting, audit and financial due diligence review, consulting, transfer pricing or domestic tax related services that may otherwise be provided by us as Chartered Accountants. We have relied on explanation and information provided by the management and accepted their information provided to us as accurate. Although we have reviewed such data for consistency and reasonableness, we have not independently investigated or otherwise verified the data provided. Therefore, we assume no liability for the accuracy of the data. The valuation analysis recommendation contain herein is not intended to represent the value at anytime other than the date of this report. We have no present or planned future interest in either the company or its subsidiaries if any, and the fee for this report is not contingent upon the value reported herein. Our valuation analysis should not be construed as investment advice, specifically we do not express any opinion on the suitability or other wise of entering into this consolidation of business transaction.

Distribution of report:

The valuation analysis is confidential and has been prepared exclusively for the management of ATL Networks Limited for Company Law requirements in India. It should not be used, reproduced or circulated in whole or in part, without the consent of the undersigned to any other person and any other purpose other than mentioned earlier in this report.

 

Sd/-

For Sundar.K. F.C.A., A.C.S.,

Chartered Accountants