dcf valuation analysis.doc

VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED

The Board of Directors

Omshakthy Agencies ( Madras ) Private Limited.,

Chennai – 600 032.

Dear Sir,

Sub: Valuation analysis of the enterprise of Omshakthy FIRE Realty Private Limited as per DFCF Methodology.

We refer to our engagement letter dated 27th May 2014 given by OM Shakthy Agencies ( Madras)

Private Ltd requesting us to carry out the Valuation of Enterprise of Omshakthy Fire Realty

Private Limited . In accordance with the terms of the engagement, we are enclosing our report

along with this letter. In attached report, we have summarized our Valuation Analysis of the

Company as at 31 s t March, 2014 together with the description of methodologies used and

limitation on our Scope of Work. This Valuation Analysis is confidential and has been prepared

exclusively for the Management of Company. It should not be used, reproduced or circulated to

any other person, in whole or in part, without the prior consent of V Narayanan & Co. Such consent

will only be given after full consideration of the circumstances at the time. We are aware that the

conclusion in this report may be used for the purpose of certain statutory disclosure by Company

and we provide consent for the same. Trust the above meets your requirements.

Please feel free to contact us in case you require any additional information or clarifications.

Yours Faithfully,For and on behalf of

V NARAYANAN & CO.,

Chartered Accountants

Partner

Date: June 4, 2014

Place: Chennai

V NARAYANAN & CO CHARTERED ACCOUNTANTS


Contents Page No

Executive Summary -------------------------------------------------------------------------- 3

Purpose of Valuation ------------------------------------------------------------ ------------ 4

Industry Assessment ------------------------------------------------------------ ------------ 5

Company Assessment ----------------------------------------------------------- ------------ 6 to 10

Inventory Assessment----------------------------------------------------------------------- 11 & 12

Valuation methodology, Approach and analysis ----------------------------------------- 13 to 15

Caveats ------------------------------------------------------------------------------ ------------ 16 & 17

Annexure: Projected Financials & Valuation



Omshakthy Agencies Limited has entered into a Equity Joint Venture Partnership with one of the leading

Private Equity Funds viz, FIRE CAPITAL INVESTMENTS MAURITIUS PRIVATE LIMITED and formed a special

purpose vehicle with 50% equity. Through the SPV, a gated community residential layout is being

developed within the CMDA limits of Chennai spread over 40 Acres, at an estimated size of Rs.200 Cr.

The project launch commenced in July-2012. Response from Customers has been very encouraging. The

SPV will be wound up once the Project is completed and the surplus will be shared between the

Promoters. This project will get completed in the next 1 to 2 years.


Executive SummaryExecutive Summary


The Purpose of valuation is to value the Enterprise as at 01.04.2014 in order to arrive fair value so that

one segment of the share holders can buy the equity of the other segment of the shareholder.

Scope of services

This valuation report has been prepared by M/s V Narayanan & Co., Chartered Accountants, to

determine the fair value of enterprise of Company in accordance with the Hybrid Method using

both Discounted Free Cash Flow Methodology and estimating the residual value of the inventory as

on the date of valuation.

The valuation exercise was carried out under the following limitations:

1. The Valuation analysis of enterprise is based upon the future projections of company provided

to us, which is based upon various assumptions made by Company relating to the operations

of its business and any change in the assumptions may have an impact on the conclusion of

this report.

2. We have not made an appraisal or independent valuation of any of the assets or liabilities of

the Company and have not conducted an audit or due diligence or reviewed / validated the

financial data provided by the management.

3. The scope of our work has been limited both in terms of the areas of the business and operations

which we have reviewed and the extent to which we have reviewed them. There may be matters,

other than those noted in this Report, which might be relevant in the context of the transaction and

which a wider scope might uncover.


Purpose of ValuationPurpose of Valuation


Real estate industry in India is currently estimated to be $16 billion with a CAGR of 30%. In this sector is

driven primarily by IT/ITeS, growing presence of foreign businesses in India, the globalization of Indian

corporate and rapidly increasing consumer class.

As real estate construction and values have expanded in India — buoyed by healthy economic growth,

and coupled with a series of IPOs by property firms — so in recent years has India's property sector

changed substantially. These trends of growth and modernisation are set to continue, with some market

participants forecasting that real estate development in India will grow from US$12 billion in 2005 to

US$90 billion by 2015.

Real Estate sector forms an important place in the Indian economy with a GDP contribution of

approximately 5-6%.

Growth Drivers

1. Rapid urbanization : Urban population expected to touch 590 million by 20302. Decreasing Household size: Average H/h size fell from 5.4 in 1981 to 5.1 in 20003. Increasing working age population (Almost 64% in 16-64 age group)4. Increasing income levels: Average salary levels increased by 13.5% in 20055. Easier access to mortgage, long tenure loans and tax incentives6. Market structure is highly fragmented and unorganized7. Regional players are expanding to achieve a Pan-India presence


Industry AssessmentIndustry Assessment



Company AssessmentCompany Assessment


About the city



Chennai is the capital city of Tamil Nadu. It is a major commercial, cultural, economic andeducational center in South India.

Known as the Detroit of Asia , it accounts for over 60% of the country’s automobile exports. The city is India’s second largest exporter of software, Information Technology (IT) and Information Technology – Enabled Services (ITES),next to Banglore. By the 2011 census, the city had 4.68 million residents making it the sixth most populous city in

India. It is ranked 4th in hosting the maximum number of Fortune 500 companies of India , next only to

Mumbai , Delhi and Kolkata. Chennai’s economic development has been closely tied to its port and transport infrastructure. The city is served by two major ports namely Chennai Port (one of the largest artificial ports and

Ennore Port. The Chennai port is India’s second busiest container hub after Mumbai. As the entertainment Capital of South ,it is also home to the large South Indian Tamil film

Industry. The Sate Govt of TamilNadu ,after successfully establishing IT and Industrial Parks , is in the

process of setting up Financial investment of over USD2.5 Billion.



Major Infrastructure Initiatives in the City

The residential real estate market of Chennai has witnessed significant improvement in termsof buyer interest, which has translated into higher transactions over the last one year. Grand Southern Trunk (GST) Road, Sriperumpudur and Porur have witnessed significant increase in terms of inquiries and conversions over the previous year.



Capital Structure

The capital structure of the company as on 31/03/2014 is as under (provisional)

Particulars Amount in Lacs 31/03/2014 Authorized(Equity share of Rs. 10 each with voting rights) 2.00 (Optionally Convertible Redeemable Preference shares of Rs.10 each) 4998.00 Issued, subscribed and paid up(18,300 equity shares of Rs.10 each fully paid up with voting rights) 18.30 (2,00,00,000 Optionally Convertible Redeemable Preference shares of Rs.10 each fully paid up 2000.00 Total 2018.30

Historical income statement Amount in Lacs

Provisional AuditedParticulars 2013-14 2012-13 2011-12 EBITD 1903.88 3843.84 (51.90) Finance cost - - - Depreciation 0.52 0.87 1.34 Profit Before Tax 1903.358 3842.97 (53.24) Provision For Taxes 646.95 1230.05 0.03 Profit After Tax 1256.31 2612.92 (53.28)



Historical Balance Sheet Amount in Lacs

Provisional Audited Particulars 2013-14 2012-13 2011-12

Sources of funds Share holders funds 4989.42 5774.92 4986.00 Secured Loans - - - Unsecured Loans - - - Deferred tax liability 0.61 0.53 0.68 Total 4990.03 5775.44 4986.68 Application of funds Net Fixed assets 4.06 4.31 5.18 Net Current assets 4985.97 5771.13 4981.50 Total 4990.03 5775.44 4986.68



Omshakthy Fire Realty Private Limited has developed a residential gated community “Kanopus”of well demarcated plots ranging from 450 sq.ft to 4000 sq.ft at Paruthipattu measuring at about 40.67 acres strategically located at 120 ft Poonamalle – Avadi State Highway No.55 and having close proximity to Avadi and Ambattur Bus Stand and Railway Station.

The Company has been selling the residential plots at its gated community and proposes to complete the entire sale of the plots by June, 2015.

The value of the undeveloped land at measuring about 34.20 acres has been determined at Rs.75 lacs per acre being the realistic value of the plot as at March, 2014 , considering that inventory of the land parcel is not contiguous , thus the total value of the inventory is estimated at Rs.2565 lacs.


Inventory AssessmentInventory Assessment


Valuation of the enterprise of the company has been done, by adopting the Hybrid method using

Discounted Free Cash Flow (DFCF) Method inrespect of ongoing projects of the company, as well as

considering the realistic estimate in respect of the inventories representing undeveloped land owned by

the company.

Finance theory recognizes four basic methods of valuation of shares, with many of its deviants being in

vogue in practice. These methods are:

i) Net Assets Value (NAV) method

ii) Profit Earnings Capacity Value (PECV) method

iii) Discounted Free Cash Flow (DFCF) method

iv) Market Approach (MA) method

NAV method: The NAV is the total value of a company's assets less the total value of its liabilities. If the

NAV is divided by the number of shares, it gives the net assets per share. This is the value of the assets

that belong to each share.

Evidently, NAV method is based on historical costs of the assets as reflected in the Books of accounts. In

the absence of any revaluation of fixed assets, the balance sheet values of assets may be far divorced

from the current market price of the assets

PECV method The PECV is to be calculated by capitalizing the average of the after tax profits for the

preceding three years at specified capitalization rates and dividing the resultant figure by the number of

shares. The capitalization rates will be different for different industries, different functions like trading/

manufacturing and the standing of the shares in the market.


Valuation methodology, Approach and analysisValuation methodology, Approach and analysis


DFCF Method DFCF valuation method is a popular method for valuation of shares, used widely by stock

analysts, worldwide. The main idea behind this method is that “a stock's worth is equal to the present

value of all its estimated future cash flow. DFCF method defines the value of the company as the

present value of the company’s future free cash flows (FCF), discounted at the weighted average cost of

capital (WACC), plus the company’s initial cash/ marketable securities. It uses discounted cash flow

valuation to get the fair value of the company based on the projections of how much money will the

company generate to investors in the future. It involves estimating the future free cash flows and

discounting them at a particular discount rate.

DCF uses the concept of time value of money. All future cash flows are estimated and discounted, at an

appropriate rate, to give their present values. The sum of all future cash flows, both incoming and

outgoing, is the Net Present Value (NPV), which is taken as the value or price of the cash flows.

Since valuation is essentially a forward looking exercise, DFCF is one of the most acceptable valuation

method used by Business valuers worldwide.

Market Approach Method In this method, the Historical EPS and Book Value as per latest balance sheet

are respectively multiplied by average PE and BV multiple of BSE 100 Index respectively. A fixed discount

of 40% is to be then applied. Higher of the two valuations is chosen.

This method takes into account both the historical value of assets and the earnings and brings in an

element of market situations also.

Each of these methods has their advantages and disadvantages and are used under different

circumstances, in tune with their characteristics. It would be naive to say one method is absolutely

better than the other. One method may be suitable for a particular circumstance while the other will be

preferred under different circumstances.



Valuation How Done

Since the purpose of valuation was to arrive fair value of the enterprise in order to arrive buyout of

either of the segment of the shareholders from the corresponding segment, we have proceeded to

value the enterprise based on availability of free cash flow from the ongoing activity together with

estimating the value of the unsold inventory .

Basis of Discounted Free Cash Flow Method (DFCF)

The DFCF to equity method expresses the present value of the business as a function of its future

cash earnings capacity. This methodology works on the premise that the value of a business is

measured in terms of future cash flow streams, discounted to the present time at an appropriate

discount rate (Cost of Equity (KE)). The value of the business is arrived at by estimating the Free Cash

Flows (FCF) to equity and discounting the same at the KE. This is estimated by forecasting the free cash

flows available for the company (which are derived on the basis of likely future earnings of the

companies) and discounting these cash flows to their present value at the KE. The DFCF methodology

is considered to be the most appropriate basis for determining the earning capability of a business.

It expresses the value of a business as a function of expected future cash earnings in present

value terms. The approach seeks to measure the intrinsic ability of the business to generate cash.

For the purpose of valuation of enterprise in this transaction through DFCF methodology, we have

relied upon the projections provided by the management for the year ending March 31 s t 2015 and

June 30 t h 2015, duly supplemented by discussions held with the management. The Cost of Equity has

been determined at 11.72 per cent as per CAPM model.

Based on our Analysis of the Company and subject to our caveats as further detailed in this report,

the fair value of the enterprise may be taken at Rs.29 crores.



1. This Valuation Report has been issued on the specific request of Omshakthy Fire

Realty Private Limited to ascertain the fair value of the enterprise in order to arrive

buyout of either of the segment of the shareholders from the corresponding segment

This Report is prepared exclusively for the above stated purpose and must not be

copied, disclosed or circulated or referred to in correspondence or discussion with

any other party. Neither this report nor its content may be used for any other purpose

without prior written consent of M/s V Narayanan & Co.

2. We have summarized the Valuation Analysis of the enterprise based on the

information as was provided to us pursuant to the meetings held with the

management of Company and other publically available information. We do not

assume any responsibility for the accuracy or reliability of such documents on which

we have relied upon in forming our opinion.

3. Although the beta for the Indian real estate players is in the range of 0.92 to 2.4, we

have assumed the beta of the company on a lower range of 0.25 as the company is in

the process of liquidating its business.

4. Although every effort has been made by us to verify and corroborate each

document and to ensure that no inaccurate or misleading data, information,

statement or opinion appears in this document, we wish to make it clear that the

information and data appearing herein are the responsibility of the contributors.

Accordingly, we do not accept any responsibility whatsoever for the consequences of


CaveatsCaveats


any such inaccurate or misleading information or data, opinion or statement

5. We have no present or planned future interest in O m s h a k t h y F i r e R e a l t y P r i v a t e

L i m i t e d and the fee for this Valuation analysis is not contingent upon the values

reported herein.

6. The Valuation Analysis contained herein is not intended to represent the value at any time

other than the date that is specifically stated in this Report. This Report is issued on the

understanding that the Management of O m s h a k t h y F i r e R e a l t y P r i v a t e

L i m i t e d has drawn our attention to all matters of which they are aware, which may

have an impact on our report up to the date of signature. We have no responsibility to

update this report for events and circumstances occurring after the date of this Report.

Annexures:

1. Valuation – Discounted Cash Flow Method

2. Projected Financials of O m s h a k t h y F i r e R e a l t y P r i v a t e L i m i t e d for period ending on

31/03/2015 and 30/06/2015.

3. Provisional Financials for the year ending 31/03/2014

4. Cash flow for the period ending 31/03/2014, 31/03/2015 and 30/06/2015.


dcf valuation analysis.doc

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