DCF method of Valuation of Shares

[Radhika V]

Dear All,

 

Can anyone provide information of how valuation of share is done under DCF Method .  (Discounted Cash Flow).

 

More specifically, how valuation of a Equity Share can be done when the shares are subscribed by wholly owned subsidiary at the time of incorporation when any one do any have any idea about the future projected cash flows into the company.

 

Please enlighten.

 

with regards,

Radhika

Company Secretary in Practice

Hyderabad.

[Anantha Subramanian]

Hi Mam,

I am associated with such exercise in my company along with CS work so I can just brief you the overall methodology.

When you value your Equity Share based on your future projected cash flow , following are to be considered:

1.) What will be your fixed expenses like Royalty you pay to the Government in case of infrastructure, Fixed Expenses, Debt Repayment (Based on the Sanction terms along with Interest) and other general expenses like Manpower, operating expenses, etc....

2.) What are all the possible revenue streams you expect in future and as I am unaware of your business model I cannot specify but if you take my present Port Project we have cargo revenues, Vessel Revenues, Storage Revenues, etc.... which we will assess based on the volume of cargo we handle year on year

3.) Adopt a discount percentage by arriving it in a prudent way and my suggestion would be you can have the simulation done for various percentages (like 10%, 11%, etc....) with the help of a CA/CWA

4.) Once you have all such things, compute the EBIDTA tree and also a simple revenue minus expense...

5.) This gives you a basic idea of ascertaining your cash flows but there are much much beyond this....

So please specify your business so that many of our members can provide their inputs.

Other members' views are solicited.....

Regards
Ananth

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[Chandru]

Dear All,

A foreign body corporate wants to incorporate a private co in India under sec 4(7) of Companies act and two non residents would be the subscribers to the MOA of Co.

Now my question is whether shares to be issued at face value or does it require DCF valuation in case  MOA Subscibers are NR's?

Thanks in advance



Regards

Chandrashekhar

[Chethan Bhat]

it will be DCF method. Without doubt.

Sent from my Nokia phone

Dear All,

Thanks in advance

Regards

Chandrashekhar

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[Chandru]

Dear Chetan,

Thanks for your reply.

I have one more query that if as per DCF valuation method if the share
of a private co. valued at 12000/per share where actual value being 10/-
Per share and this is for the purpose of current resident shareholders
of the Co. who wants to transfer shares to Non residents. In this case
do we have any other route apart from DCF method as it is costlier for
NR's ?If not is there a provision to get an exemption from DCF method by
making application to RBI in this regard?

Thanks in advance

Regards

Chandrashekhar

[Chethan Chandra Bhat]

Applying to RBI is an option. But practically, RBI will not give such permission. Unfortunately, there is no other option. 

One of the major criticism of  DCF valuation is it could rarely be considered authentic. Cash flows are always subjective. 

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With Kind Regards,

CA. Chethan Chandra Bhat
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125/126 Kamaraj Salai, Alwarthirunagar
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Email: chethan.ch...@icai.org

[Chandru]

Dear Chetan,

Thanks for sharing your views

I want to know one more thing that with ref to our discussion in below mail  you said DCF applicable for  a newly incorporated company and for MOA subscribers also but  DCF is used on companies having at least past history or records of Financial statements of about 5 years.

Based on the past record or growth rate and taking into account the present factors of the company or sector future prospects of the financials are done through DCF method.

So plz clarify where it is mentioned that it is applicable for a New co and MOA subscribers also also . Is there any circular in this regard or it is just an interpretation?



Regards

Chandrashekhar

[Chethan Chandra Bhat]

In DCF, always future estimated cash flows are discounted. Therefore, whether a company has past records of losses or a newly formed company is immaterial. It is always prospective looking. So, only future cash flows are to be considered while discounting.

[Chandru]

Dear Chetan ,

Is there any RBI circular speaks about applicability of this to Newly incorporated company or to MOA subscribers?

Regards

Chandrasekhar