THE VALUATION SCHOOL
FINANCIAL
MODELLING
STEP by STEP
SESSION - 1
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Why Financial Modelling?
Imagine a company (TATA Steel) - Its Current stock price is Rs 110
Your friend thing that the stock price should be Rs 100 but you think it should
be Rs 120
You recommend investing, but your friend recommends shorting the stock
How can you tell who's correct?
Create a financial model to quantify your views
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Why Financial Modelling?
Financial models help you to quantify your views of a company
Uses - Valuation, advising M&A, Investing, LBO, raising funds
Example 1 - Tata Elxi's stock price fell 50% from the all-time high.
should you invest? or will the price keep falling?
Example 2 - A retailer wants to acquire a small retailer - should it ?
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Steps in Financial Modelling
Step 1 - Decide purpose. Why do you want to do the analysis?
Step 2 - Collect Information - Conduct some research
Step 3 - Identify key drivers
Step 4 - Gather information on peer companies
Step 5 - Build your analysis
Step 6 - Presentation of your analysis
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Step 1 - What is your purpose?
Stock Investing - Valuation is most important
Valuation - Valuation
Merger/Acquisition - Valuation, but merger model also
Financial Analysis - Analyse Revenue, Profits, Working capital etc
Financial Planning - Forecasting of Future cash flows
Buy Entire company - Enterprise Value
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Step 2 - Do some Background Research?
Start with - Company's interim and Annual Reports
Then - Investor Presentations, Concalls, Industry reports
Good to have - Equity research reports issued by banks
Paid Modelling - Interview Management
Private company - Need information directly from Management
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Step 3 - Identify the Key Drivers?
Retailers - Sales/Store, No of Stores, Cost per product sold
Hotels - No of Hotels/Rooms, Occupancy Rates, Tariffs
F&B - Unit Sold, Average Price, Cost/unit
Pharma - No of Patients, R&D/Sales, Future Patents
User Based - No of Active users, Cancellation Rate, Retention,
Monthly fees etc
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Step 4- Gather Data of Peers
It depends a lot on Analysis and precision required
"Fairness Opinion" - Investment Banking
Quick analysis to see if your numbers are making sense
Valuation - Comparable companies, Comp Transactions
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Step 5- Build your Analysis
Projecting Revenue and Expenses of the company
Full or Partial Financial Statements (Historical)
Valuations - Sometimes need a lot of outside data + Adjustments
Acquisitions - Performing Scenario Analysis
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Step 6- Present your Analysis
What - Buy the company? Fund the company? Sell Stock?
Why - Supporting Reasons, Backed by numbers
How - What's the best structure/timings?
Format - PPT slides, Word Doc, Excel, Oral presentation
Users - Bankers, Portfolio Mgrs, VC partners, Interviewers etc
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What your Financial Model must have?
Follow proper conventions
Less Static - More Dynamic
Easy to Audit - Always!
Less complex (avoid automation as much as you can)
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What makes FM hard?
This formula doesn't always work. The company must have
achieved "Stability" to apply this formula
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What makes FM hard?
It's difficult to come up with reasonable numbers for
everything in that formula
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What makes FM hard?
What's the most difficult part?
Problem 1 - Finding the data
Problem 2 - Projecting the data
Problem 3 - What is company value?
Problem 4 - Other factors
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What makes FM hard?
Issue 1 - Finding the Data
No company discloses its Free cash flows or Discount Rate
Derive it through the company's public filing and analyze
comparable companies.
This process might require a lot of manual adjustments - we
need to decide what items to include or exclude
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What makes FM hard?
Issue 2 - Projecting the data
Unstable company - metrics changes for years until maturity
Reasonableness of Revenue and Expenses forecast
Metric forecast is more challenging - Units sold, Employees, etc
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What makes FM hard?
Issue 3- What is Company Value?
Different results - From different Valuation Methods
Value to all investors or equity investors only - EV vs Eq Value
Does value include all assets or assets related to core biz
Valuation deviated from comps without any rationale
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What makes FM hard?
Issue 4 - Other Factors
Leveraged Buyout -Its more about IRR vs targeted Returns
M&A - Care more about accounting metrics such as EPS
Equity Capital - Investors care more about returns; company is
concerned about minimizing dilution.
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Whats next?
A few settings in Excel need to be done to
optimize it
Important for you to complete all sessions
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Thanks for your time
CA Parth Verma
Connect with me
caparthverma
thevaluationschool
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