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Corporate Finance
Share holder value creation

Credit Rating

Equity Valuation & buy back

Treasury management

Term Debt management

Corporate Liabilities and Hedging risks
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Shareholder value creation

The objective of any Company is to maximise its shareholders value.

SVC may be defined as the excess of market value over its book
value.

SVC could be analysed as follows :

Market-to-book value per share approach (MV/ BV)

Economic value added approach (EVA)

DCF approach


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The Value Creation Matrix
VALUE
CREATION
Managerial
Dimension
Improve management
or replace inefficient one
Financial
Dimension
Redeploy capital
Increase RoI
Operational
Dimension
Scale Economies
Improve margins

Risk Dimension
Cost-of-capital
reduction

Market Valuation
Release value
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Economic value added approach

It is a concept based on economic profit and not accounting profit. In
EVA approach, the comparison is between ROCE and COCE. It is the
ratio of the net operating profit less adjusted tax (NOPLAT) to capital
employed (CE)

NOPLAT is profit after depreciation and taxes but before interest

NOPLAT = PBIT (I-T) = PAT + INT (I-T)

Return on capital employed = PBIT I
CE


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Economic value is added when ROCE > WACOC


Economic value is destroyed when ROCE < WACOC


EVA = net operating profit after tax cost charges of capital employed


It is the net earnings in excess of the cost of capital supplied by lenders
and share holders. It represents the excess return to shareholders over
and above the minimum required return. It is net value added to
shareholders.



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DCF approach

The true economic (present) value of a firm, or a project or a strategy
depends on the cash flows and the appropriate discount rate (adjusted if
required).

Economic value =PV of net operating cash flows + PV of terminal
value

Value creation strategies

Revenue enhancement

Cost reduction

Optimal Asset utilisation

Cost of capital reduction


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Relevance of Shareholder value creation

Private sector / Funds allowed in banking and mutual funds
in addition to FIIs are allowed to invest in Indian debt and
equity.

Indian corporates allowed to raise funds offshore

Greater freedom to financial intermediatries.

Capital issue controls abolished.

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Credit Rating


Bond rating

Equity rating

Commercial paper rating

Sovereign rating

Project/ company rating


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Credit Rating agencies


- C R I S I L


- C A R E


- I C R A


- S T A N D A R D A N D P O O R


- M O O D Y S


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Rating methodology for Corporates
Completion of Business Risk
1. Industry 2. Market Position
3. Operations 4. ongoing projects
5. Management
OVERALL RISK
Financial Risk
1. Accounting Quality 2. Existing Financial Position
3. Financial Resources/ Flexibility 4. Cash Flow Adequacy
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Industry Risk
Industry Characteristics
- Importance to the economy
- Stage of Business cycle
- Industry size
- Government policies
- Cyclical/seasonal factors
- Entry Barriers
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Industry Risk......
Extent of Competition
- Nature and basis of competition
- Threat from imports
- Unorganised players
- Substitutes
Technological risk
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Markets
Products
2. MARKET POSITION
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Products
2. MARKET POSITION
Customer Preferences / Brand Loyalty
Product Range
Competitive advantages
Pricing flexibility
Brand Equity

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Markets
2. MARKET POSITION
Market size
Market share
Marketing set-up
Selling & Distribution arrangements
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3. OPERATIONS
Labour relations
/Productivity
Supply
Chain Efficiency
Environmental
Technological
Location Factors

Cost structure

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Project Risk
Number and size of projects
Means of financing the projects
Funding tie up
Extent of completion of projects
Ability and track record in executing projects
Analysis of time and cost overruns, if any
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FINANCIAL RISK EVALUATION
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Analysis of
receivables
Return on
Capital Employed
Coverage
Ratios
Capitalization
Ratios
Profitability Ratios
Liquidity Mgmt.
2. EXISTING FINANCIAL POSITION
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3. FINANCIAL
RESOURCES
& FINANCIAL
FLEXIBILITY
Flexibility in
deferring capital expenditure
programmes
Support from
Promoters /
Group companies
Ability to raise alternative
financing
Liquid assets
available with
the company
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4. CASH
FLOW
ADEQUACY
Projected
key financial
parameters
Assumptions
underlying the
cash flows
Future earnings in relation to working capital needs
and capital spending
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Crisil Rating Symbols
Easily comprehensible to lay investors
Distinctive symbols for different debt
securities differentiated on the degree of
safety, viz. investment and non-investment
grades.
Securities with the same rating are of
similar but NOT identical investment
quality.
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CRISILs Long Term Rating
symbols
Investment Grades
AAA : Highest safety
AA : High safety
A : Adequate safety
- Change in circumstances can adversely
effect such issues
BBB : Moderate safety
- Change in circumstances are more likely to
lead to weakened capacity
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Speculative Grades
BB : Inadequate safety
- Uncertainties could lead to inadequate capacity
B : High risk
- Currently being met but adverse conditions
could lead to lack of ability or willingness
C : Substantial Risk
- Payment possible only if favourable
circumstances continue
D : Default
CRISILs Long Term Rating
symbols
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CRISIL Rating Symbols
Grades Debenture Fixed Deposit Commercial
Paper
Investment
Highest Safety AAA FAAA P1
High Safety AA FAA P2
Adequate Safety A FA P3
Moderate Safety BBB
Speculative
Inadequate Safety BB FB P4
High Risk BB FC P5
Substantial Risk C
Default D FD
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Advantages of credit rating


Provide superior information

Offer low cost information

Serve as a basis for a proper risk-return trade off.

Impose healthy discipline on corporate borrowers

Lend greater credence to financial and other representations

Formulation of policy guidelines on institutional investors




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Moodys rating analysis pyramid
Sovereign Macro Economic Analysis
Sectoral Industry Analysis
Global / Domestic
Regulatory Enviornment
Global / Domestic
Competitive Trends in Sector
Global / Domestic
Market Position
Quantitative Analysis
Finaancial Statements
Past Performance
Future Projections
Qualitative
Analysis
Management
Strategic direction
Financial Flexibility
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Equity buy back

Allowed as per the provisions of sec 77a of the companies act.

Special resolution to be passed
Complete disclosure of all material fact
Maximum 25% of paid up capital during a year.
Debt: equity ratio after proposed buy back not to exceed 2:1
Consent of Lenders
No fresh issue allowed for a period of 24 months post buyback.
Transaction Subject to Tax



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General Motivations for Share Buyback
Improve
Shareholder
Value
Surplus funds with few attractive
alternative investment options
Reduction in capital base normally
results in higher EPS
Information
Signalling by
Management
That the stock of the company is
undervalued and/or that investing
in its own stock is the best bargain
around
Signaling believed to be based on
legitimate inside information
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General Motivations for Share Buyback
Defence
Mechanism
Promoter group can improve
percentage holding
Tax effective
return of cash
A US research study reveals that
repurchase plans have a larger
impact on shareholder
wealth than special dividends
In India, depends on period of
holding, capital gains tax rate,
and dividend tax rate
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Target Companies for Buyback
Low growth plans

Cash Surplus ( Internal accruals / extraordinary receipts )

Take over threat

Promoter controlling interest

Undervalued stocks
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Success of a Buyback
Pricing :
Premium / discount to market price

Timing :
Economic and political conditions
Market phases ( Bearish / Bullish )

Funding :
Debt
Preference shares
Cash reserves

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Modes of Buy back
Open market operations by way of book building / stock
exchange

Odd lot Tender offer with or without negative mandate

If buyback results in public holding falling before 10%
resulting in de listing open offer for the balance through
book building will have to be done.
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Benefits of allowing buy back

. Enhanced liquidity for small investor

. Enhancing shareholders wealth

. Increase in EPS

. Better servicing of equity

. Signal of under valuation of stock

Drawbacks of buy back

. Insider trading

. Increase in promoter stake

. Affecting companys fund-flow/ financial positions

.
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Treasury management


- Resource mobilisation

- Resource deployment

- Risk management


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- Risk management helps in minimising cost fluctuations for
the funds mobilised and in case of forex borrowings helps in
minimising losses possible due to any exchange rates
fluctuations.

-Treasury management will become more complex as constant
monitoring of interest rates will be essential due to severe
volatility and falling of interest rates.

- Risk profiles change over the life of a company thereby
necessitating a continous correction of interest rates on
borrowings. ( Infra Projects )

- Corelation between forex market and the domestic money
market and Integration of domestic and international markets.

- Parking of mobilised funds till deployment




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Investment Objectives
Time Horizon
Income Head : Income head under which returns to be
realised to have efficient tax management
Risk Profile : Acceptable level of risk or volatility
Liquidity
Geographic and performance benchmark : Is asset /
liability matching an important consideration and against
which benchmark index should the portfolio performance
be evaluated
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Creating Portfolios
Short term / money market index : Call ( Overnight )
money rates,short term treasury bills and commercial
paper,basket of money market mutual funds as an index

Government Securities :Short term interest rates Co
relation to bond prices basket of G-sec mutual funds as an
index.

Corporate Bonds : Co-relation to G-secs, Low liquidity
and basket of fixed income mutual funds as index
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Investing Procedure
Need Analysis : Cash flow analysis and Bucketing

Recommendation : Investment policy creation , Different portfolios
for different buckets, Product selection

Execution

Predefined methods of tracking portfolio

Support

Reporting

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Treasury Products
Rupee Dollar swaps : offers flexibility to convert FC
liability to rupee liability

Swaps between fixed to floating across currencies possible

Interest rate swaps linked to MIBOR,T-bill yield etc.

Provides hedge against anticipated interest rate volatility
and reduces costs

Easy documentation and procedures

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Avenues for investing funds

Fixed income securities

Mutual funds close ended / open ended

Ready forwarded deal with banks for securities

Treasury bills / bank deposits

Certificate of deposits with banks

Commercial paper

Inter corporate deposits

Bill discounting

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