Business Valuations: A relative comparison

across Economies
______________________________________________________________________

__________

Submitted By:

Name of the Candidate: Kewal Doshi

College Name: St. Xavier’s College (Autonomous), Kolkata

Department Name: Management Studies

Registration Number: A01-1112-2406-19

Room Number: 42

Roll Number: 92

Supervised By:

Professor Basuli Dasgupta

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 Year of Submission:

2020-2021

Acknowledgment:

The completion & the final outcome of this project required a lot of guidance and
support.

I owe deep gratitude to Professor Basuli Dasgupta, who took keen interest in this
study and guided & supported me all along, till the completion of this paper.

I am thankful to and fortunate enough to get constant encouragement, support and

guidance from all the faculty of the management department which helped me in
successfully completing this project.

I would also manifest gratitude towards my parents and fellow mates for helping
me with their suggestions whenever needed.

Thank You.

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 Business Valuations: A relative comparison across Economies

Abstract:

After a brief overview of Discounted Cash Flow Valuations and Perpetuity Growth
model of business valuations under it, this paper presents a comparison between the
company valuations of the same company in developed v/s developing economies
of the World to check for an inherent variability in deciphering values based on
macro-economic conditions. Finally, the computed values are compared and
analyzed to come to meaningful conclusions that values are in fact higher in
developing Economies and lower in developed Economies, keeping all factors
constant

KEYWORDS: Business Valuations, Discounted Cash Flow, Perpetuity Growth,

Developed Economy, Developing Economy, Value per Share, Variability

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 Table of Contents:

Serial Number Topic Page Number

1.1 Background & Overview 6-7

1.2 Motivation behind the study 8

1.3 Review of Literatures 9-11

Chapter 1:
Introduction
1.4 Research Gap & Relevance of the study 12

1.5 Objective of the study 13

1.6 Research Methodology 14-15

2.1 Data Analysis 17-36

Chapter 2: Analysis &
Findings 2.2 Interpretation & Key findings 37-39

3.1 Limitations of the study 41

Chapter 3: Conclusive
3.2 Conclusion 42
Remarks

3.3 References 43

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Chapter 1: Introduction

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 Background & Overview:

In this paper, the concept of business valuation is addressed. Business Valuation is

basically a process of determining how an enterprise is valued. It is in fact highly
subjective because it involves estimating the value of intangible assets like trade
secrets and brand recognition. A business valuation may be performed for a
potential investor or buyer, which stresses the importance of taking into account for
whom the valuation is conducted and for which purpose.
While talking about this need to assess the person for whom the valuation is being
done, this paper talks about how this typical ‘person’ varies according to the state
of the economy that they belong to. In a broader sense, it may be safe to say that for
the sake of this study, the ‘person’ is basically the nation and its economy, since the
valuations would assess the economy and its conditions.
For this analysis, it is worth understanding the concept of a developed and
developing economy before running valuation simulations on them.
A Developed Economy typically has characteristics such as high levels of
economic development & growth. This may be measured using criterions like Gross
Domestic Product (GDP) & Per Capita Income among others. These days, factors
such as Healthcare standards, Human Development Index may also be considered
for the same.
A Developing Economy is also known as a low and middle-income country.
Intuitively, they are less developed than developed countries but are more
developed than underdeveloped nations. Their characteristics are having low
industrial and infrastructure development and rampant poverty with or without
economic inequality. In case of the newer parameters, healthcare and sanitation is
typically weak, with low Human Capital Development
The Discounted Cash Flow (DCF) method of valuations is a modelling tool to
value a security, asset, project or company. This method uses the application of
Time Value of Money, where future projected cash flows are discounted to a value
today. This value is called the Net Present Value or NPV. This discounting is done
using internal (debt) as well as external (market) interest rates. Perpetuity Growth

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Method is a way to calculate the terminal value or the final value of that business
assuming the business will generate cash flow at a steady growth rate forever into
the future. It assumes that the business will continue to exist indefinitely.
The Weighted Average Cost of Capital (WACC) is a calculation of how much
cost a firm incurs for the capital is uses to operate its business, stated as an average
by taking into consideration all sources of funds including long term and short term
debt, common and preferred stock as well as retained earnings. In other words, it is
also the minimum average rate of return the firm must earn on its assets to satisfy
its investors. A firm’s WACC increases as the beta and rate of return on equity
increase because an increase in WACC denotes a decrease in valuation and an
increase in risk. WACC plays a crucial role in determining the value of a company.
In the paper, the DCF method of valuation is used to determine the value of
companies using different interest rates and market scenarios to reflect how
valuation differs from country to country keeping all factors such as company
performance and future growth prospects constant.

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 Motivation behind the study:

The intrigue around the idea of how one object having the same properties can have
different values, depending upon the situation and choice of the individual who ends
up valuing the object, fascinated me since high school. This study considers the
condition & situation of the ‘valuer’ as well as the object being valued, which
considers both qualitative and quantitative aspects of valuation, making this study
a comprehensive learning process. At the same time, being a finance and market
enthusiast, I have always followed how both well- established companies and start-
ups are valued depending on both internal and external factors. On being granted
the opportunity to work on this term paper, it was an opportunity to culminate both
of these interests of mine: the curiosity of the relativity of value & the fascination
of company valuations.

Moreover, this study gives me an opportunity to learn about the theories of

valuations while comparing macroeconomic conditions of developed v/s
developing countries gives me an insight into International trade and politics too,
making this study more holistic and providing a greater scope for me to learn.

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 Review of Literatures:

In his work ‘Inputs to Business Valuation’ published in February 2020 authored by

Stephen Lynn, talks about the inputs for enterprise valuation, particularly in the
Discounted Cash Flow model—the cost of capital, the projected cash flows and
selection of comparable companies or guideline companies. The mid-year
convention and the partial-year adjustment, which help align projected cash flow
dates to the valuation date are spoken about. Detailed analysis and processes for the
construction of pro-forma financial statements & Monte Carlo simulation process,
which can be used to model uncertainty in cash flows and parameters are discussed.
The weighted average cost of capital (WACC) has components in the form of cost
of equity and the cost of debt as well as cost of retained earnings. The cost of equity
is usually measured using Capital Asset Pricing model. The application of CAPM
to find the cost of equity for a private company is achieved by aggregating betas for
a set of similar listed guideline companies. Next, they talk about how Cost of Debt
is determined and how to estimate it, for example by constructing a synthetic credit
rating or by taking suitable averages of existing ratings of debt instruments given
by credit rating agencies. Finally, the process of combining the above three to arrive
at the WACC is to attribute relevant weights to the above three based on quantum
of funds raised through each source. For small and/or very specialized enterprises,
it may be difficult to find listed similar companies to find relevant a comparable for
reference points. For such companies, an alternative to using CAPM is to use a
build-up model to derive the cost of equity. In closing statements, the consideration
of how location, size, industry and strategic positioning are factors in choosing
guideline companies/ reference points for deciphering values.

‘Damodaran on Valuation’- 2018 by Dr. Awsath Damodaran is quoted as saying-

Valuation is about digging through a business, understanding the business,
understanding its cash flows, growth, and risk, and then trying to attach a number
to a business based on its value as a business. Valuation is useful & relevant in a
wide range of processes such as Portfolio Management, Acquisition Analysis and
even for taxation purposes. Generally speaking, there a.re three approaches to

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deciphering the value of a firm: Discounted Cash Flow Valuation, Relative
Valuation and Contingent Claim Valuation. The DCF method relates the value of
the enterprise through the present value of expected future cash flows. Relative
Valuation, on the other hand looks at the pricing of assets relative to a common
variable like book value, or earnings. Finally, the third type uses option pricing
models to measure the value of assets. All of these methods may come to different
values, but should be adopted in different scenarios, which were detailed
extensively in this piece of work.

‘Macroeconomic Factors Influencing Cross-border M&As: A Negative Binomial

Approach’ written in June 2017 by ‘Yhlas Sovbetov’ from ‘The London School of
Commerce’ investigates macroeconomic factors influencing cross-border Mergers
& Acquisitions over 1990-2015 by sampling over 5,000 global Merger &
Acquisition transactions. First, using gravity model with a negative binomial
approach, the paper examines determinants of number of cross-border M&A’s and
documents several findings.

‘Macroeconomic Factors and Company Value’- August 2015 by ‘Konstantinos

Vergos & Apostolos G. Christopoulos’ illustrated that the Ohlson Residual Income
Model for equity valuation which has drawn a lot of attention over traditional
models. This paper attempted to empirically investigate the validity of this model
using data from Greece over the period 1969-2001. By using multiple regression
analysis and by incorporating macroeconomic factors, they explore the link of
accounting and macroeconomic factors in the process of market valuation. They
were able to conclusively prove that their findings were relevant for both
economists and fund managers and they did in fact consider the macro-economic
variables.

‘Fundamentals of Functional Business Valuation’ Published in April 2010, by

‘Manfred Jürgen Matschke, Gerrit Brösel, and Xenia Matschke’ said that the
functional (i.e. purpose-oriented) theory, the main functions of company valuation
are: decision, arbitration, and argument or negotiation function. The paper focuses
on the decision function and shows how the decision value can be derived as a

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subjective limit value that different economic agents assign to the company. At the
same time, it also includes how there is no one, specific value for a business and it
differs depending on the individual for whom the business is being valued. Finally,
the differences between the functional and the market value oriented theory of
company valuation are discussed at length, highlighting the gap between the value
perceived by the company internally and the value perceived by the market. The
concept and terminologies regarding the today widespread market value oriented
approach were, as well as the evolution of value theories ironed out through this
paper.

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 Research Gap & Relevance of the Study:

Based on the review of the above papers, the following research gap i.e. problem
statement could be identified:

It is understood that business valuations consider a host of micro- economic and

macro-economic inputs, which are inter-related as well. The concept of valuation
and the roles of each input have been analyzed critically over time. However, the
variability in the valuations while comparing two companies from different
countries, depending on the state of the economy has not been analyzed extensively.
Factors such as GDP, Interest Rates and Fiscal State of the country have a huge role
in determining the value of a particular company, due to these reasons:

i. Macro-economic factors act as direct inputs in deriving the value of the

enterprise, theoretically.
ii. Macro-economic factors have a direct impact on the lifestyle and standard
of living on the countries citizens, who act as value seekers or people who
end up valuing these companies. Since the value of anything is a relative
concept- where it differs from person to person, the value seekers, i.e. the
citizen of the parent country of the firm would have a different, qualitative
impact on the valuations.

This paper intends to address this gap by analyzing the impact of such macro-
economic variables in valuations of companies in both developing and developed
nations.

‘A comparison of one entity’s value in different conditions shall assist in revealing

the impact of those conditions in the value itself’ is the thought process behind this
study.

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 Objective of the study:

This paper: ‘Business Valuations: A relative study across Economies’ looks to

achieve the following objectives:

 To determine the difference in valuations of the same company in different

economies (developed & developing) and different economic conditions in
those countries.
 To ascertain the role of the macro-economic conditions of a country in
valuation of a company (positive bias or negative bias)
 To qualitatively estimate the choice of a rational investor between investing
in the same company in a developed v/s developing nation, keeping all other
factors constant.

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 Research Methodology:

Research Design:

The study will revolve around comparing Discounted Cash Flow Valuations of four
companies, two from developing nations & two from developed nations in a highly
stable and equalizing industry, namely:

 Materials & Cement Industry

 The materials industry is less monopolistic as compared to other complex
manufacturing & geographical industries such as Automobile, oil and
energy.
 There are companies of similar scale of operations and lower variances in
prices due to low import dependence in both developing and developed
countries, making the comparison fair and viable to come to a conclusion
about the concerned countries.

Sample Size:

From Developing Nations Developed Nation

UltraTech Cements- India Eagle Materials- United States of America
Indocements- Indonesia Heidelberg Cements- Germany

Data Sources & Collection:

 Financial Statements including Balance Sheets, Profit & Loss statements as

well as cash flow statements of the above mentioned companies deduced
from the Annual Corporate Reports for the year ended 2019-20.

Research Tools:

 Discounted Cash Flow method of valuations

 Graph analysis of values

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Method of Data Analysis:

The steps behind this study are as follows:

1. Creating a Valuation Model, to incorporate the above information and

evaluate an approximate value per share of each of the above companies in
their parent country (the country they are listed in).

Using the valuation model created above to determine the value of the firm in a
country having contrasting macro-economic conditions by making changes to the
cost of capital by making adjustments for market interest rates & inflation
changes. {I.e. it shall be analyzed if the company existed in a different kind of
economy (developing/ developed) to the one it originally exists in (developed/
developing) and a value would be approximated per share. For example, in case
of India and USA, the revised WACC has been derived as a weighted average
of WACC of a USA based company as well as Indian companies’ WACC.

The values will first be computed & then compared as follows:

Valuation to be done in
Company Parent Nation
Alternate Nation
United States of
Ultra Tech Cements India
America
Heidelberg Cements Germany India
Indocements Indonesia Germany
United States of
Eagle Materials Indonesia
America

2. Comparing the values arrived at in the two countries and studying the
deviations caused in market value because of varying macro-economic
factors in developing and developed nations.
3. Based on the study of these deviations, concluding & commenting about the
general shift in values of an enterprise brought about by changes in macro-
economic conditions.

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Chapter 2: Analysis & Findings

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 Data Analysis:

DCF Valuations

Company 1: (a) Ultratech Cements – Valuation in India (Developing country)

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Through the above valuation model using Discounted Cash Flow analysis & perpetuity growth method, the value of each share of
Ultratech Cements in the developing nation of India is estimated as INR 8,811.44/- taking the prevailing conditions in the country of
India.

Now, we would Value the same company: Ultratech Cements in the United States of America and compare the deviations:

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 (b) Ultratech Cements – Valuation if it existed in United States of America (Developed Country)

Through the above valuation model using Discounted Cash Flow analysis & perpetuity growth method, the value of each share of
UltraTech Cements in the conditions of the developed nation of USA is INR 5,543.37, as compared to a hefty INR 8,811.44/- in
India, demonstrating once again that the value perceived in a developing nation is higher than in developed nations.

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Company 2: (a) Heidelberg Cements– Valuation in Germany (Developed country)

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Through the above valuation model using Discounted Cash Flow analysis & perpetuity growth method, the value of each share of
Heidelberg Cements in the developed nation of Germany is estimated as EUR 162.82/- taking the prevailing conditions in the country
of Germany.

Now, we would Value the same company: Heidelberg Cements in India and compare the deviations:

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 (b) Heidelberg Cements– Valuation if it existed in India (Developing Country)

Through the above valuation model using Discounted Cash Flow analysis & perpetuity growth method, the value of each share of
Heidelberg Cements in the conditions of the developing nation of India is estimated as EUR 171.92/- as compared to a relatively low
EUR 162.82/- in Germany, demonstrating once again that the value perceived in a developing nation is higher than in developed
nations.

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Company 3: (a) Eagle Materials – Valuation in United States of America (Developed Country)

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Through the above valuation model using Discounted Cash Flow analysis & perpetuity growth method, the value of each share of Eagle Materials
in the developed nation of United States of America is estimated as USD (8.90)/- taking the prevailing conditions in the country of USA.

Now, we would Value the same company: Eagle Materials in Indonesia and compare the deviations:

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 (b) Eagle Materials – Valuation in Indonesia (Developing Country)

Through the above valuation model using Discounted Cash Flow analysis & perpetuity growth method, the value of each share of
Eagle Materials in the conditions of the developing nation of Indonesia is estimated as USD (11.63)/- as compared to a relatively low
USD (8.90) /- in USA, demonstrating one more time that the value perceived in a developing nation is higher than in developed
nations.

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Company 4: (a) Indocement – Valuation in Indonesia (Developing Country)

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Through the above valuation model using Discounted Cash Flow analysis & perpetuity growth method, the value of each share of
Indocement in the developing nation of Indonesia is estimated as Indonesian Rupiah 12,600/- taking the prevailing conditions in the
country of Indonesia.

Now, we would Value the same company: Indocement in Germany and compare the deviations:

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 (b) Indocement – Valuation if it existed in Germany (Developed Country)

Through the above valuation model using Discounted Cash Flow analysis & perpetuity growth method, the value of each share of
Indocement in the conditions of the developed nation of Germany is Indonesian Rupiah 12,375/- as compared to a higher Indonesian
Rupiah 12,600/- in Indonesia, demonstrating once again that the value perceived in a developing nation is higher than in
developed nations.

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 Interpretation & Findings:

There are eight values derived through the above performed DCF Analysis, broken
down into 4 sets of two values per company. The two values achieved per company
can be compared through graphs as follows:

Developing Nation

Developed Nation

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 Value in developed Value in developing Percentage (%)
Company
country country change in values

Ultra Tech Cements

5543.37 8,811.44 60.15%
(₹)
Heidelberg Cements
162.82 171.92 05.58%
(€)
Indocement
12,375 12,600 02.18%
(IDR)

Eagle Materials 8.90 11.63 30.67%

It can be observed that the % change in values are largely variable ranging from a
staggering 60.15% to a lowly 02.18% increase. There is no fixed range for these
change in values.

Findings:
 The above graphs indicate a similar pattern, wherein the developing nations
show a greater value than the developed nation. This depicts a greater
skew/ bias in valuations in developing nations over developed nations,
keeping all other factors constant.
 However, the quantum of change (an approximate percentage range)
cannot be deciphered since the terms developing and developed are not
very accurate and specific and that there can be various levels of developed
and developing nations.
 Keeping all other factors such as political conditions, policy decisions and
raw material availability, demand etc. constant, an investor with a
comparatively high risk appetite would choose to invest in a company
in the environment of a developing nation as the same share would be
valued at a higher level than what it would in a developed nation. However,

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 the upside potential is also high in such a scenario, making it a high risk-
high reward opportunity.
 Keeping all other factors such as political conditions, policy decisions and
raw material availability, demand etc. constant, an investor with a
comparatively low risk appetite would choose to invest in a company in
the environment of a developed nation as the same share would be valued
at a lower level than what it would in a developing nation. However, the
upside & downside potential is also moderate to low in such a scenario,
making it a less risky opportunity.

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Chapter 3: Conclusive Remarks

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 Limitations of the Study:

The study has the following limitations:

 Inability to quantitatively assess the variability of the change in

valuation between a developing economy and a developed
economy. While the qualitative relationship could be determined,
an exact or approximate range could not be determined through
this study.
 This study assesses the impact of one factor (macroeconomic
conditions) in an investor’s decision making, and excludes other
factors, not making it the only basis for decision making.

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 Conclusion:

In terms of Business Valuations, the increased value in case of

Developing nations as observed below has been attributed to the
increase in demand of resources due to greater infrastructure projects in
that country due to faster pace of development. The macro-economic
factors creating a bias is something that is considered seldom. While
the both factors do play a role in this particular behaviour or skewness,
the latter is not considered explicitly for decision making.

The objective of this study was to use the assumptions of Ceteris

Paribus (keeping all factors constant) to find out what sort of roles
market interest rates and inflation alone have in determining the value
of a company.

The study was successful in determining its objective on a qualitative

level, in that by recognizing that underrated values in developed
economies or overrated values in developing economies, while there
certainly is more scope of quantitative research to gain more accuracy
on the achieved results.

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 References:

1. ‘Inputs to Business Valuation’ published in February 2020

authored by Stephen Lynn
2. ‘Damodaran on Valuation’- 2018 by Dr. Awsath Damodaran
3. ‘Macroeconomic Factors Influencing Cross-border M&As: A
Negative Binomial Approach’ written in June 2017 by ‘Yhlas
Sovbetov’ from ‘The London School of Commerce’
4. ‘Corporate Finance Institute’s Developed v/s developing
Economy’- 2019
5. ‘Discounted Cash Flow Valuation’- Investopedia 2018
6. ‘Indian Valuations Handbook’- Bloomberg Quint 2018
7. Macroeconomic Factors and Company Value’- August 2015 by
‘Konstantinos Vergos & Apostolos G. Christopoulos’
8. Fundamentals of Functional Business Valuation’ Published in
April 2010, by ‘Manfred Jürgen Matschke, Gerrit Brösel, and
Xenia Matschke’

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