INITIAL PUBLIC OFFERING

• Raise Capital
• Under Pricing / Over Pricing
• Privately Held Companies
• Significance to the Company
• Significance to the Investor
Risk Involved

 Unpredictable
 No past record of the Company
 Business Risk
 Financial Risk
 Market Risk
Analyzing An IPO Investment

 Business Operations
 Financial Operations
 Marketing Operations
IPO Valuation (DCF)

 DCF analysis says that a company is worth all

of the cash that it could make available to
investors in the future. It is described as
"discounted" cash flow because cash in the
future is worth less than cash today.
DCF Continued
Company Competitive Position Excess Return/Forecast Period
Slow-growing company; operates in 1 year
highly competitive, low margin
industry .
Solid company; operates with 5 years
advantage such as strong marketing
channels, recognizable brand name, or
regulatory advantage .
Outstanding growth company; 10 years
operates with very high barriers to
entry, dominant market position or
prospects .
DCF Continued

 Growth Rate:
 HDIL is expected to grow at to have CAGR of 42 %
( source: Emkay Research). We take fixed growth
rate of 42% for DCF valuation for coming 5 years.
 Reinvestment Rate:
 Equity Reinvestment Rate =
 Growth Rate / ROE = 42/76 = 55.26 %
DCF Valuation

 Forecasting Free Cash Flows:

 EBIT (1-tax) – [EBIT (1-tax) X Reinvestment
Rate]
 EBIT (1-tax) nth year = EBIT (1-tax) n-1 year X (1
+ growth rate)
  Current Year 2008 2009 2010 2011 2012
Expected
Growth Rate - 42% 42% 42% 42% 42%

EBIT (1-tax) 6181 8777 12463 17698 25131 35686

Equity
Reinvestment
Rate - 55.26% 55.26% 55.26% 55.26% 55.26%

FCFE - 22185 30394 41639 57046 78153

WACC
 Cost of Equity (Re):
 CAPM = Cost of Equity = RF + Beta (Rm-Rf)
 Cost of Debt (Rd):
 Rd (1 - corporate tax rate).
 Cost of Equity + Cost of Debt
E/V 0.66 Rf 7.44

Corporate tax 30% Beta 1.1

D/V 0.34 Rm 13.5

Cost of Debt Cost of Equity

D/V x (1 - corporate tax rate) E/V x [Rf + Beta (Rm-Rf)]

0.34 [1-0.30]           0.66 [7.44 + 1.1 x 6]

WACC = Cost of Debt + Cost of Equity = 9.5%

 DCF Continued

  2008 2009 2010 2011 2012

Free Cash Flow 3927 5576 7918 11243 15965

Discount rate 1.095 (1.095)² (1.095)³ (1.095)4 (1.095)5

Present value 3586 4650 6030 7820 10141

Terminal Value

 We have assumed perpetuity growth rate for

HDIL as 6%
 Net income of 2012 × (1+ perpetuity growth
rate)
 = 35686 × (1+0.06)
 = Rs. 37827 mn
Reinvestment rate after
2012 (Terminal Point):
 Reinvestment rate = Perpetuity Growth
rate / Return on Equity
 Return on equity will drop to the stable period
cost of capital of 9.5%.
 Reinvestment rate (terminal point) = 6/9.5 =
63%
Free cash flow = EBIT (1-
tax) – [EBIT (1-tax) x
Reinvestment Rate]
 Free cash flow 2013 = 37827 – [37827 x 52%] =
Rs. 13936 mn.
 Gordon Growth Model
 Free cash flow of the year after the
terminal year /(Discount Rate –Perpetuity
Growth Rate)
Terminal Value

 Terminal Value = 13936 × 100 /(9.5 – 6 ) =

Rs 146099 mn
 Present value of = 146099 / (1.095)6
 Terminal year
 = Rs. 84754 mn
Calculating Total
Enterprise Value:
 Total Enterprise = Sum of Present value for 5
years + Present value Of Terminal Year +
Cash – Debt = 32228 + 84754 + 1949 - 3756 =
Rs. 115175 mn
 Fair value = Rs 115175 mn
 Number of outstanding shares = 214 mn
 Fair value of the HDIL per share = Rs 538
 NSE Data

Total Trd
Date Prev Close Open High Low Close Qty Turnover in Lacs

24-Jul-07 500 538.6 575.95 535 559.35 28590806 160030.8

25-Jul-07 559.35 549.4 587.4 545.3 580.1 8552244 48465.14

26-Jul-07 580.1 585.6 634.3 585.6 621.4 9125757 55976.88