Valuations

VALUATIONS:

Valuation is the process of estimating the current or future value of any assets which consists its value in money term.There are many techniques to determine the vaue of assets like some are in subjectives and other  in objectives.

Needs of Valuations:

1.Selling or Buying a Business:Many big corporations doing valuation while selling its subsidairy or buying and other firm,in order to determine the fair value of the fir which is going to sold or buy.

2.Buy or Sell Agreements:If there is preperation of any agreement for buying or selling then there is the valuation of the property or assets going to buy or sold.

3.Gift,Estate,Inheritance Taxes:During the filing of income tax there is the need of  correct valuation of items related to gifts,estate,inheritance ect.

4.Charitable Contributions:There is also a needs of correct valuation during the contribution to any charity.

5.Divorce:If any couple get divorce than there is the valuation of assets of couple for any compensation made to any partner.

6.Bankruptcy:During the filing of bankruptcy by any firm than there is the need of  correct valuation of assets of that firm.

7.In Life Insurance:During the time of taking life insurance policy than there is the need of valuation of determing need of taking life insurance policy.

Types of Valuations:

1.Fair Market Value:It means valuing the  market value of the  asset on the basis of demand and supply of asset.

2.Fair Value:It is a rational estimation of potential market price of goods or services,assets ect.it consists of acquisition,production,distribution,replacement cost ect.

3.Investment Value:It is a value of property or assets owned by the investors.It is a price at which investors buy fro the market.

4.Intrinsic Value:It is a value refer to the company's stock,assets,products ect. determine through fundamental analysis without refrence to it's market value.

5.Going Concern Value:It is the value of the business that is going to continue operating into future.

6.Liquidation Value:It is the the price of an assets,allowed insuficient time to sell in the open market.Assets have less buyers.This value have less than fair market value.

7.Book Value:It the value of the business from the comany's financial statement.It is calculated from the balance sheet,it is different between the company's total assets and liabilities.

8.Brand Value:It the value of the well known product of the company generating enough money which make its brand value in the market.

9.Human resource Value:It is a value of the personals working in the company.More efficient the employees of the company more he or she having human resource value.

10.Human Competence Value:It is a value of the human beign having specific skills,competency,knowledge ect.

Methods of Business Valuations:

1.Income Approach Methods:It is a basic valuation principle in which value of ownership interest in a company is equal to the present worth of future benifts of the ownership.

2.Discounted Future returns Methods:It means a discount rate which represents a total expected rate of returns that a buyer or investors would demand on the purchase price of ownership interest in an assets,given an risk inherent in that ownership interest.

3.Capitalized returned Methods:It is usually derived by subtracting company's expected average compound growth rate from its discount rate.It is approriate when it appear that company's current operations are indicative of it's future operations.

4.Market Approach Methods:Under this methds,the valuation of assets id done on the bases od similar or comparable assets beign sold in cash recently.This method is mostly use in large and public company counterparts.It is a most common price earning multiples.

5.Assets Based Approach:Under this method company's assets amd liabilities are adjusted to their appraised values and net result is an indication of the value of the company's equity.But this method is used in limited circumstances.

Intangible assets:Types

1.Technology related (eg Engineering drawings)

2.Customer related(eg customer lists)

3.Contract related(eg favourable supplier contract)

4. Human resources related(eg trained workforces)

5.Marketing related(eg Trade marke and Trade name)

6.Goodwill related(eg Going concern value)

Methods of Valuations:

1.Cost approach methods:

2.Income approache methods:

Capital Market Instruments

CAPITAL MARKET INSTRUMENTS:

A Capital Market is a market for securities like debts or equity,where business enterprises and government raise long term funds.It ia a types of market in which money is provided for a period more than one year and for the arrangement of funds for the short term period is from another market known as  money market.

Capital market is characterized by a  large variety of financial products like equity and preference shares,Fully convertable debenture(FCD),Non convertable debenture(NCD),Partialy convertable debentures(PCD).However,new instruments are beign introduce such as debenture bundled with warrants,participating preference share,zero cupon bonds ect.

Types of Capital Market Instruments:

1.Secured Premium Notes(SPN):It is a secured debenture redeemed at premium along with ditachable warrants.It is redeemable after notice period say four to seven years.The warrants attached to SPN gives holders the right to apply and get alloted equity shares.

There is an lock in period for SPN during which no interest will be paid for an invested amount.the SPN holders have a right to sell back the SPN to the company at par after lock in period.If holder use the option then no interest or premium is paid to the holder.If the holder hold it further then he have to paid the premium and interest on redeemption on installments as decided by the company.

2.Deep Discount Bonds:It is a types of Bonds that sells at discounted rate from par value and it has no coupon rate or lower coupon rate than prevailing rate of fixed income securities with a similar risk profile.

The main objectives ot this types of bonds is to meet the long term funds requirements of the issuer and investors who are not looking for immidiate returns.They are sold for the long maturity period of 25 to 30 years.

3.Equity Share with ditachable Warrants: A warrant is a security issued by the company entitled holders to buy the given numbers of share at stipulated price during the specified period.these warrants are seperatly registered with stock exchange and traded seperatly.Warrants are frequently attached to bond or preferred stock as sweetener allowing the issuer to pay lower interest rate or dividends.Eg Essar,Reliance ect issued this types of warrants.

4.Fully Convertible Debentures with Interest:These are the debt instruments and converted into equity share after a specified period of time.The conversion may be in one or several phases.If the debt instrument is pure debt then interest is paid to investors.After the conversion interest is ceases on the converted portion.If the project is financed through Fully Convertable Debenture issue then the investors can earn interest even when the project is under implementation.Once the operation of the  project is started investors get share price appreciation and dividend payments.

5.Equi Pref:They are fully convertible cumulative preference shares.This instrument is divided into two parts,Part A and Part B.Part A is the automatic conversion into equity shares on date of allotment without any appllication by the allotee.Part B is redeemed at par or converted into equity after lock in period at the option of the investors,at the price lower than 30% average market price.

6.Sweat Equity Shares:Sweet equity are a types of equity share given to the companies employess in recognision of their work.It means to give options to the employees to buy the share of the company.So they became a part of owner and participate in profit apart from salary earning.This helps to boost the sentiments of the employees to wark hard and to achieve the goals of the company.

7.Tracking Stocks:These are a securities issued by the parents company to track the result of the one of the subsidiaries without having claim on the assets of the parent company.When parent company issued the tracking stocks then its all revenues and expenses are separeted from the parent company's financial statements.Sometimes the high growth subsidiaries financial statement is seperated from the lose making parent company's statements.

8.Disaster Bonds:It is a high yield debt instrument and is usually linked to insurance and is used to raised money in case of catastrophe.If the issuer suffer al loses then the issued has to pay the interest or principle amount to the investors.

9.Mortgage Back Securities(MBS):It is basically a types of assets back security.It is a debt obligation the represent a cash flow from mortgage loan mostly from the residential property.It derived and claim their ultimate values from payment of principle and loans in the pool.The payment is broken down into different class of securities depending on the riskeness of the mortgaged.
Kind of Mortgage back securities:
  9.1 Commercial Mortgage Back Security:These are the commercial property which is beign kept as a mortgaged.
  9.2 Collateralized Mortgage Obligation:It is a complex MBS in which morgages are ordered into tranches by some quality,with each tranche is sold as a seperate security.
  9.3 Stripped Morgage Backed Security:Each mortgage payment is partly used to pay down the loan principal and partly pay the interest on it.

10.Global Depository Receipts or American Depository Receipts:These are the negotialble  certificate held in the bank of the one country which representing the specified number of share traded on the stock exchange of another country.Mainly GDR facilitate trading in the shares of developing countries companies.The GDR price are closely related to the price of related shares.
ADR are the negotiable certificate traded in US stock market which carry share of US companies.


11.Foreign Currency Convertible Bonds(FCCB):It is a mix between the equity and debt instrument.It is a bond having regular coupon and principal payment.This bond also give option to bondholders to convert the bond into stock.FCCB is issued in the currency different than the issuer's domestic currency.
Advantages of FCCB:
  a) Many companies like Banks,Finance institutions ect decided to issue bonds in foreign currencies  because they predict that their domestic currency may be stable in near future.
   b)  It gives issuers a opportunity to access foreign market for raising capital for investment.
   c) These bonds act like a debt and equity instruments.These bonds also helps bondholders to convert the bonds into stocks,apart of getting regular coupan and  principal payments.
   d) It is a low cost bonds because it consist of lower interest rate normally 30 -50% lower than market rate due to the equity component consist in it.
    e) It have an advantages of large price appreciation in the company stock's.
    f) It is redeemable at maturity if not converted.

Disadvantages:
    a)There is higher foreign exchange risk in FCCB as the borrowing is in foreign currency so the interest is also paid  in foreign currency.The firms which have low debt equity ratio and have earning potential is in foreign currency are opted FCCB's.
     b) FCCB create more debt in foreign currency,so the interest is also more in the form of foreign currency.
     c) In FCCB interest rate is low but there is more exchange risk in both interest and principal.
    d) If there is decline of stock price,investors will not go for conversion rather go for redemption.So the companies are going for refinancing for fulfilling promise of redemption which can hit earning.
     
12.Derivatives:It is a financial instrument,which have a characteristic in which value have been derived from any underlying assets like Commodity,Bonds,Equity,Currency ect.These are sometime leverage in which small movement in underlaying value can cause a large difference in value of derivative.Derivatives are largely use to protect the risk of fluctuation in the value of currency,shares ect by using hedging techniques.
  12.1 Futures:It is a types of financial contract obligation  in which buyer is purchasing the assets such as physical commodity or financial instrument at predetermined future date and price.Future contract have detailed on quality and quantity of underlying assets.Some future contract have facility in delivery in physical quantity while other are settled in cash.This market have characterized by the ability to use very high leverage relative to the stock market.
   12.2 Options:It is a types of financial derivatives which represents a contracts sold by one party called option writer to another party called option holder.These types of contracts offer buyers the right but not the obligation to buy(call) or put(sell) a security ot other financial assets at agreed upon priced during thr certain period of time or an specific date.
  A call option give the buyer the right to buy the assets at the given price which is called strike price.The holder of the call optiion has the right to demand the sale of the assets from the seller,who have only obligation and not the right.Similarly,put option gives the buyer a right to sell the assets at the strike price to the buyer.Here a buyer have a right to sell and the seller has the obligation to buy.

13.Participatory Notes:These are known as P- Notes which are Financial Instruments used by investors or hedge funds that are not registered with Security and Exchange Board of india invest in indian securities.Indian based brokerages buy indian based securities through P-Notes on the behalf of the foreign investors.If any divindend collected from the underlying securities are going back to the investors.

14.Hedge Fund:This is types of fund available to the very small numbers of investors that undertake a wide range investments and trading activities in both domestic and international markets,investors pay parformance fees to the investment manager.Every hedge fund has its own investment stratergies that determine the types of investment and method of investment it undertakes.This types of funds invest in board range of investments including share,debt and commodities.

15.Fund of Funds:It is types of investment stratergies hold portfolios of other investment funds rather than invest directly in share,bonds or other securities.Thsi types of investment is often refered to a multi manager investment.A fund of fund allow investors to achieve a board diversification and appropriate assets allocations with investment in a variety of fund catergories that are all wrapped up into one fund.

16.Exchange Traded Fund(ETF):It is an investment vhical traded on stock exchange like stocks.ETF hold the stocks traded on stock exchange and move same as the exchange move.Most ETF track the index such as S&P 500.ETF may be attractive as investment because of their low cost,Tax efficiency and stock like feature and single security can track the the performance of the growing number of different index fund.

17.Gold ETF:It is a financial instrument like mutual fund whose value depend on the price of gold.In most cases one unit of gold ETF is approximately equal to one gram of gold.As the price of gold rise then the price of ETF is also expected to rise by the same amount.Gold exchange traded fund are traded on the major stock exchange like mumbai,zurich,londan ect.

Financial Forcasting of Company

Financial Forcasting:Meaning 

It is a estimate of  future financial outcomesfor a company or a country.Financial forcast identifies trends in internal and external historical data and analyse those trend and provide informations to the financial analyst what the company is to be at some point of time in future.

Types of Forcasts in Company:

1.Profit/Loss Forcasts:It means forcasting future profiltability of the company by analysing historical Profit/Loss accounts.Profit/Loss forcasting helps financial managers to predict future scope of the businesses and makes financial policies accordingly.

2.Sales Forcasts:It means predicting future sales figures by analysing historical sales data.It is a key financials drivers for most of the business.

3.Cash Flow Forcasts:It means to estimate company's future cash situation based upon the anticipated result from all operating activities.

4.Projected Balance Sheet:It is a estimation of company's assets,debts and owner's equity position based upon the anticipated result from all operating activities.

5.Others:

    5.1 Breakeven:Company has to forcast the breakeven period to analyse the time required by the company to recover its investments of the business.

    5.2 ROI:Company also forcast the Return on Investment(ROI) to judge the profitability of the business.

 

QUARTERLY PROJECTION OF COMPANY FINANCIAL ANALYSIS:
1.Sourcing Data & Information:
   1.1 Sourcing Company Quarterly Data:
     a) Analyst has to capture the Performance data for last 12 quarters of the company by keeping the industry characteristics in mind.
       b) Analyst of the Company also arrange the important notes in the disclosure which should indicate any change in the past.
        c) Company has to segmented the different information arranged into segmented revenue,results,Capital employed ect.
   1.2 Sourcing Other Information of Company:
       a) Analyst has to arranged the recent annual report of the comapny for financial analysis. 
      b) Financial analyst also arrange the press release and media coverage of the company to get various valuable information ablout company and its sectors.
        c) Company arange the analysis coverage report on the company.
   1.3 Capturing Industry Trends:
    a) Company arranged the scanned news on industry value chain for 3 month,which indicate raw materials,intermideate product and supplies,Human resources,Regulations,Competition & comsumer trends.
     b) Analyst has to research companies monthly publications like Newspapers,Magazines and Industry association websites.
      c) Financial analyst has to arrange the free and sucsccribed sources of industries ,also has to arranged the publication of brokerage houses.
      
2.Business Analysis:
    2.1 Product & Services:Business analyst has to analyse the product and services of the company which shows the quality of product and services.
    2.2 Business model & Stratergies:Analyst had to identify the Business model and key stratergies of the company,which helps to rectify any error in the Business model.
    2.3 Key Business Drivers:Business analyst has to identify the key business drivers of the company.
    2.4 Segment Analysis: Analyst also has to do the segment analysis to identify the profitability of different segment.
3.Financial Aanalysis & Projections:
    3.1 Use Quarterly Data:Financial analyst has to use the quarterly data of Balancesheet,Profit and Loss a/c,Cash flow statements ect. for projection of future financial performance of the company.
    3.2 Anchors of Revenue Projections:Analyst has to use the past revenue for analysing the future revenue of the company.
    3.3 Expenditure Projections:Also,analyst has to predict the future expenditure by using historic data of the company's expenditure.
    3.4 Projections of Other income & Expenditure:If the is any other expenditure and income which are also predicted by the analyst.

4.Industry Numbers & Validation: 
   4.1 Analyst of the company has to use the past trends of the Industry and use it's historic numbersfor the forcasting the future policies of the company.
   4.2 Company has to look the industry average to compare it's current result in oreder to take correct decision for the future growth.
  4.3 Company has to see the key risk while using the  industry numbers for forcasting it's future results.Company hs to verify whether the industry numbers are accurate or not.
  4.4 Analyst has to compare the whole data of the industry with the small data of the companies like compare industry annual average balancesheet numbers  with companies quarterly balance sheet numbers.
  4.5 Company has to analyse the industry seasonal factor's with company's factors.

Valuations of Companies

1.RELATIVE VALUATIONS(Market based Valuations):

    1.1 P/E Ratio:It is known as Price to Earning ratio,It is valued by dividing company's current market price by annual earning per share(EPS).It shows how much times the share is traded on its earnings.

      Formula,

           P/E ratio = Market price/Earning per share(EPS)

       

             Advantages of P/E ratio's:

             a)It is easy to compute/calculate becuase easily data of EPS and Market price is available.

             b)It is widely and easily use by any Retail investor's to check the level of affordability of shares. 

             

             Disadvantage of P/E ratio:

             a)If earnings of the company is negative then the P/E/ ratio produce is useless and can't show current picture of stock affordability.

             b)It there is a volatility and trasitory position of earning makes the interpretation of P/E 's difficult of analyst.

             c)If there is discretion in the management within the allowed accounting practices which can distort reported earning and thereby lessen the comparability of P/E's across firms.

    

        There are two types of P/E ratio:

       (1) Trailing P/E ratio:It is calculated by dividing company's current market price by trailing earning per share for the most recent four quarters.

         Formula,

          Trailing P/E = Current market price(CMP)/EPS over 4th quarter

        (2) Leading P/E ratio:It is calculated by dividing company's market price by expected future earning (expected EPS) of the next years.It may not be relevent if the earning are sufficiently volatile,so the future years earning are not forcastable with any degree of accuracy.

         Formula,

         Leading P/E = Current market price(CMP)/Forcasted EPS of next year

    1.2 P/B Ratio:It is also known as Price to Book ratio,It is a ratio of Firm's Current market price to it's Book value.It compare the firm's market price to its book value.It is calculated by dividing current closing price of the company with it's latest book value per share.

   Formula,

   P/B ratio = Current market price/(Total assets-Intangible assets and Liabilities)

  

Lower P/B ratio shows that stock is a under value,which shows there is some problems with the fundamentals of the company.It also shows the how much you are paying for a particular stock and how much you get after company go  bankrupts.

         Advantages of Using Price to Book(P/B) ratio:

       a) Book value is cumulative amount that is usually positive even when firm reports loss and EPS is negative.so it hepls P/B to be positive.

         b) Book value is more stable than EPS,so it may be moe useful than P/E when EPS is volatile.

         c) Book value is an appropriate measure of net assets value for the firms,which are usually liquid assets like Finance,Insurance,Banking ,Investment ect.

         

          Disadvantages of using P/B ratio:

          a) P/B ratio does not refect  the intangible assets such as human capital.

          b) Sometimes P/B ratio may be mislead in case of firms which are outsouce some of the activities and have lower assets which have lower book value and hence have higher P/B ratio,example software firms.

          c)Book value and market value are too different due to the Technological and inflation,which makes difficult to value accurate shareholders investments.

        

 1.3 P/S Ratio:It is a ratio which compare price of the stock with the sales revenue of the firm.It is also known as valuation ratio.It is calculated by dividing total market capitalization of the company with it's total sales revenue.It is  also calculated by dividing price per share by sales revenue per share.The P/S ratio of any firm is compare by the average P/S ratio of the industry.If P/S ratio is undervalue or below the industry average then the share/stock price of that firm is undervalued.Also,if it is above the average P/S ratio then it is overvalued.
         Formula,
           P/S ratio = Market value of equity/Total sales
           P/S ratio = Market price per share/Sales per share

         Advantages of using P/S ratio :
        a) Sales revenue is always positive,so the P/S  ratio is always positive and meaningful even firm is facing  financial truble.This is not in the case of P/E or P/B which are may be negative.
       b) Sales revenues are not easly manipulate as in the cases of EPS and Book value which are maniputated easly.
        c) P/S ratio are not volatile as P/E multiples.This make P/S ratios more reliable in valuation analysis when earnings of the particular year very high or low relative to the long run average.
          d) P/S ratio is used for valuations for start ups and cyclic industries,where records of earnings are not available and P/E ratio is mislead here.It is also used in investment management and partnership companies.

          Disadvantages of using P/S ratio:
            a) High growth in sales does not necessarly indicate high operating profits as measure by earning and cash flow ,Although high sales growth inflate the P/S ratio which is mislead.
         b) P/S ratio include the cost part and does not include the cost part,so high cost part would lead mislead information for analyst.
         

     1.4 EV/EBITDA:
     It is known as Enterprise multiple,it is used to determine the value of the company .It is used for the firms want to search attractive takeover candidates for takeover there firms it is beacuse enterprise multiple consists of equity and debts both which shows clear picture of the firms.Debts part does not consists in P/E ratio.
     Enterprise Multiple =  Enterprise value/EBITDA
          Whereas,Enterprise value = Market value of common stock+Market value of preferred equity+Market value of debts+Minority interest - Cash and Investments

      Advantages of EV/EBITDA:
      a) EV/EBITDA ratio is more useful than P/E ratio beacuse it compare firm with different degrees of financial leverage.
       b) It is useful for the candidate who want to acquire any firm,Enterprise value is better than market capitalization of the firm beacuse it consists of debts parts also.Therefore low Enterprise multiple indicate good takeover deal.
     c) EBITDA is useful in valuing capital intensive businesses with high level of depreciation and amortizations.
         d) EBITDA is usually positive when EPS is not .


 PEG Ratio:
 It is a ratio derived by dividing P/E ratio of the any stock by the growth rate of it's earning for a specified time period.It shows the attractiveness of the stock,lower the PEG ratio indicate the undervalued of the stock and vise a versa.PEG ratio below one would shows the undervalue of the stock or it is cheap.

   Formula,
    PEG Ratio = PE ratio/Annualise EPS growth


Terminal Value Estimations(using price multiple)
1.Terminal value projected at the end of the investment horizone reflect the earning growth that the firm can sustain over the long run beyond that point in time.
       There are two method of calculating Terminal value:
       1.1 Based on fundamental approach:
        Terminal value in year n = (justified leading P/E ratio)*(forecasted earning in year n+1)
        Terminal value in year n = (justified trailing P/E ratio)*(forecasted earning in year n+1)

          Fundamental approach requires estimate of growth rate,required rate of return and payout ratio.


       1.2 Based on comparables approach:
        Terminal value in year n = (benchmark leading P/E ratio)*(forecast earning in year n+1)
        Terminal value in year n = (benchmark trailing P/E ratio)*(forecast earning in year n+1)

         Comparable approach uses market data exclusively.



Economic Value Added(EVA):
it is a measure of company's internal financial performance,calculated by subtracting weight avarage cost of capital(WACC) from it's operating profits after tax(NOPAT).

Formula,
EVA = Net operating profit after tax(NOPAT) - Weighted avarage coast of capital(WACC)

Financial Analysis of the Companies

FINANCIAL ANALYSIS:Meaning

Financial analysis is a process of  evaluating business,projects and  other financials of the business to judge whether the business is viable for investment or not.Basically,it is a tool to judge whether the business is stable,solvent,liquid or profitable enought to invest in or not.

During the analyses of any business,fiancial analyst would focus on the income statements,balance sheets and cash flow statements.In financial analyses there is the predections of companies future performance based on the past performance of the company.

Ratio Analysis:

1.Overview of Ratio analysis:Ratio analysis is a process of calculating financial performance of the company by using various types of ratios like profitability,liquidity,activity,debt ect and determined company's profitability and growth.

In Ratio analysis analyst can compare ratios for the firms and other firm in the industry which is called cross sectional comparison.Also,in ratio analyst compare ratios for a firms over several years which is called time series comparison.

2.Measuring Overall Profitability:The overall profitability of the company is measured by using Return on Equity(ROE).

  ROE = Net income/Shareholder's equity

ROE is a comprehensive indicator of firms performance.It provide information how efficient the manager uses the funds invested by the shareholders to generate the return.

In long run the value of equity of any firm is determine by the relationship between ROE and Cost of equity.Those firms that are generating excess of ROE over the Cost of equity should generate market value in excess of Book value. A comparison of ROE and Cost of equity not only deternime the value of the firm but also the future path of profitability.

      2.1 Decomposing Profitability traditional approache:ROE of the company is calculated by using two factors ROA(Return on assets) and Financial leverage.

         ROE = ROA*Financial leverage

                 =     Net income/assets * Assets/shareholders equity

          ROA tells how much profit the company is generating by investing earch rupee of assets invested.

          Financial leverage tells how much ripee of assets the firm is able to deploy for each rupee invested by  its shareholders.

          ROA calculated by using product of two factor:

          ROA= Net income/Sales*Sales/Sales assets

          Net income/Sales ratio is called Net profit margin(NPM) or return on sales(ROS).

          Net profit margin ratio indicate how much company is able keeps as profit for each rupee of sales.

          Sales /Assets ratio is also known as asstes turnover ratio.It indicate how many sales the firm is able to generate for each rupee of asstes.

       2.2 Decomposing Profitability alternative approache:Computation of ROE in this method by using Operating ROA plus Spread multiply by Net financial leverage

            Operating ROA is a measure of how profitably company is able to deploy its operating assets to generate operating profit.

           Spread is the incremental  economic effect from introducing debt into the capital structure.The economic effect is positive as long as the return on operating assets is greater than the cost of borrowing.

                 Net financial leverage is a ratio of net debt to equity provides a measure of NFL. 

                 ROE = Operating ROA+Spread*Net financial leverage

                 Operating ROA = NOPAT/Sales*Sales/Net assets

                 NOPAT measure how profitable firm's sales are from operating prospecting.

       2.3 Terminology of accounting items used in Ratio analyses:

              2.3.1 Net Interest expense after tax = (Interest expense - Interest income)*(1-tax)

              2.3.2 Net Operating Profit after tax(NOPAT) = Net income+Net interest expense after tax

        2.3.3 Operating Working Capital = (Current assets - Cash & Marketable securities)-(Current liabilities-short term debt and current portion of long term debt)

              2.2.4  Net long term assets = (Total long term assets - Non interest bearing long term liabilities)

              2.2.5 Net debts = (Total interest bearing liabilities -Cash & Marketable securities)

              2.2.6 Net assets = Operating Working Assets+Net long term assets

              2.2.7 Net Capital = Net debt + Shareholder's equity

              

3.Assessing Operating Management:The operating management is assess by the  computation of Net profit margin or Retuns on sales(ROS) which shows profitability of company's operating activities.Also, ROS allow analyst to assess the efficiency of firm's operating management.It is assess by using common size income statement in which all lines of item's are expressed as a ratio of sales revenue.

         3.1 Gross Profit Margin:It is percentage of sales revenue deducted all operating expenses interest,taxes,preffered dividend ect from firm's revenue.
                Gross Profit is a indication which shows revenue exceeds direct cost associate with sales.
                Gross Profit = Firm's sales-Cost of sales
               

           3.2 Selling ,General & Administration expenses:These are the expense influence by operating activities of the firm's.A company which is running on the basis og quality and rapid introduction of new products likely to have higher R&D cost relatively to the company competing purely on cost basis.
                 A companies which are building brand image,distribute it's products through full srvice retailers and provide sinificant customer service have higher SG&A expenses.
                A company that sells through warehouse retailers or direct mails and does not provide much customer support.
                   A company's SG&A expenses are also influenced by the efficiencies with which it manages its overhead activities.
               NOPAT maargin provide comprehensive indication of operating performance of a company because it reflects all operating policies and eliminate the the effects of debt policies.
                      

           3.3 Tax expenses:This expense is the most important element of the company.Company uses various tax planning tools to minimise it.
             There are two measure to evaluate firms tax expenses:
             3.3.1 One is Tax expense to sales.
             3.3.2 Other is the ratio of tax expense to earning before tax which is also known as average tax rate

4.Evaluating Investment Management:
 Investment management is evaluate by using Assets turnover ratio.
          4.1Working Capital Management:
          Working Capital is defined as different between Current assets and Current liabilitie
         Operating Working Capital  = (Current assets-Cash & Marketable securities)-(Current liabilities-Short term loans).
           If company want to run it's operation smoothly then there is a certain amount of investment in needed in working capital.Company's credit policies and distribution policies determine the optimum level of account recievable.Also,nature of production process and the need of buffer stock determined the optimum level of invesntory.Normal level of account payable is a routine source of financing for working capital which is determine on the bases of payment practices in an industry.
           There are some ratio's for firms to analyse the Working Capital Management(WCM):
            a)Operating Working Capital to sales ratio = Operating working capital/Sales
            b)Operating Working Capital turnover = Sales/Operating working capital
            c)Account receivable turnover = Sales/Account receivable
            d)Invesntory turnover = Cost of good sold(COGS)/Invesntory
            e)Account payable turnover = Purchase/Account payable
            f)Day's receivable = Account receivable/Average sales per day
           g)Day's inventory = Inventory/Average COGS per day
           h)Day's payable = Account payable/Average purchase per day

        4.2Long Term Assets Management:
        It another are of investment management concerns the utilization of company's long term assets.It is useful to define the firm's investment in long term assets.
           Net long term assets = (Total long term assets - Non interest bearing long term liabilities)
          Long term assets generally consists of Net property,Plant & equipment,Intangible assets(goodwill & oth assets),Non interest bearing long term liabilities ( deffered taxes).
           The efficiency which firm's use it's long term assets is measured by the ratio:
            a)Net long term assets turnover = Sales/Net long term assets
            b)Net property,pant&equipment(PP&E) turnover = Sales/Net PP&E

5.Evaluating Financial Management(Financial leverage):
Financial leverage enable firm's to have assets larger than it's equity.Firms can develop it's equity through borrowing and creation of other liabilities like account payable ,accrued liabilities and deferred taxes.
Financial leverage helps firm's to increase it's ROE.
Some firms carry large cash and invest in marketable securities.This helps firms to reduce net debts because firms can pay down its debts by using its cash and short term investment.
Financial leverage helps shareholder's but it incrases aslo risk of not fulfilling commitment of paying liabilities which have pre mature payments terms.

      5.1 Current liabilities and Short term liquidity:
          There are following ratios are useful in evaluating the risk of Current liabilities and also to measure the firms ability to repay its current liabilities:
          a) Current ratio = Current assets/Current liabilities
          b) Quik ratio = Cash + Short term investment + Account receivable/Current liabilities
          c) Cash ratio = Cash + Marketable Securities/Current liabilities
          d) Operating Cash flow = Cash flow from operations/Current liabilities
         
           The Current ratio,Quik ratio and Cash ratio helps firms to compare its short term assets that can be used to repay the current liabilities.
            Operating cash flow focus on the ability of the firms operation to generate the resources needed to repay its Current liabilities(CL).

            Analyst view that  a Current ratio(CR) is more than 1 ,which indicate firm can cover its Current liabilities from cash realized from its Current assets.Also,firm face liquidity problem even when CR>1 beacuse some of Current liabilities of firms is not easly liquidate.
              Quik ratio and Cash ratio helps firms to analyse its ability to cover its Current liabilities from liquid assets.Quik ratio assume that account receivable are liquid ,credit worthiness of customer is good or Recievable are collected in short period.


      5.2 Debt and Long term solvency:
      Benefits of Debt financing:
      a) Debt is cheaper than equity promises predefined payments to debt holders
      b) In most countries Interest is tax deductible whereas dividend to the shareholder are not tax deductible.
      c)Debt financing impose dicipline on firms management and motivate it to reduce its wasteful expenditure      d)It is easier for the management to communicate their proprietary information on the firms stratergies and prospects to private lenders than to public capital market,such communication reduces a firm cost of capital.
       Limitations of debts financing:
      a) If firm is depend too much on debts financing ,it would face financial distress if it default on interest and principle payments.
       b) Debt holders also impose convenants to the firms restricting the firms operating,investing and financial decisions.
       c) It would be the costly affairs for the shareholders.

        If operating cash flow of the firm is highly volatile and its capital expenditure needed are unpredictable then it may have to rely on equity financing.Also, managers attitude toward risk and financial flexibility also determine a firms debts policies.

        Ratios to evaluate Capital structure:
        1.Libilities to equity = Total libilities/Shareholders equity
      2.Debts to equity = Short+long term debts/Shareholders equity (it provide indication of how much rupees of debts financing the firm is using for each rupee invested by its shareholders)
        
        3.Net debt to equity ratio = Short+long debt - Cash & marketable securities/Shareholders equity (it measure the firms borrowings)
        4.Debt to Capital ratio = Short+Long debts/Debts(S+L)+equity (it measure debts as a proportion of total assets.)
    5.Net debts to net capital ratio = interest bearing liabilities(IBL)-cash&market securities/IBL-Cash&market securities +Shareholder's equity

6.Operating Metrics:Industry wise
     6.1 Automobiles
          a) Segment wise sales monthly in Units and growth CPLY
          b) Revenue per vehical
          c) PBDIT per vehical
          d) Inventory management technology
       
       6.2 Cement
           a) Gross realizationper ton CPLY
           b) Energy per ton CPLY
           c) Capacity utilization CPLY
           d) PBDIT per ton CPLY
         
        6.3 Steel or any mining cos
            a) Realization per ton CPLY
            b) Capacity utilization CPLY
            c)Energy cost per ton CPLY
            d)PBDIT per ton
            e) Production/no of employees

         6.4 Constructions
             a) Order book position last 3 quarters
             b) Order book inflow last 3 quarters
             c) Sales to order book position last 3 quarters

         6.5 Telecom 
            a) Average revenue per user last 6 quarters
            b) Average revenue per minutes last 6 quarters
            c) Minutes of utilization last 6 quarters
            d) Voice and Non voice revenue last 6 quarters
            e) GSM and CDMA last 6 quarters

         6.6 Chemicals 
            a) Realization per ton last 6 quarters
            b) Capacity utilization last 6 quarters

          6.7 Retail
             a)Average revenue per sq ft last 6 quarters
             b) No of foot fall last 6 quarters
             c)Segmental revenue last 6 quarters
             d) COnversion ratio last 6 quarters

          6.8 Oil and Gass
             a) Gross refining margin last 6 quarters
             b)Reserve/Production ratio last 3 years
             c) Production/Reserve ratio last 3 years
             d) Reserve replacement ratio last 3 years 

            6.9 Banking
               a) Net interest margin last 6 quarters
               b)NPA last 6 quarters
               c) C/D ratio quarters
               d) Business per employee last 3 years
               e) Profit per employee last 3 years
                f) Profitability per branches last 6 quarters
               g) Capital adequacy ratio last 3 years
          


 ASSESSING SUSTAINABLE GROWTH RATE
Sustainable Growth Rate(SGR):Meaning
It is a measurement of the firm which shows that how much firm can grow without borrowing money any more or means sustain growth rate without financial leverage.
It is aslo term as a rate which firm can grow while keeping its profitabilitiy and financial policies unchanged.
SGR is evaluate by using formula:
    SGR = ROE(Return on equity) * (1-Dividend payout)

Dividend payout ratio is calculated as:
   Dividend payout ratio = Cash dividend / Net income


CASH FLOW ANALYSES:
1.Cash Fow Analyses:Overview:
  Cahs flow statement is one of the most important statements of every business,which is analyse by Financial analyst in order to make future business planning.The three important parts of Cash flow statement are Operating activity,Financing activity and Investing activity which being analyse in order to generate future prospects of the business.
    1.1 Operating activites:This part consists cash generate by the firms from sales of good and services after paying for the cost of inputs and operations.
  1.2 Investing activities:This part shows the cash paid for capital expenditure,Intercorporate investments,Acquisitions and cash recieved fro sales of long term assets.
     1.3 Financial activities:It shows the cash raised from or paid to firms stakeholders and Debt holder's.

Cash flow statements provides the quality of informations in the firms income statements and balance sheets.


2. Formates of Cash Flow Statements:There are two types of Cash flow formates as follows
    2.1 Direct Cash flow formates:This types of formates use by very small numbers of firms,In this types of formate operating cash reciepts and disbursement are reported directly.
   
    2.2 Indirect Cash flow formates: This formate is mostly use by the most of the firms and there managers and analyst for there analyses puposes.Here firm derived their operating cash flow ny making adjustments to Net income.It links cash flow statement with firms Income statements and Blance sheet.
  

3.Fund Flow Statements:
 Fund flow statement is prepared by the comany to analyse the chage in the financial position of the company specially change in working capital position of the company.
It is useful for the aanlyst to know how to convert the Fund flow flow satement into Cash flow statement.
Working capital from operations consists of following items:
   a)Increase or Decrease in Receivable
   b)Increase or Decrease in Invesntory
   c)Increase or Decrease in Current assets exclude cash & cash equivalent
   d)Increase or Decrease in Payable
   e)Increase or Decrease in other Current liabilities excluding debt,Notes payable.


4.Analysing Cash flow Statements on the bases of following parameters:
    4.1 How strong id the firms internal cash flow generation?
         a)Is the cash flow from operation is positive or negative?
         b)If it is negative why?
         c)Is it because the company is growing?
         d)Is it beacuse its operations are unprofitable ?
         e)Is it having difficulty in managing it working capital properly?
        
     4.2 Does th company have the ability to meet its short term financial obligation?
          a)Such as interest payments from its operating cash flow?
          b)Can it continue to meet its obligations without reduction its operating flexibility?
          
     4.3 How much cash did the company invest in growth?
         a)Are this investment consistent with its business stratergies?
         b)Did the company use internal cash flow to finance growth or did it rely on external financing?
   
     4.4 Did the company pay didvident fro the internal free cash flow or it rely on external  financing?

    4.5 If the company have to fund its dividend from thr external sources,is the company's dividend policy sustainable?
     4.6 What types of external financing does company rely on?
         a) Equity,Short term debt or long term debts?
         b) Is the financing consistent with the companies overall business risk?
     
      4.7 Does the company have excess cash flow after making capital investments?
         a) Is it a lone term trend?
         b) what does the management have to deploy the free cash flow?
  

Credit Rating

CREDIT RATING:Definations

According to the CRISIL,Credit rating is Unbiased,Objectives and Indipendent opinion as to an issuer capacity to meet it's financial obligations.

According to the Moody's,Rating is designed exclusively for the purpose of grading Bonds according to there investment qualities.

According to the Standard and Poor's,corporate or municipal debt rating is a current assesment of creditworthiness of an obliger with respect to specific obligation. 

According to the Australian rating agency,A corporate credit rating provides lenders with a simple system of gradation by which the relative capacities of companies to make timely payment of the interest and principle on a particular types of debt can be noted.

Credit Rating:Meanings

Credit Ratings is a types of ranking given to the entity which want to borrow fund from the market on the basis of the good credit rating.Credit Rating done by specialized rating agencies on the behalf of Governments or Corporations for there close entities or for themself for raising foreign debts.

The entity have high credit rating means it have high creditworthiness and able to pay it's debts on times.High creditworthiness corporations get credit at low interest rates and also able to pay it's debts on due date.

Before given rating to any Corporations,rating agencies done detail audit of the corporation related to there books of accounts.

Investment grades of Credit rating agencies:

1.Highest safety-AAA(High Investment grade):Any Corporations rated AAA are judged to offer highest safety of timely payment of principle and interest.

2.High safety-AA(High Investment grade):Any Corporations or instruments rated AA are judged to offer high safety of timely payment of interest and principle.

3.Adequate safety-A(Investment grade):Any instrument of firm rated A are judged to offer adequate safety of timely payment of interest and principle.

4.High safety-BBB(Investment grade):Any firms or instrument rates BBB are judged to offer moderate safety of timely payment of interest and principle.

5.Inadequate safety-BB(Speculative grade):An instrument rated BB are judged to offer inadequate safety of timely payment of interest and principle.

6.High risk-B(Speculative grade):Any corporation rated B are judged to have grater susceptibility to default.

7.Substantial risk-C(Speculative grade):An instruments rated C are judged to have factor present that make them vulnerable to default.

8.In Default-D(Speculative grade):An Instrument rated C are in default and arrears of interest or principle payments or expected to default on maturity.

Rating Process:

1.The rating process start with the client approaches to the credit rating.
2 After client approache to the rating agency,rating agency take all necessary information required for this by meeting the management of the comapany /borrowers.
3.Thereafter,rating agency analyse the information collected from the client and generate report.Based on the generated report rating would be decided.
4.After that rating has to be communicated to the client along with the reson supporting  the rating.If client is not agree with the rating then client will appeal for reviewing the rating along with addtitional/new information wil have to be provided.
5.Finally,if the rating is accepted  by the client,it will then be declared by the credit rating agency.

6.Hence,rating is not a one time process,there would be continuous monitoring of client's performance and it's operational environment.Based on this information,rating may be affirmed,upgraded or downgraded.Any changes may be informed to the public.


Types of Ratings:
1.Shadow Rating:This rating is not shown by the rating agency or companies to the public.This rating is performed by the companies to assess hoe much debt issue is worth to the investors.Before,it releases to the public,companies do detail analyses of it's impact.So,this rating useful for the companies own benefits.
2.Formal Rating:In this rating grade is given to any instruments and shown it to the public for there uses.
3.Security Rating:There are various types of security ratings
   3.1 Debt/Bond rating:In this rating grade is given to the Bonds which indicate its credit quality. Credit rating agencies give ranking which shows Bonds issuers financial strength to repay interest and principle to the investors on maturity.
   3.2 Equity rating:In this rating grade is given to the equity/share of any company on the bases of the companies financial strength.Higher grade shown the higher price appreciation of the value of the share.
   3.3 Individual/Borrower rating:In this rating,the creditworthiness of individual /borrower is judge and    provide grade accordingly.This rating shows the borrowers ability to repay the principle and interest on time.
   3.4 Sovereign rating:In this rating a credit rating of a particular country has done.Rating agency evaluate the economic and political condition of particular country and give rank accordingly.This rating give insight to the investors about the risk involvement in investment of a particular country.Obtainig good sovereign rating helps developing countries to attract good investments.


Debt Rating Regulatory requirements:
1.There is compulsory Credit rating requirement if conversion is made for Fully Convertible Debenture(FCD) after 18 months.
2.In case of Non Convertable Debenture(NCD) Credit rating is compulsory where maturity exceeds 18 months.
3.If any Company rollover NCD,fresh Credit rating shall be obtained within the period of 6 months prior to the date of redemptions and communicate to the holder before roll over.
4.Under Debt rating,rating of commercial paer and fixed deposit is also compulsory.


Debt Rating Key parameters:
1.Industry Evaluations:There are some major constrains of Industry evaluation by rating agencies like General profile of the company,Major competitors,Intensity of competition,Growth potential and trend of development both domestic and international,Demand and supply position of the product,Existing insatall and licenced capacity,capacities in pipeline,Position of import and export,Technological development,Price trends,Quality and prices of major inputs,Government policies and regulation affecting industry.

2.Unit Evaluations:There are some unit evaluation criterias used by rating agencies like Position of the unit in the industry,Market sahre,Competitive edge,Major strength and weeknesses,Product range and quality,Market segmentation and Seasonality and market,Marketing strategies,Channel and network,Future programe,Goals and targets,Product range(wide,depth,scope and prospects),Brand equity,Age,Corporate governance,Group or assocaite company performances.

3.Technical Evaluations:There are various technical prameters which rating agencies consider during analyses like Level of technology,Operation efficiencies of the plant,Vintage of the pant and level of maintenace,Need and plan for modernization,Competence and support of technical collaborators,Terms of collaborations,Royalty and buyback,In house expertise and expertise for absorption of technology,Efforts of skill development and productivity improvement,Location advantages and infrastrucutral facilities,Yield analysis,Protection against hazards and other natural calamities.

4.Financial Evaluations: This is most important evaluations for credit rating by rating agancies.This includes parameters like Accounting policies, extent of disclosures,Inventory valuations,Depriciations and other major policies,Revaluation of assets,Assets quality,Contingent and off balance sheet liabilities,Auditors report and Director report,Capitalization trends and policies,Cash flow trend and potential,Future projections,Profitability and liquidity management,Interest coverage,Debt service coverage and other aspect of debt servicing,Requirements of future debts,major fund commitments and overall liquidity,Financial flexibility,Unutilized borrowing potential,Standing in capital market,Capabilities to raise resources and to absorbed debts,Working capital policies,Management of cash,debts and inventory,Budgeting and cost control systems, Sensitivity to change interest rates,taxe rates,exchange rates, Risk management policies.

5.Statutory Evaluations:There are some statutory factors take into consideration while doing analyses for rating like Compliance status in respect of government regulations and directive affecting industry,Position of obtaining approvals and NOC,Pending dispute by and against the unit,Practice regarding payments of statutory dues,Mandatory corporate governance issues.

6.Management Evaluations:Some management evaluation during credit rating are like Shareholding pattern and controlling interest,Composition of Board of directors, Organizational profile,Adequacy and quality of setup,extent and effectiveness of delegations, Competency and integrity of management and it's capability to face crises,Policies and practices regarding recruitment,taining,career planning and developement of employees,Style of management functioning,approaches and outlook,organizational culture,employee morale,Management information and monitoring system.


Commercial Paper Rating:
Commercial Paper are the short term money market instrument issued for the maturity period not more than 270 days.It is issued by the corporations to finance account recievable,inventories and short term liabilities.

Credit rating is compulsory to Commercial papers,so the company should obtain specific credit rating from the approved agencies.Minimum credit rating of A2(by ICRA), P2(by CRISIL), D2(by Fitch).Credit rating obtained for Commercial papers should not be 2 month old.


Key Ratios for Commercial Paper Rating:
1.Pre tax interest coverage ratio
2.Pre tax interest and full rental coverage
3.Cash flow / long term debt(%)
4.Cash flow / total debt(%)
5. Pre tax return on average long term capital employed(%)
6.Operating income / Sales(%)
7.Long term debt / Total capitalization(%)
8.Total debt / Capitalization including short term debt(%)
9.Total liabilities / Tangible shareholders equity(%)



Equity Rating:Key considerations:
1.ICRA has started the Equity rating which is also known as grading.
2.There is an seperate division of ICRA,which is known as Earning Prospect and Risk Analysis(EPRA) group.It is set up to do two tasks:(1).Grading of Primary market.(2 )Assesment for Secondary market.

3. The grading is grouped into 6 categories ,ER1 to ER6-In decending order of earning prospects viz,Excellent,Very good,Good,Moderate,Week and Poor.


Equit Rating: Complete Rating Symbols:
1.ER1A:Excellent Rating Prospects(Low risk)
2.ER1B:Excellent Rating Prospects(Moderate risk)
3.ER1C:Excellent Earning Prospects(High risk)
4.ER2A:Very Good Earning Prospects(Low risk)
5.ER2B:Very Good Earning Prospects(Moderate risk)
6.ER2C:Very Good Earning Prospects(High risk)
7.ER3A:Good Earning Prospects(Low risk)
8.ER3B:Good Earning Prospects(Moderate risk)
9.ER3C:Good Earning Prospects(High risk)
10.ER4A:Moderate Earning Prospects(Low risk)
11.ER4B:Moderate Earning Prospects(Moderate risk)
12.ER4C:Moderate Earning Prospects(High risk)
13.ER5A:Week Earning Prospects(Low risk)
14.ER5B:Week Earning Prospects(Moderate risk)
15.ER5C:Week Earning Prospects(High risk)
16.ER6A:Poor Earning Prospects(Low risk)
17.ER6B:Poor Earning Prospects(Moderate risk)
18.ER6C:Poor Earning Prospects(High risk)


 Individual Credit Rating:
 During the era of Globalization and Liberalization the Auto loans,Home Loans,Personal loans ect are easily available in india,So there is the requirements of  individual credit rating is arises.Individual credit rating evaluate the risk involved to a financial transactions with respect to the individual at a given point of time.      
Therefore,Equifax inc. of USA and Onida finance ltd(india) set up ONICRA to meet this types of rating requirements.


Individual Credit rating Process:
1.An Individual should not approache directly to the ONICRA,but finance company insists to it's customers to obatain an individual credit rating to reduce its risk exposure.
2.An ONICRA has tie ups with various financial firms like Home loans companies on fee bases which depend upon the quantity of work.
3.After getting work ONICRA start its work of assessing creditworthiness of the customers of its clients.

There are 3 vital parameters are studied for Individual:
1.Potential:
   1.1 Personal Strength-In individual credit rating personal strength is very important parameter based on the followings
       1.1.1 Qualification:Credit rating agency has to identify the individual educationalqualifications,higher the qualifications higher would be the rating.
       1.1.2 Occupation:Agency also has to identified and verify the individual occupation and were he/she is working.
  1.2 Stability-Stability in the occupation and job is also one of the important parameters for credit rating agencies,It is judge on the followings:
       1.2.1 Job Tenure:Agencies has to identify and  verify the tenure of the job,higher the tenure higher would be the credit rating.
        1.2.2 Duration of stay in presence place of resedence:it is also one of the important parameters to show the stability of the individual.

2.Capability:A personal capabilities are inportant factors in individual ratings,which are followings

   2.1 Income:It is one of the important parameters for raing agencies to identify the creditworthiness of the individual.
   2.2 Future Job prospects:Credit rating has to identify the individual future job prospects to judge the capabilities of paying debts in future.

3.Strength-The are some strength of individual has to identify like:

   3.1 Financial Assets:It is one of the imortant parameters of the rating of individual to shows the financial strength of the individual.
   3.2 Discipline:There should be the decipline of payment of past debt is also identify by the individual.
   3.3 Willingness to pay:Rating agencies also identify the willingness to pay the debt by the individual in present .


There are 3 vital Transaction parameters:
1.Risk:There are some risk involved in individual transactions parameters are follows
        1.1 Security:Rating agency identify if there is any assets possess to the individual.
      1.2 Ownership of the assets:If there is any assets shown by the individual then the ownership has to identify.
       1.3 Control over the end use of funds:Rating agency has to identify the controller of the end use of funds provided by its client in the form of debt.
        1.4 Collaterals:There should be the proper searching/ identification of collateral kept by the individual.
        1.5 Exposure:There should be the proper analyses of how much exposure alloted to the individual.

2.Modes of payments:There are some methods payments analyses of individual by credit rating agencies are follows

        2.1 Direct deduction from salary
        2.2 Post dated cheques
        2.3 Automated debiting of bank account
        2.4 Payments on due date
        2.5 Payments on demand

Investment Banking - Loan Syndication & Forefaiting

LOAN SYNDICATIONS: Meaning

Loan Syndication is a pocess of pooling of money from the different lenders and lent it to the large borrowers who need large capital.

Baisically,In loan syndication  may borrowers grant loan to any big borrower who need large capital where any single borrower is unable to provide this large capital.

Loan Syndication is mostly use in large scale transactions mostly in any types of merger and acquisition,Buyout ect,where there is requirements of huge capital to close the deal.

Roles within Syndication Process:

1.Arranger/ Lead Manager:The roles of arrangers is to arrange the funds for the borrowers.They are also responsible for placing the syndicated loans with other banks and ensuring that syndication is fully subscribed.They charge the arrangement fee for there services.

2.Underwriting Banks:These Banks commit to supply funds to the Borrowers,if necessarly for it's own resources if the full loans are not arranged or subscribed.Underwriter may be the arranging bank or another bank who take resposibility for providing this facility.There is also the risk involved to the underwriter if loans is not fully subscribed.

3.Participating Banks:Thes are the Banks which participate in the syndication process by lending a portion of the total amount required.These banks charge the interest on the loans given,also charging participating fees.

These Banks involve the risk of not recovering debts if borrowers get default.

4.Facility Manager/Agent:The main role of facility manager is arrange the administrative facilities over the term of loans.The facilities are in the forms of disbursement,repayments,compliances ect.Facility manager may be the arranging and underwriting banks.

 Benefits to the Leads Bankers:

1.Leads bankers have good links to arrange the fund,so they can earn fees in retun of giving there services without investing capital.

2.By giving there services leand bankers should enhance the it's reputation.

3.By providing services helps Banks to enhance there relationship with clients.

Benefits to the Paticipating banks:

1.Loan syndications helps participating banks to access to the lending opportunities at low marketing costs.

2.Once they participate in current loan syndications then there are the chances for them to participate the future syndications.

3.Participating banks have low risk as compare to the bank which dominate the high leverage over them.

 Benefits to Borrowers:

1.Loan syndication system helps borrowers to deals with single banks for raising high value loans.

2.Loan syndication process is simple and quikers than other ways of raising capitals.

Stages of Loan Syndications:

1.Pre Manadate Phases:In this phase prospective borrowers are approach to the single banks or the are invite competitive bids from numbers of banks.In this phase lead bankers identify numbers of borrowers,Designed and appropriate loan structure,Developed a persuasive credit proposal and Obtain internal approvals.

2.Placing the Loans:In this phase the leads managers are start selling the loans in marketplace.In this phase the lead banks prepare the informal memorandum,prepare a term sheet,prepare legal documentations,Approache selected banks and invite participations.

3.Post closer phase:In this phases the agent now handles the day to day running of the loan facilities.

Pricing in Loan Syndication:
1.Banks which provide Loan syndication facilities charge fees for front end activities.These may be  Arrengements and Underwriters fees.
2.Banks providing bulk loan would charge interest on them.This would be margin over base rate.
3.Banks also charge commitment fees for availability of funds.
4.Banks providing loan syndication facilities charge agency fees for managing administrative activities during the term of loans.

Documentations involved in Loan Syndication:
1.The providing Loan Syndication facilities should appoint specialized lawyers working closely with  all banks/party involved in syndication process.
2.Roles of each party is pre determined in documents,related to there duties and regulations.

FORFAITING:
It is a export finance mechanism for converting export credit sales into cash.
In this concept exporter sells it's recievables to the forfaiter at discounted rate,in return exporter get cash.All the risk associate related to the collecting of recievable are bear by forfaiter.

Benefits of forfaiting to Exporters:
1.Forefaiting helps exporters to get liquidity by converting recievable into cash by selling recievables to the forfaiters.
2.In forefaiting there is no risk associates like interest rate risk,foreign exchange risk,political risk,commercial risk ect.
3.It is simple and flexible in nature as it can be alter according to the needs of the exporters.
4.It can be finance upto 100% export value.
5.It can save exporters export credit insurance amount.


Forfaiting Risk Eliminations:
1.Commercial risk:The risk of non payments by non sovereign or private sector buyers or borrowers in his own currency arising from insolvency.
2.Political risk:There is the risk of borrowers country Government actions,which prevent or delay the repayment of export credit.This risk should be eliminate.
3.Transfer risk:There is the risk of an inability to convert local currency into the currency in which debt is denominated.
4.Exchange risk:The should be the risk of fluctuation of exchange rate.so this risk should be eliminate.


Criteria for Forefaiting:
1.Normal durationof recievable for using forefating is between 1 to 5 years.
2.Export contracts are been executed in all major convertible currencies like Pounds,Dollar,Yen ect.
3.Minimum eligible amount for using Forefaiting is Rs 250000 US dollars.

Different between forefaiting and export factoring:
1.In forefaiting,forefaiter finance 100% of bills recievable whereas,In factoring foactor finance only 75 - 85% of the bills recievable.
2.In forefaiting is used in account recievable of capital goods products or any other high value product where payment is recieved in longer duration of time,whereas in factoring is used in trade of general products were payment is recieve immiditely on delevery of goods.

Investment Banking - Venture Capital

VENTURE CAPITAL: Concepts

It is a types of capital,provided by the investors to the new start ups having innovative business idea's.It also provide capital to the small companies having strong growth prospects.It is a very important source of funding for the starts ups and new entrepreneurs who are unable to excess funding from the capital market.

There are various options available in Venture Capital like Seed funding,Angel investing ,Crowd funding ect. From out of these various options  any small firm raise capital who not have any operating history of running a firm.New firms are unable to get bank loans because of the risk involved in these firms,so Venture capitalist invest in these firms in order to get higher returns if new concept got success,also venture capitalist have benefit of taking control of decision making in the operation of the firm.

Also,Private equity firms are also a types of Venture Capitalist,which are a job creator in the economy by hiring Fund managers and Investment Bankers have role of researching a potential investors investing in Venture capital fund and a starts ups having  future business growth.

Venture Capital is transfer it's equity to the promoters or sell in the open market when company/firm listed in  stock market.Also,during the time of Initial public offer(IPO) venture capitalist sell it's equity through IPO.

Venture Capital is an investments in the forms of Equity,Quasi equity and a Times debt,which have conditions of paying interest and priciple when the venture start generating sales.

Key Elements of Venture Capital:

1.The main element of Venture capital is to invest in Unquoted companies which is not listed is stock market.So unable to raise funds for there future business expansions.

2.Venture capital is Invest for medium to longterms in the companies with high growth potential.So as to generate huge returns when company grow and expands.

3.Venture Capital comprises numbers of shareholders,influence by the Venture capitalist for the huge potential of generating returns.

4.Other main element of Venture Capital is to invest in high risk projects,which also have high potential of generating high returns.

5.The high risk factor in the venture capital backed firms,forces them to make changes in there operations and sometimes business model.

6.Venture capital also have objectives is to sell there shareholding either to the promoters or to the open market through IPO's.

7.In various countries there is a variation of Venture capital and Private equity.There Venture capital means funding starts ups and Private equity means funding to the existing high potential and growth firms through Private Equity funds.

8.Venture capitalist closely follow the Technology and Market Development in the area of expertise like Computer software,Hardware,Energy,Biotechnology ect.

9.Venture Capitalist closely screen the Entreprenure and Business concepts prior to making an investment.To diversify risk,they create venture funds that is a portfolio of investment in young companies.

10.Venture capitalist are not a passive Equity investors .They structure a financing deal with great attention to creating the right incentives and compensation for the start ups firm's owners.They are also instrumental in raising additional financing during future stages of firm's lifecycle.

VENTURE CAPITAL INVESTMENT PROCESS: 
1.Development of Fund Concept:-
1.1 Secure Commitment from Investors:Before the development of Venture Capital fund,Venture capitalist  try to secure the commitment from the investors to get investment for the fund.
1.2 Generate Deal Flow:After got commitment from the investors,Venture Capitalist generate deal flow comprises the numbers of investors,fund managers,investment managers ect.

2.Closing of Fund(first capital call):-For 2-3 years

2.1 Screen Business Plan:The venture capitalist screen the Business plan,so that to identify the viability of the business in which the are going to invest.
2.2 Evaluate and Conduct due diligence:In this step Venture capitalist evaluate and investigate the detail historical facts and figures of the firm in which the are planning to invest funds.Financial analyst of the Venture capital firm evaluate and analyse the past year Balance sheets and others financial statement of the proposed acuquire firm and give his/her verdict related to the actual position of the firm.
2.3 Negotiate Deals and Staging: After analysing financial statement,Venture Capitalist negotiate with the promoters of the firm related to the valuations and book value of the firm.
2.4 Additional capital call:After negotiate with the venture capitalist for the deals,if there is any requirement of fund before the Venture capital deal related to the paying heavy debt,additional capital is infuse by the promoters for fullfilling VC deal requirement.
 2.5 Invest fund:After deal has been finalised,Venture capitalist invest funds in Firm for the future business expansions.

3.Value Creation and Monitoring :-For another 4-5 years

3.1 Board service:Value creation and monitoring is a board service for the Venture capitalist.It is a main work after investment had done.Success and failiure of investment  is depend on the proper value creation and monitoring.
3.2 Assist with external relationships:Venture capitalist assits the invested firm for the successful running it's operations and maintain good work relations in order to inrease operation efficiency of the firm.
3.3 Performance evaluation and review:Venture capitalist evaluate and review the performance of the promoters and there staff,so as to identify the operation efficiency of the firm.
3.4 Help arrange additional financing:If there is the need of additional financing to the fim then Venture capitalist arrange finance for it,so as to helps expansion and diversification of the firm.
3.5 Recruitment management:Venture Capital helps in recruite talented manpower for the invested firm and also helps to manage them in a efficient manner.

4. Harvesting Investment:- For 2-3 years
4.1 Initial Public Offer(IPO):In this step,Venture capitalist dilute it's stake through IPO's.Here company launch IPO and allow retail investors to acquire shares of the company.Afterwards,IPO listed on stock exchanges for further trading in secondary market.
4.2 Acquisition:Sometimes firms promoters acquire entire stakes of the Venture capitalist in order to keep full control of the firm with them.
4.3 Liquidation:In thi steps,promoters of the VC backed companies also liquidate there stakes in the market during the time of IPO or afterwards through right issue/Follow up public issue.
4.4 Leverage Buyout:This is a process in which firm/company acquire the another company by using borrowed money.In such case assets of the acquired company and acquring company used as collateral for loans.

5.Distributing Proceeds:-
5.1 Cash:In this steps in there is a surplus cash with the company,it reinvested back to the company for future business expansions.
5.2 Public shares:Also,if company take the buy back then there is the opportunity to the retail investors to sell there shares back to the company if the wish to do so.


Key Success Factors of Venture Capital:
1.First and important  factor of Venture Capital is the knowledge about the Financial market and the industries in which they are invest funds.Also, they should have risk management skills and contact with the investors and have external expertise.
2.There should be high profit achieve by the venture capital company which shows good financial performances of the venture capital company.Also,there should be the good track record of the Venture capital companies in order to attract funds which needs for large deals.However,larger deal associate the higher risk of losses.many venture capital comany try to minimise the risk by hiring professional managers for eficient portfolio management.


Method of Financing through Venture Capital:
1.Equity:Venture Capitalist finanace start ups through selling equity of start ups to the investors of venture capital fund.
2.Preference(Redeemable/non Redeemable):Venture Capitalist also finance through preference shares,which carry fixed divident.They may have choice of  redeemable or non redeemable.
3.Debt(Convertable /Non Convertable):Venture capitalist also finance by giving debt or acquire debenture of the starts ups/firms,which have a choice of  convertable or non convertable.
4.Conventional loans:Venture capital finance the starups by providing conventional loans,which are a types of mortgaged loans not insured by any government schemes.
5.Conditional loans:
6.Income note loans:In this types of loans if any startups take this then it has to pay interest on loans amount plus sales of the firm.


Players in Venture capital:
1.Angels and Angel clubs:They are usually wealty individual who invest directly into the companies.Beside the money investment angel provide there personal knowledge,experiances and contact to support there investees.
2.Venture Capital funds:
    2.1Small Venture capital funds:They are small venture capital companies that mostly provide seeds and startups capital.They so called boutique firms are specialized in certain industries or market segment.
    2.2 Medium Venture capital funds:They finance after seeds stages and operate in all business segment.
    2.3Large Venture capital funds:It operate in all business sector and provide all types of capital for the companies after seed stages.They often operate internationally and finance deal upto 500 million dollar.
3.Corporate Venture funds:These funds are set up and owned by technology companies.There aims is to widen the parent companies technology based win win secuation for both,the investor and investee.In general corporate fund invest in growing or maturing companies,often when the investee wishes to make additional investment in technology or product development .
4.Financial Service Venture fund:These are the funds set up by financial institutions.Thus they have access to resources from penson funds and from their parent companies.


Major group of Stakeholders:
1.Management/Shareholders:They are interested in stable and positive future development of their Venture capital companies.Therefor they will carefully  monitor all drivers and developments.We can  assume that that management and shareholders are willing and able to take immediate action and to develop new and creative strategies eg,Aliance,Merger,new product.
2.Investors:Investors are interested in higher returns beside that group of investors can have other preference as well like suport for certain industries or technologies.Due to the globalizations and development of capital markets investors have a wider choices of investments.In additions,it provides better acess to information and better tools for analysing informations.That's we expect investors to become more critical and more interested in where there money is invested.
3.Employees/Investees/External managers:These group interest focus in Venture Capital industry as an Employer and Business partner.As long as preference are fullfilled,this group have much interest in in detail stratergies .With an expected positive development of VC industry we expect it to remain an attractive partner for employees and external professionals.The VC firm can/could provide more experianced management,contact within the industry,access to markets,to knowledge and to people.The better the VC can provides these values the better he can attract investees.



Five External factors and Drivers that impact the Venture capital industry:
1.Competitive Rivalry:There is a competitive rivalry within the industry,there are various market segments.A Venture capital company invest in early seed stage does not directly compete with an other one,investing in MBO's and MBI's.So between the segments the competition is moderate.It is more within the segment,between like and like of cource all together compete for money from investors and for experianced people.At present industry still is in growth phase we assess the competition between the players in general as moderate.Highly liquid capital markets and a growing number of startups provide sufficient Business opportunity for the whole industry.
2.Threat of New enterance:In this industry there is high profit which attract new entrants.Despite money needed but it is not difficult.If you have industry contacts and good network,you can set up new Venture capital company.In today's time of liquid financial market it is not the problems to obtain funds.Thus specially people working in the industry for several years have pre requisites to setup new companies.Beside that other larger financial and non fiancial firms can take some money and setup a new VC firm as a means of diversifications or some other reason.
3.Power of Suppliers:Powere of supplier of money is not very high beacause of high liquidity in today's financial markets.It is very important for the Venture capital companies to demonstrate good track record of high profits in order to attract funds.The investment preferance is given to the investors where they put there money.Also,equally importance to venture capital firms to compete for  attracting good talent.

4.Power of Buyers:Buyers are the investee companies.They are selected by the Venture capital companies according to there preference in order to minimise potential loses.Depending upon the proportion  of supply and demand of Venture capital we assess the supply as moderate to high.

5.Threat of substitute:There are hardly any substitute for the Venture capital industry product,consisting equity combined with management help,contacts and guidance.


conclusions:We see that there is moderate competition in Venture capital industy because of growing industry.It is rapedly changed to mature and  growth slow down.