PROJECT iBANKING

A STUDY
ON
BUSINESS VALUATION AND STRATEGIC ADVISORY
SERVICES FOR CLIENTS OF PEARS CAPITAL WITH
RESPECT TO M&A AND PE SYNDICATION

The report is submitted as partial fulfilment of the requirement of PGDM

programme of ITM Business School, Siruseri, Chennai

By
SANDHYA.H
(CH2009PGDM15F43)

Institute for Technology and Management Business School

Siruseri, Chennai
July 2010
i
 ACKNOWLEDGEMENTS

My sincere thanks to Mr. Ramkumar R, Founder & Managing Partner of Pears Capital, for
having given me an opportunity to work with the organization and guiding me through the
entire project. He was instrumental in orienting and training me for the internship program.

Special thanks to Ms. Jalaja Bhat, Associate Partner of Pears Capital for her timely support
and guidance during the internship.

I sincerely thank Dr.G.K.Sharma, Director, ITM Business School, Chennai for making this
project a part of the curriculum. Many thanks to Prof. V.S Kumar, Faculty Guide, ITM
Business School, Chennai for his valuable guidance and kind patronage to make this project a
great success.

Last but not least I would like to thank the entire Pears Capital team for having helped me
in making this internship an enriching learning experience. This project has indeed given me
a lot of exposure in terms of handling different kinds of people, in particular, clients and
investors.

ii
 EXECUTIVE SUMMARY

This project focuses on the Business Valuation and Strategic Advisory services for clients of
Pears Capital with respect to Mergers & Acquisitions and Private Equity Syndication. Most
of the deals in the project revolve around Private Equity Syndication and Mergers and
Acquisitions. Business advisory forms a very minimal part of it. Business development i.e.
adding new clients to Pears Capital is a critical part of this project. The task involves more of
front end process and direct handling of clients/investors.
The main sectors that are tracked in this project include Education, FMCG and Contract
Research Organizations.
As an initial procedure in the deal process, it is important to understand a client’s business
model. An essential prerequisite to understanding a client’s business model is a thorough
understanding of the industry and the market players for which extensive research is done.
This helps in better analysis of the financials of the company and its future projections.
Followed by financial modelling, which aids in business forecasting, estimating profitability
and cash flows. The financial model is backed by detailed assumptions, supporting tables and
computation and spread sheet analysis. Projected Income statement, balance sheet and cash
flow statements are also prepared.
Based on the future projections and the market scenario, various types of valuation
methodologies are used to arrive at a final valuation of a company. Business valuation is a
process and a set of procedures used to estimate the economic value of an owner’s interest in
a business. Valuation is used by financial market participants to determine the price they are
willing to pay or receive to consummate a sale of a business. Valuation methodologies for PE
deals are broadly based on the 2 approaches-Multiplier and Discounted Cash Flow approach.
The benchmark valuation would then help in restructuring and negotiation processes.
These opportunities are run by many Private Equity investors by sending them a teaser about
the opportunity. A teaser is a short description of the company on a no name basis which is
floated by many investors. Investors who are interested in the profile of the company will
contact Pears and request for more information.
Closure of a business process occurs with the finalization and execution of term sheet,
completion of Due Diligence, satisfaction of conditions by both parties, vetting of the
documentation, Final execution of documents for the deal, Investor releases the funds. Role
of Pears Capital comes to an end.

iii
 TABLE OF CONTENTS

Cover & Title Page

i
Certificate from SIP Company
ii
Acknowledgements
iii
Executive Summary
vi
List of Tables
vii
List of Figures
1
CHAPTER 1: INTRODUCTION
1
1.1 Brief Introduction
2
1.2 Objectives of the study
2
1.3 Scope of the study
3
1.4 Methodology
4
1.5 Limitations

6
CHAPTER 2: PEARS CAPITAL
6
2.1 Company Overview
7
2.2 Team Profile
8
2.3 Pears’ Transactions

9
CHAPTER 3: LITERATURE REVIEW
9
3.1 Mergers and Acquisitions
11
3.2 Private Equity
15
3.3 Business Valuation

iv
CHAPTER 4: EDUCATION SECTOR 22
22
4.1 Industry Overview
26
4.2 Trading Comparables
27
4.3 Transaction Comparables

28
CHAPTER 5: FMCG SECTOR
28
5.1 Industry Overview
32
5.2 Trading Comparables
33
5.3 Transaction Comparables

34
CHAPTER 6: ROLE OF PEARS
34
6.1 PE Process at Pears
35
6.2 Project Radiant-A CRO Opportunity

44
CHAPTER 7: FINDINGS AND CONCLUSIONS
47
ANNEXURE-Sample Teaser
48
REFERENCES
50
GLOSSARY

v
 LIST OF TABLES

S.No. Table No. Name of the Table Page No.

1. 3.1 Comparison of various funding options 12

2. 4.1 Trading Comparables-Education Sector 26

3. 4.2 Transaction Comparables-Education Sector 27

4. 5.1 Trading Comparables-FMCG Sector 32

5. 5.2 Transaction Comparables-FMCG Sector 33

6. 6.1 Revenue Assumption Sheet 39

7. 6.2 Profit and Loss Statement 40

8. 6.3 Discounted Cash Flow Statement 41

9. 6.4 Trading Comparables 42

10. 6.5 Transaction Comparables 43

11. 6.6 Valuation Table 43

vi
 LIST OF FIGURES

S.No. Figure No. Name of the Figure Page No.

1. 3.1 Process Of a Private Equity Deal 14

2. 3.2 Valuation Overview 16

3. 3.3 DCF Process 20

4. 4.1 Formal IES-Split up 23

5. 4.2 Non-formal IES-Split up 23

6. 5.1 Components of FMCG Sector 30

7. 6.1 Utilization of outsourcing across key industry value 37

chain components

vii
 CHAPTER 1

INTRODUCTION

1.1 BRIEF INTRODUCTION

At a very micro level, ‘Investment Banking’ as the term suggests, is concerned with the
primary function of assisting the capital market in its function of capital intermediation, i.e.
the movement of financial resources from those who have them (the Investors), to those who
need to make use of them for generating GDP (the Issuers). In other words, banking and
financial institutions on the one hand and the capital market on the other hand are two broad
platforms of institutional intermediation for capital flows in the economy. Therefore, it could
be inferred that investment banks are those institutions that are counterpart of banks in the
capital market in the function of intermediation in resource allocation.

Investment Banks help companies and governments raise money by issuing and selling
securities in the capital markets (both equity and debt), as well as providing advice on
transactions such as mergers and acquisitions.

The role of an investment banker as an intermediary is phenomenal. The iBanker not only
assists the companies in information dissemination and execution of financial transactions but
also reviews and advises the prospective investors.

Valuation is used by financial market participants to determine the price they are willing to
pay or receive to consummate a sale of a business. In addition to estimating the selling price
of a business, the same valuation tools are often used by business appraisers and many other
business and legal purposes.

This project thus attempts to study the concept of Business Valuation and strategic advisory
with respect to Mergers and Acquisitions and Private Equity Syndication through real time
experience at Pears. It would involve the front end process and direct handling of clients to
understand the business models. Preparation of teasers and financial models through the
application of the concept of Business Valuation would also be a part of the deal process.
Thus the entire process of rendering strategic, financial and valuation advisory services at
Pears will be tracked.

1
1.2 OBJECTIVES OF THE STUDY
The main objectives of the study are:

1. To study the concept of Business Valuation with respect to M&A and PE

2. To study the process of providing strategic, financial and valuation advisory services
to clients at Pears Capital
3. To understand the business models of the clients of Pears Capital in the Education,
FMCG and CRO sector through analysis of company and industry reports.
4. To apply the concept of Business valuation to appraise the businesses of the clients of
Pears.

1.3 SCOPE OF THE STUDY

As associates of Pears Capital, the experience provides us a complete insight into the process
of providing strategic, financial and valuation advisory services to clients. Meetings with
clients facilitate in gaining a better understanding of the business model and financials of the
clients thus providing a practical exposure. Since the business here involves presenting the
clients’ business to the investor it calls for a detailed study of the industry relating to the
business so as to understand the industry growth and other trends and facilitate business
valuation.

The requirement here would be the integrity of financial statements supported by concrete
evidence to support the statements of returns and projected growth rate sustenance throughout
the proposed business period. It should also be built on the fact that all the claimed model and
financial aspects are properly documentable and not merely sent out in unconformable
statements. A detailed analysis of the respective clients’ business model and preparation of
financial models thus accomplishes in the procurement of in depth understanding of the value
of the clients’ business.

Business valuation methodologies vary vastly across different industries. It is imperative that
the methodology used to evaluate a business is appropriately chosen so as reduce the risk of
erroneous reports. Since, the value of the business is the first aspect that one considers, if not
first, it contributes as a psychological factor that investors consider. There exist various
methods and tools to evaluate a business according to industry. The purpose of the valuation

2
is also required to be considered as a key factor. It is thus the selection of the right
combination of tools and methods that results in proper valuation.

Business valuation also helps in identifying strategic alternatives/opportunities for a business.

These may have been devised for future implementation nevertheless a clear understanding of
its implications and its cause and effect has to be presented to clients and to the investors of
mutual understanding of each ones intentions and direction of the business growth.

1.4 METHODOLOGY

Business Development

Business Development is a critical part of any investment bank. The task involves more of
front end process and handling clients/investors. Client meets provide the necessary first hand
information on their financials and other business processes. As an initial procedure in the
deal process, it is important to understand a client’s business model. Therefore this first step
would facilitate in getting a clear picture of the clients business.

Data Collection

Data collection is an essential prerequisite in the deal process. To gain a thorough

understanding of the industry and the market player’s extensive research is done. This helps
in better analysis of the financials of the company and its future projections. The industry
data and other business data are gathered from industry research reports and other
publications.

Financial Modeling and Business Valuation

Financial modelling aids in business forecasting, estimating profitability and cash flows. The
financial model is backed by detailed assumptions, supporting tables and computation and
spread sheet analysis. Projected Income statement, balance sheet and cash flow statements are
also prepared. Based on the future projections and the market scenario, various types of
valuation methodologies are used to arrive at a final valuation of a company. The benchmark
valuation would then help in restructuring and negotiation processes.

3
Presentation

Once the financial model is prepared a teaser/ pitch book is prepared. A teaser is a short
description of the company on a no name basis which is floated by many investors These
opportunities are run by many PE investors by sending them the teaser about the opportunity..
Investors who are interested in the profile of the company will contact Pears and request for
more information.

1.5 LIMITATIONS

Time Factor

Due to a substantial amount of funds movement and procedures to be followed for any
business process, depending on the size of business, and also factoring in the levels of
approvals and stages the process follows, the procedure from proposal to finalization and
actual closure of a deal takes anywhere between 6 months to 1 yr, which is definitely out of
scope of our project period. Since the procedures have been stretched across time and also
intermittent actions are dynamic in nature, only a general outlay of the processes can be
explored and detailed aspects of the procedure are not possible to attain.

Since the initial procedure to a proposal is research and data mining of the concerned
proposal, we are not involved in the continuity processes and thus have to observe other
processes in the middle of their execution to make a general assumption that on an overview
these are the procedures that the project we are involved in will also encounter.

Industry Size

The vastness of an industry also poses as a major limitation as it does not provide us with
time required to examine and study all the significant players in the industry. Thus time factor
also being a major constraint in this regard. Thus only a sizeable amount of information is
collected and hence we are constrained to work with minimal resources and information. But
efforts are taken so as to maintain integrity of the information and also the correctness and
accuracy.

4
Accessibility

Access to research reports is not easily attained since they tend to infringe on privacy issues
on businesses and thus a full and detailed report on a research is difficult to come by for
analysis. Thus methods of gathering information and data mining techniques are adapted.
Also it is important that we do not use any copy right material that we may want to be
published in future and hence a proper documentation of such material has to be maintained
so as to perform a credit mention in the event of publishing.

5
 CHAPTER 2

PEARS CAPITAL

2.1 COMPANY OVERVIEW

Pears Capital is a specialized investment bank, focused exclusively on Mergers, Acquisitions,

Capital Raising and financial & strategic advisory services. Pears consists of a team of over
thirty people with deep domain expertise across sectors, consisting of CAs, CFAs, Lawyers
and experienced graduates from premier business schools like IIM, ISB and INSEAD.

Private Equity Amalgamation Restructuring Services – “PEARS” has exclusive focus on

Corporate Finance activities such as

Mergers & Acquisitions

Private Equity syndication

Debt Solutions

Due Diligence

Real Estate financing

Valuation Advisory and

Business Advisory

The firm was founded in 2007 by Ramkumar R and a team of veterans with significant
experience in investment banking. The team has established a wide spread corporate network
spanning the globe with Cross Border offices in New Jersey, Dubai, Singapore and Australia.
It also has more than 25 Cross border partnerships with other Investment Banks across the
world.

Pears Capital is sector agnostic and takes up deals from various industries including FMCG,
Pharma, Engineering, Technology, Financial services, Real estate and Auto ancillaries. The
team as sector experts who would work on deals in their respective sectors.

6
2.2 TEAM PROFILE

Pears Capital consists of a solid team of sector agnostic domain experts. A brief profile of
each of the core team members is mentioned below:

7
2.2 PEARS’ TRANSACTIONS

Doctors Bio Lab Private Limited

myeasydocs.com Chennai Cancer Care

Business and Financial Acquisition of Hi-Tech Due Diligence and

Valuation Advisory Pharmaceuticals Private Transaction Advisory
Limited

September 2008 January 2009 February 2009

Exito Management Shree Micro Finance

Consultants Ltd

Business Management and Business Structuring and

Transaction Advisory Capital Raising

March 2009 March 2009

Godrej consumer products Ltd

Acquisition of Argencos SA

June 2010

8
 CHAPTER 3

LITERATURE REVIEW

3.1 MERGER AND ACQUISITIONS

Buyers and sellers can create substantial value through merger and acquisition (M&A). Both
can win from a transaction. That is the beauty of deal making. And that is much of the allure
that has driven the tremendous volume of M&A activity worldwide over the last two decades.

M&A transactions can be broadly divided into either mergers or acquisitions. These terms are
often used interchangeably, but we can still draw a rough difference between the two.

Acquisition – When a larger company takes over another (smaller firm) and clearly becomes
the new owner, the purchase is typically called an acquisition. Typically, the target company
ceases to exist post-transaction (from a legal corporation point of view) and the acquiring
corporation swallows the business. The stock of the acquiring company continues to be
traded.

Merger – A merger occurs when two companies, often roughly of the same size, combine to
create a new company. Such a situation is often called a “merger of equals.” Both companies’
stocks are tendered (or given up), and new company stock is issued in its place.

M&A ADVISORY SERVICES

For an I-bank, M&A advising is highly profitable, and there are many possibilities for types
of transactions. Perhaps a small private company’s owner/manager wishes to sell out for cash
and retire. Or perhaps a big public firm aims to buy a competitor through a stock swap.
Whatever the case, M&A advisors come directly from the corporate finance departments of
investment banks.

In particular, M&A advisory falls onto the laps of M&A specialists and fits into one of the
two buckets: seller representation or buyer representation (also called target representation
and acquirer representation)

9
Representing the target

An I-bank that represents a potential seller has a much greater likelihood of completing a
transaction (and therefore being paid) than an I-bank that represents a potential acquirer. Also
known as sell-side work, this type of advisory assignment is generated by a company that
approaches an investment bank (also an investment bank may also make the initial approach
and “pitch” the idea of the company being sold or merged) and asks the bank to find a buyer
of either the entire company or a division.

Often, sell-side representation comes when a company asks an investment bank to help it sell
a division, plant or subsidiary operation.

Generally speaking, the work involved in finding a buyer includes writing a Selling
Memorandum and then contacting potential strategic or financial buyers of the client. If the
client hopes to sell a semiconductor plant, for instance, the I-bankers will contact firms in that
industry, as well as buyout firms that focus on purchasing technology or high-tech
manufacturing operations.

Representing the acquirer

In advising sellers, the I-bank’s work is complete once another party purchases the business
up for sale. Buy-side work is an entirely different animal. The advisory work itself is
straightforward: the investment bank contacts the firm their client wishes to purchase,
attempts to structure a palatable offer for all parties, and makes the deal a reality. (Again, the
initial contact may be from the acquiring company. Or the investment bank may “pitch” the
idea of an acquisition of Company X to the acquiring company.) However, most of these
proposals do not work out; few firms or owners are willing to readily sell their business. And
because the I-banks primarily collect fees based on completed transactions, their work often
goes unpaid.

Consequently, when advising clients looking to buy a business, an I-bank’s work often drags
on for months. Often a firm will pay a non-refundable retainer fee to hire a bank. These
acquisition searches can last for months and produce nothing except associate and analyst
fatigue as they repeatedly build merger models and pull all-nighters. Deals that do get done,
though, are a boon for the Ibank representing the buyer because of their enormous
profitability.

10
3.2 PRIVATE EQUITY

Private Equity is an asset class consisting of equity securities in operating companies that are
not publicly traded on a stock exchange. There are a wide array of types and styles of private
equity and the term private equity has different connotations in different countries. Private
equity has arrived as a major component of the alternative investment universe and is now
broadly accepted as an established asset class within many institutional portfolios. Many
investors still with little or no existing allocation to private equity are now considering
establishing or significantly expanding their private equity programs.

Private equity is often categorized an "alternative investment", comprising a variety of

investment techniques, strategies and asset classes that are complimentary to the stock and
bond portfolios traditionally used by investors. This chart shows the main components of the
alternative investment space at a broad level.

DEFINITION OF PRIVATE EQUITY

Private equity investing may broadly be defined as "investing in securities through a

negotiated process". The majority of private equity investments are in unquoted companies.
Private equity investment is typically a transformational, value-added, active investment
strategy. The various investment categories in Private Equity includes: Venture Capital, Seed
stage financing, Expansion state financing, Replacement Capital and Buyout. Private equity
investing calls for a specialized skill set which is a key due diligence area for investors'
assessment of a manager. The processes of buyout and venture investing call for different
application of these skills as they focus on different stages of the life cycle of a company.

11
 Table 3.1: Comparison of various funding options

Private Public
Parameters Debt
Equity Listing

Increasing business risk / New

business model evolution / New 1 3 2
ventures

Revenue less than threshold 1 3 2

Funding flexibility 1 3 2

Branding / Company reputation 1 2 3

Organizational development 1 - -

Portfolio advantage / Synergies 1 - -

Market pressure 2 3 1

Regulatory screening 2 3 1

Valuation 1 2 -

Control over company &

3 2 1
management

Costs 2 3 1

ROLE OF AN INVESTMENT BANKER

The role of an investment banker in a PE process can be summarized as follows:

• Identify and initiate contact with prospective investors

• Represent the company in the meeting
• Review the outcomes of the meeting
• Suggest a plan of action.
• Assist the company in coordinating information dissemination and due diligence
program
• Review and advise the prospective investors
• Oversee the execution of financial transactions and provide other services

12
TYPES OF PRIVATE EQUITY

Private equity investments can be divided into the following categories:

• Leveraged buyout, LBO or Buyout: refers to a strategy of making equity

investments as part of a transaction in which a company, business unit or business
assets is acquired from the current shareholders typically with the use of financial
leverage. The companies involved in these transactions are typically more mature and
generate operating cash flows.
• Venture capital: a broad subcategory of private equity that refers to equity
investments made, typically in less mature companies, for the launch, early
development, or expansion of a business. Venture Capital is often sub-divided by the
stage of development of the company ranging from early stage capital used for the
launch of start-up companies to late stage and growth capital that is often used to fund
expansion of existing business that are generating revenue but may not yet be
profitable or generating cash flow to fund future growth.
• Growth capital: refers to equity investments, most often minority investments, in
more mature companies that are looking for capital to expand or restructure
operations, enter new markets or finance a major acquisition without a change of
control of the business.

13
PROCESS OF A PE DEAL

A brief description of the deal process is mentioned in the flow chart shown in figure 3.1

Fig 3.1:
3.1 Process of a Private Equity deal

• Seeking a mandate
1

• Perform a limited Due diligence

2

• Financial Modelling
3

• Arriving at the proposed valuation

4

• Preparation of offer literature

5

• Offer formulation
6

• Investor presentations
7

• Term Sheet and Negotiation

8

• Deal Closure
9

14
3.3 BUSINESS VALUATION

Business valuation is a process and a set of procedures used to estimate the economic value
of an owner’s interest in a business. Valuation is used by financial market participants to
determine the price they are willing to pay or receive to consummate a sale of a business. In
addition to estimating the selling price of a business, the same valuation tools are often used
by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation,
allocate business purchase price among business assets, establish a formula for estimating the
value of partners' ownership interest for buy-sell agreements, and many other business and
legal purposes.

The four basic types of business valuation methodologies used are

1. Discounted Cash Flows

2. Trading Comparables
3. Transaction Comparables and
4. Leveraged Buyout Analysis

Each of the types is explained briefly in figure 3.2

Valuation also involves analyzing the economic conditions in the macro environment of the
business. The financial statements are analyzed thoroughly and the above mentioned four
methods are used to arrive at the final valuation of a company/ business.

15
Fig 3.2: Valuation overview

16
COMPARABLE COMPANY ANALYSIS – TRADING COMPS

The Comparable Company Analysis is one of several techniques used to determine a range of
values for a specific company, the “target” company. The equity of fundamentally similar, or
“comparable” companies tends to be valued on a relatively consistent basis by the public
markets. Broadly speaking, if Widget Company A competes in the same industry as Widget
Company B, using a similar business model, the equity markets are likely to value the two
businesses in a relatively consistent manner. By analyzing certain key ratios and operating
data for each of the companies in the comparable universe, it is possible to estimate how the
public equity markets would value the target. Typical benchmarks include multiples of net
income and book value (equity value multiples) and multiples of Sales, EBITDA and EBIT
(enterprise value multiples). The Comparable Company Analysis is, by its nature, based on
an analysis of currently public companies. Accordingly, the valuations received by the
comparable universe do not typically reflect:

• The premium a buyer must pay for control of a company in an M&A transaction; or
• The discount the market may place on shares which are newly introduced in an initial
public offering or the discount that is appropriate for a private company

Identifying the Comparable Company Universe

A comparable peer group should possess the same fundamental business and financial
attributes such that their public trading values represent a meaningful proxy from which to
determine a value range for the target. Relevant attributes include:

• Macroeconomic issues
• Industry group
• Business model
• Geographic location
• Business mix (products, markets, distribution channels)

Refining the Comparable Company Universe

In some cases it will be necessary to limit the universe to a smaller, more focused group of
comparables. Factors to consider include:

17
 • Size (sales, value)
• Operating history/philosophy
• Customers
• Operations (production, processes, critical inputs/components)
• Financial characteristics (leverage, historical and future growth, margins)
• Growth (organic vs. acquisitions)
• Profitability
• Ownership structure

Expanding the View of Comparability

As a practical matter, in many cases a broad universe of directly comparable companies will
not exist. In these situations the parameters of comparability will be widened to assemble a
group of companies with sufficiently similar, albeit not ideal, characteristics

COMPARABLE TRANSACTION ANALYSIS – TRANSACTION COMPS

The Comparable Transaction Analysis is based on the premise that the value of a company or
an asset can be estimated by analyzing the prices paid by purchasers of ownership interests in
reported comparable transactions. The analysis provides a history of selected transactions in
one particular industry where acquired companies have relatively similar characteristics in
terms of economic drivers such as business mix, size, customer base, distribution channels,
industry dynamics, etc. The purpose of the comparable transaction analysis is to derive
pricing benchmarks based on the selected transactions. It compares the transaction values
paid for selected companies to the respective companies’ financial results to determine
transaction multiples. Typical benchmarks include multiples of net income and book value
(equity value multiples) and multiples of Sales, EBITDA and EBIT (enterprise value
multiples). Transaction multiples define the prices that acquirers are willing to pay for
companies in that industry in the context of a deal. By applying transaction multiples to
financial results of the company being analyzed, it is possible to determine a range of value.
In contrast to the “Comparable Company Analysis,” this approach is generally based upon
multiples paid for control of a company (i.e., includes control premium)

18
A good understanding of the background and factors surrounding a transaction is necessary to
extract meaningful conclusions from the analysis. In particular, specific deal circumstances
are likely to have an impact on prices paid, including:

• Nature of transaction (minority stake vs. control, incidence of other contractual

arrangements, auction vs. negotiated sale)
• Attractiveness of the target company
• Relative needs of seller vs. buyer (i.e., a distressed seller may get a lower price)
• Identity of acquirer (strategic vs. financial, foreign vs. domestic)
• Underlying market conditions (state of M&A, equity, financing markets)

DISCOUNTED CASH FLOW ANALYSIS

The DCF analysis is based on the premise that ownership is essentially a claim on the cash
flows generated by a firm’s assets. The method entails estimating the free cash flows (“FCF”)
available to all investors (equity and debt holders) and discounting these cash flows back to
the present using an appropriate cost of capital to arrive at a present value for the assets.
These assets may be financed in a multitude of different ways, but because the returns
generated by these assets are available to all providers of capital, and to avoid distortions
caused by a particular capital structure, the cash flows should be considered on an unlevered
basis (i.e., free from financing considerations) The company’s operational value (prior to
adjustments for non-operating assets) can be broken down into two components:

• Present Value of free cash flows up to cut point for terminal (or continuing) value
calculation;
• Present Value of terminal value

Company value = PV(FCF) = Σ FCFt / (1+r)t + TV / (1+r)n

The discount rate r is the Weighted Average Cost of Capital (“WACC”), which reflects the
required returns by both debt and equity investors for investments with the same risk profile.
The company’s operational value must be adjusted for non operating assets such as
investments in unrelated subsidiaries, discontinued operations, hidden assets, contingent

19
liabilities, etc. The company’s equity value is obtained by deducting the value of the
Company’s financial debt and other nonworking capital debt. The DCF process is explained
in Figure 3.3

Figure 3.3: DCF process

LEVERAGED BUYOUT ANALYSIS

A leveraged buyout (“LBO”) is an acquisition of a company in which a financial sponsor

(e.g., private investor, LBOfund) invests a relatively small amount of equity (compared to the
total purchase price) and uses leverage (debt or other source of financing) to fund the
remainder of the consideration. Debt is repaid with cash flows of the business acquired
(conceptually similar to buying a house, renting it out and using the rent to pay the
mortgage). LBOs are used in numerous types of transactions and corporate finance situations,
including:

20
 • Take-privates, in which a public company goes from being owned and traded by a
large number of public shareholders to one that is privately held by a small group of
investors
• Buyouts of a subsidiary or division of a larger company by a group of investors
• Management buyouts, in which the acquisition is done by the company’s existing
management group, often with the backing of a financial sponsor
• Recapitalizations (i.e., re-leveraging the company and paying a large dividend)
• Leveraged acquisitions by corporations
• JV LBOs, in which corporations and financial sponsors partner together to acquire a
business in a leveraged transaction (corporations sometimes contribute assets); in
most instances the JV structure permits the debt to be off-balance sheet for the
corporation

LBO Analysis is a valuation methodology that provides an indication of the maximum price
that a financial investor would be willing to pay for a business on a stand-alone basis (i.e.,
without any strategic value or synergies). It also indicates the credit statistics and potential
equity returns for the business at a given price. LBO Analysis is used for a number of
purposes in various transactions. A few of them are mentioned below.

• Estimates the amount a financial buyer would be willing to pay for a business, helps
to identify potential LBO opportunities
• Estimates the potential equity returns to the business, and provides sensitivity of the
returns to growth, leverage, and valuation multiple expansion
• Highlights the effects of adding leverage to the business (e.g., recapitalization, take-
private)
• Illustrates the debt capacity of business (based both on company specific credit
criteria and capital market criteria)

In LBO Analysis, there are several assumption areas that need to be addressed. For example,
operating projections and maximum leverage and capital structure parameters. It is also
necessary to determine the expected method of exit and most likely (and realistic) exit
valuation multiples.

21
 CHAPTER 4
EDUCATION SECTOR

4.1 INDUSTRY OVERVIEW

The biggest asset of any country is its people. India has a population if 108cr, the second-
largest in the world. However, India's literacy rate is just 61% and it ranks a disappointing
172nd in the world on this front. Thus, there is a short supply of educated manpower in India.
In fact, there is a huge requirement of talent in the fields of Hospitality, IT Services, Retail,
Financial Services and Aviation, to name a few. We believe India will have to significantly
gear up its educational infrastructure to meet this demand.

“Over-regulated and under-governed” best describes the largest sector in India –Education
(IES). IES is by far the largest capitalized space in India with $30bn of government spend
(3.7% of GDP; at global average), and a large network of ~1m schools and 18,000 higher
education institutes. Yet, the public education system is ‘insufficient’ and ‘inefficient’,
leading education-hungry and affluent Indians to spend $50bn on private education (14%
CAGR over FY08-12E).

India has approximately 50,000 private schools, present generally in urban clusters. These
schools share a sizable load of educating the Indian student population and satisfy the
demand for quality of education and infrastructure by the Indian middle and elite class. To
provide quality education, these schools are on always on the look-out for better content,
which is provided by the education companies.

SEGMENTS IN THE INDUSTRY

The private spend in the education sector is $50bn. It can be split into two segments:
• Formal ($40bn) and
• Non-Formal ($10bn)

Formal IES: The formal educational system in India broadly comprises schools (often
classified as K12–kindergarten to 12th) and higher education (HE) level. All the levels, from
school to higher education, fall under the purview of the Ministry of Human Resource
Development (Department of School Education and Literacy & Department of Higher

22
Education). Schools cater to the ‘3-17
‘3 17 years’ age group. With no central governing body for
K12, they are ruled by state boards/ ICSE/ CBSE/ International Boards. Higher education
institutes cater to the ‘18-22
22 years’ & above age group. With a single governing body (UGC),
HE comprises graduate/ diploma/professional courses. This may be followed by post
graduation courses.

Figure 4.1:
4 Formal IES – Split up

K 12
50% 50%

Higher
Education

formal education segments flanking the formal ones include

Non-formal IES: The non-formal
preschools (1.5-33 years), coaching classes, multimedia/ IT to schools and colleges (catering
to both private and public institutions), vocational training and the books market. The
segments are freee of any regulations (i.e. no governing/ regulatory bodies for this segment).

Figure 4.2: Non-formal IES

Coaching classes
0.9%
0.7%
Pre-school
17.3%
14.8% 63.3% Vocational Training

Books

3%
ICT (in govt schools)

Multimedia in Pvt.
Schools

23
MARKET PLAYERS

OPPORTUNITY
The Indian education sector, estimated at US$75bn, offers enormous opportunities for private
players. Despite regulatory constraints, the acute shortage of trained teachers and quality
schools combined with cash-strapped governments would open the doors for corporates to
capitalize on this opportunity.

We see private players building business models around formal education system. Sectors
such as pre-schools, tutoring, provision of multimedia content, IT training and e-learning are
prime sectors in which private players can allocate their funds. These areas are attractive
because while they relate closely to the profitable K-12 segment, they are largely
unregulated.

The huge opportunity in the education sector makes it an attractive proposition for private
investors interested in taking advantage of the burgeoning demand for quality education.
Liberalization will continue to intensify as the government struggles to provide quality
education to the masses.

The private education market is estimated to be US$45bn of which the size of formal K-12
and higher education market in India is US$30bn. Segments such as preschool, multimedia in

24
schools, skill development and vocational are showing more promise and expect them to
grow at fast rate.

VALUATION
The current valuations do not reflect the true potential as the sector is still evolving and there
are only few listed companies in India. While international peers are trading at 13-26x
CY09E, Indian companies are trading at 7-22x FY10E.

Companies such as Educomp Solutions, Everonn Systems and NIIT are market leaders in the
field. With these companies building scalable business models, the valuation gap between
domestic peers and international players should narrow. Companies with scalable model and
growth visibility would get better valuations.

25
 4.2 TRADING COMPARABLES

Table 4.1: Trading Comparables-Education Sector

EV/
Particulars Sales Mn (USD) EBITDA EBITDA% PAT PAT% Mcap Debt Cash EV EV/Sales EBITDA

NIIT 263 37 14% 8 3% 240 88 13 315 1.2 8.6

Educomp 246 117 47% 58 24% 1121 175 18 1278 5.2 11.0
Birla Shloka
Edutech Ltd. 38 2 4% 1 3% 24 1 2 22 0.6 14.0

Aptech 35 6 17% (5) -14% 143 4 0 146 4.2 24.4

Everonn Education 62 22 36% 10 16% 134 19 10 143 2.3 6.5

Compucom
Software Ltd 13 6 45% 2 14% 18 8 3 23 1.7 3.9

Mean 2.5 11.4

Median 2.0 9.8

The average Sales (trading) multiple is 2.5x and the average EBITDA (trading) multiple is 11x for the companies in the education sector.

26
4.3 TRANSACTION COMPARABLES

Table 4.2: Transaction Comparables-Education Sector

Amount Invested (Mn

Year Target Company Investor/Acquirer Sales(Mn USD) USD) Stake Valuation(Mn USD) V/S

2010 Schoolmate Edserv 0.32 0.87 100% 0.87 2.72

2009 Educomp Pearson 20 17.5 50% 35 1.75

2007 MT educare Helix Investments 7.2 12 30% 40 5.56

Mean 3.34

The average Sales (transaction) multiple is 2.5x for the companies in the education sector.

27
 CHAPTER 5
FMCG SECTOR

5.1 INDUSTRY OVERVIEW

FMCG sector is the fourth largest sector in the Indian economy and is a key component for
India’s GDP as it accounts for 5% of the total factory employment in the country. The sector
is characterized by a large distribution network, strong branding and intense competition
from organized and unorganized players. The FMCG industry is more of a branding industry
than a manufacturing one. Higher asset turnover ratios, sustained profitability and free cash
flows are expected to ensure healthy return on equity for the sector.

The size of the Indian fast-moving consumer goods (FMCG) sector is close to Rs 850 bn. The
northern and the western regions of the country account for more than half of the market for
consumer goods. Barring the fastest-growing personal care segment, no other product
segment has seen the entry of so many players.

In the past decade, the personal care industry has witnessed a consumer boom. This has been
due to liberalization, urbanization, and an increase in the disposable incomes, and altered
lifestyles, especially a heightened level of awareness among the rural community, consequent
to the onslaught of satellite television. Furthermore, the boom has also been fuelled by the
reduction of excise duties, dereservation from the small-scale sector and the concerted efforts
of personal care companies to woo the burgeoning affluent segment of the middle class
through product and packaging innovations.

Unlike in the past, when domestic companies were not perceived as competitive vis-à-vis
multinational corporations (MNCs), the scenario is gradually changing, with some domestic
companies, like Nirma, Marico and Jyothi Labs, standing up to their MNC counterparts.
Also, competition amongst the MNCs has intensified, leading to shrinkage of margins.

The personal and home care segment has very low entry barriers of technology and capital
requirements. This attracts new players and has resulted in intensifying competition. Despite
this, the strong distribution networks and heavy investments needed for brand building
remain key deterrents to new players.

28
Low margins and high volumes characterize the industry. While the level of disposable
incomes determines the overall sector growth, the market has already been segmented and
sub segmented. Companies have launched products at a number of price points to drive up
volumes. New products are being launched in niche segments, and old products re-launched.

Brand equity drives the customer’s purchase decisions, and is the key to gaining market
share. Also, competitive pressures have hiked the advertising budgets of most players.
Besides, a profusion of promotional schemes are being offered. Most players, including
Hindustan Lever Ltd (HLL), are struggling to maintain top line growth, despite the heavy
advertising and sales promotion (ASP) expenditure. A lower price differential between the
organized and the unorganized sectors from reducing excise duties allows the former to grow
at the expense of the latter. The organized sector also has a superior distribution reach.

Although most of the product categories are still in the growth phase, a few broad categories,
like detergents, have reached a mature phase only in the urban market. It should be noted that
the affluent segment in the rural sector is growing at a faster rate than the urban one. Rural
India accounts for over 70 per cent of the country’s population and is largely catered by
unorganized players. With urban markets saturated for most categories, it has become
imperative for all major players to increase their penetration levels in rural markets. There
has been a rapid expansion of the consumer majors’ distribution networks into the rural
regions.

With increasing competition, the market players have had to absorb a lot of price cuts to
boost volumes. In the past one year, however, the industry has been reeling under a demand
crunch. The Indian consumer is very price sensitive. In the personal care sector, branding
allows companies to partially pass on the cost increases to the customers. Most players have
introduced products with mass-market pricing, so as to build volumes. The increased
promotional activity that is taking place amongst players has relegated brand loyalty to the
backseat. Moreover, the increased competition has restricted not only growth rates, but also
the ability to absorb frequent price increases, thus benefiting the consumer.

29
MAJOR PLAYERS

COMPONENTS OF THE FMCG INDUSTRY

The approximate size of the Indian FMCG market is pegged at Rs. 850 bn. While HUL is the
largest player in the category with leadership in soaps, detergents, shampoos among others,
players like Colgate, GSK Consumer, Britannia and Marico have established market
leadership in their respective segments of oral care, health beverages, biscuits and hair oils
respectively. Nestle on the other hand is a pure food company and has presence across several
food sub –categories.
categories. Players like Dabur and Godrej Consumer are present in multiple
categories and have established their strong presence across different segments. The
components of thee FMCG industry are depicted in pie chart shown below:

re 5.1: Components of FMCG sector

Figure

Soaps

10% Detergent
32% 12% Hair Oils
Shampoo
Oral Care
4%
Hair Colour
3% Skin Care
5%
Branded Tea
2% Coffee
3% 1%
5% Snacks & Conf
10% 7% Biscuits
5%
1%
Health bev
Fruit drinks & Juice

30
Major players in the industry like HUL, ITC, Britannia, Dabur, Colgate Palmolive and
Godrej Consumer Products Limited are looking for acquisition of FMCG companies in
developing nations and countries like South America, South Africa, Nigeria, etc. where there
is a huge untapped market potential.

Thus, with competitive pressures (to maintain/ regain/ grow market shares and volumes)
remaining high and advertising spends possibly coming down to some extent (as raw material
cost benefits get exhausted), maintaining margins at the current levels is likely to be a
difficult task for the FMCG companies.

31
5.2 TRADING COMPARABLES

Table 5.1: Trading Comparables-FMCG Sector

Particulars
(Rs Crore) Sales (in EBITDA EV/ EV/
EBITDA PAT PAT % Mcap Debt Cash EV PE
crores) % Sales EBITDA
Company

HUL 20,504.28 3,241.48 16% 2,500.71 12% 57,945.15 421.95 190.59 58,176.51 2.84 17.95 26.32

ITC 18,567.45 6,677.37 36% 4,061.00 22% 1,15,167.85 107.71 120.16 1,15,155.40 6.20 17.25 28.36

GCPL 1,274.20 316.55 25% 248.12 19% 10,697.28 12.40 20.63 10,689.05 8.39 33.77 43.12

Dabur 2,408.33 473.4 20% 373.55 16% 17,941.67 138.98 32.16 18,048.49 7.49 38.13 43.35

Marico 1,921.85 222.1 12% 142.10 7% 7,927.51 308.53 13.37 8,222.67 4.28 37.02 33.70

Colgate 1,960.01 522.37 27% 423.26 22% 11,519.27 4.59 347.58 11,176.28 5.70 21.40 27.22
Mean 5.82 27.58 33.68

Median 5.95 27.58 31.03

The average Sales (trading) multiple is 6x and the average EBITDA (trading) multiple is 28x for the companies in the FMCG sector.

32
5.3 TRANSACTION COMPRABLES

Table 5.2: Transaction Comparables-FMCG Sector

Sales(Mn Amount Invested (Mn

Year Target Company Investor/Acquirer USD) USD) Stake Valuation(Mn USD) V/S

2010 Argencos GCPL 12 16 100% 16 1.33

2010 Godrej Sara Lee GCPL 193 232.48 55% 422.69 2.19

2008 Fem Dabur 18.75 40.8 72.15% 56.54 3.02

Mean 2.18

The average Sales (transaction) multiple is 2x for the companies in the FMCG sector.

33
 CHAPTER 6
ROLE OF PEARS

6.1 PE PROCESS AT PEARS

The iBanking process at Pears starts with Business Development wherein, many companies
are contacted to explore options of raising Private Equity for them. Once a client is interested,
they engage Pears Capital as exclusive bankers.

After signing the Non disclosure Agreement, Pears understands more about the business, its
revenue streams and future growth potential. Based on this, a detailed financial modelling
and business valuation would be performed for the client.

Pears Capital then runs these opportunities by many PE investors by sending them a teaser
about the opportunity. A teaser is a short description of the company on a no name basis
which is floated by many investors. Investors who are interested in the profile of the company
will contact Pears and request for more information.

Pears signs a Non Disclosure Agreement with the prospective investor and reveals the name
of the company along with a detailed Information Memorandum (IM) which describes
everything about the company. The investors, after analyzing the IM, meet the clients or have
conference calls with them to understand about the top management of the company.
Investors and clients may have multiple meetings before finally agreeing to merge.

Term sheet negotiation is the next stage in the process where in all the Terms and Conditions
for both the investors and clients would be laid down categorically. Once this is through, a
due diligence would be performed on the company, business plan, projections, financial
modelling and valuation by one or more of the BIG FOUR (KPMG, E&Y, Deloitte, PwC).
Once this is done, clients get the funding from the investors.

34
6.2 PROJECT RADIANT-A CRO OPPORTUNITY

INDUSTRY OVERVIEW
Ever since pharmaceutical companies started outsourcing functions, the effect has been
almost amoeba-like; where each outsourced function grows into a company, and finally
creates an entire industry with its own ecosystem. Contract research organisations (CROs)
may be relatively younger than the pharmaceutical companies they partner with, but they
have grown substantially to stand shoulder-to-shoulder with them. Contract research is a
multi-billion dollar industry. With demand for CRO services expected to increase by 16%
annually over the next five years, the future appears rosy.

The CRO industry provides independent product development services for the
pharmaceutical, biotechnology and medical device industries. Companies in these industries
outsource product development services to CROs in order to manage the drug development
process more efficiently and to cost-effectively maximize the profit potential of both patent-
protected and generic products.

The CRO industry has evolved since the 1970s from a small number of companies that
provided limited clinical services to a larger number of CROs that offer a range of services
that encompass the entire research and development process, including pre-clinical
development, clinical trials management, clinical data management, study design, bio
statistical analysis, post marketing surveillance, central laboratory and regulatory affairs
services. CROs are required to provide these services in accordance with good clinical and
laboratory practices, as governed by the applicable regulatory authorities.

The CRO industry is highly fragmented, consisting of several hundred small, limited-service
providers and a limited number of medium-sized and large CROs with global operations.
Although there are few barriers to entry for small, limited-service providers, there are
significant barriers to becoming a CRO with global capabilities. Some of these barriers
include the infrastructure and experience necessary to serve the global demands of clients, the
ability to manage simultaneously complex clinical trials in numerous countries, broad
therapeutic expertise and the development and maintenance of the complex information
technology systems required to integrate these capabilities. In recent years, the CRO industry
has experienced consolidation, resulting in the emergence of a select group of CROs that

35
have the capital, technical resources, integrated global capabilities and expertise to conduct
multiple phases of clinical trials on behalf of pharmaceutical, biotechnology and medical
device companies. Some large pharmaceutical companies, rather than utilizing many CRO
service providers, are selecting a limited number of CROs who are invited to bid for projects.
This trend will further concentrate the market share among CROs with a track record of
quality, speed, flexibility, responsiveness, global capabilities and overall development
experience and expertise.

India's status as an information technology superpower, with access to specialist skills and
24/7 work hours, is a huge advantage as it strengthens its position as the destination of choice
for contract research, including drug discovery.

India and China's drug outsourcing discovery markets combined are currently worth around
$7.3 billion and, driven by government initiatives to diversify the drug discovery portfolio
and develop infrastructure, are set to reach $19.8 billion in 2011.

API Manufacturing is the largest contributor to outsourcing market with a 55 percent share.
Clinical Research with a 35 percent share of the market is the second largest segment
contributing to more than one-fourth of the revenues in this industry followed closely by
Drug discovery and Dosage form Development at 25 percent and 20 percent, respectively and
figure 6.1 shows the same.

36
 Fig 6.1 Utilization of outsourcing across key industry value chain components

India is likely to account for 3-4 percent of the global contract outsourcing industry. From the
above estimates, it is evident that the Indian CRAMS story has just scaled the ‘tip of the
iceberg’ and ‘sky is the limit’ for the companies that have ventured into this space.

The players meeting the industry expectations of increased adoption of global standards,
regulatory compliances and the pressures of cost and cycle time reductions in drug
development, with an efficient and effective data management system will survive.

COMPANY OVERVIEW

Roxaane Research Limited founded in August 2007 began its operations in the year 2009.
Headquartered in Chennai, Roxaane Research Limited is an Independent Contract Research
Organisation, providing outsourced development services on a global basis to the
pharmaceutical, biotechnology and medical device industries. In a highly fragmented
industry, Roxaane is one of a small group of organizations with the capability and expertise
to conduct clinical trials in all major therapeutic areas on a global basis. They have the
operational flexibility to provide development services on a stand-alone basis or as part of an
integrated “full service” solution. The main services provided are Preclinical, Clinical Trials
(Phase I-IV), Clinical Data Management, Clinical Research Training, Analytical,
Biotechnological, Formulation Development and Bioinformatics services to the

37
Pharmaceutical and Biotechnological industries. However their core Clinical Research
business specializes in the planning, management, execution and analysis of Phase I – IV
clinical trials, ranging from small studies to complex, multinational projects. The company
has been profitable since the first year of operations and has a clear road map for the future.

INVESTOR OVERVIEW
As part of its fund management plans, Ventureast is keen on partnering with entrepreneurs in
any stage of business. The industry focus is mentioned below:

• Life sciences
• Technology
• Emerging sectors

Ventureast will invest upto 15 million USD in the prospective company.

TRANSACTION OVERVIEW

The company is looking to raise Private Equity in order to fund the operation of its deal
pipeline. Pears Capital is working on the project and the financial modeling was done for the
same.

Pears
Roxaane Ventureast
Capital

The valuation is 4 times Sales and 15 times EBITDA. The valuation for Roxaane is shown in
following tables:

38
 Table 6.1: Revenue Assumption Sheet

Annual Revenue in
Cr

Service Industry FY11E FY12E FY13E FY14E

IT/ITES Revenue 18,98,43,750 27,84,37,500 32,90,62,500 43,03,12,500

CDM
Data Entry 10,80,00,000 18,90,00,000 24,30,00,000 32,40,00,000
Medical Coding 3,78,00,000 5,94,00,000 9,72,00,000 14,58,00,000
Projects( End to End) 0 0 11,25,00,000 24,75,00,000
Combined Revenues 14,58,00,000 24,84,00,000 45,27,00,000 71,73,00,000

CT / BE
BE 1,35,00,000 2,70,00,000 5,40,00,000 8,55,00,000
CT 1,80,00,000 5,40,00,000 18,00,00,000 27,00,00,000
Combined Revenues 3,15,00,000 8,10,00,000 23,40,00,000 35,55,00,000
BE/CT- Direct Project
related costs 1,26,00,000 3,24,00,000 9,36,00,000 14,22,00,000
Net Revenues 1,89,00,000 4,86,00,000 14,04,00,000 21,33,00,000

PV/BS Revenue 2,70,00,000 5,40,00,000 10,80,00,000 14,40,00,000

Total Revenue 38,15,43,750 62,94,37,500 1,03,01,62,500 1,50,49,12,500

39
 Table 6.2: P&L statement

% of
Particulars in Rs. Cr FY11E FY12E FY13E FY14E
Revenues

Revenues 38.15 62.94 103.02 150.49

Expenditure

Salary 30% 11 19 31 45

Marketing 10% 4 6 10 15

Rent & Maintenance 15% 6 9 15 23

EBITDA 17 28 46 68

EBITDA % 45% 45% 45% 45%

Interest 2.8 2.8 2.8 2.8

Depreciation 2 1.8 1.62 1.46

PBT 12.37 23.72 41.94 63.46

Tax - - - -
PAT
12.37 23.72 41.94 63.46

40
 Table 6.3: Discounted Cash Flow Statement

DCF
Rs. Cr FY11E FY12E FY13E FY14E
PAT 12.4 23.7 41.9 63.5
Depreciation 2.0 1.8 1.6 1.5
Working Capital Changes ( 25% of PAT) 3.1 5.9 10.5 15.9 Capital 331005033
Capital Expenditure 0.0 5.0 7.5 10.0 Debt 0.66
FCF 11.3 14.6 25.6 39.1 Equity 0.34
Computation of Discount Rate
(WACC)
Cost of Equity ( Ke) 25%
Cost of Debt (Kd) 15%
After Tax Cost of Debt ( 1- T ) * Kd 15%
Proportion of Equity in the capital
structure 0.34
Proportion of Debt in the capital structure 0.66
Hurdle rate WACC = ( Ko) 18%
Discount rate at the cut off rate 0.879 0.713 0.602 0.509
DISCOUNTED CASH FLOWS 9.9 10.4 15.4 19.9
Terminal Value 198.7
Growth rate 15%
Discounted Terminal Value 101.1
PV ( Business ) 156.7
Average Debt 21.7
Value to Equity Shareholders 135.0

41
 Table 6.4: Trading Comparables

TRADING COMPARABLES

Particulars (Rs Crore)

EBITDA EV/ EV/
Sales EBITDA PAT PAT % Mcap Debt Cash EV PE
% Sales EBITDA
Company

Aurobindo Pharma 2,795 323 12% 129 5% 4,908 2,115 79 6,944 2 21 9

Elder Pharma 620 108 17% 49 8% 673 391 54 1,010 2 9 12

Dishman Pharma 416 142 34% 93 22% 1,815 291 1 2,105 5 15 26

Accentia Technology 79 31 40% 21 27 413 30 0 443 6 14 23

Mean 4x 15x 18x

Median 4x 14x 18x

42
 Table 6.5: Transaction Comparables

TRANSACTION COMPARABLES

Txn Value Sales

Target Acquirer
(Mn USD) Multiple

Taro Sun pharma 454 1.5

Sanofis
Aventis
Shantha Biotech 781 7.8

Merck Mylan 6700 2.7

Negma Wockhardt 265 1.8

Mean 3x

Table 6.6: Valuation Table

VALUATION

In Rs. Crore

DCF 135

Trading Comparables – Domestic 141

Transaction Comparables 132

Mean 136

STATUS OF THE DEAL

Pears Capital is awaiting the final confirmation from Ventureast to fund Project Radiant. The
discussion with investors and the company are in the final stages and is expected to close
soon.

43
 CHAPTER 7

FINDINGS AND CONCLUSIONS

The Indian education sector, estimated at US$75bn, offers enormous opportunities for private
players. Despite regulatory constraints, the acute shortage of trained teachers and quality
schools combined with cash-strapped governments would open the doors for corporates to
capitalize on this opportunity.

Sectors such as pre-schools, tutoring, provision of multimedia content, IT training and e-

learning are prime sectors in which private players can allocate their funds. These areas are
attractive because while they relate closely to the profitable K-12 segment, they are largely
unregulated. As such, they make attractive propositions for private investors interested in
taking advantage of the burgeoning demand for quality education.

The current valuations in the education sector do not reflect the true potential as the sector is
still evolving and there are only few listed companies in India. While international peers are
trading at 13-26x CY09E, Indian companies are trading at 7-22x FY10E.

Many of the Big Education players like Educomp, TutorVista, Edserv & Everonn are riding
on availability of high PE funds to gobble up more acquisitions as providing an integrated
product will win them more clients in future rather than focusing on niche services.

With these companies building scalable business models, the valuation gap between domestic
peers and international players should narrow. Companies with scalable model and growth
visibility would get better valuations.

And in the FMCG sector the hunger for growth is driving the domestic fast moving consumer
goods (FMCG) companies to snap up new firms and brands across the globe. FMCG majors
are increasingly focusing on expanding their global footprint by acquiring companies in niche
segments to fill gaps in their product portfolio. Most FMCG companies have witnessed a
sharp rally in the recent past, and are currently trading at rich valuations that are being driven
by a steady Earnings growth, significant Margin expansion, and a sustained volume growth.

44
These cash-rich companies have been waiting for the right moment and it seems to be now,
as valuations remain tepid in most parts of the world.

Indian companies today are in league with the traditional multinationals from Europe, US,
and Japan. The overseas acquisitions by Indian companies indicate that they are prepared to
compete globally.

With respect to the contract research organization industry, it is relatively young. Estimates
of the industry's size are difficult given that most CROs including some of the largest are
privately held. Services are what CROs are made of and today’s promising market certainly
has the potential to keep them busy. An increasing number of CROs will enter a variety of
strategic partnership deals in order to expand their service offerings and geographical presence. And
there's plenty of room for consolidation: of the 1,100-plus CRO companies the top 10 players only
accounted for 56.1 percent of the global market (Quintiles is the largest, with a market share of almost
17 percent). That means many smaller and mid-sized contractors could be buyout or merger bait.

Attractive sectors for most investors are Food & Beverage, Education, Healthcare and
Media/Entertainment. Pears Capital targets many companies in these sectors to explore deal
possibilities. Pears’ focus in this process as an investment bank is to assist companies in raising the
necessary capital to meet their growth objectives by providing end-to-end advisory solutions to
companies in high-growth markets on their capitalization/re-capitalization strategies. Pears also
focuses on providing both buy-side and sell-side advisory services as part of its M&A advisory
offering it typically handles deals which are less than US $20 Million. To capitalize on a given
sector's robust demand, external capital often becomes a catalyst to achieving market leadership.
Thus, the importance of investment banks in this process.

Having been a part of Pears Capital for over two months, I have closely interacted with
investors in these two months and observed that there are so many deal opportunities.
In that context, I also happened to interact with more than 30 companies to explore their
interest levels in raising Private Equity. This process has significantly helped in
understanding the market players in the Education, FMCG and CRO space. Close interaction
with various clients in each of the sectors facilitated in gaining a clear understanding of the
business models. Business Valuation has become an intrinsic part of the corporate landscape.
The corporate landscape has witnessed dynamic changes in the recent years as mergers and
acquisitions, corporate restructurings, and share repurchases are happening in record

45
numbers, both in the India and abroad. At the core of the dynamics of all these activities
stands some notion of valuation.

Thus a thorough analysis of the company and industry reports helped in tracking the industry
deals and also understanding the valuation trends.

This practical exposure not only helped in gaining a clear understanding of the concept of
business valuation with respect to Mergers and Acquisitions and Private Equity syndication,
but also helped in understanding the process of providing strategic, financial and valuation
advisory services to clients of Pears Capital.

46
ANNEXURE

47
 REFERENCES

Available from: http://www.pearscapital.com/

Available from: http://business.mapsofindia.com/investment-industry/investment-banks.html

Patrick A. Gaughan, 2001. MERGERS AND ACQUISITIONS: AN OVERVIEW. [online]

Available from:
http://docs.google.com/viewer?a=v&q=cache:PhgkwGiqwV8J:https://web.vu.union.edu/~sif/Investm
ent%2520Banking.pdf+report+on+investment+banking+pdf&hl=en&gl=in&pid=bl&srcid=ADGEES
gLjbhXJf8OauBxOXwPEV0kIuB6aFPwA4hrSk805iYdxhPlePNHnD9o6YZY7hy14hE0Kgly_F8Ni
Gxk7-
m0KHMMBEw8f9QNbF7FC00PsA6nskrIu3FMHJ85HAie6FjW4Fe7yDMF&sig=AHIEtbSc3YeW9
AlrU4sSZUDyQVeLJjDNpw

Available from: http://www.business-standard.com/india/news/fmcg-firms-develop-appetite-for-

acquisitions-abroad/396534/ [Accessed 31st May 2010]

Available from: http://researchonindia.com/tag/healthcare/

Available from: http://www.mydigitalfc.com/knowledge/india-turns-hub-clinical-research-

outsourcing-105 [26 May 2009]

Available from: http://www.moneycontrol.com/

Available from: http://in.reuters.com/finance/deals

Available from: http://dealcurry.com/home.htm

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Available from: http://www.vccircle.com/

Available from: http://www.wikipedia.org/

Available from: http://www.investopedia.com/

Available from: http://www.onesource.com/

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INTERNATIONAL PRIVATE EQUITY AND VENTURE CAPITAL VALUATION
GUIDELINES BOARD, 2009. International Private Equity and Valuation Guidelines

Available from: http://www.free-press-release.com/news-top-opportunities-in-education-

sector-to-grow-by-30-35-1272889607.html [Accessed 3 May 2010]

IDFC SSKI. 2009. Editorial. Indian Education Sector.

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 GLOSSARY

EBITDA:

Earnings before Interest Tax Depreciation and Amortization is referred to as EBITDA. It is

an indicator of a company’s financial performance. When a company is valued using
EBITDA it is known as EBITDA valuation.

EBITDA= Revenue – Expenses (excluding tax, interest, depreciation and amortization)

PAT:

Profit after tax is referred to as PAT. It the net profit earned by the company after deducting
all expenses like interest, depreciation and tax.

MCap:

Market Capitalization is popularly referred to as Mcap or MarketCap. It is calculated by

multiplying the current market price per share by the number of shares outstanding.

EV:

Enterprise Value is referred to as EV. It is a measure of company’s value. It is calculated as

Mcap plus Debt, minority interest and preferred shares, minus total cash and cash
equivalents.

EV/SALES:

A valuation measure that compares the enterprise value of a company to its sales. It gives the
investor an idea of how much it costs to buy the company’s sales.

EV/EBITDA:

EV/EBITDA is known as the enterprise multiple or EBITDA multiple. The enterprise

multiple looks at a firm as a potential acquirer would, because it takes into account debt.

P/E:

Price-Earnings ratio is a valuation ratio of a company’s current share price as compared to its
earnings per share. Calculated as Market price per share / EPS.

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Market Price:

The current price at which an asset or service can be bought or sold.

EPS:

The portion of the company’s profit allocated to each outstanding share of common stock. It
serves as an indicator of profitability.

It is calculated as (Net Income- Dividend on preferred stock) / Average outstanding shares.

DCF:

Discounted cash flow is referred to as DCF. It is a valuation method used to estimate the
attractiveness of an investment opportunity. This analysis uses future cash flow projections
and discounts them to arrive at the present value.

FCF:

Free Cash Flow is referred to as FCF. Free cash flow represents the cash that a company is
able to generate after laying out the money required to maintain or expand its asset base.

FCF= Net Income+ (Amortization/Depreciation)-(Changes in WC)-(Capital expenditures)

TV:

Terminal value is referred to as TV. It is the value of an investment at the end of a period,
taking into account a specified rate of interest. The formula to calculate terminal is the same
as that for compound interest:

TV= P*(1+r)t

MULTIPLE:

A term that measures some aspect of a company's financial well-being, determined by

dividing one metric by another metric.

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