{"id":1007,"date":"2020-02-27T09:46:00","date_gmt":"2020-02-27T09:46:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1007"},"modified":"2020-02-27T09:46:00","modified_gmt":"2020-02-27T09:46:00","slug":"clariant-chemicals-and-basf-india-updates-and-why-ebitda-is-used-for-valuation","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1007","title":{"rendered":"Clariant Chemicals and BASF India-Updates And Why EBITDA is used for Valuation"},"content":{"rendered":"
\n<\/p>\n
\nClariant chemicals ran up
\ndecently to 440 from 275 when it was advised last time in Nov-2019 (Click here for old post)<\/a>. At that
\ntime it was expected to sell its Masterbatches and Pigments business to focus
\nmore on high margin specialty chemicals business. I was expecting to sell the
\nsame at anywhere around 1500 cr to 2000 cr valuation excluding land bank which was
\naround 15 times its last year EBITDA and around 1.5 times to 2 times of the turnover
\nof 1000 cr while it was available at just .6 times of turnover. So the
\nvaluation discount was massive.<\/div>\n
\n<\/div>\n
\nAnd it finalized the deal in
\ndec-19 to sell its Masterbatches business to PolyOne for Rs. 426 cr. Global
\nparent Clariant has entered into two transactions with Polyone-first it sold
\nits global business for Swiss $ 1.56 billion which is 12 times its EBITDA. Then
\nit also sold its Indian business (as it is listed separately and parent has 51%
\nshare) to Polyone for 426 cr which is around 17 times its previous year EBITDA
\njust as per our expectations. The turnover of Masterbatches business was 284 cr
\nso it got the valuations of 1.5 times of turnover. The proceeds will be used to
\ninvest in innovative and technically superior products, to give dividends to
\nshareholders. At parent level they have plans to retrun back some $1 billion
\n(almost 60%) as dividends so we can expect the same in India also. If after tax
\nproceeds in India are 350-380 cr then we can expect some 200 cr as dividends
\nwhich is around Rs. 90-100 per share. This is from the sale of Masterbatches
\nbusiness and Clariant is expected to sell its pigments business also by the end
\nof 2020. Its Pigment business in India is much bigger than Masterbatches and so
\nwe can hope for another big dividend this year. Sale of masterbacthes business
\nis expected to be closed by Mar-2020.<\/div>\n
\n<\/div>\n
\nClariant is going to concentrate
\non three core Business Areas Care Chemicals, Catalysis and Natural Resources
\nand I think they will do the same in India also. After the sale of pigments and
\nMasterbatches, Clariant is focusing on chemicals for consumer products likes
\nsoaps and shampoos, the oil and gas industry, and catalysts that help speed up
\nchemical reactions.<\/div>\n
\n<\/div>\n
\nClariant Dec-19
\nresults<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nAfter the result of Dec-19
\nquarter, clariant has fallen to 340 levels all the way from 460-470. I think
\nperhaps market misunderstood the results of clariant chemicals. It was not that
\nbad as they are looking. It has shown a loss before tax of 3 cr this quarter
\nbut the same is due to the impact of showing of masterbatches business under
\ndiscontinued operations. As they have entered into an agreement to sell the
\nsame so the performance of this segment is shown under discontinued operations
\nand if we add the same into the normal business then the figures will start to
\nlook much better:<\/div>\n\n\n\n\n\n\n\n\n
\n
\n(Figures
\n in Rs. Cr)<\/b><\/div>\n<\/td>\n
\n
\nDec-19<\/b><\/div>\n<\/td>\n
\n
\nDec-18<\/b><\/div>\n<\/td>\n<\/tr>\n
\n
\nContinuous
\n business Turnover<\/div>\n<\/td>\n
\n
\n188.33<\/div>\n<\/td>\n
\n
\n171.09<\/div>\n<\/td>\n<\/tr>\n
\n
\nAdd:
\n Discontinued business Turnover<\/div>\n<\/td>\n
\n
\n91.75<\/div>\n<\/td>\n
\n
\n78.83<\/div>\n<\/td>\n<\/tr>\n
\n
\nTotal
\n Turnover<\/div>\n<\/td>\n
\n
\n280.08<\/div>\n<\/td>\n
\n
\n249.92<\/div>\n<\/td>\n<\/tr>\n
\n
\nPBT<\/b><\/div>\n<\/td>\n
\n
\n3.25<\/b><\/div>\n<\/td>\n
\n
\n-3.53<\/b><\/div>\n<\/td>\n<\/tr>\n
\n
\nPBT
\n after adding outgo of 1.36 cr on tax amnesty scheme<\/b><\/div>\n<\/td>\n
\n
\n4.61<\/b><\/div>\n<\/td>\n
\n
\n-3.53<\/b><\/div>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
\n <\/span><\/div>\n
\nFurther this year they have opted
\nfor amnesty schemes of various state and central governments in respect of outstanding
\nindirect tax litigations and paid around 10cr this year otherwise the figure of
\nprofit of 9 months this year would have been higher by 10 cr (45 cr vs 10 cr up
\nto Dec-19). The expenditure under this head in Dec-19 quarter is 1.36 cr. <\/div>\n
\n<\/div>\n
\nI
\nthink this one is a great buy at 340.<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\nBASF India:
\nAnother gem at massive discount<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nIn the same post on clariant in
\nNov-19 (click here<\/a>), I have also mentioned the great prospectus of BASF India as the same was
\nalso looking to sell its construction chemicals business to focus on speciality
\nchemicals business. Earlier, BASF has also sold its pigments business for euro
\n1.5 billion to Japanese chemical giant DIC in order to focus on new age
\nspecialty chemicals. In dec-19, BASF has entered into an agreement with Lone star
\nwhich is a global private equity player to sell its construction chemicals
\nbusiness for $3.52 billion (around Rs 25,000 crore). So the same is also being
\ndivested from Indian arm also. Its indian construction chemicals business has
\nbeen sold for Rs. 595 cr which is having turnover of Rs. 484 cr so the
\nvaluation is 1.2 times of turnover. Its global business is having revenues of
\n$2.5 billion so at transaction value of $3.52 billion the valuation is 1.4
\ntimes of turnover.<\/div>\n
\n<\/div>\n
\nSo taking 1.2 times as the basis-
\ntotal turnover of BASF India is around 8000 cr so it should be valued around
\n10000 cr although its remaining specialty chemicals business is of higher
\nmargin business. Right now at current market price of
\n900 it is valued at just 4000 cr which shows the gross undervaluation.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nBASF expanded in construction
\nchemicals in 2006 but it has struggled to build the scale in this complex
\nsector since local construction techniques can differ even from country to
\ncountry. So this unit was not the star performer for BASF and that\u2019s why I think
\nthe rest of the businesses of BASF are much more valuable. <\/div>\n
\n<\/div>\n
\nIts
\nresults in Dec-19 quarter were great. Its topline has grown to Rs. 2000 cr from
\n1400 cr last year but I am surprised that market is caring more for profits
\nwhen scale and market share is more important in chemical sector. BASF India is
\nhaving minor losses due to high raw material costs but it happens due to
\nproduct differentiation and it being predominately a specialty chemical player
\nwhile most of Indian chemical companies are commodity or basic chemicals
\ncompanies.<\/span> Its raw material prices are high and it is trying to lower
\nthe same. Another listed indian player Aarti industries trades at valuation of
\n4 times of its revenue only due to low raw material costs although Aarti is
\nmainly a commodity chemical player. Its turnover is around 4000 cr and it
\ntrades at 17000 cr market cap. Aarti’s raw material costs are 60% of turnover whereas the same are 80% for BASF. So one can assess the scope of growth for BASF
\nwith turnover of 8000 cr and it just need to solve the raw material equation. Higher oil prices and currency fluctuations are the main issues hitting its raw material costs as it sources the same from group companies across the globe.<\/div>\n
\n<\/div>\n
\nBASF has made significant
\ninvestments in China. Recently it has planned for $10 billion investment in China for engineering
\nplastics and thermoplastic polyurethane (TPU) and first unit has started production. Very
\nfew knows that BASF is a significant player in electric vehicle battery segment
\n(Cathode material) and global electric, electronics and automotive players look
\ntowards BASF for the innovative solutions. <\/span>Its indian investments are
\nnot that high but recently it has upped the ante in india and announces a mega
\nJV with the likes of Adani to start a Rs. 16000 cr chemicals plant in India. Its
\nturnover in china is $8 billion whereas the same in India is around $1 billion.
\nBut it has invested big in India in last 5-6 years as compared to last 100
\nyears so as India is going to be the global hub for chemicals I have no doubt
\nthat BASF is going to increase the investments in India big time.<\/div>\n
\n<\/div>\n
\nBASF is one of the best chemical
\nplayer in the world and have several innovations to its credit including supply
\nchain. Supply chain plays a major role in chemical sector because quality plays
\na lesser role in affecting sales. The major factors which affect the chemical
\nsector are price, volume, currency and portfolio of products. So raw material costs and supply chain efficiency are the
\nmajor factors which drive the profits. BASF is only company from chemical
\nsector which is counted amongst the global best in most innovative supply chain.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nBASF has one of the most
\ninnovative and advanced constructed supply chain where the byproducts of one
\noperation get converted into starting materials of another operation. In Germany
\nthey call this concept \u201cVerbund\u201d. When by-products of one plant can be used as
\nthe starting materials for another, chemical processes consume less energy,
\nproduce higher product yields and conserve resources.<\/div>\n
\n<\/div>\n
\nThe
\nLudwigshafen site of BASF having an area of ten square kilometers, is the
\nlargest chemical complex in the world where 110 production facilities and 200
\nproduction plants are interconnected. Byproducts and products flow through 2850
\nkilometers of pipes, 230 kilometers of rail, and over 100 kilometers of road.
\nAn astounding 39,000 employees work at this site. <\/span>On its six Verbund
\nsites across the global, BASF achieves annual savings of more than $ 1 billion
\nthrough its Verbund.<\/div>\n
\nSo BASF
\nis a great buy at CMP of 900.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nReason for recent
\nM&A activity in Chemical sector<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nI have covered some details as to
\nwhy the likes of Clariant and BASF are divesting some of their chemical
\nbusiness in the last post in Nov-19 (click here<\/a>). Actually as I have shared in chemical sector raw material and supply chain create the biggest space for margins
\nhence size matters in this sector so over time what happens is that all the
\ncompanies try for the capacity expansions which result in the excess supply in
\nthe sector. The only way to absorb this excess supply is to acquire capacities
\nand then merge or align the same with your existing business because if one
\ncompany plans for shutting down one of its existing facilities due to excess capacity
\nthe same is going to benefit the rivals the most because this will lead to
\nlesser supply. For growing scale and margins, it is easier for companies to shut down plants of much larger
\nentity formed after acquisition of rival capacities and by keeping the most productive
\nplants with best raw material linkages and supply chain.<\/div>\n
\n<\/div>\n
\nSo M&A in chemical
\nindustry creates the value for buyers but as in M&A most of the value
\naccrues to seller and that\u2019s why I think both clariant and BASF have got good
\nprices for their divestments. And if we can see, when both the buyer and seller
\nare fighting for getting the synergy and benefit out of sale, the other players
\nin the industry who have done nothing are also going to gain from this
\ntransaction as this will reduce the overall capacity in the industry. This is
\nvery complex set of creativity and planning and that\u2019s why sometimes I say that
\nbusinesses are just like creation of a piece of an art like a painting or music.<\/div>\n
\n<\/div>\n
\nFurther, as there is general slowdown
\nin the global economy so demand is low for chemicals also and they are growing
\nat 2-3%. So many global players have increased their focus on mergers and
\nacquisitions in order to create the scope for growth, realize cost and revenue
\nsynergies, and enhance their product basket and their value proposition to the
\ncustomer.<\/div>\n
\n<\/div>\n
\nEBITDA for
\nValuation of Business<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nMany readers have asked me why EBITDA
\nis used for valuation rather than PE especially while acquiring businesses. First
\nof all, there is not a perfect valuation of a business. Valuations are always
\nsubjective (50% subjectivity) and extreme hard work, capability and vision is
\nrequired to make acquisitions work. Hence, most of the times (99%) selling firm
\nshareholders derive most of the benefit not the buying firm. <\/div>\n
\n<\/div>\n
\nIf one can see, accounting these
\ndays has become so complex that it has lost its utility for valuation of
\nbusiness. There is huge involvement of complex accounting treatment of various
\nbusiness entities along with subjectivity in using or assuming accounting
\npolicies. I always say that profit we see in the books of account is mainly
\naccounting profit not business profit. The books of accounts primarily serve
\nthe purpose for taxation or accounting profit and loss figures. Apart from
\nthis, another important factor is the presence of situational or positional
\nfactor at a particular point of time for an organization which are unique to
\nthat organization only and these factors may have no or <\/span>different presence for the entity who is
\nacquiring the business. <\/div>\n
\n<\/div>\n
\nSo if we can see that the profit
\nof an organization is derived after accounting for some factors which are
\nunique for that organization only and for the buying entity it is necessary to
\neliminate these individual factors in order to arrive at figure of profit which
\nis more general and realistic. Like, for example, depreciation has a big impact
\non the profits of a manufacturing organization but depreciation charge depends
\nupon the age of machines. So if there are two firms with same topline, say 1000
\ncr, but as one firm has installed new machinery its depreciation charge is much
\nhigher at 100 cr while the other one has much lower depreciation charge of 30
\ncr due to old machines. So as we can see, for same turnover ,almost same raw
\nmaterial and employee costs the profit of new machine firm will be much lower
\nthan the other. So this situational factor will change the profit figure
\nsignificantly without affecting the business performance or profits. Same is
\nthe impact of tax rates and leverage (interest costs due to debt\/loan while
\nother may have higher equity and nil debt). The selling firm may have higher
\ninterest costs due to lower credit rating while the buyer firm may have much
\nhigher credit rating so it can keep the same level of debt although at much
\nlower interest cost.<\/div>\n
\nSo the buying firm may have very
\ndifferent capital structure, tax rates or different asset base which
\nnecessitates it to have a more realistic evaluation of performance of the
\nselling firm by eliminating these individual factors. So EBITDA figure is the
\ncontribution from the business irrespective of the asset base, capital structure
\nor tax rate. In other words, it is more generalized version of the performance.
\nFirm specific factors color the real performance but as the firm is being sold
\nto another firm so selling firm specific factors will no more color the
\nperformance in the future so it is necessary to eliminate their impact.<\/p>\n

Further, EBITDA valuations provide the enterprise value (EV) of a firm which means that this value also includes debt in it as interest is also included in EBITDA figure. So in order to arrive at shareholder’s stake value we need to deduct the quantum of debt from Enterprise value.<\/span><\/div>\n

\n<\/div>\n
\nUsing Net profit (PE ratio) as a
\nbase for acquisition will give very misleading results and may spoil the game
\nfor a potential bidder. Net profit figure is arrived after accounting for all
\nthe complex accounting and taxation laws and firm specific capital and asset
\nstructure which will distort the real performance indicators. I have almost stopped
\nusing PE ratio while doing the analysis long time back. Many times I don\u2019t even
\nlook at the Net profit or EPS figure. This is just like small children are
\ntaught in school. \u201cA\u2019 for apple is only used to make them understand the sound
\nof A not apple. As their understanding grows, they can make new words with A.
\nSimilarly, PE is just \u201cA\u201d for apple and it is not the only m<\/span>etric<\/span> to judge the
\nperformance of a company. It is just the starting point.<\/p>\n

DCF-Any Merit?<\/span><\/b><\/u><\/div>\n

\n<\/div>\n
\nI do not have much liking for DCF
\n(discounted cash flow) method for valuation of business although the same is
\nused widely and in fact in many research papers I have seen authors arguing in
\nfavour of DCF and heavily criticizing EBITDA method. Actually, one thing which
\nI find worth mentioning is that there is not any perfect objective formula or
\nmethod to evaluate businesses and one reason for the same is uniqueness of every
\nbusiness. So, two firms can have same figures of top line and bottom line but
\nwith different modes of operations like one is outsourcing entire manufacturing
\n(asset light like Bajaj electricals) while the other may be having its own
\nmanufacturing capacities, assets etc. So customization is required at every
\nstage. Further, the fact that most of M&A fails is a testimony to the wrong
\nprice discovered and paid (still DCF is used widely, recently for valuation of
\ndefense arm of Tata power, Tata Power SED, PWC has used DCF method valuing the
\nfirm at 1780 cr) and shows the limitations of any linear method in the
\nvaluation. <\/div>\n
\n<\/div>\n
\nDCF- one very important problem
\nwhich I find in DCF is that it tries to value the future business performance
\nbut if we can see what we are getting is \u201cwhat the previous owner has done\/created
\nin business till date\u201d. <\/span>so past
\nperformance should be the basis for evaluation not future. Past profits are
\nwhat the previous owner has achieved. This is just like we are getting a
\nchicken but as we want to make Bar be que chicken in the future so we are ready
\nto pay the price of Barbequed chicken!! I think that DCF over-value a business
\nand buyers end at paying much higher price. Second, DCF requires too much
\nguesswork with regard to everything. If we leave alone the complexities in
\nassessing the future cash flows for next 10-15 years (which requires estimating
\nthe growth rate etc.) still even the estimation of discount rate is very
\ncomplex. Discount rate requires estimation of interest rates, inflation rates
\netc. which I think even best economists, central banks across the globe has
\nnever been able to forecast even with 50% accuracy. In DCF future forecasting
\nfor cash flows there is never a bad year or down year\u2026all the time there are
\npositive cash flows which I find hard to believe. Industries and businesses go
\nthrough periodic variability every now and then. Then there is complexity in
\nassessing the terminal growth rate.<\/div>\n
\n<\/div>\n
\n <\/span>So amid so much melodrama, I am surprised how
\npeople can have any sort of confidence in the valuation figure we get from DCF.
\nIn the end, DCF fails to offer any practical value (in my view)\u2026but still it
\nhas immense theoretical and conceptual value because even in other valuation
\nmethods the inherent logic is the cash flows. It is surprising that even after
\n300-400 years of equity markets we are yet to develop a workable real life
\nbusiness valuation formula\u2026even 70% accuracy is more than enough.<\/div>\n
\n<\/div>\n
\nBut still, DCF can offer valuable
\ninsights when valuing annuity type of business. Like, that day I was checking
\nMukta arts ltd which has a library of some 30-35 films (some of the most hit
\nhindi movies like Karz, Khalnayak, Saudagar, Pardes,Ram lakhan etc.). Mukta
\narts is selling the rights of their 35-40 movies for some 60 cr for 5-6 years
\nwhich means that yearly cash inflow is some 10 cr\u2026after tax is around 7-8 cr
\nand as this require zero maintenance (as compared to commercial lease\/real
\nestate) so 7%-8% is good risk adjusted return for this one which makes the
\nminimum value of this content assets at some 80-90 cr and this is the current market
\nvalue of Mukta arts!!! But apart from this library, they have much valuable
\nbusiness in the form of India\u2019s best media university (Whistling woods
\ninternational, revenue 50 cr High margin) and their cinema brand A2 cinema
\n(revenue 100 cr mostly share of revenue\/advertisement with 65 screens), they
\nhave 2 properties in Bandra valued some 40-50 cr, they have high growth content
\nproduction business after the onslaught of OTT. The movie rights were sold for
\nsome 40 cr 3-4 years back\u2026so instead of depreciation the value of these assets
\nkept on increases. And they are carried at Nil value in the books.<\/div>\n
\n<\/div>\n
\nI am not saying that Mukta arts
\nis worthy of investment but still it looks much undervalued. As we can see, in
\nannuities types of business DCF will have its worth like lease rentals firms.<\/p>\n
\nOnce one of my friend explained a
\ncase to me to show the fallacy of EBITDA valuation. He studied the same in many
\nresearch papers and articles proving the worthiness of DCF and fallacy of
\nEBITDA. In those articles, authors have given an example where two companies of
\nthe same size have different levels of EBITDA- one (A) has 35% EBITDA margins
\nwhile the other (B) has 30% so one can say that A is better and should be
\nvalued more as per EBITDA. But then they revealed that firm A has invested
\nmassive sum (1000 cr) for expansion while B has spent some 200 cr for repair
\netc. of old plant and machinery. So if one can look at 1000 cr investments then
\nB is more valuable because the ROE of B will be much higher than A.<\/div>\n
\n<\/div>\n
\nBut i think there are some most
\nbasic flaws in the estimation work and because it is estimation so one can
\nprove it any way. First of all, I find it hard to believe that a firm with 1000
\ncr assets is only having 5% more EBITDA margins than firm with 200 cr assets\u2026I mean
\nfirm A should have massive depreciation charge and that should raise EBITDA to
\nvery high levels as compared to B. Then, EBITDA is not a gun in the hands of a
\nchild who can shoot anything. If both the assets have same age then it is so foolish
\non the part of firm A to invest 1000 cr just to earn 5% more by putting 5 times
\nmore\u2026.but why a business will be so foolish? We know it is not the case\u2026we need
\nto treat businessman as rational while taking hypothetical cases\u2026we can\u2019t
\nimagine one man as fool and then reach at some rational conclusion.<\/div>\n
\n<\/div>\n
\nSo if firm A is rational than it
\nmeans that assets of A are much more valuable and will last much longer and
\nthis is where the difference will arise. People try
\nto present EBITDA as one tool which does not care for the age difference of
\nassets and cost of capital. But I think this is gross miscalculation because in
\nEBITDA valuation, EBITDA is just one of the variables\u2026it is not the entire
\nuniverse. Because the second very important variable is the \u201cvaluation multiple\u201d
\nand if you ask me this multiple is affected by the age difference of assets and
\ncost of capital. Firms with much costlier, advanced and new assets get higher
\nvaluation multiple. But still this depends upon the industry we are dealing
\nwith like branded FMCG has lesser impact of production assets because maximum
\nvalue is derived by the Brand strength of the company and people buy their products
\neven if they are costlier than the competition. <\/span>So there may be a case
\nwhere one firm with large assets (firm A) is compared to same size firm with
\noutsourcing model (firm B). If we take all other factors affecting profits as
\nequal then firm A should have higher EBITDA because the firm B will have higher
\ncost of production because in any case the assets are created by third party
\nmanufacturer who will charge the same to the firm B in production cost as
\noverheads besides direct costs. So as we can see, firm A EBITDA will return
\nprofits in the shape of depreciation for financing the future investments for
\nexpansions or replacement. <\/div>\n
\n<\/div>\n

<\/p>\n

\nI can\u2019t believe that two hospital
\nchains-where one is having its own hospital buildings and other is having
\nleased assets- can have same (or little difference) EBITDA levels (let\u2019s ignore
\nIND AS 116 on lease accounting for time being) because lease rent will be
\ncharged as expense and will not be a part of EBITDA while owned assets will
\nretain a part of profits in EBITDA figure as depreciation. So EBITDA of asset
\nfirm will be higher and when multiplied by the valuation multiple the difference
\nwill be significant.<\/div>\n<\/div>\n
\n<\/div>\n
\nTurnover for
\nBusiness valuation<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nFurther, EBITDA has different
\nimplications for different set of buyers. Like, if a new player is buying the
\nbusiness (like a Private equity firm) EBIDTA will be more relevant for him. But
\nfor a firm which is also into same line of business then the turnover figure
\nwill be more relevant as they may have their own raw material sourcing at lower
\ncosts, different organizational structure resulting in low employee cost etc. They
\nwill also get the positive synergy impact after merging the both businesses due
\nto lower administrative costs, common IT costs, efficiency in sourcing of raw
\nmaterial, lower supply chain costs as it can leverage its present supply chain
\nmuch better. So many times instead of EBITDA, turnover figure is used because
\nthis is the figure where there is no impact of subjectivity and individual
\nfactors. Further, there is very less scope of play (not fraud) with turnover
\nfigure like depreciation rates etc. So due to these reasons many times turnover
\nfigure is taken as basis for valuation especially in case of brands because due
\nto brand strength turnover figure will not have much variations and this will
\nbe stable for the most of foreseeable future like Maggi noodles.<\/div>\n
\n<\/div>\n
\nBut turnover as a basis for
\nbusiness valuation is not used frequently although I find it a very valid
\nmethod and I use this quite often. In my view, this is best suited for
\nbusinesses which are operating in mature markets (mature does not mean
\nsaturated but maturity related to information and demand and supply of the
\nproduct), high margin products so that there is not much complexity involved in
\ncalculating the impact of factors like raw material, labour and energy costs because
\nin low margin product businesses any significant move in the cost factors can
\ndrastically change the business performance hence turnover alone can\u2019t be the
\nbasis of business evaluation here. Then comes the market share- firms with high
\nmarket share in the mature markets. Further, high margins businesses often do
\nnot need to offer large credit to distributors\/retailers so if we can see the
\nfactors which can affect the margins coming out of topline figure are very less
\nin high margin businesses due to high entry barriers in the forms of
\ntechnology, monopoly or brand strength hence turnover figure alone can
\nrepresent the true worth of the business. Like, in services business it is very
\neasy to use this metric as it satisfies the conditions of high margins and
\nlesser impact of cost factors (IT industry).<\/div>\n
\n<\/div>\n
\nSo many times I use both EBITDA
\nand turnover based valuation methods for the valuation of a stock as both give
\nvaluable insights. Still, EBITDA and turnover are just the base materials and
\nthe major complexity is in the deciding the valuation multiple- whether the
\nsame should be 15 times or 20 times of EBITDA or 1 time of turnover. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nI have done some work on valuations multiples and want to write more on this with more real life examples but for the time being due to length of this article I am leaving it
\nhere. I\u2019ll take up this valuation exercise in detail in some other post.<\/div>\n
\n<\/div>\n
\n(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post).<\/span><\/div>\n
\n<\/div>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

Clariant chemicals ran up decently to 440 from 275 when it was advised last time in Nov-2019 (Click here for old post). At that time it was expected to sell its Masterbatches and Pigments business to focus more on high margin specialty chemicals business. I was expecting to sell the same at anywhere around 1500 cr to 2000 cr valuation excluding land bank which was around 15 times its last year EBITDA and around 1.5 times to 2 times of the turnover of 1000 cr while it was available at just .6 times of turnover. So the valuation discount was…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1007","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1007","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1007"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1007\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1007"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1007"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1007"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}