FACTORS AFFECTING VALUATION OF A COMPANY: A CASE STUDY ON TYRE INDUSTRY

Abstract

Intrinsic Value of a company is what most investors, researchers and stakeholders look out for dealing with the company in form of investment, mergers and acquisition, amalgamation or buyout. Value of a firm is dependent on a whole lot of factors which are categorized into qualitative and quantitative. Valuation of a firm can be both absolute and relative. Absolute valuation involves discounting future expected cash flows known as the widely used Discounted Cash Flow Method. The other methods are Dividend Discount Method. Relative Valuation compares similar companies on various multiples like Price to Earnings Ratio, EBITDA multiple, EBIT multiple, Cash Flows, EPS. In this research our focus is on specific multiples like P/E, ROA, Net Profit Margin, EPS and Debt Equtiy Ratio. Major emphasis is paid on the capital structure of the company and how company manages or utilizes its assets. Prime consideration is analyzing the sources of funds and various applications of those funds to maximize shareholder’s wealth. The operational performance is directly linked with valuation of the company. For this study, comparable companies of the same sector are studied for validated comparison of the market value of the company. The sector for the reference is the Tyre sector. Tyre industry very well replicates the automotive industry and experiences same types of risks and opportunities. The recent BS-VI norms by Government have a huge impact on the industry increasing its technology investments. Tyre industry is highly dependent upon crude oil and carbon black, both of which are highly volatile in prices. Their costs, profitability, capital structure and asset utilization are studied in depth. A contrast of the company valuation and relative multiples and factors is drawn. The factors are regressed to infer a causal relationship between dependent and independent variables. The coefficients, standard error and p values are studied to conclude the thesis.