Equity Research for Private Company
Mapped
Equity Research for a Private Company which is unlisted requires following beginning steps to understand and move on to the NEXT Steps !
1. Deep Understanding of the Sector which majorily requires the Product and Services offered
2. Parent Company and the origin
3. Financials & Clients list
4. The Projects or Work currenlty being executed ; with future plans & start of its execution.
How will the above four points will help you to almost execute the whole research and Complete you Mandate ?
Step 1. Deep Understanding of the Sector !
The Valuation of the Private Co. for Equity research is done through Market Comparable of the company in the sector providing the same product and services while having it's Revenue and PAT nearby to the Private Co. we are doing research for.
How will you do the Market Comparable ?
If you are LAZY !!
Then just take the P/E of the 5 most matching company as explained above and average the P/E in excel the formula will be =AVERAGE(A1:A5)
And follow the steps given here : My NEW WEBSITE
IF you want to learn all the Market Comparable here we go :
We need to collect the information under the following head of the top 5 (note : it can be less or more than 5 , I have just taken it for example and it varies from case to case but usually it's 5) companies that is coming near to the Revenue and PAT of the Private Unlisted Co. we are doing Equity Research for :
1. Company Name (Registered and Public)
2. Market Cap
3. Equity Share Capital
4. Revenue
5. EBITDA (It is Profit after all Expense + Depreciation and Finance Cost)
6. EBIT (It is EBITDA but without Depreciation)
7. PAT
8. Face Value
9. No of Shares (Available in Annual Report but can also be seen on MCA if an Indian Company)
10. EPS (that is PAT/No of Shares)
11. Current Market Value (CMP)
12. P/E (that is Share Price / EPS)
Then do the average of all the P/E of the 5 Companies we have calculated.
Now what's the Price of the Private Unlisted Company ?
As we have taken out the EPS you have to take out the EPS of the Pvt. Ltd. Co. and then mutilply the EPS with the Average P/E this is how you will get the Share Price.
How to get the Market Cap?
Multiply the Share Price with the No of Shares
Or
PAT into P/E
Step 2. Parent Company and the origin
Now we have to understand and see the trail, how the Company Started and Who started it ?
Why so it is important ?
A investor coming into the company will need to know about who started it what was the inception equity and how does it got diluted, distributed and bought back.
"In Equity Research one thing that is important is that the Promoter Equity should be meaning ful more than 10% atleast , this makes the deal attractive".
We need to map and make a Presenatation of the Shareholding from the start of the company till now! Then we need to that what Product and Services (P&S) was there and which P&S got stopped and new one coming in or have came.
Now we need to understand the Market of the Product and Services of the Private Unlisted Company :
to note we have already marked competitors in Valuation Process
Market need to understood by taking the Size, the Industry P/E and the growth Potenial, while one of the important thing in this is that we need to undrestand the Investments coming in, in this through National (that includes Government and Private Players) and International (including Foreign Government and Funds)
Step 3 Financials & Client List
Equity Research and Private Equity Presentation is almost the Pitch Deck, you need to evaluate the company like it is selling in whole, every aspects need to be given a equal importance.
The Financials of the company with each aspects explored, but what are the main financials to be listed in you Presentation and Information Memorandum ?
1. Revenue (With Y-oY growth and if the company has existed for more than 5 yrs then CAGR is must)
2. Expense
3. PAT (with a little comparison with PBT if possible)
4. Net worth
5. Share Capital (Bifurcation into Equity and Other Equity which may include Reserve and Surplus etc.)
6. Borowings (Debt Securities and Other than Debt Securities)
Then the top Lenders and Lending of the Private Unlisted Co. to which sector (if an NBFC or any Banks if others Personal or Employee Loans being given)
The Information that a Investor will need is, is the company economically viable till he gets his/her actual investment back for which a forecasting is made and a Company forecasting is just not based on Financials it is also based on the Clients and Network has the Co. built over the year and how that is being leveraged till now and if not leveraged till now how they have planned to do so.
What are the legalities under which the Company come ?
This is as important as showing the profitability of the company, for example
I have worked for a Public Listed Companies, Joint Venture and for that company to get investor and dilute the holding of the Public listed company you need to follow Indian DIPAM and get permissions from DPE. This was a major bottleneck and which needed to be solved and told to the investors, but this was leveraged with the image of the world's largest company that Public Listed Co. being the parent company and having the back of the JV.
A List of Complainces, it's fulfillment and then the right person who will continue to see it with his/her credentials.
Management & Directors Background and Credentials
This is another very important aspect it is not only seen as the Equity Research thing but are also seen in Debt Syndications and Financial Advisory.
We neeed to list down the
1. Name,
2. Educational qualifications and
3. Age
of the Management Personnels and Directors with any history of Default or any ongoing matter to be disclosed upfront as the auditor of Analsyt will find that out on it's own which will be an embarassment and will put a question on honesty and integrity.
Step 4 The Projects or Work currenlty being executed ; with future plans & start of its execution
The most important thing to showcase and get the confidence of the Investor is the current Project scale with networking for repeated clients.
Why so important ?
The Revenue and Profit is based on the network of the current Management and Employees and that need to continued with the same and better level of work ! The current project and the expansion startegy. A business plan is also prepared for the Equity Infusion.
Business Plan is almost like scaling the current operation, cutting down the loss making units and expanding into more profitable ventures.
Execution is more important than the plan so a summary of the same needs to be kept ready ! the presentation for the Investor need to have points on this.
What should the Private Unlisted Co. should see in the Investor?
Investor should cover three thing needed money, expertise and comply with regulations.
I give you an example if you have to choose an investor it's not necessary to have history of investments but an intent.
An investor need to be capable, not only in monetory terms but also in skillsets and network. To choose an investor is as hard as choosing the best colour out of the 300 variation of green colour available. A lot of people feels investors are superior in choosing a company to invest in but mostly in my experience a investee company choose the right investor.
What are the parameters to choose a company ?
1. Capability :
