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| Case Study 3 |
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- OBJECTIVE:
A critical study in the Oil & Gas sector.
- BRIEF:
A private investor wants to undertake a critical study and analyze the financial due diligence regarding an investment in a company belonging to the Oil & Gas sector. Valuation has been done by 3 proposed models namely - Asset based method, Market based method and Income approach (DCF method and capitalization of benefit stream method). The crux of the study lies in identifying the right valuation model to be used and also reformulating the selected valuation model.
- ACTION:
Global Strategy & Investment Consulting - an off-shoot of Planman Consulting India Pvt. Ltd. was hired to undertake the project.
- APPROACH:
The study was based upon the data provided by the client on financial due diligence of the company and a critical study was to be undertaken by scrutinizing every segment of the same with respect to own secondary research and analysis.
- REQUISITES: The client's specifications entailed the following:
- Review the fundamentals of the valuations.
- Suggest the most appropriate valuation model to be incorporated.
- Current valuation of the company as per the valuation model suggested.
- Estimated valuation of the company as per GSIC.
- METHODOLOGY:
The study was made on a critique format with each segment of the report being analyzed to the last detail. The project required more of financial analysis and projections on factors like earnings growth rate, working capital policy etc.
- OUTCOME: The result of the project undertaken was as follows:
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Deliverables - A reasoned quantitative report covering the following:
- Valuation as per Income approach (discounted cash flow method).
- Scrutiny of the other proposed valuation models.
- Estimated valuation by GSIC.
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The study found major faults in the earlier models employed for valuation:
- The valuation approach was incorrect with several figures being inflated by as much as 50 per cent.
- Projected growth rate and assumptions were far-fetched.
- Price quotations were not feasible for acquisition.
- Results - GSIC undertook a relevant valuation model based on sound logic and reasoning explicated in the report. A revenue model was forecasted (taking into account, the volume of expected sales and price quotations) for the company based on which the current valuation was undertaken followed by an estimated valuation by GSIC.
- POST-MORTEM REVIEW:
The investor was highly satisfied with the critique and based on our valuation modeling went into further negotiations regarding the investment proposal which was earlier over-valued. The client was able to conclude at an appropriate price which he should ideally pay for a stake in the company.
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