Valuation - what to do?

Valuation is an intrinsic part of any negotiation. Even though we possibly look at in terms of financial transactions, every transaction has the inherent question "What is the value of the service/product" that is being offered.

Valuation is subjective, yes very much. The logic for that is pretty simple, ice to an eskimo is not very valuable. So what is being sold?

First the cash flows:

1) For a BOT, PPA or license, the essential valuation metric is the good old discounted cash flow. The DCF is one of the elegant logical construct that can be used, t'rows cash flows are less than today's cash flows, so once the cash flows are determined, there is nothing much to determine other than the discount rate. Cost of Debt currently is 11.75%(before the PLR cut), even if you assume the impact of leverage ot be minimal then the cost of equity would be > 11.75% ( assuming the firm is not out to destroy value to the shareholders - a fair assumption). So depending on the assumed levarage and the model of cash flows to firm or equity and wacc or cost of equity you are there.

2) The problem of valuation of an going concern is unique:
-The first PE question, what multiple? How do the ratio's compare to that of the industry. As a rule, higher the ROE higher the P/E, higher the earnings growth expected higher the P/E , higher the ROCE, higher the P/E. The question is simply, if firm getting superior returns out of the capital? The key issue becomes interpretation - getting the ratio's right will come in the advanced stage of the business, but during its initial build out phase the ratios will be skewed, both because of the lack of focus there or more likely management disdain/discomfort.

-Industry Analysis: OOh la la, all those consultants cannot help you take a decision here. As my boss loves to say, India it is all about getting the asset up. Once the asset is up you cannot stop it. But if somone where to look at the landscape in terms of a framework: cats dogs & what not - you will most likely come across the same. More importanly, the lack of availability of data (and incorrect data to be precise) kills the end purpose of an analysis

-holy grail: promoter premium. The uniquely indian animal called a promoter. He runs the company (sometimes strategy sometimes everything) and believes he needs a premium. ( the investor would want a discount for precisely the same reasons). Depending on the market most of the deals swing on this aspect quite significantly.

These three simple constructs actually muddle the concept of p/e that its almost imposible to decide on the right metric for everyone, so there is endless negotiation on this. All in all choose your methodology and its implementation carefully.