Venture Care Digest December 2017 INR 150/- MAGAZINE What are your company strategies in this new Economy? Re-writen Risks and Entrepreneurship Valuation: A Modern Art Re-writen Financial Modelling- A practical view Producer Company in India < < < < < < < < < < The Traditional Ways Of Planning Breakthrough
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Venture Care
D i g e s t
December 2017 INR 150/-
MAGAZIN
E
What are your company strategies
in this new Economy?
Re-writen Risks and Entrepreneurship
Valuation: A Modern Art
Re-writen Financial Modelling-A practical view
Producer Company in India
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The TraditionalWays OfPlanningBr
eakthrough
IndexEditorial
Special Story
Index
What are your company strategies in this new Economy?
3
5
Legal & Compliance
Producer Company in India 16
Finance
Re-Writen Risks and Entrepreneurship 9
Index
Valuation: A Modern Art 11
Financial Modelling- A practical view 14
www.Venture-Care.com/Magazine December 2017 2
Prashant KumarPrashant KumarEditor
Happy Reading...
Editorial
www.Venture-Care.com/Magazine December 2017 3
Economy witnesses many turns!! But the challenge is
that how corporate India will survive and grow. It is
imperative to adopt new strategies every now and then….
The Economic downturn is now a reality. With financial
markets in turmoil and a daily stream of bad news, from
falling Profitability to company failures, the consensus
view is now that we are in for an extended period of
economic pain that have a profound impact on both
consumers and corporate.
Survival, Repositioning and re-engineering strategies
are the best. Companies should not forget their
competitors and should not rely completely on the old
methodologies to do things. If we talk about
repositioning we should consider product, market &
marketing!!!If we consider re-engineering then we must
focus on Mergers and acquisitions.
Risks and entrepreneurship go hand in hand. No
business owner should just believe it and be passive. Of
course risks should be mitigated or at least be reduced.
Let me clarify that risk is not always bad for business and its owner. Entrepreneurs should take calculated
risk.
Business valuation is still a mystery. "You can't really challenge the worth of a business," or "Every business
is so unique that no one could ever put a justified value on it," Both of these statements show the fact that
professional valuators have put decades to perform accurate business valuations but still they find its not a
dart game.
Few analysts understand that financial modelling nothing but workings on excel spread sheet. Partially true!
Financial modelling is of building a Model which represents real world financial situation. This is a
mathematical model. It is designed to represent the expected performance of a business or project or
business portfolio.
The concept of Producer Company in India was introduced to allow cooperatives to function as a corporate
entity under the Ministry of Corporate Affairs. The Companies Act defines Producer as any person engaged in
any activity connected with or relatable to any primary produce (Produce: “things that have been produced
or grown, especially by farming”).
You will read all the above with much interest in December issue of the digest…
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What are your company strategies
in this new Economy?
The Economic downturn is now a reality. With financial markets in turmoil and a daily stream of bad news,
from falling Profitability to company failures, the consensus view is now that we are in for an extended period
of economic pain that have a profound impact on both consumers and corporate. However times of change
create opportunities as well as threats. For some companies, survival will dominate the agenda; however for
others the downturn offers the chance to extend their lead over the competition.
A ripple effect, which started with the credit crunch, has been expanding. The global economic
environments has also changed dramatically since the re-engineering boom of the last 20 years and the wave
of outsourcing and off shoring that has dominated the last 10 years, have left companies leaner but less
flexible. Furthermore, some of the key assumptions on which many current business models were predicated
no longer hold true as low interest rates, cheap transport, consumer indifference and wage gap.
As a result, many companies are likely to find themselves with sub optimal business models, which will be
expensive and risky to change. It is not enough to understand what the effect of the downturn will be on
demand for your own products and services. It is equally important to understand what is happening to your
partners, customers and suppliers. A comprehensive risk analysis must look at all of these players, as their
fate can substantially influence your results different options for how to steer through and adapt to the
changing environment. Broadly, these Strategies can be grouped into three categories:
v Survival
v Repositioning
v Corporate Re-structuring
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Survival StrategiesDe-leverage and re-structure debt
For companies facing current or potential shortages in cash flow, de-leveraging, and re-negotiating debt
terms should be a near term priority. To preserve cash, many companies will choose to reduce or cancel
dividend payments.
Cut costs and maximize cash
Minimize the cost of purchased inputs through exploiting synergies across the organization and
establishing greater control over external spends.
Reduce exposure to poor payers and invest in more efficient and effective debtor collection .Digging
deeper, optimize business processes to substantially reduce both cost and time required.
Repositioning Strategies The Re-positioning strategies can be evaluated only with the prior company's problem like- how companies
are organized— by product, geography, process? This all need to be consider carefully in today scenario.
Some of the repositioning strategies are below:-
Invest in innovation Business and consumer buyers alike are likely to shift expenditure when they feel the squeeze, often in
unexpected ways. Products and services that deliver better value for money will benefit and whether a
company serves consumers purchasing patterns are likely to change in a period of downturn, and what new
needs are emerging. Moving early on anticipate and service these needs can help to establish strong
customer loyalty and a base for future growth
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Upgrade human capital
A downturn can also create an ideal opportunity to upgrade human capital and tailor it and A
straightforward exercise of mapping the required skills against the organization's current skills is likely to
reveal significant gaps, as well as areas of substantial oversupply. With redundancies on the agenda for many
companies, this is a timely opportunity to address these imbalances
Corporate Re-structuring Establish up front a shared vision of a desired future operating model. This should provide answers to
questions such as the following: What role will Merger Acquisitions play, and where we are likely to make
them. The underlying trends that have been driving consolidation across a range of industries have not gone
away. The benefits of scale, geographic reach, and access to scarce resources will continue to make large
Merger Acquisitions an attractive source of future growth.
Divestiture of non-core assets is a strategy that companies should be considering carefully. Consequently,
companies need to take a clear and decisive view as to what constitutes a core vs. a non-core asset and act
accordingly.
Conclusion Risks are coming from last two three quarters—mapping these carefully and understanding how to mitigate
them will be essential. Many companies will struggle to survive— and some will not make it. In these cases,
rapid action to secure cash flow and minimize exposure to risk can make the difference. Finally, companies
with the financial strength to back major acquisitions should be looking at the current environment as
presenting an ideal opportunity to establish market leading positions through domestic, global M&A. on the
downturn company with competitive advantage and on the learning curve will look very different than it does
today
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Re-Writen Risks and Entrepreneurship Risks and entrepreneurship go hand in hand. No business owner should just believe it and be passive.
Of course risks should be mitigated or at least be reduced.
Let me clarify that risk is not always bad for business and its owner. Entrepreneurs should take calculated
risk. First of all let us discuss what the benefits are of risks in the business:
It refines vision and mission of the company
It makes the organization more proactive in handling any kind of situation
It makes decision makers more aggressive
It helps in devising flexible strategies for the organization
It sends positive energy to the middle and junior level management
It helps organizations in reaching new height of growth
It helps in forming much more loyal and dedicated team for execution
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However, it is injustice to say that there are no cons of risks:
Frequent failure of strategies may dishearten the top management
Competitors may acquire the failed organization
Execution team may leave the organization
Sense of fear may develop across the organization
Future contracts may be cancelled
There may be socio-economic pressure from stakeholders including government
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In contrast, smaller organizations including start-ups can shift to alternative strategic plans soon to mitigate
or reduce risk.
It is general notion that a start-up always faces higher degree of risk. But, this in not completely true. A
bigger organization will always face higher degree of risks because of large size, huge finance obligation,
bigger team, global operation etc. Shifting from one strategy to another to reduce risk is time taking and by
the time it takes alternative course of action, aftermath of risk becomes severe and unmanageable.
Let us discuss that what kind of general risks an organization may face:
Management risk- any of the key persons leaving the organization
Product risk- failure of product because of being out-dated or competitors came up with
much advanced product or associated services
Team risk- execution team leaving the running projects suddenly
Suppliers' risk- vendors/suppliers cancelling the contracts at very short notice
Legal risk- companies falling into litigations with competitors
Environmental risk- sudden development of rules and regulations by state or central
government putting pressure hard to survive
Financial risk- inability to service to debt or not meeting financial expectations of outside
equity providers
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General approach for mitigating or reducing the impact of risks:
Try to forecast the risk- although it is difficult in changing business environment but to
some extent it is possible as well as desirable.
Do not ignore ifs and buts- always have back up plan; be it related to product/services
modification, new launch, execution team etc.
Communicate well inside and outside the organization- miscommunication will create risk
Maintain relationship- develop and maintain relationships with current customers/vendors
and also with past vendors.
Raise finance only to the extent of requirements and stage-wise
Focus on cutting down the operational and other cost
Develop new way of marketing
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To conclude, risk is a double-edged sword. Taking risk is good but mitigating the impact of unwanted risk is
desirable. Understand your business and business dynamics very well and deeply. Do counter attack if
possible and required.
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10
Valuation: A Modern Art
Business valuation is still a mystery. "You can't really challenge the worth of a business," or "Every business
is so unique that no one could ever put a justified value on it," Both of these statements show the fact that
professional valuators have put decades to perform accurate business valuations but still they find its not a
dart game.
All of the processes that make up company have a cost. Culture, key management, labor, overhead,
inventory, capital, goodwill, employees, patent, copyright, and even human relationships. All of these have a
value associated with them. Some assets are so unique that it's very difficult to value them practically. In fact,
if any of the elements are missing probably its possible that we will not be able to justify the value of the
business. So judging and considering every parameter in the valuation is important.
In these turbulent times or in exponential growth period, the normal methods of valuation of businesses
don't fit. Net Asset Value, Sum of Parts, Discounted cash flows, multiples of future revenues - nothing seems
acceptable. So many businesses are available at below its book value of assets and has dividend yield as
high as 8%. So it is like equilibrium in economics, which is just in theory, but rarely that is achieved. So
almost all time we, don't arrive at right valuation using any mathematics model. So, that makes us not
believing in projections of target as things are so uncertain. Now the big question is if it is not science than
how to go about it.
There is a myth that determining the value of a profitable company is simply a matter of mathematics.
Really this myth only is helping various transactions getting executed, because both buyer and seller arrives
at the different value of the same business.
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The word value means different things to different people and the result will not bethe same, should the context change.
A valuation is not an exact science. The value is subjective term and can have a different connotation.
Valuation involves use of professional judgment, knowledge of business, analysis of facts, interpretations and
use of different methods and procedures, which may result into different value in each given situation. This
implies that the business value must be measured and defined by a 'standard of value' that is relevant,
meaningful and reliable. Before applying any of the accepted methods in the course of valuation of any
business on going concern basis one need to look at and consider many factors which are subjective and
not objective as in the case of quantitative models. We list below some of them:-
1. Purpose of the transaction
2. Type of transaction
3. Historical perspectives
4. Quality of management
5. Synergy between business of target and acquirer
6. Comparative company analysis
7. Baggage attached to Target not required by Acquirer
8. Quality and type f target business
9. Cost of restructuring the business
10. Mode and terms of consideration
11. Appropriateness of a method
12. Various variables to be used in a particular method
13. Transaction cost
The use of professional judgment is an essential and most important component of estimating value
in all cases. Further in most cases valuer arrives at range of values and not just one value.
The very first thing which we need to consider is the purpose of the transaction for which we are doing
valuation- is it a Merger, Demerger, Acquisition, Sell-off, Distress assets sell-off, etc. As valuation approach in
every case will be different because every transaction is unique and require specific consideration at the time
of valuation.
What is the type of the transaction- strategic or financial, 100% buy out or partial stake, whether the
present management will continue etc. should be considered. Sometimes it may be necessary that the
acquirer would like the present management of the target company to continue because the existing
management has strong relationship with the customers and vendors and there is probability to lose the
business if management changes. The cost of retaining the present management shall also form part of the
purchase price. How much to be paid for retaining is critical and actually require a lot understanding of the
importance of the present management in business dynamics. The acquirer should also see that whether the
past baggage of the target is required to be bought. The hidden liabilities also need to be identified.
Purchase price has to be adjusted accordingly.
Mode of consideration is another aspect which also gets factored in the purchase price. Purchase price in
case of modes such as hard cash, equity shares, preference shares, bonds, Royalty or conditional consideration
may be different.
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“Which method to use and why” is equally critical. Should we consider Asset base of the target or its
business prospects of the company or intangible of the target or combination of all- It depends? All these
approaches have various variables such as market value of the assets, marketability of the assets, optimal use
of the assets, cash flows, risk premiums etc. we can see in the asset based the art is deciding the book value
or Market value of assets as currently the book value of Joot Mills is higher than the market value. Estimating
all these is beyond statistics and justifying appropriate one out of several methods is a really a challenge and
needs real art. For example, what risk premium should we use in this economic scenario? Should the risk
premium be same for all the companies falling in the same industry, Does micro picture of the target
company has role to play in this and so on.
So, transactions have to evaluate the value creation for everybody in the system so coming out with the
valuation which create value for every body is an art not science because science can not consider the
subjective parameters in the valuation.
Let us study a very old case of Tata Oil Mill Company Ltd's (TOMCO) merger with Hindustan Lever in 1993.
This particular case used three valuation methods- The yield value, the asset value, and the market value of
the shares of both the companies and appropriate weight ages were given to each of the above values. The
valuation figure arrived by the valuation expert Mr. Malegam was less than the book value and the employee
union took the company to the court challenging for the valuation however, later on Supreme Court stood on
Hindustan Lever side for the valuation figure. In the Yield valuation method deciding the profit figure and
profitable year is an art as we can see that Mr Malegam artistically decided the profitable year for TOMCO as
the company was making losses in two subsequent previous years and made above normal profit in 1991.
Therefore, he considered years before 1991 which was showing stability in profit for arriving at the valuation
figure.
“Who is the buyer”, also plays critical role in the valuation. A foreign company acquiring in India shall be
ready to pay for the entry premium and for saving on the gestation period. Only simple projection of cash
flow of the target company shall not justify the value for the acquirer. How much entry premium has to be
paid is probably the main concern and justifying it for the valuer is a real task.
To conclude, Value lies in hands of beholders. A diamond in the hand of diamond merchant is more
valuable than in the normal hand because he understands better than the normal man. Valuation changes
every time, every day as company information is dynamic. Factoring the qualitative aspects is critical. It is a
MODERN ART. How can we develop a standard approach to art? We cannot.
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Financial Modelling- A practical view
Few analysts understand that financial modelling nothing but workings on excel spread sheet. Partially true!
Financial modelling is of building a Model which represents real world Financial situation. This is a
mathematical model. It is designed to represent the expected performance of a business or project or
business portfolio.
Myth and truth attached with financial modeling
It is only for accounting purposes:- There are many accounting software available globally. These software
are just used to see the result. But financial modelling is developed for many purposes such as corporate
finance, asset valuation, project management etc.
It is a standard product:- Many analysts believe that financial modelling is a standard product and can be
used the same model everywhere. But this is not true. Even in the same organization different financial
modeling shall be used for different purposes such as valuation, corporate finance, estimating risk return
attached with portfolio etc.
It is very easy to develop:- Since the model is a representation of real world situation, anything expected to
happen in the real world has to be incorporated in the model to know the impact on the profitability and
wealth. Therefore assessment and forecasting of data input is very critical. Moreover, all the variable inputs
should be considered and level of impact needs to be assessed with proximity.
Small business does not need financial modeling:-financial modeling can be used even for small
businesses including start-ups. For start-ups it is helpful to build out a model to understand all the variables
needed for success. The act of building out the model will bring different expenses, revenue ideas, and cash
flow requirements to the surface.
Same model can be used every time:- NO. as the time passes, business becomes bigger i.e. the internal
variables are going to change. Also, external market dynamics will also shift. Therefore, there is need to
update the mathematical model.
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How to develop financial model for your business?
Clarity on business's aspects is very important. It is imperative to know the product's worth, industry aspects,
change in dynamics of the industry, funds as and when required and impact of any kind of change on
business.
Step 1:- understand the business
It is not possible to identify all the variables at a time. But list out the variables as many as possible is
required. Also it is the best idea to find out the most critical variable. For start-ups it is bit difficult but
business understanding can help in that.
Step 2:- identify the variables:-
Step 3:- Assessment of impact of those variables:-
After identifying the variables, impact of those variables should be assessed. Impact may be upside or
downside.
Step 4:- Give quantitative figure to those impact:-
This is one of the most difficult task to convert qualitative aspects to convert into quantitative figure. But it
is required because financial modeling is a mathematical model. For already running businesses, it is bit
easier because previous impact is known but for start-ups it is difficult. The way out is to keep tentative
figures and as soon as any change in variable is noticed quantitative figures should be incorporated.
Uses of financial modeling
The most popular use of this mathematical model is for internal analysis for decision making. Be it market
environment or internal situation, these are not static.
Financial model can be presented to the investors/fund providers to provide them to have fair view so that
they can have good confidence to invest in the business.
To conclude, business owners should appreciate the value derived from financial model. It will help in
growth of the business and will keep minimum risk with maximum return. Let us not considered developing a
model waste of time and use it properly. Start-up should even be more proactive in developing it to grow
faster.
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Producer Company in India
The concept of Producer Company in India was introduced to allow cooperatives to function as a corporate
entity under the Ministry of Corporate Affairs. The defines Producer as any person engagedCompanies Act
in any activity connected with or relatable to any primary produce (Produce: “things that have been
produced or grown, especially by farming”). A Producer Company is thus a body corporate having an object