The Value v/s Price – A Valuation Professional’s Conundrum
Value | noun – the regard that something is held to deserve; the importance, worth, or usefulness of something.
Price | noun – the amount of money expected, required, or given in payment for something.
Definitions from Oxford Languages
The Value v/s Price is the zone where Deal Makers, Investment Bankers & Investors play within to maximize gains. The difference between the two lies between couple of key words in the above definitions as per Oxford Languages – “Worth” & “Given” or “Deserve” & “Expected”.
However, Warren Buffett simplifies this by saying, “Price is what you pay; Value is what you get.”
The year 2021 has been stellar year for Global Capital markets with almost all indices reaching newer highs. This is on the back of business recovery amid waves of covid infections and vaccinations gaining momentum. Indian Capital Markets and its both main Indices have risen ~19.5% YTD (till 22nd Dec 2021) after taking hit of ~ 1050 bps at the fag end of the year due to the uncertainty around Omicron variant of Covid19.
This stellar run in Indian equity has been broad based by the surge in Initial Public Offerings (IPO) offerings and success rate of these issues. We saw IPO getting subscribed 339 times over their Initial offering (Latent View IPO). We also saw more than IPO offering giving their initial subscribers listing day gain of over 185% (Paras Defence IPO). The 2021 year was also a coming-of-age year for Indian Techscene with a spate of IPO however a mixed bag in terms of gains/losses after listing. One wonders, how these IPOs are valued? Or they are Priced?
The focus comes on Valuation Professionals who go about their jobs in the most unbiased ways. There is a big temptation to adopt pricing models instead of valuation methodology to carry out the valuation process. The most classic methods to value a going concern is to discount its future cashflows to its present value. It may be the most simplistic approach however in my view a lot of science and common sense goes behind. Following what guru of valuation – Damodaran says on valuation, it starts with a building a story for the business you believe in and the projecting the cashflows for next 5 or 10 years. Selecting appropriate discount rates which represent the costs, risks and opportunities of the business plan. This I believe gives the Value of the business – something it deserves or is worth of.
Often Valuation Professionals use imperial methods like multiples of sales or profits or other matrices specific to businesses like EBITDA/ton etc. These terms have become colloquial in the investment community and then the further terms associated are like “multiples rerating” to justify or argue the price at which it is quoted or expected to move to in future. These I believe are Pricing a business – something it is expected of or given.
However, Valuation Professionals relying on these imperial methods is like doing a Pricing exercise and not Valuation. There are some unique situation in which these methods can be looked at. Situations like when it is extremely difficult to predict future cashflows due non-availability of key information or some special situation.
I, while wearing the hat of a Valuation Professional, always look to get convinced by the story the future projection talk about the business. It helps me to stick to Valuing the company instead of Pricing the company. The solution for Value v/s Price conundrum is to look for a convincing story.
This article was contributed by Mitesh Gala from Kanu Doshi Group, a member of RT ASEAN
About Kanu Doshi Group
Headquartered in Mumbai, India, KDA Corporate Advisors LLP is the Investment Banking arm of Kanu Doshi Group which specializes in providing professional services relating to Advisory, Assurance, Accountancy, Taxation, and Regulatory matters, amongst others. Established in 1979, the firm has since grown strength to strength, expanding its footprint across the region and beyond. Today, it is positioned as one of the top mid-tier firms in India.
