Invaluable valuations!

For a couple of weeks now, I've had the opportunity to look at companies through an Analyst view point. Its quite fascinating actually to take an excel sheet, punch in numbers and tell a story at the end. It’s almost like you are having the horoscope of the company at hand and telling the company's stake holders where the hell they are heading. Let me describe the process a little briefly here.

First, you pick up the company and all its annual and quarterly statements of the past 5 years. Then, you painstakingly (yes, it is!) punch it into the excel sheet. This is the first stage, know as populating the sheet.

Next, you need to define Metrics. Metrics are the key drivers of growth of the company. This is where you need to really understand the business of the company to exactly figure out what the metrics are. In general, cues about the metrics will be present either in the annual report or the Analyst earning calls. But if its not there, you are going to have a tough time.

After you identify the metrics, you identify the trends of the metrics through available data. With this information, we forecast the future cash flows of the company. Now we use the standard discounted cash flow technique to value the company. Sounds simple?

You might feel now that valuations are as easy as I described it above. Well, its just a process and not a solution. Take a look at this company for example. ICGE. We have a company that invests in 20 -25 private e commerce companies. It actively gets involved in the management of 10-12 of them and the rest are through a short term investment point of view. Now, let’s look at the value of its assets. Look at what we've got here. Shares of 20 odd private limited companies. Okay good. Now how do we value these 20 odd stock holdings the company holds? Since they are private companies and more importantly start-ups, I’m sure most analysts and fund managers don’t have even a spec of an idea on how to value them. Valuating start-ups is a totally different ballgame. Its a game played by VC's and Angels. Even Private equity investors don’t dare to enter the realm.

The reason simply is, to understand a start-up, you really need an in-depth understanding of the product and the market the startup is trying to address and its really time consuming .The start-ups can be so dynamic. And so are their cash flows. And guess what, we have 20 of them sitting in this company’s portfolio. It’s not worth spending so much time on these start-ups if you are a fund manager minting money in high volume deals of blue-chip companies.

Let go of start-ups. Even Public Growth companies are so damn hard to valuate. The Numbers and Annual reports never give you the complete picture and the information about the companies too will be scarce.

There were a couple of firms which covered ICGE, and all they can do is to set the floor and possible ceiling values of the company. Nothing more. This is where, a person with a real insight into the e commerce industry and the dynamics of start-ups can be a killer. Are you one? Do let me know your thoughts on this fascinating company!! :-)

On the whole, Asset Valuation is such an exciting field partly because of the huge amounts of money at stake and also it involves loads of intuitive assumptions, deep understanding of the fundamentals of the business, and at last an good grasp of numbers, which is the only thing that can validate your story. As someone rightly pointed out Trend is your friend, but fundamentals are your lifeguard! :-)