Valuation of an emerging IT firm for a PE fund

Modelling the expected future growth

 

A US based PE fund wanted to evaluate the attractiveness of an Indian IT consulting firm as a potential investment target. They needed a comprehensive study to estimate the market value of the firm over a three year period. Further, the client wanted to estimate the time period over which the firm was expected to grow 2.5x of its valuation. As they did not have a presence in India, they needed ground level inputs from domain specialists to assess the true prospects of the firm.

 

Extensive Indian market knowledge combined with deep financial insights offered the solution

 

Projecting the future financial performance of the target company required a deep knowledge of the company as well as the IT industry dynamics in India.

 

We started by identifying the key factors that were relevant for the study. These included, among others,

– Expected industry growth rate and the factors influencing it, including risk factors

– Key players and competitors, with their respective strengths and weaknesses

– Operational matrix of the IT companies

– Current and expected industry PE multiples

– Fluctuations in the foreign exchange markets

 

After studying all published material, ValueNotes undertook extensive discussions with senior level industry people both from the target company as well as its competitors. We focused on operational metrics in detail and did a comparison of the target’s metrics with those of its peers as well as industry leaders. We were able to establish a cause and effect relationship which highlighted the intrinsic attractiveness of the target company.

 

The valuation was done using the earnings multiplier approach based on projected earnings. Value was estimated under base, best and worst case scenarios, along with expected probabilities of each.

 

Value Delivered = Cost effective quick turnaround actionable research

 

Since the client had a small window of opportunity, they needed accurate, reliable analysis in a short time frame. ValueNotes leveraged its domain expertise and networks in the IT industry to derive deep actionable insights quickly.

 

ValueNotes put forth a convincing case for the target company based on the insights gained from primary interactions and objective assessment of its financial numbers. ValueNotes concluded that the target company presented an attractive investment opportunity for the client.

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