Hi Prasanna,
You are very right. I think it’s the “noise” and extraneous factors surrounding the PEL that makes it tricky to arrive at valuation. Of course, company’s entry into some new businesses has further compounded the complexity. Let me share my thought process here if at all it can be of help. As they say, price is what you pay; value is what you get! Let me start by weeding out the “noise” and separating financing and investment angle from intrinsic business valuation.
Market cap: 9400 crores
Total outstanding debt: 9500 crores ( Q3, FY 14 analyst presentation)
Total investment:
Current investment: 900 odd crores in debentures and liquid MF
Vodafone investment: 5864 crore (book value); Now Vodafone will buy out PEL’s stake
at9000 crores. So net of capital gain of 20% on 3000 crores, this
investment is worth 8400 crores
Other investments: 1000 crores in equity/quasi equity in various
infrastructure/housing projects
STFC Investment: 1600 crores
In all investment of around 12,000 crores.
Receivables + Cash: 2221 crores + 379 crores = **2600 crores **
So business is available at (9400+9500-12000-2600) = 4300 crores
Mcap + Debt - Investment - (Receivables + Cash)
Now let’s look at business side
Pharma solutions + Critical care + OTC business Annualized top line (based on extrapolation of 9M estimates): 2757 crores (Typically, for valuation we can assign Avg. multiple range 3 -4 times sales based on peer valuation)
Financial Service business: 748 crores (Avg. multiple range 2-3 times sales based on peers’ valuation)
DRG business : 1000 crores (Avg. multiple range 3-4 times sales considering the combination of moat and growth of the business)
If we apply the lower range of this multiples total business valuation should be
27573 + 7482 + 1000*3 = (8271+1496+3000) = 12700 odd crores
While market is assigning only @4300 crore value to PEL business. There is steep discount applied to PEL just because of the complexity of the PEL structure and uncertainty associated with cash deployment and future returns on investment made
In addition to the operating businesses, one is getting an option on upside on new NCE fructifying and AP weaving his magic wound again to generate returns similar to the one he has generated in the past.
So, to me it looks a very favourable opportunity as an investor. Hope this may be of help gain better handle on valuation of PEL.