Timing the market is a challenge, a truth universally acknowledged by investors. For value investors eyeing excellent companies at reasonable rates, the task becomes even more nuanced. The heartbeat of this endeavor lies in understanding a stock’s intrinsic value —whether it’s dancing on the edge of over-valuation or standing at the gateway of a bargain. But what happens when the stock is unlisted, shrouded in the absence of market prices?
In the absence of market prices, determining their fair value becomes a formidable challenge. Here, the playbook changes; it’s a game of book values and assumptions. Let’s embark on a journey to unravel the complexities and tactics involved in valuing unlisted shares, navigating through the maze where everything hangs on the balance of worth.
Fundamentals Analysis
? Understanding the Business Core
Analysing the company’s business is the foundation. Dive into financials, scrutinise revenue sources, assess cash flow risks, and evaluate the growth proposition. This is the bedrock of understanding what the company is truly worth.
? Vision and Competitive Edge
Peering into the management’s long-term vision is like gazing into the crystal ball of the company’s future. What sets the company apart? Identify the USP, the competitive advantage that makes its products and services irresistible.
? Right Timing
The right time to invest in unlisted shares is a dance between valuation and market conditions. Positive news or a significant milestone can tilt the scales, presenting a lucrative entry point for investors.
Valuation Techniques: A Tactical Handbook
? Comparable Company Analysis (CCA)
In the absence of market prices, CCA becomes a guiding light. Hunt for publicly traded siblings, similar in industry, age, and growth rates. Their valuations paint a canvas to estimate the fair value of unlisted shares. Consider a tech startup in India. Its CCA might involve looking at publicly traded tech companies with a similar growth trajectory to determine a ballpark valuation.
? Equity Valuation Metrics
Traditional metrics like price-to-sales, price-to-earnings, and EBITDA multiples step into the limelight. A relative valuation perspective comes from comparing these metrics with their listed counterparts. If a promising e-commerce startup’s price-to-sales ratio is lower than that of established e-commerce giants, it may suggest potential undervaluation.
? Private Placements: A Peek into Fair Value
Private placements often precede unlisted transactions. Investors and promoters negotiate and agree upon fair value in these private circles, offering a snapshot of the perceived worth of the shares. This method is unique as it provides insights into the valuation of those deeply involved with the company.
For example: Before a company goes public, private placements can give early investors a sense of how the market values the company. This could be crucial for subsequent transactions.
? Book Value Approach
Here, tangible assets and liabilities take centre stage. Annual revaluation ensures fairness in accounting. Goodwill, as the only intangible asset considered, highlights its unique role in reflecting the company’s reputation and customer loyalty.
Let’s say an established manufacturing company may have substantial tangible assets, but goodwill could play a significant role if it has a strong brand and customer relationships.
? Last Transaction Price
Calculating the value based on the last cash infusion, this method considers the most recent transaction in the market. Institutional investors often guide these valuations, offering insights based on insider information.
Example: If a venture capitalist recently invested in a startup, the last transaction price might be influenced by the VC’s evaluation of the company’s potential.
? Discounted Cash Flow (DCF)
A popular technique, especially for robust businesses, DCF estimates future cash flows and applies a discount rate derived from listed counterparts in the same sector. It is forward-looking and accounts for the time value of money. Maybe for a healthcare company with stable cash flows, DCF could project the future value of these cash flows, helping investors make informed decisions.
? Value of Net Assets
➡️When Including Goodwill
Derived from current market prices, NAV considers all tangible assets and liabilities, including the elusive goodwill. It provides a holistic view of the company’s net worth. NAV including goodwill could be significant for a technology company with valuable intellectual property contributing to its goodwill.
➡️ NAV When Excluding Goodwill
Similar to the previous method but excluding goodwill, this approach focuses solely on tangible and intangible assets and liabilities. It provides a more conservative estimate of the company’s value. For an asset-heavy manufacturing company, excluding goodwill might provide a more accurate reflection of its tangible value.
Navigating Buying and Selling Strategies in a Nutshell
Buying Unlisted Shares
- Financial Scrutiny: Analyse company financials comprehensively.
- Industry Analysis: Understand market sentiment and growth potential.
- Comparison with Peers: Compare with listed peers using key financial ratios.
- Discounted Cash Flow (DCF): Utilise DCF if the company’s financial projections are available.
Selling Unlisted Shares
- Valuation Changes: Evaluate changes in valuation over time.
- Exit Opportunities: Explore exit opportunities through various platforms.
- Market Liquidity: Assess market liquidity for optimal timing.
Tips for Retail Investors
- Caution in Bull Phases
Avoid succumbing to momentum-driven investments during market upswings. Opt for well-informed decisions rather than following market momentum.
- Strategic Risk Mitigation
Strategically allocate investments across various assets, balancing risk in domestic and international equity, fixed-income instruments, and gold. Diversification is key to managing risk effectively.
- Brokerage Awareness
Be mindful of high brokerage rates. Ensure that costs don’t overshadow potential gains. Bargaining for favourable commission rates can enhance overall returns.
- Invest in Unlisted Shares through AIFs/PMS
Financial institutions facilitate access to unlisted shares through Portfolio Management Services (PMS) and Alternative Investment Funds (AIF). These funds strategically invest, aiming to capture pre-IPO valuations or profit from post-IPO rises.
At Rurash Financials, we’ve streamlined the process of buying or selling Unlisted Shares, Pre IPO Shares, and ESOP Shares for you. When you invest with us, you’re not just getting a transaction; you’re gaining a trusted partner. We understand the complexities of unlisted stock investments, and our expertise mitigates the associated risks.
As your dedicated wealth custodian, we provide personalized tips throughout your investment journey, backed by comprehensive research reports. Our services extend beyond transactions—we assist in price discovery and valuation, unraveling the intricacies of fair market pricing in the unlisted shares domain.