Wednesday, December 19, 2012

Ek sikshak ki vidambana



Mein baitha soch raha aaj,
Kiya vidya du tumhe eh chatra,

Samay pe tum class nahi aate,
Kyoki raat ko disc jaate
Gyan nahi chahiye tumhe,
Jab ankh iske bina bhi milta,
Har chatra naukri chata,
Magar mehnat karna usse nahi bhaata,

Sochte sochte yeh vichar aaya,
Ye system ham log hi ne banaya,
Phir kyon kare ham chatra ko badnam
Magar afsos! Mein baitha ab bhi soch raha aaj,
Kiya vidya du tumhe eh chatra,
how is it?

Author: Abhishek Sinha

Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience. At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +

Saturday, June 9, 2012

Assumptions in "valuation"

A student walked to me after a valuation class and asked me " Abhishek, it is a beautiful subject. I don't think anyone of us would lose marks. It involves taking any assumptions and then using formula based on these assumptions." This made me think and think hard. Is valuation all about taking assumptions and proving your assumptions?
The answer I finally arrived at is a firm no. You have got the whole process of valuation wrong if you think that is what valuation is all about.Through this piece, I aim trying to reason out why is this approach wrong.
Let us start by defining valuation. Valuation is the process by which we determine the "most likely value" of an asset, project, firm, business, share, goodwill etc. If the existing price is lower than the "perceived value " of the asset then we should sell the assets.
Hence, logically it can be inferred from the above statement that to determine the most likely value we need to have a complete understanding on what makes a buyer pay for the asset.Thus, all the assumption that an analyst makes is to come at the most logical value. These assumptions are not made to make the life of the analyst easy. Following are the important attributes of assumptions that analysts make:

  1. The assumptions should be logical.
  2. It should be in line with the assumption generally made in the given industry.
  3. The assumption should never be made keeping the end result in mind.
  4. Assumptions cannot be tweaked at the end so that the valuation looks justified

Author: Abhishek Sinha

Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience. At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +

Information is everywhere; how to search is the game


Searching information on website is not easy. Especially, if you are new to financial research. The fact that you are not an expert on financial research bogs you down. On top of that scarcity of information is a real concern for a novice in the world where knowledge determines your existence.
Websites that help:
Global Perspectives
Quick Facts
Indian Policy Watch
Sector Research
Indian States – Business Information and Statistics
M&A Deal Trackers
Monthly data released by Grant Thornton India provides business owners with M&A market insight. Monthly
Valuenotes
Research views by eminent broking firms
Equity Master
India Ecomomy
Sector Analysis
Example
Articles on Indian sectors/companies
Views on news – Outlook Arena
Excellent source on views on sector
Sector Specific- Pharma
Finance Topic Specific
Vinod Kothari on Securitisation
Sources for information on securitsation
Valueresearch Online
Excellent resource on researching on Mutual Fund Sector in India
Good Blogs on Valuation
Aswath Damodaran – Musing on the Markets
Jim’s Finance and Investment Blog – A slightly outdated but good
Information on US companies
·         Hoovers is an excellent source to search mid sized and large sized US and European companies
·         www.finance.yahoo.com
·         www.finance.google.com

Author: Abhishek Sinha

Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience. At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +

Budgetary Allocation to NSDC:A welcome news



'India has exam system, not education system'
C N R Rao, who heads the Scientific Advisory Council to the Prime Minister (SACPM), made this statement in a letter to the Prime Minister in April 2011. This hurt the sentiments of lot of educationists who believed that India was able to face competition from global forces effectively on job front.

However, this is what I believe: The skills possessed by Indians, is not the reason for the “growth story”.  India is enjoying the benefits of “demographic dividend” due to fall in birth rates and improvement in life expectancy; Hence, the availability of employable youths in the country has increased manifold in the last two decades. Thus a lot of jobs were created with outsourcing becoming the buzz word.  Let’s face it most of the jobs being created were those which required minimum skill set.

 In a country like India where there is an emphasis on exams rather than skills at any level of formal education it is important for the government to take steps to promote organizations which aim to enhance skills of individuals going forward so that the work being outsourced is higher on the value chain. These organizations could very well run for profit and contribute in the same way in which NIIT Ltd. has contributed to overall education. They not only help an individual to increase his overall employability but also help improve an organisation’s competitiveness in the long run. This pushes the production possibility frontier outward and takes growth rate of the country to the next level. Skill building could also be seen as an instrument to empower the individual and improve his/her social position.  In today’s competitive environment where your competitors can be from any part of the globe quality of the product and services seems to be an important differentiator. The quality to a great extent depends on the ability of the work force which in turn depends on the skill set that the employees possess.  Hence, skill building is often seen as a vehicle to improve the effectiveness and contribution of labor to the satisfaction of customers. 

National Skill Development Corporation (NSDC) was created in early 2008 with the same objectives in mind. It has Union finance ministry as one of it’s founders and aims at training 500 million people by 2022, and has identified 21 sectors for which 150 million people will be trained by 2022 . This, comes as a welcome relief for everyone in the education sector who believe that education is all about getting the students prepared for bigger battles in life and not about creating walking encyclopedias who cannot even provide four square meal for his family. In 2011-12, the National Skill Development Corporation (NSDC) approved 26 new projects, doubling the projects sanctioned since 2009 to 52, with a total funding commitment of Rs 1,205 crore. This is a welcome sign for future of skill development industry in India. To add to to this Skill development received  Rs 1,000 crore as an allocation to the National Skill Development Fund for 2012-13.

I would like to conclude by saying that it might be small news compared to the ones that hogged the limelight with respect to budget but a giant step in the process of helping Indian industries move up the value chain.

Author: Abhishek Sinha

Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience. At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +

Capitalization versus Expenses



Expenses refer to amount of money spent in a period which helps meet the day to day needs of a business. Asset is future benefit at a particular point of time.   
Now the best way to understand the concept of capitalization and expenses is to draw an analogy with how pastries are sold in the market. The bakery shop bakes a big cake. When the customer walks into the shop and demands for a pastry, the baker cuts a chunk of the cake and sells it to the customer. Same happens when an asset is expensed.
Examples:
·         A machinery is purchased for the purpose of manufacturing goods. When we purchase the machiney it is shown as an asset. In the period the goods are manufactured we show the “usage of machinery” as depreciation and treat it as an expense. Hence, every accounting period the size of our cake a.k.a machinery in the balance sheet decreases as a chunk of it goes in the income and expense account.

·         Inventory or Closing Stock refers to the goods not sold at the end of the accounting period.  Hence, here closing stock is the “cake”, when we sell the goods the “pastries” a.k.a. cost of goods sold is expensed  is expensed.

·         Patents and Goodwill are intangible assets when we utilize the benefits from the same it is expensed out as amortization.

Author: Abhishek Sinha

Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience. At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +