Exit Multiples through Relative Peer Multiple

Exit Multiples through Relative Peer Multiple

While taking exit multiples to calculate terminal value of the company we can also take help from at what median multiples do our peer group trades.

Peer group does not mean companies which belong to the same industry it rather means that companies have similar business characteristics. Some of the factors that should comparable in peer are as follows:

  1. Industry Segment
  2. Sources of Revenue Generation/Business Model
  3. Sales growth & scale
  4. Margins
  5. Management quality
  6. Segmental contributions
  7. Asset intensity and
  8. Leverage like Debt to Equity (D/E)

It seems so easy on the face of it that it has become a gold standard for valuations across the globe but let's check below how even in such simple cases an analyst might get stuck.

Let's look at some real life scenarios where applying peer group valuation multiple become tedious

a)???? Dhanuka Vs PI Vs UPL Vs Rallis

Even though Dhanuka & PI optically looks to be comparable businesses that's only true for domestic segment. In abundant reports we have read people comparing valuations Gap between the both but they miss a simple point - Right from the point of Revenue generation source to opportunity size available for growth to Capex requirements both businesses are poles apart. Hence, Market won't rationally assign same valuation multiples to both the business.

In some reports we have seen comparison between Bharat Rasayan, Dhanuka & PI Industries. That's becomes even more absurd as Bharat Rasayan operates in different portion of Value Chain (preparing intermediates) VS Dhanuka & PI focusing mainly on formulations. The industry structure in terms of bargaining power of buyer, Entry Barriers are way different for Bharat Rasayan Vs like of Dhanuka & PI.

Note: This example is not to explain any business model is better than other it's just to put a simple point that a simple cut-copy-paste of valuation multiples between businesses is a crime that an analyst should never commit.

2. Two and Three wheeler auto industry

On the face of it it seems the industry with limited number of players and hence easy to understand multiples awarded to companies by the market. But let's look at the revenue break up and try to understand the issues that arise. See the table below:

Basically, no company seems comparable to one another even for basic things like Revenue contribution & geographical dependence.

For Detailed workings see: https://drive.google.com/file/d/19oHRUBfuH2T0xTLNUkqTwsdx34tXnX06/view?usp=sharing

A)??? ?Delta corp (only listed company in casino gaming)

And it is very difficult to find it's peers because of regulatory licences i.e Government rate of giving approval for casino license is very low. So below is the link where you can find Number of States in which Government has given Casino license https://www.worldcasinodirectory.com/india

B)??? ?Cement industry- economics of scale

(Credits: ValuePickr’s Birla corp thread)

So above is the image from which we can see that Cement as an Industry is a business of scale (Economies of scale). If your company has reached a certain level of scale then your market will offer a high multiple compared to other players. The outliers are Prism, Birla, Dalmia, ACC and Ambuja. Prism has single digit Op Margin and huge debt. ACC and Ambuja were having merger issues at that time. The odd men out are only Birla and Dalmia.

So in cement you will have to find a sub-set within your peer group to truly apply peer multiple strategy.

Hence conducting a relevant peer groups based exit multiple exercise requires decent effort.

Read our next blog to understand Exit Multiples through the transaction method or DOWNLOAD Our Terminal value master PDF.

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