SUM OF THE PARTS (SoTP) VALUATION

“Company A is doing Sugar Business with Value of Say Rs 100 and company B is doing Cement Business with Value of say again Rs. 100 then what should be the value of company C doing both the above business by itself, On unitary basis it should be Rs 200."

In terms of Schedule 1 of the Notification, an Indian company may issue equity shares/compulsorily convertible preference shares and compulsorily convertible debentures (equity instruments) to a person resident outside India under the FDI policy, subject to inter alia, compliance with the pricing guidelines. The price/ conversion formula of convertible capital instruments is also require to be determined upfront at the time of issue of the instruments.

Value of C company = Value of A company + Value of B company


It seems so simple; however it is not the way how valuation actually happens in the real life scenarios. That’s where the role of a valuer becomes significantly important. A corporate valuer always focus on the risk involved while undertaking any SOTP valuation and gives appropriate discounts accordingly. In the transaction history and the empirical research carried by various researchers it being well laid that the market gives discount to the sum of parts value which is known as Diversification discount or portfolio discount or conglomerate discount.

In real life scenario there are companies which are engaged in diversified business, and each business has different product line, profit margin etc, so to value diversified companies on a consolidated level, like consolidated sales and consolidated profit may not able to give a true value of the company as some business segment may fetch a high comparable companies multiple and some low Multiple. Similarly the cash flow generating components of each Biz would also be different.

To read full article, please visit the page SUM OF THE PARTS VALUATIONS on Corporate Valuations website.

For any queries related to SoTP Valuation or Business Valuations, please contact:

Mr. Chander Sawhney
Corporate Professionals
Vice President
+911140622252, +919810557353,
Email chander@indiacp.com


Mr. Maneesh Srivastava
Sr. Manager
Corporate Professionals
+9111406222255, +919871026040,
Email:- maneesh@indiacp.com

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