Uttar pradesh cooperative sugar factories federation limited

Managing Director

U.P. Co-operative Sugar factories Federation Limited

9-A, Rana Pratap Marg

Lucknow-2260010
Ref: Your advertisement in ET dated___________
Sub: Valuation services for Sugar Mills in Uttar Pradesh
Sir,
Being duly authorised to represent and act on behalf of .................................................... (hereinafter referred to as "the Bidder"), and having reviewed and fully understood all of the requirements of the Expression of Interest (BID) and information provided, the undersigned hereby apply for the project referred above.
We are enclosing the following documents in one original plus two copies, with the details as per the requirements of the Bid invitation, for your evaluation.

1. 
   A valid and duly authenticated registration document issued by the state or central government certifying the us as a “Government approved valuer”
   
2. 
   Credentials for assignments undertaken in the last two years along with proof thereof (Letter of Appointment etc).
   
3. 
   Undertaking that, we will be able to submit the valuation reports for________ bundles, as specified in para 1, if awarded to us, within 4 weeks of appointment.
   
4. 
   Technical Bid (Envelope A) as per Annexure III of BID
   
5. 
   Financial Bid (Envelope B) as per Annexure IV of BID.
   
6. 
   Bid Security in the form of a demand draft worth Rs. 50,000 (Rupees Fifty thousand only) addressed to “Managing Director, UPCSFFL” for each bundles that we have bid for within the specified period of four weeks.
   

Yours sincerely.

Signature

Name (Authorised Signatory)

A] SHORTLISTING PARAMETERS

Note: Please provide details of each reference project for which your firm was contracted by the client in the details below:

Start date of assignment:

End date of assignment:

Detailed narrative description of project:

Detailed description of actual services provided by your firm:

ANNEXURE IV
FORMAT FOR FINANCIAL BID
FINANCIAL BID
(On the letter head of the Bidder)

To ,

U.P. Co-operative Sugar factories Federation Limited

9-A, Rana Pratap Marg

Lucknow-2260010

I/We have perused the proposal document for subject assignment contracting Scope of Work at Para 10 and other details and am/are willing to undertake and complete the assignments as per terms and conditions stipulated in the proposal document.

Our offer is inclusive of all taxes including service tax, incidentals, overheads, travelling expenses, printing and binding of reports, all sundries, all other expenditure for execution of this service/assignment covering all 'Scope of Work’ as mentioned in the bid document of UPCSFFL is as follows:

1. 
   For Valuation of bundle1: Rs. ........................... (i.e., in words Rupees.....................................................).
   
2. 
   For Valuation of bundle 2: Rs. ........................... (i.e., in words Rupees.....................................................).
   
3. 
   For Valuation of bundle 3: Rs. ........................... (i.e., in words Rupees.....................................................).
   
4. 
   For Valuation of bundle 4: Rs. ........................... (i.e., in words Rupees.....................................................).
   

This offer is valid for a period of 3 months from the date of opening of the bid (bid due date).

Name : Name :

Address : Address :

ANNEXURE V

Valuation Methodologies being followed

Making a valuation requires an examination of several aspects of a company's activities, such as analysing its historical performance, analysing its competitive positioning in the industry, analysing inherent strengths/weaknesses of the business and the opportunities/threats presented by the environment, forecasting operating performance, estimating the cost of capital, estimating the continuing value, calculating and interpreting results, analysing the impact of prevailing regulatory frame work, the global industry outlook, impact of technology and several other environmental factors.

Keeping with the best market practices the following four methodologies are being used for valuations: -

a) Discounted Cash Flow (DCF) Method.

b) Balance Sheet Method.

c) Transaction Multiple Method.

d) Asset Valuation Method.

While the first three are business valuation methodologies generally used for valuation of a going concern, the last methodology would be relevant only for valuation of assets in case of liquidation of a company. In addition, in case of listed companies, the market value of shares during the last six months is also used as an indicator. However, many sugar company’s stocks suffer from low liquidity and the price determination may not be always efficient. Moreover, there could be increased trading activity after announcement of the valuation, which could be on account of high market expectation of the bid price and even based on malafide intent. This could lead to the price being traded up to unsustainable levels, which is not desirable.

The Discounted Cash Flow (DCF) methodology expresses the present value of a business as a function of its future cash earnings capacity. This methodology works on the premise that the value of a business is measured in terms of future cash flow streams, discounted to the present time at an appropriate discount rate.

This method is used to determine the present value of a business on a going concern assumption. It recognises that money has a time value by discounting future cash flows at an appropriate discount factor. The DCF methodology depends on the projection of the future cash flows and the selection of an appropriate discount factor.

When valuing a business on a DCF basis, the objective is to determine a net present value of the free cash flows ("FCF") arising from the business over a future period of time (say 5 years), which period is called the explicit forecast period. Free cash flows are defined to include all inflows and outflows associated with the project prior to debt service, such as taxes, amount invested in working capital and capital expenditure. Under the DCF methodology, value must be placed both on the explicit cash flows as stated above, and the ongoing cash flows a company will generate after the explicit forecast period. The latter value, also known as terminal value, is also to be estimated.

The further the cash flows can be projected, the less sensitive the valuation is to inaccuracies in the assumed terminal value. Therefore, the longer the period covered by the projection, the less reliable the projections are likely to be. For this reason, the approach is used to value businesses, where the future cash flows can be projected with a reasonable degree of reliability. For example, in a fast changing market like telecom or even automobile, the explicit period typically cannot be more than at least 5 years. Any projection beyond that would be mostly speculation.

The discount rate applied to estimate the present value of explicit forecast period free cash flows as also continuing value, is taken at the "Weighted Average Cost of Capital" (WACC). One of the advantages of the DCF approach is that it permits the various elements that make up the discount factor to be considered separately, and thus, the effect of the variations in the assumptions can be modelled more easily. The principal elements of WACC are cost of equity (which is the desired rate of return for an equity investor given the risk profile of the company and associated cash flows), the post-tax cost of debt and the target capital structure of the company (a function of debt to equity ratio). In turn, cost of equity is derived, on the basis of capital asset pricing model (CAPM), as a function of risk-free rate, Beta (an estimate of risk profile of the company relative to equity market) and equity risk premium assigned to the subject equity market.

For example, the following profit and loss account shows the computation of the Profit Before Depreciation, Interest and Tax (PBDIT) of Company X for the first year of business projections:

    Figure 1 : Profit and loss account of Company X Rs million

Therefore, for Company X, the computation of FCFwould look like the following:

Figure 2: FCF computation for Company X Rs million

	Year 1	Year 2	Year 3	Year 4	Year 5
PBDIT of Company X *	150	200	300	400	500
Less: Income tax (assumed)	-20	-40	-60	-80	-100
Less: Capital expenditure (assumed)	-50	-50	-50	-50	-50
Less: Incremental working capital (assumed)	-25	-50	-75	-100	-125
FCF	55	60	115	170	225

* Notice that a growth has been assumed in the PBDIT

  Weighted Average Cost of Capital (‘WACC’)

The FCF is then discounted at a discount rate, which represents the WACC. The computation of the WACC is set out below:

Figure 3: WACC parameters

To illustrate, for Company X, the computation of WACC typically could be as follows:

Discount factor = Discount factor of previous year

(1 + WACC)

In year 1, the discount factor is equal to 1. Thus, the discount factor of Company X for the first year will be as follows:

Discount factor for year 1 = 1 / (1 + 0.1655) = 0.858

Discount factor for year 2 = 1/(1 + 0.1655)² = 0.736, and so on for year 3 etc.  

Therefore, for Company X, the computation of discounted cash flow (DCF) is as follows:

Figure 5: DCF computation for Company X Rs million

This value reflects the average business conditions of the Company that are expected to prevail over the long term in perpetuity i.e. beyond the explicit period. The DCF approach assumes that by the terminal date, the business will have achieved a steady state and will be growing at a constant rate.

At the end of the explicit period the terminal value is calculated as follows:

Terminal Value = Terminal Cash flow (for last year of explicit period) * (1 + g)

Discount Factor - g

Where; Discount Factor = Weighted Average Cost of Capital, and;

g = Estimate of average long term growth rate of cash flows in perpetuity assumed to be 5%

Therefore, for Company X, the computation of terminal value is as follows:

Terminal Value = 105 * (1 + 0.05) / (0.1655 - 0.05) = Rs. 951 million

This is further discounted to the valuation date to provide the contribution of continuing cash flows in the total net present value. This net present value is commonly known as the "Enterprise Value" (EV) which is the sum of value of debt as well as equity. To arrive at the Equity value, the outstanding net debt as on the valuation date is deducted from the Enterprise value.

Figure 6: Valuation of Company X based on DCF methodology Rs million

	Rs million
Primary value	361
Terminal value	951
Enterprise value	1,311
Add: Value of surplus land outside factory area (assumed)@	200
Less: debt (assumed)	-600
Equity value of Company X	911