What is valuation?

Valuation through ancient times has been the method to determine the value of any commercial exchange and make the transaction fair for all the parties involved. Valuation brings stability to the economy as it promotes the culture of fair dealings as well as the confidence in long term wealth building.

Recent trends have even shown the vastly growing involvement of earlier known auditing and accounting firms in start-up valuations and deals. As per the India Start-up deals tracker published by PwC India, this is the first time that funding into privately held Indian start-ups has crossed USD 10 billion in a quarter (Q3 CY21) across approximately 350 deals.

Take the recent example of One97 Communications Ltd. going for Initial Public Offering (IPO) in 2021. They are the parent company for the emerging financial technology and E-commerce company Paytm. The whole process clearly demonstrated the importance of valuation results and even external expert opinions on how the valuation was done. It was a roller-coaster ride for the company as gaining public investor confidence matters a lot when it comes to any IPO. Even after listing Paytm shares plunged a lot before stabilising. Now was this just the incapability of Paytm to deliver short term profits that led to this scenario? No, it was the overall expert sentiment for the leadership and strategic decision making that drove the valuation in the opposite direction after initial assessment.

Another contrasting example was the IPO of FSN E-Commerce Ventures Ltd in 2021. They are the parent company for the e-commerce brand Nykaa. The Investor confidence in them did not root from just the fact that they were profitable, but in fact more from the confidence in its leadership and long term vision for the company. Their public investors gained a lot from initial listing and are hopeful for even long term returns.

What were the basis for these deals? They all had expert-led valuations that helped them secure the right amount for their needs from investors. Without those experts diligently assessing the value of their ideas it was not possible to raise a request for the right amount of equity of the company.

Investors are becoming more and more informed as well as educated about different kinds of securities they can trade in for earning a good amount. It makes the jobs of accountants much more tough to present the correct picture as more and more public money is getting involved in the market, whether directly or indirectly.

Investors usually rely on two major factors before taking the risk to invest in any asset. One being the possibility of future outflows to investors from the asset or business and the other being the timelines under which the delivery of such cash flows is expected. As it goes without saying in finance that both the factors are decisive in coming to the actual value. Current Profits are also a much used indicator for valuation purposes as they assist in determining the value of a business based on it’s profit generating capacity.