Comparable Company Valuation (Comps)

You are working as a Financial Analyst and have been asked to estimate the valuation of Reliance Retail by comparing it with similar publicly listed Indian retail companies.

In this lab, you will use Comparable Company Analysis (Comps). You will collect financial data from peer companies, calculate important valuation multiples, and use those multiples to understand the valuation and investment rationale behind Silver Lake’s investment in Reliance Retail.

Topic : Valuation Techniques

1) Comparable company analysis

2) Precedent transaction analysis

3) Discounted cash flow (DCF)

4) Interpretation of valuation outputs

Comparable Company Valuation (Comps)

Select Peer Companies

Reliance Retail operates in the Indian retail industry. Since Reliance Retail is not directly available as a listed retail stock for this comparison, we use publicly traded retail companies as valuation benchmarks.

For this lab, use the following three peers:

• Avenue Supermarts (DMart)

• Vishal Mega Mart

• V-Mart Retail

These companies represent different segments of India's organized retail market and provide a useful range of valuation multiples.

Open Screener.in

2

Open Screener.in in your web browser.

Search for:

Avenue Supermarts

Open the company page.

Find the Peers Section

3

On the Avenue Supermarts company page:

1. Scroll down to the Peers section.

2. Locate the peer comparison table.

3. Click EDIT COLUMNS at the top-right of the peer table.

Select the Required Columns

4

In the EDIT COLUMNS section, make sure the following columns are available:

• CMP Rs. → Share Price

• EPS 12M Rs. → Earnings Per Share

• EV Rs.Cr. → Enterprise Value

• EBIDT Ann Rs.Cr. → EBITDA

• Save COLUMNS

Record the Peer Data

5

Use the peer table to collect the required figures.

Enter the following data into Excel:

Note: Your actual figures will vary at the time of the activity subject to current market conditions.

Excel Check

Before moving to Task 2, check that:

• All three companies are included.

• Share Price and EPS are in ₹.

• Enterprise Value and EBITDA are in ₹ Crores.

• The figures have been entered correctly.

• No cells containing financial data are left blank

Now calculate two important valuation multiples for each peer company.

Calculate P/E Ratio

1

Create a new column called Calculated P/E.

Use the formula:

P/E Ratio = Share Price ÷ EPS

Example: Avenue Supermarts

3,900 ÷ 46.95 = 83.1x

In Excel, if Share Price is in B2 and EPS is in C2, enter:

=B2/C2

Press Enter and copy the formula down for the other companies

Calculate EV/EBITDA

2

Create another column called Calculated EV/EBITDA.

Use the formula:

EV/EBITDA = Enterprise Value ÷ EBITDA

Example: Avenue Supermarts

2,56,536.99 ÷ 5,258.82 = 48.8x

In Excel, if Enterprise Value is in D2 and EBITDA is in E2, enter:

=D2/E2

Press Enter and copy the formula down.

Calculate Industry Average

3

Below the three companies, calculate the average of each multiple using Excel's AVERAGE function.

For example:

=AVERAGE(F2:F4)

and

=AVERAGE(G2:G4)

Your completed table should look like:

Task 3: Analyze the Reliance Retail–Silver Lake Deal

Understand the Deal

1

In September 2020, private equity firm Silver Lake invested ₹7,500 crore in Reliance Retail Ventures Limited for a 1.75% stake.

The investment valued Reliance Retail at approximately ₹4,21,000 crore.

For this analysis, use Reliance Retail's reported FY 2020–21 EBITDA of ₹9,842 crore.

Read Sources:

https://www.silverlake.com/silver-lake-to-invest-%E2%82%B97500-crore-in-reliance-retail-at-an-equity-value-of-%E2%82%B94-21-lakh-crore/

https://www.ril.com/ar2020-21/financial-capital.html

Calculate Reliance Retail's EV/EBITDA

2

Use the following formula:

EV/EBITDA = Enterprise Value ÷ EBITDA

In Excel, enter:

=421000/9842

Your answer should be:

Reliance Retail EV/EBITDA = 42.78x

Interpret the Valuation

3

Now compare Reliance Retail's 42.78x multiple with the peer companies.

Answer the following questions:

1. Compare with the Industry Average

Reliance Retail's EV/EBITDA is 42.78x, while the industry average is 29.9x.

Interpretation:
Reliance Retail has a higher valuation multiple than the average of the selected retail companies.

This means investors were valuing Reliance Retail at a premium compared with the broader peer group.

2. Compare with Avenue Supermarts

Reliance Retail's EV/EBITDA is 42.78x, while Avenue Supermarts has an EV/EBITDA of 48.8x.

Interpretation:
Reliance Retail's multiple is lower than DMart's multiple.

So, although Reliance Retail was valued above the peer average, its multiple was still below DMart's multiple.

3. Premium or Discount?

Complete the following:

Reliance Retail's EV/EBITDA of 42.78x is higher than the industry average of 29.9x. Therefore, Reliance Retail was valued at a premium to the broader peer group.

Understand Why Silver Lake Accepted the Valuation

4

A higher valuation means investors are paying more for the company's current earnings. One reason investors may do this is because they expect the company to grow strongly in the future.

Choose TWO reasons and explain them in simple words.

Reason 1 – Omnichannel Business

Reliance Retail has both physical stores and digital retail platforms such as JioMart.

Simple interpretation:
Customers can shop through stores as well as online platforms. This gives Reliance more opportunities to increase sales in the future.

Reason 2 – Reliance/Jio Ecosystem

Reliance Retail is connected to the larger Reliance and Jio ecosystem.

Simple interpretation:
This gives Reliance Retail access to a large customer base and technology infrastructure, which can support future growth.

Other possible reasons

Students may also discuss:

• Large number of customers.

• Large network of retail stores.

• Strong brand and market presence.

• Opportunity to expand online and offline retail.

• Potential for higher future sales and profits

Final Investment Interpretation

5

Complete the sentence:

"Reliance Retail's valuation of 42.78x EV/EBITDA is higher than the peer average of 29.9x, but lower than Avenue Supermarts' 48.8x. This suggests that Silver Lake's investment valuation reflected expectations of strong future growth, large-scale expansion and digital/omnichannel opportunities."

In Simple Words

The numbers tell us three important things:

1. Reliance Retail was valued higher than the average peer company.
Its 42.78x multiple was above the 29.9x industry average.

2. Reliance Retail was not valued as highly as DMart.
Its 42.78x multiple was below DMart's 48.8x.

3. Investors appeared to see strong future potential in Reliance Retail.
The higher-than-average multiple suggests that the valuation was not based only on current profits. Investors were also considering factors such as future growth, digital retail, large scale and the Reliance/Jio ecosystem.

Key Takeaway

A valuation multiple helps us compare companies. A higher multiple generally means investors are willing to pay more for each rupee of earnings because they may expect stronger future growth. However, the multiple should always be considered along with the company's business model, growth opportunities and competitive position.