Investment Banking

Investment Banking and present Shashank More Fin Gyaan Session 1

Structure of an I-bank Intermediary Directing / Facilitating the Flow of Capital Clients Seeking Capital Investors With Capital INVESTMENT MANAGEMENT (Private Wealth / Asset Management) INSTITUTIONAL PUBLIC INVESTORS COMPANIES INVESTMENT BANKING MERCHANT MARKETS BANKING Advisory Financing Traditional Private • Sales • Equity Fund Groups Group Trading & • Country Debt Product § § Real Estate Private • Strategy Equity Fund Teams Groups RETAIL GSS/Prime • PRIVATE Industry Equity § § INVESTORS Infrastructure • COMPANIES Brokerage Teams Product Fund Groups SSG • Derivatives § GLOBAL INVESTMENT RESEARCH GOVERNMENT & Operations, Technology Human Capital Legal/Management GOVERNMENTS & Finance Management Compliance Controls AGENCIES & AGENCIES *Including Services EXECUTIVE OFFICE Chinese Wall Source: GS Sumer Internship presentation 2006

Work done by IBD Team • Relationship Development • Acquisition Strategy • IPO Advisory • Sale Advice • Execution of M&A • Debt advisory

Recent Trend • Debt Restructuring to avoid bankruptcy • Global Expansion by Firms • Structured Products that aid fund raising for deals • Participation by Private Equity and VC Firms

Types of Valuations • Market Based (# of shares outstanding * Share Price) • Comparables Method (Very common in IPOs) • P/E , P/B , EV/EBITDA, EV/EBIT • Sum of the Parts Valuation • Most often method used in M&A today • Cash Flow based Valuations • Used in Manufacturing Industries

FCF based Valuation • EV (Enterprise Value) = Equity Value + Net Debt • Net Debt = ST and LT loans – Operating Cash – Liquid and short term investments

Sector Preparation • Detailed sector analysis of at least 2 sectors • Choose common sectors • Imp. points to think over: • What has been happening in the sector? • Where is the sector headed? • FDI norms in the sector. • Which stocks in the sector are over valued? Avg P/E • Stocks to buy in the sector? • Which company should come out with an IPO? • What M&A opportunities are there? • Evaluative parameters of the sector. E.g. EV/Reserves, ARPU, Avg. cost per seat mile

Deal Preparation • All the deals of the sector that you are preparing • Major historic deals and all recent deals • Questions • Why did the deal happen? • Did it make strategic sense? • Value of the deal • Transaction multiples • Was it over valued? • What happened after the deal got executed?

Key Industry • Infrastructure • Real Estate • Steel • Mining • Metals (Aluminum) • Banks and Financial Services • Automobile • Telecom • Airlines • Spirits Business • Retail • IT & BPO Services

Steel Industry • Major Deals • MittalArcelor • Tata Corus • Essar Steel acquired a Canadian firm • Parameter for Evaluation: EV/Tonne • Why did Mittal buy Arcelor? (Image makeover) • Did Tata Steel over-pay? • What is Tata Steel doing with Corus? • Other important issues: • How is raw material sourced?

Banks & Financial Services • Major Deals • Nationalization of RBS • India: ICICI BOR Deal • Events out of the credit crisis • BASEL III Norms (How is it better than the previous norms? Should BASEL be made a regulation?) • Parameter: Geographical Spread, CASA: Current Account Savings Account, Advances Growth, Gross NPA ratio, Net NPA/Net advances, RWA/Total Assets, Cost / Income Ratio, Cost of Funds, NIM-Net Interest Income/(Average Interest Bearing assets), • Capital Adequacy ratio-need to raise capital • CARMEL Model

Telecom • Major Deals • Idea Cellular - Spice • Hutch – Vodafone • Unitech-Telenor, Swan- Etisalat • NTT Docomo-Tata teleservices • Bharti-Zain Deal • Parameters: • Revenue=Subscribers x ARPU (ARPU is more for Airtel and Vodafone because old post paid urban customers) • Revenue = RPM x MOU • Spectrum availability (900 Mhz, 1800 MHz) • EVA/No. of subscribers • Common Questions: • After the huge price war, where do you see the industry headed? • Details of 3G Spectrum allocation. Was it overpriced? • Why did Hutch Sell? What was the value that Vodafone saw? What is tax issue that Vodafone is facing now? • What are the tax hiccups they face with the Indian revenue authorities? • Possible mergers is a very relevant question for this sector

BhartiMTN deal • $24-billion cash-and-share swap deal which will have over 200 million subscribers and $20 billion in annual revenues • Bharti to buy 49% of MTN for $14 billion MTN, to acquire 33% of Bharti for about $10 billion • Merged entity to be the world’s third-largest mobile phone operator by subscribers that would straddle Africa, Asia and the Middle East. • South African government keen on dual listing –Indian laws do not allow dual listing • GDR issues with voting rights may fall under SEBI takeover code

Coal and Iron Ore • Indian Power and mining companies scouting for raw materials in Australia, Indonesia and South Africa • Look at major mines acquired by Indian companies abroad • Shift in industry practice from long term contracts to short term contracts • Coal India IPO: • Multiples, EV/Reserves EV/Resources

Airlines • Major Deals • Kingfisher – Air Deccan • Jet – Air Sahara • Parameters: Average fuel costs, average yield/passenger, average yield/kg, Passenger Load Factor, Number of Departures, revenue/passenger-km • What is the current industry scenario? Further Consolidation? • Details regarding Jet & Kingfisher agreement/ Deccan buyback • Details of Air India’s sovereign backed debt issue • Details regarding changes in the loan structure for airline industry • How much impact does fuel prices make on the industry?

Others: • Oil and Gas: • Imperial Energy Corp Plc-ONGC • Reliance petroleum Ltd-Reliance Industries Ltd • Pharma: Ranbaxy-Daiichi Sankyo, PiramalAbott (Why is pharma the source of many acquisitions?) • Auto and auto ancillary: JLR-Tata Motors • Infrastructure and Engineering sector • Retail (Recent FDI controversies in Retail. Should the 74% cap be raises?) • FMCG

Primary Market The market for new issue of securities. • Primary market issuers are bodies corporate, mostly companies under the Companies Act, 1956. Other bodies corporate are corporations owned pre-dominantly by the Government. • The main market for new issuances are Public Issues (IPOs and FPOs), Rights Issues and Private Placements. • The main constituents of the primary market are – Investors, Issuers, Instruments and intermediaries.

Primary Market • Investors are in three categories – Institutional, HNI and Retail. • The main instruments that can be issued are pure equity (ordinary shares), pure debt such as NCDs/long term notes or bonds and convertibles. Convertibles can be debt convertibles such as PCDs/FCDs and equity convertibles such as warrants. • The main intermediaries associated with the primary market are merchant bankers, underwriters and brokers. The service providers are bankers, registrars, depository participants, couriers and printers.

Institutional Investors • Also known as Qualified Institutional Buyers (QIBs) as per regulations – • Multilateral, Bilateral and Domestic Financial Institutions (MFIs/ DFIs) • Foreign Institutional Investors (FIIs) • Unregistered Foreign Investors (FDI Investors) • Foreign Venture Capital Investors (FVCIs) • Domestic Venture Capital Investors (VCs) • Domestic Mutual Funds (MFs) • Commercial Banks

Non-Institutional Investors • High Networth Investors – These are investors who cannot be categorized either as Institutional or Retail – • Non-banking Financial Companies • Capital Market Intermediaries (other than in issues wherein they are acting in official capacity) • Investment companies, trusts, societies and other incorporated bodies • Partnership Firms • HUFs and Individuals • Retail Investors – • Are those whose application in a public issue does not exceed Rs. 100,000 in value. • Any of the above category of investors under the HNI category can be a retail investor if the application size does not exceed the above limit.

Methods of Raising Funds • IPO • Fixed Price Offer – also known as 100% retail offer • Book Built Offer – price discovery through book building • FPO and Right Issues • Qualified Institutional Placement

Recent trends in Equity Capital Markets • Large number of divestments • Near zero fees • Standard chartered issued India’s first ever IDR

Depository Mechanism • Depository - security that represents ownership in a foreign security. Therefore they are negotiable securities in a foreign jurisdiction that represent a company’s publicly traded domestic equity. • An ADR is an American security that is issued through a public offering in the US which requires SEC registration. • A GDR is issued anywhere in the world through a public offer but only through private placement (Rule 144A) in the US.

Underwriting • Contingent Obligation • Underwriting Agreement and Commission • SEBI (Underwriters) Rules 1993 • Devolvement • Tata Motors Rights Issue – JM Financial • Hindalco Right issue

Fight for League Tables • Major banks are getting mandates at near zero fees to get top spots in the league tables • Evaluation criteria used by companies is 70% based on bid and 30% technical based on the presentation • Coal India IPO total banker’s fees is expected to be around Rs. 12,000/- to be shared among 5 bankers • Banker’s expense expected to go upto Rs. 25 crores

Stages of fund raising • VC or seed investment • Now even VCs have started to approach I-banks for advisory • Evaluate individual more than company • PE investment • If company does not wish to list to avoid regulatory compliance • IPO • To gain visiblity • Have to abide by regulatory compliance • PE firms can invest as PIPE • Delisting • Market is undervaluing the firm • Change in strategic objectives due to change in control

Company specific preparation • Know as much as possible about the bank you are interviewing • Regions and areas of operation • Sector of expertise (This will give you a point of discussion in the ppt and interview) • Scale in India • Major deals that it has been a part of

Stock market specific questions • Where is the stock market headed? • Are Indian companies overvalued? What is the average P/E? • Which industries are you bullish on? • Which companies would you invest in? • Do you have a portfolio? • What is your criteria of choosing stocks?

Preparation stuff • HR Questions • Why IBD? • Why not Markets / Consulting? • Lifestyle management • Finance personality you are a fan of • Other resources • Vault Guides • Text Books • Corporate Finance, Macroeconomics, Valuation • Online News resources • Bloomberg • http://online.wsj.com/public/page/news-mergers-acquisitions.html • http://www.marketwatch.com • http://money.cnn.com/news/deals/mergers/dealchart.html

Thank You Questions ???

Investment Banking