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Bottomline: A private valuation reset is set to hurt equities

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Bottomline: A private valuation reset is set to hurt equities


A reset in valuations in the private investment market can have a cascading impact on listed equities

Bottomline: A private valuation reset is set to hurt equities
Financial markets are interlinked and don’t operate in silos. Hence, what happens in the public markets impacts private deals and vice versa. The lofty valuations of many new-age listed businesses in India have already seen a reset, with valuations down 30 percent to 65 percent from highs for the prominent names.
Company52 Wk HighCMPChange (%)
In this context, the Tata Power deal with a pre-money equity valuation of Rs 34,000 crore is being seen by some analysts as sharply below expected valuation by about 50 percent. That’s a big number. What’s more important is that the deal value could be a warning signal of valuations in the private market becoming more sensible.
Is Tata Renewables undervalued?
While the valuation of Tata Power’s renewables business, which includes solar and wind assets, EPC business, EV charging infrastructure and the solar rooftop business, is expected to be below expectations, the moot question is whether these estimates were unreasonable to start with.
While there is no direct peer for Tata Power’s renewables platform, if we look at the renewables business as a peer set, the valuation doesn’t seem below par. For instance, ReNew Power, which is listed on the Nasdaq, trades at an EBIDTA to EV yield of about 10 percent. In comparison, Tata Power Renewables on a projected FY23 EBIDTA basis is valued at an EBIDTA to EV yield of under 7.5 percent. So, Tata Power may not have got a bad deal from the BlackRock-Mubadala consortium for a near 10 percent equity in its new renewables platform. Is this value lower than what might have been, say 6 months ago? Quite likely, if you factor that ReNew Power today trades at a 33 percent discount to its 52-week high.
What also needs to be kept in mind is that another fund raise will be required for the renewables business in about 18 months, as the current infusion of Rs 4,000 crore will only meet the investment need for two years. And a down round can be a big sentiment damper. In this context, it might be better to price equity more realistically to start with so that there is scope to price the next round at a fair premium or near par.
Valuation resets can hurt
It is generally seen that when liquidity is pulled out, valuation of assets witnesses a downward reset. It may be no different this time. In his recent GREED & fear note, Jefferies’ Chris Wood opines: “In GREED & fear’s view the obvious area for trouble to emerge is the area where the most money has been made in the last ten years and more. That is the private world of alternative investments. The obvious issue here is that, unlike participants in listed markets, private players do not have to mark their assets daily.
The sign of trouble will come if financings start to be done at lower valuations than the previous financing round, suggesting losses for existing investors and lenders.
This is what should be expected to happen in a monetary tightening cycle that ends up triggering a recession. GREED & fear is no economist. But on that point history shows that almost all Fed tightening cycles seen since the 1950s have ended up in a recession.”
In recent times, there are several listed businesses that have made forays into new-age businesses, mostly through entities created specifically for such businesses with an idea to raise private money in them to fund growth. EV arms of Tata Motors and Ashok Leyland are just a couple of them. Valuations ascribed to many such arms may now come into question, leading to reset of valuations of their parents.
Time for rationality
The time for ascribing lofty numbers in sum-of-the-parts valuations may be behind us. A more rational approach based on cash flow discounting may be more prudent to adopt today, as valuations get redefined by tighter liquidity. So, be careful. Don’t buy the potential value arguments based on last known deals anymore. The past is history. The future will likely see more conservative estimates being adopted. Be prepared for the reset.
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