Deal Comps

Deal comps value a business off its earnings rather than off a share price.

The workbook's definition is precise: deal comps, also called Transaction Comparables or earnings based multiples, are the family whose most commonly used members are EV/EBITDA and EV/Sales — the latter known as the topline multiple.

They are the natural tool for alternative investments, because they do not need a market price. That is why relative valuation developed firm value multiples at all: to determine value without reference to a market price, for the unlisted companies where trading comps are unsuitable.

The workhorse is EV/EBITDA, and the workbook gives two reasons for preferring EBITDA to profit after tax.

First, EBITDA measures operational efficiency. A higher EBITDA implies a higher return on investment and therefore more efficient use of capital in the business, and companies are awarded higher multiples for it. Second, and more practically, EBITDA can be positive while PAT is negative — which is exactly what happens in businesses carrying heavy interest, depreciation and amortisation charges: start-up companies in their growth phase and asset-heavy businesses with long gestation to break-even. Where PAT is negative, a P/E multiple gives you nothing and EV/EBITDA still works.

The EV/Sales or topline multiple goes one step further up the P&L and is reached for when even EBITDA is negative.

The chapter adds the non-financial variants used in early-stage and technology businesses: the GMV multiple in e-commerce, ARPU in telecom, ARR in hotels. And it makes the general case for multiples — that they are very useful to validate a valuation arrived at by another approach, because they compare easily against peer companies listed and unlisted, and against industry benchmarks.

As with every multiple here, the output is an enterprise value. Deduct outstanding debt for the equity value.

EV/EBITDA = Value of firm ÷ EBITDA
EV/Sales  = Value of firm ÷ Revenue        (topline multiple)

Equity value = Enterprise value − outstanding debt

Illustration 11.6 runs the multiple out of a completed DCF: enterprise value Rs 26,737.79 lakh, estimated year 1 EBITDA Rs 1,875 lakh, so EV/EBITDA = 14.26. That is the validation use — a cross-check on the DCF, not a replacement for it.

Now the pricing use. A Category II AIF is valuing a direct-to-consumer brand at the end of year 3 of its holding:

The company is loss-making, so P/E is unusable — there are no earnings to multiply. EV multiples still work:

Two multiples from the same family, a Rs 64 crore gap, and both defensible — which is the workbook's point that the selection of multiples is subjective. The AIF reports the one its valuer can support against genuinely comparable transactions, and discloses the other as a sensitivity.

Chapter 11 (Valuation), section 11.7 and sub-section 11.7.1, with Illustration 11.6. Expect a straight EV/EBITDA computation, and the reasoning question that always accompanies it: why EV/EBITDA is preferred to P/E for a company with positive EBITDA and negative PAT.

• The workbook calls the EV multiples "Deal Comps" and the P/E and P/BV multiples "Trading Comps". Outside the workbook, "deal comps" usually means multiples paid in completed M&A transactions. Answer on the workbook's mapping.
• EV/EBITDA gives enterprise value. Subtract outstanding debt before quoting an equity value or a price per share.
• EBITDA is not cash flow. It sits above interest, tax, capex and working capital; a company can raise EBITDA every year and still run out of money.
• A negative PAT does not stop an EV multiple. That is precisely when the workbook says to use one.
• The topline multiple is EV/Sales, not price-to-sales. Keep the whole-firm numerator with the pre-interest denominator.
• Multiples are best used to validate a value reached another way. Treating one as the whole answer inherits every subjectivity in the peer selection.