Sum of the Parts - SOTP Valuation - YouTube

hey there folks welcome to Wall Street modules Investment Banking tutorial Oh

watch the video till the end and also if you are new to this channel then you can

subscribe us by clicking the bell icon and the topic is some of the parts

valuation now some of the past valuation is it's typically used for companies

which have got diversified businesses you know which you cannot value using

DCF or or a single relative valuation technique so typically if you look at if

you look at a conglomerate like Johnson & Johnson or or Walt Disney you know

these are the kind of companies where and you know SOTP would make

sense so so typically what happens is different parts of the business are

valued differently and then they are all summed up with the cash so to arrive at

the final number alright so this is this is what the whole technique of SOTP is

and we can just look at the explanation you know as in what needs to be

ascertained here while doing SOTP so if you look at a an hypothetical example

here you know mojo corp it consists consists of different segments like Bank

e commerce software oil and gas and automobiles and these segments or these

individual businesses cannot be combined and valued so in a way we will you know

separately value them because banks cannot be value you know typically they

are not valued using a DCF that is used in automobile or oil and gas or you know

such capital intensive businesses so banks would be valued or on price to

book value or you know such multiples so SOTP valuation of mojo

corp you know so this company different segments of the company like what I have

said so automobile would be valued using the EV by EBITDA multiple or the or the

EV multiple or the p/e ratios oil and gas can be valued using the EV or you

know EV by BOE which is barrels of oil equivalent you know these are the

kind of multiples which would be used in oil and gas then software is again PE

and the packing would be price to book value so and then again the e-commerce

segment is EV by sales so these are the kind of different multiples which

one can use for valuing different businesses and then all of the values

can be summed up so so here the sum of the parts valuation for ITC ITC is

Indian tobacco company has been inundated and you can look at the values

here down so these are the kind of businesses which ITC is into FMCG and

other businesses so FMCG consists of cigarettes and other brands and then

other businesses is hotels agricultural agree agribusiness paper packaging and

others so under under under these boxes you know you would see the overall sales

percentage and the EBIT percentage of all the businesses alright so sales for

cigarettes is 65% while for hotels it is just 8% so the revenue in terms so

hotels contribute just 8% of the overall revenue while sales while while

cigarettes contributes 65% of the overall revenue so the emphasis here

would be always in cigarettes that's the basic core business of the company all

right so here if you come down you would see the relative valuation

you know done the comparables company done for the company and the peer group

analysis for the multiples for different global players as well as the Indian

players alright and then here down you would see the overall multiples and the

values and the target values and the price of that particular segment which

just you know price for which this is just for higher price per share and this

sums up to the overall price so ITC valuation per share is 187 and this is

coming out from the sum of all of these different segments you know which are

ascertained by the multiples of comparable companies listed in India and

abroad alright so this is this is one huge

exercise you know when you talk about SOTP and please remember that this is

typically done with respect to the conglomerates alright and are all big

businesses which have got multiple multiple segments running into different

streams and you know then it would make sense to do the SOTP analysis alright

and if you come down here you would see the waterfall for the ITC which we have

just discussed so if you look at the waterfall chart you would see that FMCG

cigarette is contributing the most which is like almost you know 65 plus percent

you know of 187 now and on the other hand hotels FMCG non cigarette paper

packaging and agriculture and you know the cash per share these are just there

so to sum up you know I would say that conglomerates needs SOTP you know so

different kind of segments cannot be clubbed together and and a DCF or a

simple EV by EBITDA multiple you know not do so there you would need SOTP all

right now how you can calculate SOTP or how SOTP can be ascertained with respect

to a biotech or a pharma company so when you talk about biotech you know the

concept is going to be the same just that in the biotech you will be like we

will be doing the valuation of different drugs and and which are in pipeline and

also the ones which are commercial and then we will add them together like what

we did in the previous video for SOTP and we for a conglomerate basically so

now let's look at this particular company here you know radius

pharmaceutical and if you see there's something called products and then there

is something called pipeline all right now it says products and let's go and

try to figure out how many products are there so there's one product called

timeloss alright so there is this this product which we can value then there is

another thing called pipeline so let's look at what all products are there in

the pipeline so there there's a below Abaloparatide SC Abaloparatide patch and

then Elacestrant Elacestrant RAD1901 and RAD140 so these are the these

are the pipeline candidates so these are not giving the revenue as of now but we

can still go ahead and value them and then the to overall value of these

individual drugs can be you know summed up to get the sotp so this is the sotp

for biotech so biotech in a biotech setup you know there is there is nothing

called you know different businesses so it is why I've picked it picked up this

companies because it is easier to understand in this respect because it

has got small small drugs which can be

which can be thought of as different business segments so let's just do one

thing open the Excel and try to figure out what can be taken so in the products

you know usually I'll just take tymlos because there's only one product

and coming back to pipeline I can take and I can just copy it then elacestrant

trend and RAD140 now for each of this what can be ascertained is the net value

net value of each of this items so how would I do that so basically what can I

do is like what we do in the DCF we can create income statements related to the

different products I'll just call them products here I'll not confuse them

anymore so these are the or let's say the business segments so these are the

business segments now what I'm going to do is I will independently create you

know the income statement for these products and do the DCF of each of them

alright so once I will be done with all of that what I will be left with this

the sum of NPV for the projected years and

terminal value and if we sum sum them up that's gonna give us the next value all

right and this is going to be the case for each one of these candidates so let

me just indent them so this is for this and let me also color code them so this

is first color and this is second let's say this is third fourth and fifth

the final one alright now what I'm going to do is I'll copy

across alright and in the end I'm going to take the cash so whatever the

value I get here so net value for so net value for time loss so whatever the

value I get let's say I get the value as 450 so this has to be divided by the

number of shares outstanding to arrive at the per share value so and let's say

the number of shares outstanding is and this is by the way 450 million and

the number of shares outstanding is let's say I don't know 10 million so

this by this and this is this is a hypothetical example so this is the

final value of tymlos for per share value alright so this segment is

valued at $45 per share now in the same way we can just hypothetically assume of

different values of others other segments alright so let's say 250 and

the value of this is going to be this by the number of shares outstanding again net

value for Abaloparatide patches let's say 300 million and for this one

let's say 600 million and for this one let's say 650 million alright now the

overall value is going to be

I should have put in the dollar sign there anyways yeah so as you can see you

know we have achieved at the value we have a ride we have arrived at the value

so these values you know can be summed up to get the value for sotp I'll just

do it here so the value for sotp is going to be so this plus this plus this

plus this and the final one here there is and yeah we also have to include the

cash value so cash value let's say let's say the company is not having any cash

so the overall value is going to be this so 225 dollars per share now if the if

the stock price of this particular company is trading at less than

this then you can you know put in your buck and if it is more than this then it

is over value so that's that's up to you you know but to give you an idea that's

how the sotp will function alright so that's it

for this particular topic if you have learned and enjoyed watching this video

please like and comment on this video and subscribe to our channel for the

latest updates thank you everyone Cheers