The unlisted market in India has grown significantly, drawing the attention of investors keen to explore new opportunities. However, one of the most critical challenges for investors in this space is determining the fair value of unlisted shares. Unlike listed shares, which have market prices that fluctuate based on supply and demand, unlisted shares lack this transparency. This article provides a clear and comprehensive guide on how to calculate the fair value of unlisted shares using simplified approaches.
Fair value refers to the estimated worth of a company’s shares based on its business performance, assets, and future potential. Since unlisted shares do not trade on a stock exchange, their value must be estimated using fundamental financial information. Investors need to focus on accessible and straightforward methods to arrive at a fair value that can guide their investment decisions.
The Net Asset Value (NAV) method determines the value of a company based on the difference between its total assets and total liabilities. This method is especially useful for companies that hold significant tangible assets, such as real estate, equipment, or inventories.
Step 1: Calculate Total Assets: Gather information on the company’s total assets, which can include cash, receivables, property, machinery, and inventory. These figures are usually available in the company’s balance sheet.
Step 2: Subtract Total Liabilities: Deduct all liabilities, such as loans, payables, and other debts, from the total assets.
Step 3: Divide by the Number of Shares: Divide the resulting figure by the total number of shares issued by the company.
Example: Suppose a company has ₹500 crore in assets and ₹200 crore in liabilities. If it has issued 10 crore shares, the calculation would be:
₹500 crore (assets) - ₹200 crore (liabilities) = ₹300 crore
₹300 crore ÷ 10 crore shares = ₹30 per share
This method provides a direct and tangible estimate of the share value, making it a practical starting point for valuation.
This method estimates the fair value of an unlisted company by comparing it to similar companies that are listed on stock exchanges. The assumption is that businesses operating in the same industry and of a similar size should have comparable valuations. Here’s a step-by-step guide to using this method:
Step 1: Identify Comparable Companies: Look for companies in the same industry as the unlisted company. Calculate their P/E ratios (Market Price / Earnings).
Step 2: Find the Industry Median P/E: Get the median P/E ratio of the comparable companies in the industry. This is the middle value when you list all the P/E ratios from the comparable companies.
Step 3: Calculate the Fair Value Using the Industry Median P/E: Multiply the unlisted company’s earnings by the industry median P/E ratio to get its implied market value (fair value).
Fair Value = Earnings × Industry Median P/E
Example:
Now, calculate the fair value using the industry median P/E:
➢ Fair Value = Earnings × Median P/E
= 5 crores × 12 = 60 crores
Fair Value per share = 60 crores/1 crore= ₹60
In contrast to current market price of ₹50, it shows undervaluation.
While this method is simple and effective, it relies heavily on the assumption that the performance and growth potential of the unlisted company are similar to the comparable listed company.
When valuing unlisted shares, it’s important to consider several factors that can influence their fair price. Unlike shares of listed companies, unlisted shares are traded privately, making the valuation process more complex and subjective. Below are some key factors to keep in mind:
Unlisted companies typically don’t have the same regulatory obligations as listed ones to disclose detailed financial reports. This means:
Limited Transparency: Investors may have to rely on minimal data such as basic financial statements, revenue figures, or informal updates from the company.
Challenges in Analysis: Without audited reports or comprehensive details about assets, liabilities, and profitability, it’s harder to gauge the true financial health of the company.
Dependence on Third-Party Insights: Investors often rely on research from intermediaries, industry reports, or private equity firms to supplement the lack of direct company disclosures.
The industry in which a company operates plays a significant role in its valuation. Factors to consider include:
Growth Potential: Is the sector expanding? For example, fintech and clean energy are high-growth sectors, which may boost a company’s valuation.
Competitor Performance: Assess how similar businesses in the industry are performing, even if they are listed, to understand market dynamics.
Economic and Regulatory Environment: Changes in regulations or macroeconomic trends, such as rising demand for renewable energy, can directly impact a company’s prospects.
By using methods like the Net Asset Value (NAV) method and the Comparable Companies method, investors can estimate the value of unlisted shares effectively. While challenges such as limited data and illiquidity persist, focusing on reliable metrics and adopting a conservative approach can help mitigate risks. The unlisted market holds significant potential for investors, and understanding how to value shares is an essential step toward making informed investment decisions.
