“Cross Sector Equity Valuation and Determinants of Profitability”

Abstract

Our research report focuses on a very specialized sub area of finance, which is equity valuation. The domain of valuation is extremely important in financial markets world over, different financial institutions value companies for different purposes, our valuation focus is for investment purposes. Firm valuation includes the total value of a firm which includes the value against debt holders and the value against equity holders, whereas equity valuation refers only to the value which is available for the shareholders of the company. Firms issue equity to raise capital for several purposes, the value of this equity is determined by the cash flows the firms current and future assets are expected to generate. Valuation is a key metric because theory and historical data conform to the fact that a stocks market value (at which it trades in the market) can deviate away from its true intrinsic value, thereby paving way for investors to make or lose money by going long or short on their stock holdings. Our research covers a number of companies across different sectors such as Cements, Fertilizers, Oil and Gas Exploration and Oil refinning. We have used fundamental analysis for valuing these companies, which encompasses areas including dynamics and assumptions about the economy, industry, company fundamentals and forecasting of financial statements. Through our results, we generate the intrinsic value of these stocks and show how market value deviates from the intrinsic value, hence supporting the hypothesis that the market does not truly incorporate current and potential value in the price at which the stock trades. We also aim to show different value and profitability determinants for different sectors. Our research indicates that value creation and profitability is different across sectors, dynamics which are important for one sector may not be important for another sector which would have its own dynamics.