Valuations and Matrimony !!

 

Disclaimer: My views, your views (particularly, married friends- u can focus on the DCF) may be different !!

This phase of my life - I'm into the profession of valuations. To be more clear, I do business and equity valuations, day in day out, professionally. And at a personal level, I'm into the survival mode of finding a suitable match. This phase of my life - am not sure how to refer- but is difficult, tense and more taxing than actually working for making a living. Sure, it was same for a few of you, but you have sailed past and am stuck somewhere.

Let me hold back on the main subject and ponder of how did I get into this phase? let me divide my life into few more phases (and here start the bullet points),

·         School phase - I don't remember what I did, lost it somewhere...

·         College phase - I remember attending but then had the onerous task of clearing CA exams; that meant clear focus on passing out first (so no girls again!)

·         Job I phase - Decent salary

·         Job II phase - Polishing skills.... (and still polishing skills; never work with a Boss who is just too good at this work, you always feel a beginner)

 

Starting College phase and till date, I have been, by and large, with the same set of friends. A phase where, Friends A and B and C stuck together for a large part of their life and had more time to discuss work, bosses, girls and life, in general. Friend A, Friend B and Friend C....and Friend A, Friend B and Friend C...all happy and gay (pls, gay = happy at heart, as per old English and not as now understood in Sec 377). In these set of things, suddenly one day, Friend A got married and then Friend B got married. Friend C then wanted to get married but realised how difficult it is to just find someone that matches (or does not match) your wavelength. Ok though, that's not that part to be discussed here. What is to be discussed is as an individual what is ones value in the matrimonial market and how it is perceived as an matrimonial match? Since, I have some experience of the arranged marriage set up now, I thought of marrying these two aspects of professional and personal lives.

 

To begin, valuation involves 3 methods - the net assets value (NAV), the discounted cash flow approach (DCF) and the market multiples. I see to apply them from a hopeful groom's perspective,

 

1.       NAV - It represents the value of the assets you (or your family!) holds. Most relevant from bride's perspective. This perhaps could be the largest driver of decisions from a brides/ brides family. This approach though does not provide that individuals value per se. I can have assets inherited but not earned by me but as said is very relevant for the Indian bride and her family. Let me chuck this out though- this method does not give a 'going concern' value, nor does it capture the earning potential of the groom. This is how, on most occasions we discard this method in our professional applications as well.

2.       Market multiples - Markets know better, isn't that true. When you see a stock trading at a price on the markets, you presume the price at what it is traded to be its 'fair value' at that point in time and invest if you feel it would give a good return on money in future. Its relative and you consider peers, industry sector, management and what not before investing. Same with the groom. If his salary is decent enough and more or less above others, chances of him getting an good interest are higher. The end result is still dicey for the groom as involves other factors as well.

3.       DCF - the most important and where am more focussed on. All finance guys learn one thing as part of their curriculum, 'value of any asset (and if the groom be called an asset), is the present value of its future earnings'. This is the first line I remember reading on the cover page of MAFA subject at PE-II level of CA exams and has stayed with me. So, I do a valuation based on future cash flows. Not easy, very subjective and many variables involved - I still put a thought though.

 

So, I start with some base salary. Most of my peers earn, say in the range of INR 1.5 mn to INR 2.5 mn gross p.a, and I start to apply that here as well (A few are outliers but this not for them are more likely snapped up in the matrimonial market). Remember, this is the earning potential and based on assumptions, and I make a few further assumptions -

 

a) Life = say u survive 70 years (be optimistic), b) Inflation = Say hovers around 5% (that is what RBI thinks of the long term), c) Increment rate (on an average) = 8% (actuaries say for calculating gratuity!) d) Discount rate = 6% (if inflation is 5%, am hoping risk free rate would be percent higher and in such a long run one won't really fool the markets to do better than the risk free rate for his earnings), e) Working life of 58 years (happy, if I have a black swan event to reduce it to say 50 and retire to enjoy life - but then its black swan event, how to predict) and then 5 more years of consulting at the same level of earnings (no inflation, just to be realistic and optimistic), f) Taxes (how can you ignore) - 30% g) Expenses rate  - 40%, throughout.

 

A long list of assumptions? Yeah, valuations is subjective. What do I get for the outcome - a value range - for salary range of INR 1.5 mn to INR 2.5 mn, the value outcome is INR 27 mn to INR 44 mn. Present value of future cash flows of that individual. And to add some sensitivity, what if the discount rate increases by 1% (to 7%), well the value range, with all other factors cet par, lies between INR 23 to INR 38 mn.

 

Well, well, well...said all of the above, how does the matrimonial market value you though - If I had understood that, I won't have found time to write this blog!

 

PS: Hope blogspot continues to remain at the end of my life and I continue to live...I wanna validate all my DCF assumptions then!