Valuation of a company in an emerging market - in USD or in local currency
Need to do a valuation of a company in an emerging market with quite volatile local currency.
The business is local.
What would you choose: to value the company in a local currency and then convert the final number into USD with the most current exchange rate, or
to value the company in USD?
But then comes another question: would you translate each year numbers with , say, the average exchange rate for that particular year or use some sort of common reference rate? What would be the best practice here in setting the reference rate?
Thanks,
I’ve never had to value an emerging market company, but the easiest thing is value in local currency and then convert to USD at the spot rate from Bloomberg. That way you can update easily and not have to deal with adjusting financial statements.
Probably I will stick to that. Tnx.
For IS and CF I'd use the average rate, whilst for BS I'd use EoP rate.
Valuation should not change if you do it in US$ or in local currency.
Watch out for the effect of inflation accounting, it fucks up lots of information not making it comparable to years outside the ones being reported,
That is tricky with the changing FX rates, especially depreciation and growth,
You should always value an asset in the currency it operates in/has most of its revenue stream. The asset will produce local currency, not dollars, so you can’t value it in dollars. 10% irr in usd is NOT a 10% irr in emerging market currency.
You should: (i) project the 3 statements as they are, (ii) add a currency/country premium to WACC (check Damodaran/Duff&Phelps valuation guide for that), and (iii) create EV/irr sensitivity table for the USD/local currency rate (+-5%, 10% and etc).
There is no use of IRR in a valuation. I have no idea what are you talking about, and what kind of EV/irr table you have in mind.
The discount rate (the cost of capital) is different, of course. It is currency dependent. I actually can value every company in every currency. But I asked a practical question based on the experience that some IBs do valuation in USD and I have noticed a weird use of FX rates to do so.
I would always model in local currency if possible - takes out the brain damage on FX depreciation (not all EM FX will revert to mean) and country specific risk work.
On your second question, you can just assume a fixed forward rate for the rest of the the projections. Or if you really want to be accurate, you can use the Fwd rate T+1...T+10 (assuming 10 year TV), both are fine and the variance will not be significant.
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