Richa Motwani

Hey everyone,

Two days ago I asked: How do you treat lease liabilities in valuation?

After 2019, lease accounting changed. Under IFRS 16 from 1 Jan 2019 and Ind AS 116 from 1 Apr 2019, rentals are no longer shown as a simple operating expense the way they were earlier. Instead, companies recognise a right of use asset and a lease liability. In the P and L, the lease cost shows up mainly as depreciation on the ROU asset and interest on the lease liability, which usually sit below EBITDA.

That is why reported EBITDA often jumps post 2019, especially for store heavy businesses like retailers, airlines, and telecom, because rent is no longer inside operating expenses.

For simplicity:
Ind AS EBITDA = reported EBITDA post Ind AS 116
IGAAP EBITDA = old style EBITDA where rent was inside operating expenses

In valuation, there are two consistent approaches:

Approach 1
Stay with Ind AS EBITDA
Treat lease liabilities like debt
EV = Equity Value + Net Debt + Lease Liabilities

Approach 2
Convert back to IGAAP EBITDA by bringing rent back
Many companies do not report a clean rent expense line anymore, so you can approximate total lease payments using cash flow line items like principal repayment of lease liabilities and interest on lease liabilities
Here, EV = Equity Value + Net Debt, without adding lease liabilities separately

Key takeaway
Do not double count. Be consistent.
If you add lease liabilities to EV, do not also subtract rent in EBITDA.
If you subtract rent in EBITDA, do not also add lease liabilities to EV.

For more clarity, check Grant Thornton on IFRS 16 impacts and Prof Aswath Damodaran ( this article is before Ind As Implementation but will help you understand the logic) on treating leases as debt in valuation.

www.grantthornton.in/globalassets/1.-member-firms/…

pages.stern.nyu.edu/~adamodar/New_Home_Page/valque…

Let me know its clear or not? Or If you want a video explaining the same.

2 hours ago | [YT] | 5

Richa Motwani

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Could Terminal Growth Rate be negative ?

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Why do we use Post Tax Cost of debt in WACC?

Why do we multiply (1-t)?

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Richa Motwani

Equity Research Interview Question Series (13/30)

If two retailers are identical but one leases stores and the other owns, what should you do in valuation to make them comparable.

Comment down your practical approach.

2 days ago | [YT] | 10

Richa Motwani

Equity Research Interview Question Series (12/30)




This was asked to me in one interview -



While the Buffett Indicator provides a high-level view of market valuation, it has certain limitations. Which statements are correct:




1.The Buffett Indicator can look artificially high in countries where large listed firms earn a big share of profits overseas, because GDP is domestic but market cap reflects global earnings

2. The Buffett Indicator is easily comparable across countries because every economy has the same mix of listed and private companies

3. The Buffett Indicator ignores interest rates, so the same ratio can mean different things when bond yields are high versus low

4. Differences in how much of the economy is publicly listed versus private can distort the Buffett Indicator and reduce cross country comparability

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Which statement is most accurate about R&D costs?

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When would Sum-of-the-Parts be most appropriate?

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When comparing banks vs other industries, EV/EBITDA fails because:

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Richa Motwani

Read this article, and when you are trying to understand any industry try to analyze using these forces.

www.investopedia.com/terms/p/porter.asp


Equity Research Interview Questions series (7/30)

After reading the article, which statement best captures how equity research analysts use Porter’s Five Forces?

1 week ago | [YT] | 8

Richa Motwani

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Consumer retail companies typically run at much lower margins (3-8%) than SaaS (20-30%) or manufacturing businesses. Why do investors still pour billions into them?

1 week ago | [YT] | 7