Valuation Methods

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Step 1: Project Free Cash Flows

Forecast FCF for next 5-10 years based on historical growth, industry trends.

💡 Conservative estimates better than aggressive. Consider business cycles.

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Step 2: Calculate WACC

Weighted Average Cost of Capital = discount rate for future cash flows.

💡 WACC = (E/V × Re) + (D/V × Rd × (1-Tc)). Typically 10-15% for Indian companies.

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Step 3: Discount Cash Flows to Present

Present Value = FCF / (1 + WACC)^year. Sum all PVs.

💡 Excel formula: =NPV(WACC, cash_flow_range)

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Step 4: Calculate Terminal Value

Value beyond forecast period. Terminal Value = Final FCF × (1+g) / (WACC-g)

💡 Perpetual growth rate (g) typically 3-4% for mature companies.

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Step 5: Add Terminal Value PV

Discount terminal value to present: TV / (1+WACC)^n

💡 Terminal value often 70-80% of total enterprise value.

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Step 6: Calculate Intrinsic Value

Enterprise Value = Sum of discounted FCF + Terminal Value. Subtract net debt, divide by shares.

💡 Compare with market price. >20% margin of safety recommended.

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P/E Multiple Method

Fair Value = EPS × Sector Average P/E. Most common method.

📌 Best for mature, profitable companies. Not for loss-making firms.

💡 If sector P/E is 20 and company EPS is ₹50, Fair Value = ₹1,000

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P/B Multiple Method

Fair Value = Book Value × Sector Average P/B.

📌 Good for banks, financial institutions, asset-heavy companies.

💡 Bank with book value ₹100 and sector P/B of 2 = Fair Value ₹200

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EV/EBITDA Method

Enterprise Value = EBITDA × Sector EV/EBITDA multiple.

📌 Better than P/E for comparing leveraged companies.

💡 Useful for capital-intensive industries like telecom, infrastructure

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PEG Ratio Comparison

Compare company PEG with peers. <1 potentially undervalued.

📌 Accounts for growth. Good for growth stocks.

💡 High P/E justified if growth rate is proportionally high

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Dividend Discount Model

Fair Value = D1 / (r - g). D1=next dividend, r=required return, g=growth.

📌 Only for dividend-paying stocks with stable dividends.

💡 ITC, Coal India - stable dividend payers

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Sum of Parts Valuation

Value each business segment separately, then add up.

📌 For conglomerates with diverse businesses.

💡 Reliance: Retail + Telecom + Oil & Gas valued separately

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Book Value Method

Based on balance sheet equity. Book Value per Share = Equity / Shares.

📌 Floor value. Market price below book value = potential value trap or opportunity.

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Liquidation Value

What shareholders get if company liquidates today. Assets sold at market value.

📌 Conservative estimate. Used for distressed companies or Benjamin Graham investing.

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Replacement Cost

Cost to rebuild company from scratch. Tobin's Q ratio.

📌 Good for asset-heavy industries. Market Value / Replacement Cost < 1 = undervalued.

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NAV for Real Estate

Net Asset Value = Fair value of properties - Debt. Used for real estate companies.

📌 Trading below NAV = potential opportunity. Check realizability.

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DCF for Stable Businesses

Use DCF when company has predictable cash flows and steady growth.

💼 FMCG (HUL, Nestle), IT services (TCS, Infosys)

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Relative Valuation for Comparisons

Quick screening tool. Compare multiples with sector peers.

💼 Finding undervalued stocks in banking, pharma, auto sectors

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Asset-based for Asset-heavy

Use for companies with significant tangible assets.

💼 Real estate, infrastructure, steel, cement companies

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Combination Approach

Use multiple methods and triangulate. Reduces single-method risk.

💼 Professional analysts use 2-3 methods for final valuation