Valuation frameworks
In this chapter: DCF — discount rate, terminal growth, sensitivity · PE, PB, EV/EBITDA — when each works in India
Three families of valuation: DCF (intrinsic, future cash flows discounted), relative (multiples vs peers), and asset-based (NAV, replacement cost). DCF is theoretically most rigorous but assumption-sensitive. Multiples are quick but require comparable peers. Most practitioners use both — DCF for anchor, multiples for sanity check.
DCF inputs: revenue growth (10-year explicit forecast + terminal), EBITDA margin trajectory, working capital, capex, tax rate, terminal growth rate (2-4% real for mature India), WACC (Indian risk-free + equity risk premium 7-8% + beta-adjusted). Sensitivity: ±50 bps on terminal growth or WACC swings valuation 20-30%. PE multiples: useful when earnings are stable; misleading for cyclicals at peak/trough. PB: relevant for banks (loan book). EV/EBITDA: capital-structure-neutral, useful for cross-comparisons; weak when D&A varies (asset-heavy vs asset-light businesses). PEG ratio: PE divided by growth rate; <1 suggests undervalued.
An Indian-context nuance: DCF works poorly for early-stage growth (negative cash flows, terminal value dominates). For these, reverse-DCF (back into implied growth from current price) or scenario DCF (multiple growth paths weighted) is better. Relative valuation in India is tricky — peer sets are often small (3-5 companies) and dominated by one or two leaders. Conglomerate discounts (India's many holding companies) require sum-of-parts (SOTP) valuation. Most analysts undervalue cyclicals at peak and overvalue at trough — knowing this counter-cyclically is the edge.