Valuation of share

• Share valuation can be done using

• FCFE,
• DDM and
• Gordon Growth Model
2 Stage DDM
• ABC Ltd. is expected to grow dividends at 12% per year for the
next 3 years and then stabilize to a constant growth rate of 5%
thereafter. The most recent dividend paid (D0D_0D0) is ₹4 per
share. The required rate of return (r) is 10%.
• Required:
• Calculate the intrinsic value of the stock using the Two-Stage
DDM.
• Steps:
• Calculate dividends for the high-growth period:
• 𝐷𝑡=𝐷𝑡−1×(1+𝑔)D t =D t−1 ×(1+g)

• Find the present value of dividends for the high-growth

period:𝑃𝑉=𝐷𝑡/(1+𝑟)𝑡
• Calculate the Terminal Value at the end of the high-growth
phase: P3=D4/r−g2
• Where g2 is the stable growth rate.
•Find the present value of the Terminal Value: PV(P3)=P3/(1+r)3​​
•Sum all present values to get the intrinsic value of the stock.
•
Q2) 2 stage FCFF
• XYZ Ltd. is expected to grow its FCFF at 15% annually for the
next 3 years, after which the growth rate will stabilize at 5%
indefinitely. The most recent FCFF is ₹50 [Link] is 500
crores.
Additional data:
• Cost of Capital (WACC) = 10%
• Number of shares outstanding = 10 crores
• Required:
• Calculate the intrinsic value per share using the Two-Stage
FCFF Model.
• Relative Valuation
Relative Valuation
• Relative valuation is a method of valuing an asset by comparing it
to similar assets using valuation multiples such as Price-to-
Earnings (P/E), Price-to-Book (P/B), Price-to-Sales (P/S),
EV/EBITDA, etc. It is widely used in equity valuation and
investment decision-making.
Relative Valuations - Trading and Transaction Multiples

• Trading Multiples (Market-Based Multiples)

• Derived from publicly traded companies.
• Based on current market prices of comparable firms.
• Used for ongoing valuation in equity research and portfolio
management.
• Examples:
• Price-to-Earnings (P/E) Ratio = Market Price per Share / Earnings per
Share (EPS)
• Enterprise Value-to-EBITDA (EV/EBITDA) = (Market Capitalization +
Debt - Cash) / EBITDA
• Price-to-Book (P/B) Ratio = Market Price per Share / Book Value per
Share
Example Usage:
If Company A trades at a P/E of 15x, and Company B has an EPS of ₹10, we estimate Company B’s
valuation as:
Price = 15 × ₹10 = ₹150 per share
Transaction Multiples (Deal-Based
Multiples)

• Derived from past mergers, acquisitions, or private transactions.

• Reflect control premium and strategic synergies.
• Used for private company valuation and M&A deals.
• Examples:
• EV/EBITDA from M&A Deals = Purchase Price / Target’s EBITDA
• EV/Revenue = Total Transaction Value / Revenue of Acquired
Compan
• If a similar company was acquired at EV/EBITDA = 12x, and
Company C has an EBITDA of ₹100 crore, its estimated enterprise
value would be:
EV = 12 × ₹100 crore = ₹1,200 crore
Key Differences

Aspect Trading Multiples Transaction Multiples

Source Public market data M&A transactions
Used for Valuing ongoing businesses M&A, private company valuation
Includes Premium? No (pure market value) Yes (includes control premium)
Earnings-Based Valuation Matrices in Stock
Valuation
• Earnings-based valuation metrics are used to determine the
intrinsic value of a stock by analyzing its earnings potential.
These metrics help investors compare stocks across industries
and assess whether a stock is undervalued or overvalued.
• Price-to-Earnings (P/E) Ratio
• Formula:
• P/E=Market Price per Share/Earnings per Share (EPS)

• Interpretation:
• High P/E (> industry avg.) → Investors expect high future growth
(potential overvaluation).
• Low P/E (< industry avg.) → Stock may be undervalued or facing
challenges.
Price-Earnings (P/E) Model
• The Price-Earnings (P/E) Model is a relative valuation method
used to determine the fair value of a stock by comparing its
market price to its earnings per share (EPS).
• Formula for Stock Valuation using P/E Ratio:
• Stock Price=P/E× Earnings Per Share (EPS)
• Where:
• P/E = Market Price per Share / EPS
• EPS = Net Income / Number of Shares
• The P/E ratio reflects how much investors are willing to pay for ₹1
of earnings of a company.
Q3

• Company A is in the consumer goods sector and is being

evaluated for potential investment. A peer group of similar
companies has an average P/E ratio of 15. Company A’s earnings
per share (EPS) is ₹20.
• Required:
• Estimate the fair value per share of Company A using the P/E
ratio method.
Price-to-Earnings-Growth (PEG) Ratio

• Formula:
• PEG=P/E/Earnings Growth Rate (%)
• Interpretation:
• PEG < 1 → Undervalued stock (growth is high relative to price).
• PEG > 1 → Overvalued stock (stock is expensive for its growth
rate).
Q4
• Company XYZ Ltd. has:
• P/E Ratio = 20
• EPS Growth Rate = 10% per year
• Required:
• Calculate the PEG Ratio and interpret the stock’s valuation.
Stock Valuation Using Price-to-Revenue (P/S)
Ratio
• Company LMN Ltd. has the following details:
• Market Capitalization = ₹5,000 crores
• Annual Revenue = ₹1,250 crores
• Industry Average P/S Ratio = 4.5
• Required:
• Calculate the current P/S ratio and determine if the stock is
undervalued or overvalued.
Price to Book Value
• Formula:
• P/B=Market Price per Share/Book Value per Share (BVPS)
• Interpretation:
• P/B < 1 → Stock is undervalued (trading below asset value).
• P/B > 1 → Investors expect high future earnings.
P/B ratio
• EG:
• Company C has:
• Market Price per Share = ₹300
• Book Value per Share = ₹100
• Calculate P/B Ratio and interpret if the stock is
overvalued/undervalued if industry P/B ratio is 2.
Q5)
Compute Value of Sigma Ltd. With the help of comparable co.
approach.
Its sales is 100 crs., PAT = 15 Cr. And Book value is 60 crs. Valuer
feels 50% weight should be given to earnings, sales and BV may
be given equal weights. Comparable firms are as follows: Amount
in Rs. Crores.
Particulars A B C

Sales 80 120 150

PAT 12 18 25

BV 40 90 100

MPS 120 500

SOTP Valuation
• Sum-Of-The-Parts (SOTP) Valuation
• Several businesses operate as a cluster/bundle of businesses rather than one business. For example, ITC, L&T
and other corporations have different business under one umbrella. One way to value these businesses is to
value each business separately and then do the sum of those valuations. This method of valuing a company
by parts and then adding them up is known as Sum-Of- Parts (SOP) valuation.
•Equity Research Reports
Meaning
• Research reports are documents produced by professional equity
analysts that recommend actions like buy, sell and hold for a
particular security to investors.
Report Essentials
• Basic Information about the company
• The research report should begin with some basic information
about the firm, including the company’s ticker symbol, the
primary exchange where its shares are traded, the primary sector
and industry where it operates, the investment recommendation,
the current stock price and market capitalization, and the target
stock price.
BUSINESS DESCRIPTION
• This section would include a detailed description of the company
and its products and services. It should convey a clear
understanding of the company’s economics, including a
discussion of the key drivers of revenues and expenses.
INDUSTRY OVERVIEW AND COMPETITIVE
POSITIONING
• This section would include an overview of the industry dynamics,
including a competitive analysis of the industry. Most firms’
annual reports include some discussion of the competitive
environment. A group of peer companies should be developed for
a competitive analysis
INVESTMENT SUMMARY
• This section should include a brief description of the company,
significant recent developments, an earnings forecast, a valuation
summary, and the recommended investment action.
VALUATION
• This section should include a thorough valuation analysis of the
company using conventional valuation metrics and formulas.
Equity valuation models can derive either absolute or relative
values.
FINANCIAL ANALYSIS
• This section should include a detailed analysis of the company’s
historical financial performance and a forecast of future
performance. Financial results are commonly manipulated to
portray firms in the most favorable light. It is the responsibility of
the analyst to understand the underlying financial reality.
INVESTMENT RISKS
• This section should address potential negative industry and
company developments that could pose a risk to the investment
thesis. Risks can be operational or financial or related to
regulatory issues or legal proceedings.
Reading a Research Report
Writing a research Report
• In simpler words, equity research is a document written and
published by a brokerage house or securities firm for its clients to
help them to make better decisions regarding which stocks to choose
for profitable investment
Types of Research reports
• Buy Side
• Sell Side
• Initiating Coverage Reports
Sell Side Reports
• Sell-side reports are the most common type of equity research
reports in circulation.
• They are normally produced by investment banks, typically for their
clients to guide their investment decisions.
• A sell-side analyst works for a brokerage firm or bank which manages
individual clients and makes investment recommendations to them.
• Sell-side analysts issue the often-heard recommendations of “buy”,
“hold”, “neutral”, or “sell”
Buy Side Reports
• The ‘buy-side’ reports are internal reports, produced for the bank
itself, and are guided by differing perspectives and motivations.
• A buy-side analyst generally works for a mutual fund or a pension
fund company.
• They perform research and make recommendations to the money
managers of the fund that hires them.
Initiating Coverage Reports
• The initiating coverage reports are conducted on firms that the bank
has begun following and are typically more comprehensive in nature.
• Initiating coverage reports analyze a company’s historical financial
information, order books, efficiency, SWOT, cash-flows, and future
earning potential, basis which it estimates the future earnings of the
company and its P/E multiples.
Standard reports

• After an initiating report is produced standard reports will follow for

as long as the brokerage house continues to track the stock.
• Stocks that are tracked are typically part of an index like the SENSEX
or are amongst the top stocks in an industry as these are the stocks
that investors care about and are traded in larger volumes.
Contents of a Research Report
• An ER report typically has the following contents:
• 1. Analyst opinion and summary
• 2. Key highlights of the company
• 3. A snapshot of the industry
• 4. Financial ratio analysis
• 5. Financial Modeling and Valuation analysis
• 6. Risk factors
• 7. Disclosure and rationale of rating
Company fundamental analysis

• a) Macroeconomic Analysis
• b) Checking public information of the company
• c) Discussion/ interviews with company management
• d) Prepare a 5-year cash flow model and earnings forecast model
• e) Review your operational and financial assumptions
• f) Assess management and competitive environment, buyers,
suppliers, substitutes, porter 5-forces model that tells you the
competitive advantage of the company.
Company valuation analysis

• 1. Use intrinsic valuation—Discounted Cash Flow(DCF) method

• 2. Relative valuation
• 3. Sum-of-the-parts valuation method, wherever required.
 Writing a research Report
1. A clear view of the company
Before writing the report, have a clear view of the company in terms of—Investment rationale, risk assessment,
key growth drivers, cost drivers, and revenue drivers.
2. Recommendation/Rating
Clearly write the company’s name at the top of the report and mention your recommendation—buy, sell, hold.
You can also use the words—outperform, underperform, neutral or accumulate based on your valuation.
Have an image of an equity research report in your mind, and so you won’t miss these details.
Usually, there are templates available in your company and you need to write the report using these templates.
3. Target price
You need to mention the target price based on your valuation along with the recommendation.
4. Investment rationale
Write clearly your investment rationale. Why do you think the share price will go up/down?
Writing a research Report
5. Share price chart
Include a price chart of the stock that will show the last 52-weeks’
share price movement.
[Link] model
Mention the analysis of the company’s business model and how will it
perform in the next 2-3 years.
Writing a research Report
7. Key ratio analysis
Include important ratio analysis of the company and 52-week high-low share price on a stock
exchange.
Include market capitalization, Enterprise Value(EV), Earnings Before Interest Tax and Depreciation
(EBITDA), EV/EBITDA, and dividend yield (%)
8. Product profile and segments
Analyze the company’s product profile, its various segments, and brands. Include current sales and
forecasted revenue figures, cost, market size, company’s market share, competition, the company’s
performance in domestic and other markets.
9. Economy-Industry-Company (E-I-C) Analysis
Cover the company’s fundamental analysis with supportive data.
10. Intrinsic and relative valuation
Perform DCF analysis and relative valuation. Relative valuation should be done with the company’s
peers on the basis of Price-Earnings ratio (P/E), Price to Book ratio (P/B), Price to Sales (P/S), Return
on Equity (ROE) and Return on Capital Employed (ROCE).
Writing a research Report
11. Reasoning for recommendation
Write proper reasoning for your recommendation. For example—Why buy the stock or why not to
buy the stock. So, your reasoning has to be strong.
12. Unlock the value
Write what can unlock/increase/reduce the value of the company.
13. Legal matters
If the company is battling any case, write what could be its effects on the stock price.
14. Common industry points
While writing industry reports, write the points which are common for all players in the industry, for
example, regulatory limitation, excise duty, oil prices, etc.
15. Covering all the areas in an equity research report
While writing the equity research report, assume that the reader is new to the company and he
doesn’t have any idea about its business.
So, your report should include precise information about—product, financials, management,
market, future plans of the company, growth estimates, and the risk factors of the company.
In short, as an equity research analyst, your equity analysis report writing process should be
structured and you should follow the dos and don’ts mentioned in this post.
ER Reports Sample
• Equitec- Angel One
• [Link]