Valuation Study Notes

VALUATION
A Study Guide from First Principles
Covering:
Net Asset Value (NAV) • Comparable Companies Method (CCM)
Discounted Cash Flow (DCF) • SEBI ICDR Valuation Norms
Key Terminology, Formulas, and Worked Examples

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Table of Contents
TOC \h \o "1-3"

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1. Introduction to Valuation
Valuation is the process of estimating what a business, an asset, or a share is worth in monetary terms. There is
rarely one 'correct' value - valuation produces a reasoned range of value that depends on the purpose of the
exercise (a sale, a merger, a tax filing, a fund-raise, a regulatory requirement), the information available, and the
assumptions used. A good valuation analyst therefore triangulates value using more than one method and explains
why the methods agree or disagree.

1.1 Why Valuation Matters

• Mergers & Acquisitions - deciding a fair purchase price.
• Fund raising / private equity and venture capital investment - deciding how much equity to give up for a
given amount of capital.
• Regulatory and statutory compliance - e.g. SEBI ICDR pricing norms, Income Tax Rule 11UA, Companies
Act share swap valuations.
• Financial reporting - impairment testing, purchase price allocation, fair value accounting (Ind AS 113 / IFRS
13).
• Litigation, arbitration, and shareholder disputes - oppression and mismanagement, dissenting shareholder
buy-outs.
• Investment decisions - deciding whether a listed stock is undervalued or overvalued.

1.2 Key Foundational Terms

Term Meaning

An estimate of worth; always tied to a purpose, a date, and a set of assumptions.

Value
Value is opinion-based, not a fact.

The actual amount paid or received in a transaction. Price can differ from value
Price
because of negotiation, urgency, or limited buyers/sellers.

The price that would be received to sell an asset in an orderly transaction between
Fair Value
market participants (Ind AS 113 / IFRS 13 definition).

The price at which an asset would change hands between a willing buyer and a
Fair Market Value (FMV) willing seller, neither being under compulsion, both having reasonable knowledge of
relevant facts.

The 'true' underlying value of an asset based on its fundamentals (cash flows, growth,
Intrinsic Value
risk), independent of its current market price.

The value of a business assuming it continues to operate indefinitely, as opposed to

Going Concern Value
being shut down.

The net amount that would be realised if the business were shut down and its assets
Liquidation Value
sold off individually, after paying off liabilities.

The specific date as of which the value is determined. Value can change materially
Valuation Date
with the date chosen.

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Term Meaning

The professional (Registered Valuer, Merchant Banker, or Chartered Accountant,

Valuer
depending on the regulation) who performs and certifies the valuation.

1.3 Approaches to Valuation (The Big Picture)

Almost every valuation methodology in the world falls under one of three broad approaches. SEBI ICDR is a
regulatory overlay that prescribes how these approaches must be applied for specific transactions involving listed
companies.

(a) Asset Approach (Cost Approach)

Values a business by looking at what it owns (assets) minus what it owes (liabilities). Best suited for asset-heavy
businesses, holding companies, or businesses being wound up. Net Asset Value (NAV) is the classic method
under this approach.

(b) Market Approach (Relative Valuation)

Values a business by comparing it to similar businesses that are already priced by the market - either listed peers
or recent M&A transactions. Comparable Companies Method (CCM) and Comparable Transaction Method
(CTM) fall here.

(c) Income Approach (Intrinsic Valuation)

Values a business based on the cash flows it is expected to generate in the future, discounted back to today's value
using an appropriate discount rate. Discounted Cash Flow (DCF) is the classic method under this approach.

1.4 Summary Map of Methods

Term Meaning

Net Asset Value (NAV) Method, Replacement Cost Method, Liquidation Value
Asset Approach
Method

Comparable Companies Method (CCM) / Market Multiple Method, Comparable

Market Approach
Transactions Method (CTM), Market Price Method (for listed shares)

Discounted Cash Flow (DCF) Method (FCFF/FCFE), Dividend Discount Model

Income Approach
(DDM), Capitalisation of Earnings Method

SEBI ICDR Regulations, Income Tax Rule 11UA, Companies Act 2013 (Section 62,
Regulatory / Statutory
232), RBI FEMA pricing guidelines

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2. Core Terminology Used Across All Valuation Methods

Before diving into NAV, CCM, DCF, and SEBI ICDR individually, it helps to understand a common vocabulary
that appears in almost every valuation report.

2.1 Value Terms

Term Meaning

The total value of the operating business, belonging to ALL capital providers (both
Enterprise Value (EV) lenders and shareholders). EV = Equity Value + Total Debt + Minority Interest +
Preference Capital - Cash & Cash Equivalents.

The value belonging only to equity shareholders. Equity Value = EV - Debt -

Equity Value / Market
Minority Interest - Preference Capital + Cash. For a listed company, Market Cap =
Capitalisation
Share Price x Number of Shares Outstanding.

The value of an asset or of equity as recorded in the company's accounting books

Book Value
(balance sheet), i.e., historical cost less depreciation/amortisation, not market value.

Net Worth / Shareholders' Total Assets minus Total Liabilities (excluding equity), i.e., Share Capital + Reserves
Funds & Surplus. This is the accounting book value of equity.

Minority Interest (Non- The portion of a subsidiary's equity not owned by the parent company, shown
Controlling Interest) separately in consolidated accounts.

Total equity value divided by the total number of outstanding equity shares (fully
Per Share Value
diluted, including the effect of convertible instruments and ESOPs).

2.2 Cash Flow & Earnings Terms

Term Meaning

Revenue / Turnover / Net Sales Total income earned from the sale of goods or services, before deducting any costs.

Earnings Before Interest, Tax, Depreciation and Amortisation. A proxy for operating
EBITDA cash profit, used widely because it strips out financing structure and accounting
policy differences.

Earnings Before Interest and Tax, i.e., EBITDA minus Depreciation & Amortisation.
EBIT
Also called Operating Profit.

PAT / Net Profit Profit After Tax - the bottom line profit available to equity shareholders.

Cash generated by the business available to ALL capital providers (debt + equity),
Free Cash Flow to Firm
before financing costs. FCFF = EBIT x (1-tax) + Depreciation - Capex - Change in
(FCFF)
Working Capital.

Free Cash Flow to Equity Cash available only to equity shareholders, after meeting all obligations to lenders.
(FCFE) FCFE = FCFF - Interest x (1-tax) + Net Borrowings.

Working Capital Current Assets minus Current Liabilities; the capital tied up in day-to-day operations

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Term Meaning

(inventory, receivables, less payables).

Money spent on acquiring or upgrading long-term physical assets such as property,

Capital Expenditure (Capex)
plant, and equipment.

2.3 Discounting & Risk Terms

Term Meaning

The rate used to convert future cash flows into today's (present) value, reflecting the
Discount Rate
time value of money and the riskiness of those cash flows.

The principle that a rupee received today is worth more than a rupee received in the
Time Value of Money
future, because today's rupee can be invested to earn a return.

Present Value (PV) The current worth of a future sum of money, discounted back at an appropriate rate.

The value of all cash flows occurring after the explicit forecast period, capturing the
Terminal Value (TV)
fact that a healthy business continues to operate beyond the forecast horizon.

Weighted Average Cost of Capital - the blended rate of return required by both
WACC lenders and shareholders, weighted by their respective proportions in the capital
structure. Used to discount FCFF.

The return that equity shareholders require for the risk they bear, usually estimated
Cost of Equity (Ke)
using the Capital Asset Pricing Model (CAPM). Used to discount FCFE.

Capital Asset Pricing Model: Ke = Risk-Free Rate + Beta x Equity Risk Premium. It
CAPM
links the required return on a stock to its systematic (market) risk.

A measure of a stock's volatility (systematic risk) relative to the overall market. Beta
Beta
of 1 means it moves in line with the market; above 1 means more volatile.

The theoretical return on an investment with zero default risk, usually proxied by the
Risk-Free Rate
yield on a long-term government bond (e.g., 10-year G-Sec in India).

The extra return investors demand for investing in equities over the risk-free rate, to
Equity Risk Premium (ERP)
compensate for the additional risk of equities.

The effective interest rate a company pays on its borrowings, usually taken post-tax
Cost of Debt (Kd)
since interest is tax-deductible.

The rate at which cash flows are assumed to grow forever after the explicit forecast
Terminal Growth Rate (g)
period, typically close to long-term GDP or inflation growth.

2.4 Multiple / Ratio Terms (used heavily in CCM)

Term Meaning

A ratio that expresses value as a multiple of a financial metric, e.g., a company

Multiple
'trading at 20x earnings'.

P/E Ratio (Price to Earnings) Market Price per Share / Earnings per Share. Shows how many years of current

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Term Meaning

earnings investors are willing to pay for one share.

Enterprise Value / EBITDA. The most commonly used multiple in M&A because it is
EV/EBITDA
capital-structure and tax neutral.

Enterprise Value / Revenue. Useful for early-stage or loss-making companies with no

EV/Sales
positive earnings.

Market Price per Share / Book Value per Share. Common for valuing banks and
P/B Ratio (Price to Book)
financial institutions.

P/E Ratio divided by the expected earnings growth rate; used to judge whether a high
PEG Ratio
P/E is justified by high growth.

Trading Multiple A multiple derived from the current market price of listed comparable companies.

A multiple derived from the price paid in recent M&A deals for comparable
Transaction Multiple
companies (includes a control premium).

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3. Net Asset Value (NAV) Method

NAV is an asset-approach method. It values a company by determining what would be left over for shareholders
if all the assets were sold at their fair value and all liabilities (including preference capital) were paid off. It
answers the question: 'What is the company worth today, based purely on what it owns and owes?'

3.1 When NAV Is Used

• Asset-heavy businesses such as real estate, investment holding companies, and infrastructure companies.
• Companies with unstable or unpredictable earnings, where DCF is unreliable.
• As a 'floor value' or sanity check alongside DCF and CCM.
• Liquidation or wind-up scenarios.
• Statutory valuations under Income Tax Rule 11UA (NAV method for unquoted equity shares).

3.2 Key Terminology

Term Meaning

Value of assets as recorded in the audited financial statements, i.e., historical cost less
Book Value of Assets
accumulated depreciation.

Fair Value / Market Value of The current realisable value of an asset if sold in the open market today, which may
Assets be higher or lower than book value.

The process of restating an asset's book value to its current fair value, usually done
Revaluation
for land, buildings, and investments.

A potential liability that may or may not become an actual obligation depending on a
Contingent Liability future event (e.g., a pending lawsuit); usually disclosed but not always included in
NAV unless probable.

Non-physical assets such as goodwill, patents, trademarks, and brand value. Self-
Intangible Assets generated goodwill is typically excluded from NAV; only purchased/recognised
intangibles are included.

Capital raised through preference shares, which ranks above equity but below debt in
Preference Share Capital
a wind-up; deducted before arriving at value for equity shareholders.

NAV after adjusting book values of specific assets/liabilities to their fair/market

Adjusted Net Asset Value
values (the most commonly used variant in practice).

3.3 Formula
FORMULA
NAV (Equity Value) = Fair Value of Total Assets - Total Liabilities - Preference Share Capital

FORMULA

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NAV per Share = NAV (Equity Value) / Number of Equity Shares Outstanding

3.4 Step-by-Step Process

• 1. Take the latest audited (or provisional) balance sheet.
• 2. Identify assets that need to be revalued to fair value (land, buildings, investments, unquoted shares).
• 3. Add back any unrecorded assets and deduct any unrecorded/contingent liabilities considered probable.
• 4. Deduct all outside liabilities (borrowings, trade payables, provisions).
• 5. Deduct preference share capital, if any.
• 6. Divide the resulting equity value by the number of equity shares to get NAV per share.

EXAMPLE: NAV Calculation for XYZ Ltd.

XYZ Ltd's balance sheet shows: Total Assets (book value) = Rs 500 crore, of which land carried at Rs 50 crore is
now worth Rs 120 crore (a fair-value uplift of Rs 70 crore).
Total Liabilities (borrowings + payables + provisions) = Rs 260 crore. There is no preference capital.
Fair Value of Total Assets = Rs 500 crore + Rs 70 crore (revaluation) = Rs 570 crore.
NAV (Equity Value) = Rs 570 crore - Rs 260 crore = Rs 310 crore.
If XYZ Ltd has 3.1 crore equity shares outstanding, NAV per share = Rs 310 crore / 3.1 crore shares = Rs 100 per
share.

3.5 Limitations of NAV

• Ignores the company's future earning potential and growth prospects.
• Self-generated goodwill, brand value, and human capital are typically not captured.
• Can significantly undervalue asset-light, high-growth businesses (e.g., software, services).
• Revaluation of assets can be subjective and open to manipulation.

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4. Comparable Companies Method (CCM)

CCM (also called the Market Multiple Method or Comparable Company Analysis / 'Comps') is a market-approach
method. It values a company by looking at how the stock market is currently pricing similar, publicly listed
companies, and applying that pricing (in the form of multiples) to the company being valued. The underlying
logic: similar companies, facing similar risks and growth prospects, should trade at similar multiples.

4.1 When CCM Is Used

• Valuing a company for an IPO, where the market's appetite for similar businesses is directly relevant.
• Sanity-checking a DCF valuation using real, observable market pricing.
• Private equity and venture capital deal pricing.
• Situations where reliable long-term cash flow forecasts are hard to build, but good listed peers exist.

4.2 Key Terminology

Term Meaning

A publicly listed company operating in the same or a similar industry, with similar
Comparable Company / Peer
size, growth, margins, and risk profile to the company being valued.

Peer Set / Comparable The final list of comparable companies selected for the analysis, after screening out
Universe unsuitable candidates.

A valuation multiple (e.g., P/E, EV/EBITDA) calculated from the current share price
Trading Multiple
of a listed peer.

Financial figures for the most recent trailing twelve-month period, used to keep
LTM (Last Twelve Months)
multiples current between annual results.

A multiple calculated using projected (forecast) financials for the next 1-2 years,
Forward Multiple
instead of historical figures.

The extra amount a buyer pays over the current market price to gain a controlling
Control Premium
stake in a company (relevant when comparing to CTM, not pure trading comps).

Liquidity/Marketability A reduction applied to value because unlisted or thinly traded shares cannot be sold
Discount quickly at fair value, unlike shares of a heavily traded listed company.

Removing one-off, non-recurring, or non-operating items from earnings (e.g., a one-

Normalisation / Adjustment
time asset sale gain) so that the multiple reflects sustainable, comparable earnings.

A comparable company whose multiple is unusually high or low compared to the

Outlier
peer set, often excluded or given less weight.

4.3 Formula / Process

FORMULA
Implied Value of Target = Target's Financial Metric x Peer Group Average (or Median) Multiple

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4.4 Step-by-Step Process

• 1. Identify a set of listed peer companies in the same industry, of comparable size and growth profile.
• 2. Gather each peer's market capitalisation, enterprise value, and key financials (Revenue, EBITDA, PAT,
Book Value).
• 3. Calculate relevant multiples for each peer (P/E, EV/EBITDA, EV/Sales, P/B).
• 4. Normalise earnings for one-off items, then compute the average/median multiple for the peer set.
• 5. Apply the chosen multiple to the equivalent financial metric of the company being valued.
• 6. Apply any adjustments needed - e.g., a discount for lack of marketability if the target is unlisted.

EXAMPLE: CCM Valuation for ABC Pvt Ltd (an unlisted IT services company)
Three listed IT services peers trade at EV/EBITDA multiples of 12x, 14x, and 13x respectively. The average peer
multiple = 13x.
ABC Pvt Ltd's normalised LTM EBITDA = Rs 40 crore.
Implied Enterprise Value of ABC = Rs 40 crore x 13 = Rs 520 crore.
ABC has debt of Rs 20 crore and cash of Rs 10 crore, so net debt = Rs 10 crore.
Implied Equity Value = Rs 520 crore - Rs 10 crore = Rs 510 crore.
Since ABC is unlisted, a marketability discount of, say, 15% might be applied: Rs 510 crore x 0.85 = Rs 433.5
crore.

4.5 Limitations of CCM

• Finding truly comparable peers is difficult, especially for unique or niche businesses.
• Market prices of peers can themselves be over- or under-valued (the whole sector may be in a bubble or a
slump).
• Doesn't directly capture company-specific future growth or risk; it borrows the market's collective view on
the sector.
• Accounting policy differences between companies can distort multiples if not adjusted for.

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5. Discounted Cash Flow (DCF) Method

DCF is an income-approach method, widely regarded as the most theoretically sound valuation technique because
it directly values what an investor actually receives: future cash flows. It projects the free cash flows a business
will generate over an explicit forecast period, adds a terminal value for everything beyond that period, and
discounts all of it back to today's value using an appropriate discount rate.

5.1 When DCF Is Used

• Businesses with reasonably predictable and forecastable cash flows.
• Mergers & acquisitions, especially where control and long-term strategy matter.
• Infrastructure, power, and project-finance valuations with long-term contracted cash flows.
• As the primary method in most independent fairness opinions and fund-raise valuations.

5.2 Key Terminology

Term Meaning

The number of years (typically 5-10) for which detailed, year-by-year cash flow
Explicit Forecast Period
projections are built.

The value of all cash flows beyond the explicit forecast period, usually calculated
Terminal Value (TV)
using the Gordon Growth (perpetuity growth) formula or an exit multiple.

A perpetuity formula that values a stream of cash flows growing at a constant rate
Gordon Growth Model
forever: TV = FCF(final year) x (1+g) / (WACC - g).

An alternative way to calculate terminal value, by applying a market multiple (like

Exit Multiple Method
EV/EBITDA) to the final forecast year's financial metric.

FCFF (Free Cash Flow to Cash flow available to all capital providers (debt and equity), discounted using
Firm) WACC to arrive at Enterprise Value.

FCFE (Free Cash Flow to Cash flow available only to equity holders, discounted using the Cost of Equity to
Equity) arrive directly at Equity Value.

The number of years from the valuation date to each cash flow; the mid-year
Discounting Period / Mid-Year
convention assumes cash flows arrive evenly through the year rather than at year-end,
Convention
giving a slightly higher present value.

Testing how the valuation output changes when key assumptions (WACC, growth
Sensitivity Analysis
rate, margins) are varied, to understand the valuation's key risk drivers.

A DCF variant where each business division/segment is valued separately and then
Sum-of-the-Parts (SOTP)
added together, used for conglomerates with very different businesses.

5.3 Formula
FORMULA

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Enterprise Value = Sum of [ FCFF(t) / (1+WACC)^t ] for each forecast year t, + Terminal Value /
(1+WACC)^n

FORMULA
Terminal Value = FCFF(final year) x (1 + g) / (WACC - g)

FORMULA
Equity Value = Enterprise Value - Net Debt - Minority Interest - Preference Capital

5.4 Step-by-Step Process

• 1. Build a revenue and cost forecast for 5-10 years based on business drivers (volume, pricing, margins).
• 2. Derive FCFF (or FCFE) for each forecast year.
• 3. Estimate WACC (or Cost of Equity, if using FCFE) as the discount rate.
• 4. Discount each year's cash flow to present value using the discount rate.
• 5. Calculate the Terminal Value at the end of the forecast period and discount it back to present value too.
• 6. Add up all discounted cash flows and the discounted terminal value to get Enterprise Value.
• 7. Bridge from Enterprise Value to Equity Value, then divide by share count to get value per share.

EXAMPLE: Simplified DCF for PQR Ltd. (2-year forecast for illustration)
Assume PQR Ltd's FCFF is projected at Rs 50 crore in Year 1 and Rs 60 crore in Year 2. WACC = 12%. Terminal
growth rate (g) = 4%.
PV of Year 1 FCFF = 50 / (1.12)^1 = Rs 44.6 crore.
PV of Year 2 FCFF = 60 / (1.12)^2 = Rs 47.8 crore.
Terminal Value (at end of Year 2) = 60 x 1.04 / (0.12 - 0.04) = Rs 780 crore.
PV of Terminal Value = 780 / (1.12)^2 = Rs 621.7 crore.
Enterprise Value = 44.6 + 47.8 + 621.7 = Rs 714.1 crore.
If Net Debt = Rs 100 crore, Equity Value = Rs 714.1 crore - Rs 100 crore = Rs 614.1 crore.

5.5 Limitations of DCF

• Extremely sensitive to assumptions - small changes in WACC or terminal growth rate can swing value
significantly ('garbage in, garbage out').
• Requires reliable long-term forecasts, which are hard for cyclical, early-stage, or highly uncertain
businesses.
• Terminal value often makes up 60-80% of total value, so the whole valuation hinges on a single, distant
assumption.

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6. SEBI ICDR Valuation Norms (for Listed Companies)

SEBI ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2018, are issued by the Securities and
Exchange Board of India. Unlike NAV, CCM, and DCF - which are valuation methodologies - SEBI ICDR is a
regulatory pricing framework. It does not tell you how to build a DCF or NAV; instead, it prescribes the
minimum/floor price at which a LISTED company can issue new shares in specific types of transactions, so that
existing public shareholders are not short-changed and promoters cannot issue shares to themselves too cheaply.

6.1 Key Terminology

Term Meaning

Securities and Exchange Board of India - the capital markets regulator that frames
SEBI
ICDR Regulations.

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 - govern

ICDR Regulations public issues (IPO/FPO), rights issues, preferential issues, and QIPs by listed
companies.

Issue of shares by a listed company to a select group of investors (promoters, PE

Preferential Issue / Preferential
funds, strategic investors) rather than to the public at large, priced as per Chapter V of
Allotment
ICDR.

A method by which a listed company raises capital by issuing shares/convertible

Qualified Institutions
securities only to Qualified Institutional Buyers (QIBs), governed by Chapter VI of
Placement (QIP)
ICDR.

The reference date used to calculate the floor price - for preferential issues it is
Relevant Date typically 30 days prior to the shareholders' meeting date; for QIPs it is the date the
Board decides to open the QIP.

The minimum price at which shares can be issued under a preferential allotment or
Floor Price QIP, calculated as per the SEBI ICDR formula - the company can price at or above
this, never below (except with special shareholder approval within permitted limits).

Shares of a company where the traded turnover during the 240 trading days prior to
Frequently Traded Shares the relevant date is at least 10% of the total number of listed shares - the pricing
formula differs for frequently vs. infrequently traded shares.

VWAP (Volume Weighted The average trading price of a share weighted by the volume traded at each price
Average Price) point during a period - the core input for the SEBI ICDR pricing formula.

The minimum period for which shares allotted on a preferential basis must be held by
Lock-in Period the allottee before they can be sold, as prescribed under ICDR (e.g., promoters' shares
typically locked in for a set period).

A valuer registered under the Companies (Registered Valuers and Valuation) Rules,
Independent Valuer / 2017, or a SEBI-registered Category-I Merchant Banker, required to certify valuation
Registered Valuer in specific ICDR situations (e.g., allotment against assets, or where the frequently-
traded-shares formula does not apply).

Merchant Banker A SEBI-registered intermediary who manages public issues, QIPs, and due diligence,

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Term Meaning

and is often required to certify pricing compliance under ICDR.

6.2 Pricing Formula for Preferential Issues (Chapter V)

For shares that are 'frequently traded', the ICDR floor price is the higher of the following two averages:

FORMULA
Floor Price = Higher of: (a) 90-trading-day VWAP prior to the Relevant Date, or (b) 10-trading-day VWAP
prior to the Relevant Date
If the shares are infrequently traded, the price is determined by an independent valuer, taking into account various
valuation parameters, and must be certified by a merchant banker or an independent chartered accountant, as
applicable.

EXAMPLE: Preferential Issue Floor Price for LMN Ltd.

LMN Ltd, a listed company, plans a preferential allotment. Its shares are frequently traded.
90-trading-day VWAP prior to the relevant date = Rs 245.
10-trading-day VWAP prior to the relevant date = Rs 260.
Floor Price = Higher of (Rs 245, Rs 260) = Rs 260.
LMN Ltd cannot issue new shares under this preferential allotment below Rs 260 per share.

6.3 Pricing Formula for QIP (Chapter VI)

FORMULA
QIP Floor Price = Average of weekly high-low closing prices during the 2 weeks preceding the 'Relevant
Date' (typically the date the Board decides to open the QIP)
SEBI permits a discount of up to 5% on the QIP floor price if approved by shareholders through a special
resolution.

6.4 SEBI ICDR vs. NAV / CCM / DCF - How They Relate
A common point of confusion: SEBI ICDR is not an alternative to NAV, CCM, or DCF - it is a pricing floor
imposed on top of them, specifically for certain share-issuance transactions by listed companies. In many other
listed-company contexts (e.g., a scheme of merger/demerger, a delisting, or an open offer under the SEBI
Takeover Code), the company is still required to obtain a fair valuation using NAV, CCM, and DCF (and the
SEBI ICDR / Takeover Code price serves as one more benchmark or floor to be compared against).

Term Meaning

Situation Applicable Framework

Preferential Allotment / QIP by

SEBI ICDR pricing formula (VWAP-based floor price)
a listed company

Merger / Demerger / Scheme of Fair value using NAV, CCM (Market Price Method for listed entity) and DCF, as per

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Term Meaning

Arrangement SEBI Circular on valuation reports for schemes

Reverse Book Building mechanism under SEBI Delisting Regulations, with a floor
Delisting of a listed company
price and independent valuer's report

Open offer under Takeover Highest of several parameters including negotiated price, market price (VWAP), and
Code price paid for prior acquisitions

Unlisted company share issue

(e.g., FEMA pricing for foreign DCF or any internationally accepted method under RBI/FEMA pricing guidelines
investment)

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7. Side-by-Side Comparison of Methods

Method Approach Basis of Value Best Suited For Key Weakness

Fair value of assets less Asset-heavy/holding Ignores future earnings

NAV Asset
liabilities companies, wind-up potential

Peer trading multiples applied IPOs, sanity check, sector Hard to find true
CCM Market
to metrics benchmarking comparables

Present value of future free Businesses with forecastable Highly sensitive to

DCF Income
cash flows cash flows assumptions

VWAP-based floor pricing Preferential issues/QIP by Applies only to specific

SEBI ICDR Regulatory
formula listed cos. transactions

In practice, a valuation report for a listed company transaction (e.g. a merger) will typically present NAV, CCM
(called the 'Market Price Method' when applied to the company's own listed price), and DCF together, and then
arrive at a final recommended value using a fair weighted combination of the three - a process often called
'triangulation'.

8. Consolidated Glossary (Quick Reference)

Term Meaning

The process of estimating the economic worth of a business, asset, or share as of a

Valuation
given date.

Total value of the operating business belonging to all capital providers (debt + equity
Enterprise Value (EV)
- cash).

Equity Value Value belonging only to shareholders (EV minus net debt and other claims).

NAV Asset-approach method: Fair Value of Assets minus Liabilities.

CCM Market-approach method: value derived from listed peer trading multiples.

DCF Income-approach method: present value of projected future free cash flows.

WACC Weighted Average Cost of Capital; discount rate for FCFF.

Cost of Equity (Ke) Required return for equity holders, from CAPM; discount rate for FCFE.

Terminal Value Value of all cash flows beyond the explicit forecast period.

EV/EBITDA, P/E, P/B,

Common valuation multiples used in CCM.
EV/Sales

FCFF / FCFE Free Cash Flow to Firm / to Equity - the cash flow bases discounted in DCF.

VWAP Volume Weighted Average Price - core input to SEBI ICDR floor price formula.

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Term Meaning

Floor Price Minimum permissible issue price under SEBI ICDR for preferential issues/QIPs.

Relevant Date Reference date for calculating the SEBI ICDR floor price.

Registered Valuer / Merchant

Professionals authorised to certify valuations under various Indian regulations.
Banker

Price at which an asset would change hands between a willing buyer and seller, both
Fair Value / FMV
informed, neither under compulsion.

Marketability/Liquidity Reduction in value for shares that cannot be readily sold (typically applied to unlisted
Discount companies).

Control Premium Extra value paid to acquire a controlling stake, over and above the trading price.

9. Quick Revision Cheat Sheet

9.1 One-Line Definitions

• NAV = Assets (fair value) - Liabilities.
• CCM = Peer multiple x Target's financial metric.
• DCF = Present value of future free cash flows + present value of terminal value.
• SEBI ICDR Floor Price (preferential issue, frequently traded) = Higher of 90-day VWAP or 10-day VWAP.

9.2 Which Discount Rate Goes With Which Cash Flow?

• FCFF -> discounted using WACC -> gives Enterprise Value.
• FCFE -> discounted using Cost of Equity (Ke) -> gives Equity Value directly.

9.3 Common Exam / Interview Traps

• NAV does not capture future growth - remember it is backward-looking (based on the balance sheet).
• CCM multiples must be based on comparable, normalised earnings - never compare raw, unadjusted
numbers.
• In DCF, always check whether the discount rate and cash flow are consistent (WACC with FCFF; Ke with
FCFE) - mixing them is a classic error.
• SEBI ICDR gives a floor price, not a valuation - a company can always issue above the floor price, but never
below it (subject to specified exceptions).

End of Study Notes.

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