Valuation Fundamentals

Table of Contents [Link]

Table of Contents

> Introduction > Which method is best suited ?

– Concept of Fair Value – Public vs Private Company
– Who uses Valuation? – By Scenario
> Valuation & Wealth Maximization – By Sector
> Valuation Approaches > Valuation FAQs
> Valuation Methods – General
> Is there a ‘Best’ method? – DCF
– Comparables

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 Equity Valuation Fundamentals
Introduction – Concept of Fair Value [Link]

At Finatics, we define Equity Valuation as

“A process that involves determining „Fair Value‟ of a company‟s equity in order to assist buy/sell decisions for the
purpose of Financial or Strategic Investment”

So what is Fair Value of an How should the worth of an …(Contd)

investment? Investment be determined ?
Put Simply, Fair Value is the price at As discussed, investment related … the other way is to find out what
which, one will get the desired rate of demand will be driven by expected are other „similar‟ opportunities
return when the investment is sold to return resulting from demand of available for, and then comparing the
a willing & able buyer. other similar opportunities available, extra price paid for or money saved
The worth of an investment is potential to generate cash and by the Asset.
determined by whether it is meant for implied risk. Another approach one may use is
long term use to generate returns When determining whether expected determining the cost of a substitute
(i.e. Strategic Investment) or for return can be achieved, one way is to a.k.a. replacement cost! Valuation
resale when the „right price‟ or „fair estimate the cash generated from deals with understanding & applying
value‟ is achieved (Financial the „Asset‟ against what is invested these 3 approaches in varying
Investment). The purpose of Valuation after considering „Time Value of situations
is to determine a fair value range of Money‟ (a.k.a. Net Present Value)
an investment (or capital asset) using
one or more of several available
techniques

1
 Equity Valuation Fundamentals
Introduction – Who uses Valuation? [Link]

Valuation is used at two levels

– Primary, which deals with „Value Creation‟ at a Corporate Finance level
– Secondary, that deals with market intermediaries & investors

Buy Side Institutions Sell Side Institutions Corporate Finance

Buy Side refers to those institutions Sell side are involved with Corporate Finance refers to managing
that are engaged in buying research recommending buy/sell decisions to finances of a company and involves
conducted by others. They clients. The buyers of such reports selecting projects, creating budgets
invest/manage client‟s funds (as well may be Retail clients, High Net-worth & arranging funds. Their job is the
as their own) into investments in Individuals or Institutional investors. toughest one i.e. Creating Wealth in
primary or secondary markets. E.g. – Brokerage Houses, Research the secondary market through
Primary refers to direct investment in Firms & focused KPOs managing expectations and delivering
companies while secondary involves Note: Bulge bracket Investment superior results. They use valuation
buying/selling stocks in the stock Banks play both buy/sell side roles. to understand gaps in expectation
market. and performance of the firm as a
E.g. – Mutual Funds, Hedge Funds, whole and to take decisions at a
Private Equity Firms & Venture project level!
Capitalists (any Asset Management
Company).

2
 Equity Valuation Fundamentals
Wealth Maximization through Valuation [Link]

What is Wealth Maximization?

Strategies are made in the boardroom while their results are declared by the secondary market! Wealth Maximization
deals with making business decisions that create „wealth1‟ for shareholders instead of just maximizing Profit/EPS

Wealth
Maximization
Step 3 - Adapt through
expectations in „Valuation driven‟
Step 2 - Quantify Business Decisions decision making
expectations through
Business decisions must be
Step 1 - Understand Valuation
aligned to expectations so as to
Expectations Valuation is the process of maximize wealth. Managers
capturing expectations with must ask themselves whether a
Expectations are difficult to project will add wealth to the
the „most likely‟ scenario in
capture as they are not only firm as a whole
terms of business performance
affected by sentiments but
also fundamental performance

Note: Today, many companies believe that „Value Creation‟ for

customers & society is as relevant as maximizing shareholder
returns. However, these two goals may result in friction at 1 Wealth refers to
the total wealth created for shareholders through capital
times leaving the shareholders to prioritize! appreciation + dividends a.k.a. Total Returns to Shareholder (TRS) 3
 Equity Valuation Fundamentals
Valuation Approaches [Link]

Why not have just one approach?

The idea is to capture all dimensions that a investor may be concerned with. Unfortunately, no single valuation
methodology is „complete‟ and hence two or more approaches are necessary to arrive at a „fair value range‟

Income based Market based Asset based

Income based approaches aim to discover Market based approaches aim to capture Asset based approaches aim to value a
value of a firm through its income metrics market sentiment while also taking into firm by valuing its assets on a carry
like Net profit or Free Cash Flows etc. account peer comparison. value, replacement value or liquidation
E.g. DCF Valuation, Edwards Bell Ohlson E.g. Trading & Transaction Comparables value basis
(EBO) model etc. i.e. Relative Valuation E.g. Liquidation value approach,
Pros Pros Replacement cost method and Book Value
 Cuts through accounting variances &  Captures market sentiment Pros
earnings abnormalities while also  Very quick & easy to apply  Works best for distressed & loss
considering Macro level implications to  Works best between quarters making companies
determine fair value of the firm  Results are very easy to explain/pitch  Works best in the downturn
 Considers Time value of Money Cons  Gives „worst case scenario‟ value (i.e.
 Most detailed & scientific  Does not work well for startups in a way intrinsic value)
 Provides intrinsic value  Has a tendency to overvalue stocks in  May also be used for target screening
 Used as a basis to determine whether bullish markets and undervalue in as first step in the M&A lifecycle
valuation is „stretched‟ bearish ones Cons
Cons  Sways with the market as there is no  Severely undervalues profit making
 Fails to capture sentiment anchor or „intrinsic value‟ companies by not capturing market
 Extremely data intensive  Many believe that the approach is sentiment or business performance
 A forecast, by virtue, brings with it an responsible for bubbles  Fails to capture market sentiment
element of uncertainty 4
 Equity Valuation Fundamentals
Valuation Methods [Link]

Discounted Cash Flows Trading Comparables M&A Valuation Other Methods

DCF Valuation aims to discover a.k.a. Relative Valuation, aims Although not an entirely Other methods some of which
the „Intrinsic Value‟ of a to determine valuation by peer different methodology it deals are „academic‟ in nature and
company by estimating comparison and hence with judging the feasibility of a hence best left in books.
present value of future cash captures market sentiment merger/acquisition using However, theory is the basis of
flows. Sub Methods: slightly modified techniques practice hence they deserve a
Sub Methods: - Equity & Enterprise Methods Used good read!
- Enterprise valuation (FCF/F) Multiples - Accretion/Dilution Analysis - First Chicago Approach
- Equity method (FCFE) Pros: (measures whether EPS - Contingent Claim Valuation
- Economic Profit Model - Capture Market Sentiment increases or decreases post - Edwards, Bell & Ohlson model
- APV approach - Quick & Easy to apply deal) - Dividend Discount Model2
Pros: - Works between quarters - Transaction Comparables - Liquidation Value approach2
- Very scientific and detailed Cons: (scrutinizes historical - Replacement Cost approach2
- Normalizes accounting noise - In the real world, there is no transactions for „deal - Sum Of The Parts Valuation2
- Provides intrinsic value such thing as a perfectly premium‟ paid on similar (SOTP ) a.k.a. Multi-business
Cons: comparable company acquisitions) Valuation
- Sensitive to many factors - Valuation is always biased as - LBO modeling (measures the
most of which are at the there is no benchmark „IRR‟ available for equity Remark: Modern theory &
discretion of the analyst. valuation of the company in contributors post debt practice is a result of great
- Does not work well between question repayment) amount of invaluable
quarters - Bull markets lead to more contributions made by several
- Fails to capture sentiment bullish valuation and vice-versa Remark: These are the most academicians on the subject.
popular techniques used for Some of these methods were
Best Suited For: The long Best Suited For: Highly volatile valuing M&As and hence there part of the evolution chain and
term. Acts as an anchor for companies, cyclical companies. is little choice available to that was the only role they ever
other methods Suited for the short term discuss pros/cons played! 2 briefly discussed ahead 5
 Equity Valuation Fundamentals
Is there a „Best‟ method? [Link]

Simply Put Investment Horizon & Valuation Investment Type & Valuation
No. There is no „Best‟ Investment Horizon i.e. Short Term or Long term Investment type
method. Apart from the A short term (let‟s say less than one year) investor Is typically i.e. Strategic or Financial
pros/cons, each method interested in determining fair value between quarterly results. Financial investments are made in
is designed to suit: Although DCF provides an intrinsic value, in the short run, share the secondary market where one
- an investment horizon prices may be very volatile and DCF will not help such an investor relies on secondary data with the
- an Investment type in any way. Hence, Short term investors a.k.a. „speculators‟ must idea of liquidating the investment at
- market conditions rely on trends, sentiments and news to determine valuation. some point in the horizon instead of
- a specific sector3 These factors are best captured in the Comparables Method (i.e. generating regular returns from the
- a specific scenario3 Relative Valuation). capital itself. On the other hand,
Strategic investments are the ones
made as part of „Corporate Finance‟
The best way out Market Conditions & Valuation and hence data availability is not an
issue and the investor may go for
The best approach is what Bullish & Bearish Markets call for different valuation strategies
primary research when more data is
many call the “Valuation and hence different methodologies. In bullish markets, many shift
required. Needless to say, the funds
Football Field” a.k.a. from DCF to Comparables in the pretext that “DCF fails to
involved & research carried out is
“Triangulation”. This capture that the market as a whole has moved to a higher level”.
more intense. E.g. Project Appraisal
involves determining fair However, they fail to recognize that without DCF, the valuation is
Which method for which type?
value using all relevant „floating‟ and is no longer tethered to an intrinsic value. The
For a Financial Investment one may
approaches followed by opposite prevails in case of bearish markets, when analysts swear
choose a Market / Income / Asset
drawing an inference in by DCF, now claiming that Comparables understate valuation.
based valuation approach.
terms of a fair value Bottom-line: It is at an inflection point, that the truth about such
However, in case of strategic
range. This approach also theories is exposed. Secondly, one cannot predict inflection points
investments one must rely on an
helps in using one method implying that, along with comparables an intrinsic value method
Income based approach backed by an
to „sanitize‟ the other! must always be used to see how far the tether can be stretched.
asset valuation. 3 briefly discussed ahead 6
 Equity Valuation Fundamentals
Which method is best suited: Public vs Private [Link]

Public Company Valuation Private Company Valuation

Public Companies, by law, must provide audited financial results It must be noted that , Private company valuation is driven by a
on a regular basis to the public at large. That apart, they also strategic purpose like Private Equity, Joint Ventures and M&As.
„may‟ make available a host of other investor friendly information For such purposes, traditional „financial investment‟ driven
in the form of industry trends, presentations, analyst meets & methodologies will fail. Simply because, strategic transactions
conference calls. Secondly, Public companies get far more are motivated by a „control factor‟ i.e. the power/authority to
coverage in the form of analyst reports, news, management change business direction & strategies. This control commands a
guidance and interviews. All this makes the job of valuation an premium over normal „trading driven‟ valuation approaches.
easier one. With such data availability it is easier to use any of Hence, the Transaction Comparables approach (a.k.a. Precedent
the valuation techniques with a high degree of reliability. For such Transaction Analysis or Deal Comps) is more popular & relevant
companies, any of the valuation methodologies discussed earlier here. However, as for all scenarios, one must use other
may be used (also depending on the Scenario and sector) approaches as well to determine a fair value range.

Which valuation method results in the highest Valuation?

Contrary to popular belief, the highest valuation is not driven by the method alone In short, Transaction Comparables result in
but market conditions & the sector as well. In general, Transaction Comparables highest valuations. While, in Bull markets
include a control premium and hence result in a higher valuation than other methods. Comparables result in higher valuations than
Between DCF & Trading Comparables the results will vary depending on. DCF. The reverse holds true in Bear markets.
For E.g. When valuing a cement company, DCF is likely to result in a higher valuation Unlike what many believe, DCF does not Inflate
as compared to Trading Comparables. However, the case reverses in the IT sector value or result in highest value. The so called
where Trading Comparables seem to „inflate‟ value. This is caused because, the DCF inflation is a result of errors & unrealistic
market at large believes that DCF fails to capture value in some sectors while assumptions as a consequence of over-
Comparables fail in others. simplification of the approach
Note: The explanation above should be considered a „Rule of thumb‟ & not a tenet!
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 Equity Valuation Fundamentals
Which method is best suited: Scenarios-wise [Link]

Start-ups Matured Companies IPO Valuation

Startups are driven by far too Matured Companies, have fairly Although, for such situations it is best to use DCF as it
many factors to be captured by predictable financials and hence determines the intrinsic value, not many will want to use it as
simplistic valuation models. DCF will result in a fairly reliable it is likely to understate value as against Comparable valuation.
Their sensitivity to Economic, valuation. However, the Dividend Simply because, the idea behind an IPO is to raise maximum
Sector Specific and Company Discount Model will also work possible capital for a minimum dilution in equity! Hence most
specific factors must be reliably, as matured companies IPOs come out in bull markets where valuations are already
captured as far as possible to have nominal expansion needs „stretched‟ and Comparable Valuation will result in higher
reasonably value them. These and hence a high dividend values as compared to DCF, as a result of circularity involved
factors can only be captured payout ratio along with in such the approach. Consequently, you may notice that IPOs
with the DCF method. predictability of growth rates. are „demand driven‟ rather than intrinsic value led, as a result
E.g. Large FMCG companies many average companies get extraordinary valuations!

High Growth Companies Cyclical Companies Distressed Companies

High growth companies have Cyclical Companies, by virtue, Distressed company valuation, is particularly tricky as the
drastically changing market have a very high degree of challenge lies in finding fair value and not the lowest value!
shares and hence it is very uncertainty. Secondly, such By distressed, we mean loss making companies or those that
difficult to compare them with a companies are always on the are restructuring their businesses by selling off „toxic assets‟
benchmark, making comparable radar for news & management and toning down capital structure. Traditional valuation
valuation difficult and leaving comment both of which are approaches fail miserably as a result of the uncertainty
one to go with the DCF immediately reflected in involved and this is where Liquidation Value & Replacement
approach. Comparables. On the other cost method come to the rescue. Liquidation Value measures
E.g. Telecom companies hand, DCF may have to wait for return from selling off or liquidating the assets while
a quarter or more to reflect a Replacement Cost measures the opportunity cost of setting
change. E.g. Sugar Companies up a business. E.g. Many Textile Companies 8
 Equity Valuation Fundamentals
Which method is best suited: Sector-wise [Link]

Basic materials IT & ITes Telecom Healthcare / Hospitality

Steel & Cement represent IT & ITes companies have very The Telecom sector, has rich & Like telecom, these sectors
basic/building materials. The complicated business models abundant data availability to too can be very easily broken
sectors are cyclical (driven by where revenues are scattered generate very reliable numbers down into a logical flow of
expansion cycles). Being & unpredictable, face constant over a 3-5 year horizon and the numbers resulting in a reliable
cyclical, in normal/bullish threat of protectionism and so business model can be very medium-long term forecast.
scenarios Comparables one simply cannot have a easily broken down into a flow Hence DCF is a rational choice.
approach is best suited. reliable long term forecast. of numbers. For this reason it However, asset based
However, in downturns it is Hence Comparables is chosen is recommended to use the approaches are a must in
better to shift to Asset based over DCF by most. However, DCF approach. However, many bearish markets to determine
approaches to reflect we suggest the use of DCF in analysts use Comparables to „worst case scenario‟ valuation
maximum downside potential. very bullish/bearish markets. provide short term targets.

Core Sectors Retail Conglomerates / Multi Businesses

Infrastructure, Power and Oil & Although appearing to be SOTP valuation, is not an altogether different valuation
Gas together form the Core simple, this is one of the most methodology but just a combination of two or more traditional
Sector. These sectors are complicated sectors to value. ones. The idea being, in case of a multi-business firm, certain
primarily driven by government The complexity is a result of business units may be better off valued using DCF while others
policy and funding, the details distant breakevens, multiple may be valued using Comparables while some maybe valued with
of which are clearly made formats, complex funding an asset based approach. The result of each, shall be summed-up
available. Having distinct provisions (debt/lease/cash) to determine the value of the firm as a whole. Sum Of The Parts
drivers along with rich data and „not-so-easily-quantifiable‟ (SOTP) can be used for multiple product lines, multiple business
availability make it a perfect demand. This leads to a hybrid units or multiple subsidiaries. The choice of valuation for each
DCF candidate. Asset valuation valuation approach often called unit must be based on strong rationale, rather than gut feeling
should be used as a support. „SOTP‟ Valuation! (as discussed for the sectors above). 9
Equity Valuation Fundamentals
Valuation FAQs: General [Link]

Why do share prices move up ?

Why do Share Prices
There are two broad factors affecting share prices
Move up?
1. Fundamental performance of the company - Growth and quality/sustainability of Cash flows,
excess return over cost of funds (a.k.a. Economic Profit or EVA™)
2. Market Sentiments – Market sentiments may be influenced by overall performance of the
Economy, Institutional holding, Government policy, Sector performance, Promoter holding,
Management quality etc.
The points above can be combined to suggest that Share prices will move up only when
performance (fundamentals) is greater than expected returns (sentiments)
Or as Mckinsey calls it ‘Running faster than the expectations Treadmill’

Can we forecast sentiments ?

Can we Forecast No. It is like asking how many people will want to buy/sell a stock at a given point. As mentioned
Sentiments? above there are lot of factors affecting sentiments and it is very difficult to understand how the
market will react to each such factor. Although, Technical analysts claim to do so, it is yet to be
proven and therefore it remains a controversial subject

What about market expectations ?

What about market Unfortunately, sentiments drive expectations. At best, a snapshot of market expectations can be
expectations ? taken by getting Consensus estimates (available on popular websites /databases like Bloomberg,
Thomson-Reuters etc.) However, one cannot forecast this aspect and hence beating the street
remains the biggest challenge for managers!
10
 Equity Valuation Fundamentals
Valuation FAQs: General …[Contd] [Link]

Any proof that other methods of valuation work ?

Any proof that other
Yes. According to a study conducted by Tom Copeland (Co author of a bestseller, Former Chicago
methods work ?
University Professor, Former Partner at McKinsey & Co. and currently Partner - Monitor group) a
correlation of 80% between DCF and Current Market Price exists!

Wealth Maximization or Profit Maximization ?

Wealth Maximization or
Profits are not the only source of Financial rewards to a shareholder. She may also benefit from
Profit Maximization?
capital appreciation as a result of selling her stocks at a higher price. As a result the Profit
Maximization motive fails in comparison to Wealth Maximization (includes also sources of wealth)

How does a company create wealth ?

How does a company To achieve this goal the company must strive to generate a return over its cost of funds while
create wealth? beating (or at least matching) market expectations ! The spread between the returns over funds
and cost of such funds is called Economic Profit.

What does Economic Profit mean ?

What does Economic A.k.a. EVA™ In the equation below, ROIC represents the return on capital while WACC reflects the
Profit mean? cost of the same. For a firm to grow and reward its Claimholders its Return on Funds must always
be higher that the cost. Economic Profit = (ROIC – WACC ) x Invested Capital

So When does DCF come into the picture ?

So when does DCF come A Discounted Cash Flow Valuation aims to arrive at the ‘Intrinsic Value’ of a company by
into the Picture? discounting the forecasted ‘free’ cash flows at a rate = cost of generating such cash flows. 11
 Equity Valuation Fundamentals
Valuation FAQs: DCF [Link]

Why Discount Cash Flows ?

Why Discount Cash Flows
As discussed, the goal of a company is to generate wealth for its owners (i.e. Shareholders) and not
and not Profit?
Profit Maximization. The method is based on the belief that ultimately what can be distributed to
Shareholders is Cash and hence the phrase ‘Cash is King’.

Why is it considered more scientific ?

Why is it considered more
Shareholder wealth will be maximized as a result of cash inflow through cash/stock dividends and
scientific?
capital appreciation. However, paying dividends implies that the company has lesser internal cash
to reinvest as a result it will need to borrow/raise more, causing the Share price to come down by
that much. On the other hand Capital appreciation, in the long run is related to company
fundamentals. This also explains why growing companies pay less or no dividends as compared to
stable/mature ones.

Why not discount dividends4 ?

Why not discount Firstly, Not all companies pay dividends. Secondly, dividends reduce internal cash resulting in a
dividends4 ? reduction in its Share price (Although for mature companies, as a result of lesser reinvestment
needs Dividends are ‘believed’ to increase Shareholder wealth).

4 Dividend Discount Models, although not very popular with practitioners, have their own place when the situation is ‘right’. For e.g. 12
they are popular with investment banks & research firms when it comes to valuing banks and companies that have high payout ratios
 Equity Valuation Fundamentals
Valuation FAQs: DCF…[Contd] [Link]

Will DCF give an accurate value per share ?

Will DCF give an accurate
Value per share as arrived at using DCF is just as good as the quality of Forecasts. Although there
Value per Share?
are several approaches to scientifically forecast the performance one must remember that a
forecast, by virtue is based on certain assumptions, which are specific to every company/analyst.
Although companies often aim to standardize such assumptions, they remain just that !

Is DCF the best method to arrive at Fair Value ?

Is DCF the best method to As mentioned earlier, there is no ‘best’ method. Share Prices, in the long run will (and must) revert
arrive at Fair Value? to fundamental performance of the company in question. However, prices are also driven by
sentiments which are not captured in DCF. This is where Comparables come to the rescue, it not
only captures sentiments but is also better suited between quarterly results. Hence DCF and
comparables are said to be complimentary! The process of triangulation is hence recommended

Should we forecast cash flows directly ?

Should we forecast cash No. Cash Flows are the most important component within the DCF equation and hence the quality
flows directly ? of forecasts will ultimately decide the reliability of the Intrinsic Value thus arrived at.
• Although Academicians suggest that cash flows must be directly forecasted, such a practice will
yield unreliable results in real world situations.
• The lifeblood of a company is Sales and hence it is a very critical item while forecasting cash flows
Secondly a detailed COGS & Capex build up cannot be ignored. Put Simply, Free Cash flows are an
outcome of a detailed Financial-cum-business model. Directly forecasting them will result in little
credibility to the final output !
13
 Equity Valuation Fundamentals
Valuation FAQs: DCF…[Contd] [Link]

What is Discounting? And why must it be used?

What is Discounting?
Discounting flows from the concept of ‘Time Value of Money’. Put simply, it means the value of
And why must it be used?
money deteriorates with time as a result of risk/uncertainty. To determine ‘Present Value’ of a
future cash flow we must discount it by the cost of funds raised to generate the cash flows.

How is the discount rate calculated ?

How is the Discount rate The Estimation (not calculation) of the discount rate firstly depends on the type of DCF method
calculated ? used, following which, one must estimate the opportunity cost of the capital contributors (i.e.
depending on the type of DCF method used the discount rate will vary). Following the principle of
consistency one must identify all contributors to the specific cash flow model

Methods within DCF ?

Methods within DCF ? Contrary to popular belief, all 4 methods within DCF must result in the absolutely same Value per
Share. However, capital structure and beta prevent this from happening.
Therefore, it is futile to compare/use two different DCF approaches simultaneously.
1. Enterprise DCF – The method aims to forecast operating cash flows for firm (i.e. available to all
capital contributors), subtract the Present Value of all Non-Equity items and add back all non-
operating excess cash/cash equivalent items. The discount rate hence must be the WACC.
2. Equity DCF – Theoretically the easiest of all, but practically the method poses several challenges
and hence loses out to the Enterprise method in popularity. As the name suggests, Cash Flows
to Equity holders are calculated and hence discount factor is the ‘Cost of Equity’
3. Adjusted Present Value – Recommended for use in Special situations like LBOs
4. Economic Profit Method – Uses EVA™ to‘validate’ the Enterprise DCF approach 14
 Equity Valuation Fundamentals
Valuation FAQs: Comparables [Link]

What are multiples ?

What are multiples? Multiples are ratios used to gauge the degree to which a stock is over/under valued. By themselves,
they are of no significance. However, when compared to a set of ‘similar’ companies a lot may be
revealed. As mentioned earlier they are used both in Trading and Transaction comparables .
• Multiples are of two main types Equity and Enterprise each having its own place
• Types of Equity multiples P/E, PE/G, M/B (or P/B) etc.
• Types of Enterprise Multiples EV/Sales, EV/EBITDA, EV/EBIT etc.
• For Every multiple the numerator must be related to the broader market while the denominator
must be one that reflects a relationship between the company fundamentals and the appropriate
numerator. To make things simpler, lets consider the most popular of all multiples – P/E. Now, the
numerator is the Market capitalization or Market Value per share i.e. the market value of equity
and hence the denominator must reflect what is available to equity claimholders – Net Profit.

How are Multiples used ?

How are Multiples used? A sector average (or weighted average ) is calculated as a benchmark on a Last twelve month
(LTM) or ‘Forward’ basis, to which the company in question is compared, thus determining
whether it is over/under valued. 5

Are they more popular than DCF ?

Are they more popular Yes. The approach, as a result of it’s (believed) ease of application, flexibility and reach is far
than DCF ? more popular than any other. However, to make it real world ready it needs some serious
research and enhancements to it’s popular avatar! 5 The explanation was a over-

simplification of the actual process

15
Equity Valuation Fundamentals
Recommended Reading [Link]

Recommended Reading
Books
1. Mckinsey Valuation 4th Edition – Tim Koller, Marc Goedhart & David Wessels
2. Financial Valuation – James R. Hitchner (with contributions from 25+ Authors)
3. Investment Fables – Aswath Damodaran
(Note: Although, „Investment Fables‟ is a very well written „study‟, we do not recommend Damodaran‟s valuation
approach as we believe it is far too simplistic & fundamentally naive for real world application)

Recommended Articles
1. The expectations treadmill – Richard F.C. Dobbs, Tim Koller (Mckinsey Quarterly)
2. Do Fundamentals or Emotions drive the Stock Market? – Tim Koller, Marc Goedhart & David Wessels (Mckinsey
Quarterly)
3. Equity Analysts: Still too bullish – Marc Goedhart, Rishi Raj & Abhishek Saxena (Mckinsey Quarterly)
4. The irrational Component of your Stock price – Marc Goedhart, Bin Jiang & Tim Koller (Mckinsey Quarterly)
5. New developments in valuation – An interview with Tom Copeland
Equity Valuation Fundamentals
Contact US [Link]

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