RELATIVE VALUATION

-Parvesh Aghi
Fundamental Principles of Relative Valuation

2
Relative Valuation

3
Intrinsic valuation/ DCF valuation

» The value of a risky asset can be estimated by

discounting the expected cash flows on the asset over
its life at a risk-adjusted discount rate:

where the asset has a n-year life, E(CFt) is the expected

cash flow in period t and r is a discount rate that
reflects the risk of the cash flows.
Generic DCF Valuation Model
Two components to relative valuation

** risk, growth potential, and

* by converting prices into
cash flows
multiples of earnings,
book values, or sales

6
USE OF RELATIVE VALUATION

7
Reasons for Popularity

8
Potential Pitfalls

9
STANDARDIZED VALUES AND MULTIPLES

» To compare the values of similar firms in the market ,

we need to standardise the values in some ways by
scaling them to a common variable.
[Link] the earnings the firms generate ( EPS/EBIT
EBIDTA
[Link] the book value
[Link] the revenues that firms generate
[Link] the Firm’s operational performance measures
that are specific to firms / sectors ( production
capacity/ subscribers / natural reserves)

10
Multiples

11
Earnings Multiples

PE ratio :
when buying a
* value of the
stock
operating
assets of the
EV/ EBIDTA:
firm.
when buying a
business

12
Book Value Multiples

13
Revenue Multiples

*Market value of equity / revenues.

14
Sector-Specific Multiples

15
VALUATION MULTIPLES

16
 EV/SALES
Multiple Positive Limitation Conclusion
EV/Sales Not effected by accounting Does not capture Can be used for the
policy differences in profitability part of industry where
comparable companies comparable profitability is
companies negative. Or where
profitability margins
are in a standard
range.

Can be used for the industry

where profitability is negative.
E,g,
e
commerce and electric
vehicles

EV based multiples are not

effected by differences in
capital structure

17
 EV/ EBIDTA
Multiple Positive Limitation Conclusion
EV/ EBIDTA Cannot be used Can be used for
for the industry almost every industry
Less effected by having negative except, loss making
accounting policy EBIDTA industry, banking
differences than other and financial
profit margins companies
This multiple is more
Captures picture of useful specially in
profitability of case of capital
comparable companies, intensive industry,
which is not the case compared to ev/ebit
with ev/sales multiple margin
Huge D&A exp can
EV based multiples are distort earnings in
not effected by capital intensive
differences in capital industry if we use
structure EBIT
Not effected by non
operating items of
income and expenses. 18
Positives:

19
Limitations:

20
Conclusions:

21
Key Takeaways:

22
EV/EBITDA – Summary Table
Aspect Details

Enterprise Value divided by Earnings Before

Definition
Interest, Taxes, Depreciation, and Amortization.

- Less affected by accounting policy differences

than other profit margins.- Reflects profitability of
Key Positives comparable companies (unlike EV/Sales).-
Neutral to differences in capital structure.-
Ignores non-operating income/expenses.

- Not suitable for industries with negative

Limitations EBITDA.- Not applicable to banks and financial
institutions.

- Capital-intensive industries where D&A distort

EBIT.- Cross-company comparisons across
Best Use Cases
different accounting methods and capital
structures.

- Companies are loss-making.- Industry is

Avoid When financial/banking.- EBITDA is artificially adjusted
or volatile.

23
 PE MULTIPLE
Multiple Positive Limitation Conclusion

Captures picture of Effected by capital Can be applied in

P/E Multiple profitability of structure differences the industry having
comparable intangible
companies, which leverage.
is not the case
with ev/sales
multiple

Effected by non
operating items of
income and
expenses
Most effected by
accounting policy
differences

24
Positives:

25
Limitations:

26
Conclusions:

27
Key Takeaways:

28
Multiple Positive Limitation Conclusion
EV/ EBIT Can not be used
Captures picture of for the industry Can be used for
profitability of having negative almost every
comparable ebit industry except, loss
companies, which is making industry,
not the case with banking and
ev/sales multiple financial companies
EV based multiples We should avoid
are not effected by using this multiple
differences in for capital intensive
capital structure industry
Not effected by non Huge D&A exp can
operating items of distort earnings in
income and capital intensive
expenses. industry if we use
EBIT

29
EV/operating matrix
Multiple Positive Limitation Conclusion

EV/ Operating Can be used for does not capture Eg, Whatsapp,
Matrix industry not financial and other app
having sales, but performance of based companies
subscribers etc comparable
companies

30
Multiple: EV/Operating Matrix

31
Positives:

32
Limitations:

33
Conclusions:

34
Key Takeaways:

35
 Valuation Multiples – Comparative Framework

Multiple Key Positives Limitations Best Use / Conclusion

- Less affected by accounting - Useful across most industries

- Not usable for negative EBITDA.-
differences.- Neutral to capital (esp. capital intensive).- Preferred
EV/EBITDA Not applicable to banks &
structure.- Excludes non-operating over EV/EBIT in heavy D&A
financials.
items.- Reflects core profitability. businesses.

- Intuitive and widely used by - Sensitive to capital structure.- - Best for stable, profitable firms
equity investors.- Captures Distorted by non-operating items.- with strong earnings.- Suited for
P/E Multiple
profitability better than EV/Sales.- Highly affected by accounting industries with intangible leverage
Simple and transparent. policies. (brands, tech).

- Useful for early-stage, app-

- Applicable where
- Ignores actual financial based, and platform businesses
revenues/profits are not
performance.- No standardization (e.g., WhatsApp, Snapchat).-
EV/Operating Matrix meaningful (e.g., subscribers,
across metrics.- Risk of inflated Should be complemented with
users, downloads).- Captures
valuations. financial multiples once
growth potential early on.
monetization starts.

36
EV/Operating Metrics

37
Technology & Social Media

38
Telecom & Subscription Services

39
SaaS (Software-as-a-Service) & Cloud Businesses

40
E-commerce & Marketplaces

41
App-based Companies

42
✅ Bottom Line:

43
Valuation Multiples – Real Data
Operating-Based Financial-Based
Company Operating Metric Financial Metric
Value Value

–44.5× (negative
EV/EBITDA EBITDA) (
Snap Inc. — —
(TTM) CliffsNotes,
StockStory)

34.8×
— — EV/FCF (TTM)
(GuruFocus)

~$1,360 Market
Cap per ~12.7×
Revenue per EV/Revenue
Netflix, Inc. subscriber (2021 (GuruFocus,
subscriber / User (TTM)
est.) Yahoo Finance)
([Link])

41–42×
EV/EBITDA
— — (Multiples,
(TTM)
StockAnalysis)

— — EV/FCF (TTM) 62× (GuruFocus)

44
Insights & Context

45
Netflix

46
 RIGHT MULTIPLES
Multiple Positive Limitation Conclusion

Can be used for the industry where profitability

1. Not effected by accounting policy differences Does not capture profitability part of is negative. Or where profitability margins are
EV/Sales in comaparable companies comaprable companies in a standard range.
2. Can be used for the industry where profitability
is negative. E,g, e commerce and electric
vehicles
3. EV based multiples are not effected by
differnces in capital structure

Can be used for almost every industry except,

1. Less effected by accounting policy differences Can not be used for the industry havingloss making industry, banking and financial
EV/EBITDA than other profit margins negative ebitda companies
2. Captures picture of profitability of comparable This multiple is more useful specially in case
companies, which is not the case with ev/sales of capital intensive industry, compared to
multiple ev/ebit margin
3. EV based multiples are not effected by Huge D&A exp can distort earnings in capital
differnces in capital structure intensive industry if we use EBIT
4. Not effected by non operating items of income
and expenses.

1. Captures picture of profitability of comparable Can be used for almost every industry except,
companies, which is not the case with ev/sales Can not be used for the industry havingloss making industry, banking and financial
EV/EBIT multiple negative ebitda companies
2. EV based multiples are not effected by We should avoid using this multiple for capital
differnces in capital structure intensive industry
3. Not effected by non operating items of income Huge D&A exp can distort earnings in capital
and expenses. intensive industry if we use EBIT

1. Captures picture of profitability of comparable Effected by capital structure

companies, which is not the case with ev/sales differences Can be applied in the industry having
P/E Multiple multiple intangible leverage.
Effected by non operating items of
income and expenses
Most effected by accounting policy
differences

Can be used for industry not having sales, but does not capture financial performance Eg, Whatsapp, and other app based
EV/operating matrix subscribers etc of comparable companies companies

47
Takeaways
» Operating metrics like value per user or subscriber
offer invaluable insights—especially for growth-oriented
or app-based businesses where financials may not yet
reflect true potential.
» Financial multiples (EV/Revenue, EV/EBITDA,
EV/FCF) help anchor valuation in profitability and scale
—but may become negative or misleading in loss-
making scenarios.
» Together, they provide a fuller picture: operating
metrics reflect scale and engagement potential, while
financial metrics capture profitability and cash
generation.
48
 MULTIPLES USED

104

Sector Multiple Used Rationale

Cyclical Manufacturing PE, Relative PE Often with normalized
earnings
Growth firms PEG ratio Big differences in growth
rates
Young growth firms w/ Revenue Multiples What choice do you have?
losses
Infrastructure EV/EBITDA Early losses, big DA
REIT P/CFE (where CFE = Net Big depreciation charges
income + Depreciation) on real estate

Financial Services Price/ Book equity Marked to market?

Retailing Revenue multiples Margins equalize sooner
or later
Thus, a firm which has historically traded at half the market PE (Relative PE =
Relative PE = PE of Firm / PE of Market . 0.5) is considered over valued if it is trading at a relative PE of 0.7.
What to control for

50
FOUR BASIC STEPS TO USING MULTIPLES

51
FOUR BASIC STEPS TO USING MULTIPLES

52
[Link] is defined consistently and measured uniformly

53
Consistency

54
Consistency

55
Consistency

56
 Uniformity

Aggressive companies report higher EPS thus look cheap ( lower PE Ratio)
57
[Link] characteristics of a multiple

58
Distributional characteristics of a multiple

» It is difficult to look at a number and pass

judgment on whether it is too high or low without
the knowledge of cross distribution of a multiple.
» The table below summarizes the average and
standard deviation for three widely used multiples
US companies Current PE Price-to book Equity EV/EBITDA
Average 48.12 7.14 26.52
Median 23.12 2.53 8.64
Standard dev 235.64 65.44 250.54
Minimum .10 .00 0.00
Maximum 10,081 4,447 11,322

59
USA 2025
Metric Approximate Value / Range

Median P/E (S&P 500) ~ 22

Average P/E (Tech) ~ 33

Average P/E (Rest of S&P) ~ 22

EV/EBITDA (IT Sector) ~ 27.3

EV/EBITDA (Energy) ~ 7.5

EV/EBITDA (Health Care) ~ 16.8

Typical "Healthy" EV/EBITDA Range 8×–30× (sector-dependent)

60
Distributional characteristics of a multiple

61
Time variation in multiples

» Multiples can change over time

US Stocks Average Median % of firms
with PE ratios
Jan 00 52.16 24.55 65.33
Jan 01 44.99 14.74 63.00
Jan 02 43.44 15.50 57.06
Jan 03 33.36 16.68 49.99
Jan 04 41.40 20.76 58.18
Jan 05 48.12 23.21 56.43

» 2000 was the peak of market bubble.

» Multiples during recession will decrease
62
Historical P/E Ratios for the S&P 500
Year Trailing P/E (≈ Jan 1) Notes
Jan 2000 29.0× Dot-com era peak
Jan 2001 27.6×
Jan 2002 46.2× Post-bubble spike
Jan 2003 31.4×
Jan 2004 22.7×
… …
Jan 2023 22.8× Pre-pandemic levels
Jan 2024 25.0× Ramp-up into 2024
Jan 2025 28.2× Elevated valuation

Aug 15, 2025 29.9× Latest estimate available

63
USA Market Valuation Snapshot (as of ~August 2025)

Historical 10-
Current P/E Insight
Index / Metric Forward P/E Year Avg
(Trailing) Summary
(Trailing)

Elevated
compared to
~29.9× (Aug
S&P 500 ~23.0× ~19–20× history, well
2025)
above decade
average

NASDAQ 100 Median ~20.8×; Near historical

~30.4× (Aug
(100 largest – Typical ~18.9– upper range,
2025)
non-financial) 30.9× above median

Currently ~36×
S&P 500 Long-term avg
– – – historically
(Shiller CAPE) ~16×
very high

64
Summary Table: Historical Context for Indian Indices

Current P/E (~Aug 10-Year Average

Segment Insight
2025) P/E
Slightly above
Nifty 50 (trailing) 21.66× ~20× average, fairly
valued
Overvalued
India Market
24.69× 20.24× relative to 10-year
(INDA)
mean
Highly elevated
Small-Cap 100 24.5× (forward) 16×
valuations
Substantially
Mid-Cap 100 35.8× (forward) 22.4×
overvalued

65
Key Observations

» The Nifty 50’s trailing P/E remains modestly

elevated but still within a reasonable range
relative to its decade-average trend.
» The broader market (via INDA) is currently richer
in valuation terms compared to its historical norm.
» Small-cap and mid-cap stocks are trading at
notably high forward P/E ratios—suggesting
potential overvaluation in these segments.

66
» The India Market (INDA) in the data I shared refers to the iShares MSCI India ETF (ticker:
INDA).
» 🔹 What is INDA?
» INDA is an Exchange-Traded Fund (ETF) managed by BlackRock’s iShares, designed to track
the performance of the MSCI India Index.
» The MSCI India Index is a broad equity index that captures the performance of large- and mid-
cap companies in India across multiple sectors (financials, IT, energy, consumer, etc.).
» 🔹 Why it’s used as a proxy
» Since it includes a basket of major Indian stocks (not just the Nifty 50 or Sensex), it gives a
broader picture of the Indian equity market.
» Analysts often use INDA’s valuation multiples (like P/E, P/B, EV/EBITDA) as a proxy for the
overall Indian market, especially for international comparisons, because:
» It’s accessible to global investors (traded on U.S. exchanges).
» Data providers (like [Link]) track its valuation metrics consistently.
» 🔹 Key Difference vs Nifty / Sensex
» Nifty 50 / Sensex: Focused on the top 50–30 companies in India, typically blue chips.
» INDA (MSCI India Index): Covers a wider universe of ~100+ companies (large & mid-caps),
making it a broader measure of India’s equity market.

67
68
69
70
[Link] the multiple
» In discounted cash flow valuation the value of a
firm is a function of three variables , namely

71
Analyse the multiple

72
Analyse the multiple

73
Analyse the multiple

74
Math

75
Analyse the multiple

PE Ratio = Share Price / EPS

D0 / EPS = Payout ratio

76
Analyse the multiple

77
Analyse the multiple

PB Ratio = Share Price / BV

D0 / BV = ROE X Payout ratio

78
MULTIPLES – Key driver

79
[Link] Tests

80
Application Tests

81
What is a comparable firm ?

A telecom firm can be compared to a software firm , if two are

Identical in terms of cashflows , growth & risk

82
Controlling for differences across firms

83
Subjective Adjustments

84
Subjective Adjustments

» EPD

85
Subjective Adjustments

86
Modified Multiples

87
Modified Multiples
» The P/E ratios and expected growth rates in EPS over the next five years, based on
consensus estimates from analysts, for the firms that are categorized as beverage
firms are summarized in the following table:

88
Modified Multiples

89
Sector Regressions

90
Market Regressions

91
Market Regressions

92
Market Regressions

93
Market Regressions

94
Predicted PE vs Actual PE - Regression

95
Market Regressions

96
Market Regressions

97
Market Regressions

98
MULTIPLES – Key driver

99
 Industry EV/Revenue EV/EBITDA P/E P/B

Apparel 2.0x 18.4x 40.8x 3.8x

Application Software 5.5x 33.7x 47.5x 5.1x

Auto Parts and Equipment 1.8x 14.5x 32.5x 4.6x

Automobile Manufacturers 1.9x 12.5x 29.9x 4.9x

Chemicals 2.2x 20.2x 35.0x 3.5x

Construction and
Engineering 1.8x 14.7x 28.2x 4.2x

Construction Material 2.2x 17.6x 46.9x 2.9x

Electric and Gas Utilities 1.9x 12.2x 25.8x 3.0x

Energy 1.2x 6.5x 13.1x 1.8x

Health Care Facilities and
Services 6.3x 30.6x 60.3x 8.9x

Real Estate 7.9x 28.5x 50.1x 5.3x

100
Household and Personal
Products 2.2x 20.8x 36.3x 5.3x

Household Appliances 3.3x 33.2x 83.7x 8.3x

Independent Power and
Renewable Electricity
Producers 4.3x 12.9x 18.9x 2.1x

Industrial Machinery 4.8x 32.1x 51.9x 7.7x

Internet Services and
Infrastructure 3.8x 21.4x 35.5x 7.4x

Media 1.8x 7.1x 25.1x 1.4x

Metals and Mining 1.8x 12.2x 25.1x 3.0x

Pharmaceuticals and
Biotechnology 5.2x 24.6x 40.8x 6.1x

Banks 8.2x 1.2x

Capital Markets 25.4x 3.3x

Consumer Finance 18.0x 2.3x

101
 Industry EV/Revenue EV/EBITDA P/E P/B
Apparel 2.0x 18.4x 40.8x 3.8x

Application Software 5.5x 33.7x 47.5x 5.1x

Auto Parts and Equipment 1.8x 14.5x 32.5x 4.6x

Automobile Manufacturers 1.9x 12.5x 29.9x 4.9x

Chemicals 2.2x 20.2x 35.0x 3.5x

Construction and Engineering 1.8x 14.7x 28.2x 4.2x

Construction Material 2.2x 17.6x 46.9x 2.9x

Electric and Gas Utilities 1.9x 12.2x 25.8x 3.0x

Energy 1.2x 6.5x 13.1x 1.8x

Health Care Facilities and

Services 6.3x 30.6x 60.3x 8.9x

Household and Personal Products 2.2x 20.8x 36.3x 5.3x

Household Appliances 3.3x 33.2x 83.7x 8.3x

Independent Power and

Renewable Electricity Producers 4.3x 12.9x 18.9x 2.1x

Industrial Machinery 4.8x 32.1x 51.9x 7.7x

Internet Services and

Infrastructure 3.8x 21.4x 35.5x 7.4x
Media 1.8x 7.1x 25.1x 1.4x

Metals and Mining 1.8x 12.2x 25.1x 3.0x

Pharmaceuticals and
Biotechnology 5.2x 24.6x 40.8x 6.1x
Real Estate 7.9x 28.5x 50.1x 5.3x
Banks 8.2x 1.2x
Capital Markets 25.4x 3.3x
Consumer Finance 18.0x 2.3x

102
Industry Multiples in India

103