There has been a ton of bullishness about the Price/Earnings-to-Growth (PEG) ratio being a great indicator to buy stocks. Motilal Oswal’s wealth creation studies did a great job explaining that buying stocks below a PEG of 1 and especially 0.5 lead to good wealth generation. Hence it has become a ha

What’s common between shows on Indian television, Equity Markets and a prominent investor Chamath Palihapitiya who for the very good part of the year in 2020 and 2021 claimed that he is better than Warren Buffet! The common element is the surprising and unexpected turn of events twisting the complet

The period between June 2020 and September 2021 was one of the best for the Indian equity market but 2022 is turning out to be a gut-wrenching time. The liquidity/volumes in the market have fallen by half and correction in small- and midcaps in India is severe. All the hyped growth stocks—even the l

After showing basic framework in of Valuations in Post 6, Post 7, Post 8 & Post 9 we go to the final post where we will see the scenario when there is a real/significant jump in Valuation Multiples of a business. So as you can see P/E is rising from the combination of Return (ROIC) over WACC an

With basics in mind from Valuation Post 6 : Drivers of Business valuation Basic Framework Part 1 let’s shift our attention to the key drivers of business valuation. Let's imagine a business in which there is no leverage and no non-operating income/non-operating asset. Hence, ROE=ROCE=ROIC. Not

Though this method has been used left right center by the startup space, this method has gained acceptability in listed space too. The main crux of this method is if a similar company has raised capital in your industry the analyst community can get an idea of what multiples the investors are willi

Terminal Value (TV) is the estimated present value of a business beyond the explicit forecast period. The terminal value includes all the value of future cash flows outside of a particular projection period. There are two methods used to calculate the terminal value: 1. Exit Multiple 2. Gordon Gr

Everyone knows they should buy stocks at low P/E and the real way to make money is by buying stocks at a valuation where you are not paying too much for future growth but there is not much literature published on this topic. The right definition of minimum valuation (P/E ratio) is the value a busine

NEVER sell your house to buy equities. It’s just a metaphor to explain when you should get aggressive with putting more money into equities. Rakesh Jhunjhunwala has often been sighted saying 2003-2007 was one of the most golden and ferocious bull markets in India. This led us to think about what was

Note: Read Valuation Post 11: Calculating Intrinsic P/E - P/E ratio primer 1 before proceeding to this post. We have Growth and ROIC in the table below so we can find Reinvestment through these 2 factors. Also one thing you need to keep in mind: don't take growth more than WACC otherwise the deno

In the last post (Valuation Post 8: Drivers of Business valuation framework Part 3 growth Impact) we understood what if ONLY growth increases without an improvement in ROIC (increase) or WACC (decrease) it won’t increase the valuation multiples in fact sometimes growth can decrease multiples. In t

Before we go deep into the drivers of valuations we have dedicated this blog post on some formulas which explains the interlinkages between few critical financial metrics & valuations of a company. The Formula for growth in earnings is EPS Growth = Retention Ratio * Return on Equity. This is a

Check Part 1 & Part 2 of the series. While taking exit multiple to calculate terminal value of the company we can also take help from at what median multiples do our peer group trades. Peer group does not mean companies which belong to same industry it rather means that companies have similar bu

Markets talk in the language of expectations and not Hindi/English etc. At any point of time in the market cap of a company, there is an inherent expectation embedded about future cash flows and discount rates. For discount rates, also called the opportunity cost of capital, it’s reasonable to take

India being a country of trust deficit, it has become a policy to micro analyse promoters' every move all in the name of looking out for the little guy, the shareholders. There certainly isn’t any debate on shareholder interest against promoter interest but where do we draw the line? It is important

In this blog we will try to understand mathematically what should be the intrinsic P/E (especially at the time of taking an Exit multiple) of the company given it's ROIC and growth rate. We have created a Model in Excel which will help you derive the Intrinsic P/E of a company based on a few input

As per our last post in Valuation Series (Valuation Post 7: Drivers of Business valuation Basic Framework Part 2) we understood that ROIC, Reinvestment rate, Cost of Capital, Growth rate, and length of growth period as some of the key drivers of Valuation multiples. In this post we will break some

Price to earnings ratio is one of the most useful ratio for an investor/analyst. It gives us an idea of what the market is willing to pay for a company's earnings. So as this is the most useful ratio now let us try to understand it in detail. First of all we cannot generalize by saying that a P/E

Valuing a business based on exit multiple is straightforward in theory, it requires you to understand the Industry, Company prospects and estimate their future plans to get a rough estimate of the company’s revenue & margins at the end of let's say 3 or 5 years and then some simple mathematics is r