I am doing a valuation of an Indian company (TCS). As per DCF valuation, the share price comes out to be INR 1750 and as per relative valuation comes out to be INR 2500.
The difference is huge.
Why is there such a difference. What am I missing?
It would be really helpful if someone can guide me.
There could be thousands of things you’re missing.
Did you use the correct discount rate for the DFC?
Did you estimate future cash flows correctly?
Did you account accurately for all of the reasons that their ratios might differ from others in their industry?
Where to start?
The first two things I took care of. I mean I have used a correct discount rate which is 10.7%.
For Indian companies the discount rate is in the range of 10-12% and considering that TCS is a bellwhether stock, 10.7% looks good.
Regarding the cash flows, it will again depend upon person to person and the assumptions they are making. Currently, the stock is trading at INR 2050 levels and my calculated value comes out to be 1750. So, I think the assumptions may be correct.
Regarding the 3rd point, I have no idea what are you talking about, can you please elaborate, it would be helpful.
By the way, thank you for helping. Looking forward to your response.
For the relative valuation, what ratio(s) are you using?
EV/EBITDA
Check the image I have uploaded. This is how I am doing relative valuation.
Do let me know if there is any issues.
Thanks
So . . . you’re using EV/Revenue and EV/EBITDA.
My question is: why do TCS’s EV/Revenue and EV/EBITDA ratios differ from those of the the other companies? Different revenue recognition standards? Different capital structures? Different whatever else? And have you accounted accurately for all of those differences?
Those are the sorts of things that will give you different valuations.
Ohk…
I haven’t considered all these factors into calculation as I am still learning valuation and haven’t gone this deep. Thank you for enlightening me.
Apart from the factors you mentioned, can there be some other reasons?
Probably, but this isn’t my forte.
Maybe there are others here with more experience in valuation who can chime in.
No problem.
Thanks for helping me out