Learn Everything About the Relative Valuation of a Company in India

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Master the Art of Company Valuation: Learn How Peer Comparison Reveals True Stock Value

Understanding the relative valuation of a company is crucial for Indian investors, startups and businesses aiming to assess their worth against peers in the Indian market. Whether valuing a stock for investment, preparing for an IPO on the BSE/NSE or evaluating M&A opportunities, relative valuation methods provide a market-driven approach.

At ezylegal.in, we connect you with SEBI-compliant valuation experts to simplify this process. This guide explores relative valuation, its techniques, advantages and applications in India, helping you make informed financial decisions.

What is Relative Valuation?

Relative valuation estimates a company’s worth by comparing its financial multiples (e.g., Price-to-Earnings (P/E), Enterprise Value to EBITDA (EV/EBITDA)) to similar companies listed on the BSE or NSE. Unlike absolute valuation (e.g., Discounted Cash Flow), it leverages market data to determine if a stock is overvalued, undervalued or fairly priced.

Key Features

Market-Driven: Reflects investor sentiments in India’s stock market.
Comparative: Benchmarks against peers like Reliance Industries or Infosys.
Simple: Uses BSE/NSE data, requiring fewer assumptions.
SEBI-Compliant: Meets Indian valuation standards for IPOs, M&A or funding.

Why use it in India? It’s ideal for quick assessments in India’s dynamic market, from tech startups to FMCG giants.

Is Your Investment Strategy Aligned with the Right Valuations? Our legal team specializes in providing expert advice on company valuation, helping you navigate the complexities of financial ratios and market multiples.

How Does the Relative Valuation Model Work in India?

The relative valuation model assumes that similar Indian companies trade at comparable multiples. By analyzing peers’ ratios (e.g., P/E of Nifty 50 firms), experts estimate a target’s fair value. For example, if a peer group trades at 25x P/E and the target’s EPS is ₹20, its fair value is ₹500/share.

Core Steps

Identify Comparable Companies: Select BSE/NSE-listed peers with similar size, industry and operations (e.g., TCS, Wipro for IT).
Gather Market Data: Use BSE/NSE platforms or Moneycontrol for stock prices and financials.
Select Ratios: Choose metrics like P/E for retail or P/S for startups, per Indian market norms.
Calculate and Compare: Compute ratios and identify pricing gaps, adjusting for India-specific risks (e.g., rupee volatility).

How does ezylegal.in help? Our IBBI-registered valuers ensure accurate peer selection and SEBI-compliant valuations.

What are the advantages of the Relative Valuation Model in India?

The relative valuation model offers:

Simplicity: Uses BSE/NSE data, easier than DCF projections.
Market Relevance: Reflects Indian market trends (e.g., high P/E in tech).
Benchmarking: Compares to Nifty 50 or BSE SmallCap peers, spotting mispricing.
Risk Assessment: Identifies overvaluation risks in volatile sectors like small-caps.
Startup Valuations: Values Indian unicorns (e.g., Zomato) via P/S ratios.
M&A Support: Guides fair pricing for deals like Tata-Air India.

Why popular in India? It aligns with BSE/NSE trading patterns, aiding investors and startups.

What are the Disadvantages of the Relative Valuation Model?

Limitations include:

Mispricing Risk: If BSE/NSE sectors (e.g., IT) are overvalued, valuations reflect the same.
Lack of Comparables: Indian SMEs or niche startups may lack true peers.
Limited Scope: Ignores future growth, critical for Indian tech firms.
Data Reliability: Small-cap financials may be inconsistent on BSE/NSE.
Market Volatility: Rupee fluctuations or FII outflows can skew multiples.

How to mitigate? Combine with DCF, guided by ezylegal.in’s valuation experts.

What are the Relative Valuation Techniques of the Standardising Values?

Relative Valuation Techniques for Indian Companies

Key relative valuation methods include:

Price-to-Earnings (P/E) Ratio
- Formula: Stock Price ÷ EPS
- Use: Measures investor willingness to pay per rupee of earnings. Common in Indian FMCG (e.g., HUL).
- Example: If Nifty 50 P/E is 25x and Company A’s EPS is ₹20, fair value is ₹500/share.
Enterprise Value to EBITDA (EV/EBITDA)
- Formula: EV ÷ EBITDA
- Use: Ideal for M&A in India’s IT sector (e.g., Infosys), ignoring debt.
- Example: If peers trade at 15x EBITDA and Company B’s EBITDA is ₹200 crore, EV is ₹3,000 crore.
Price-to-Sales (P/S) Ratio
- Formula: Market Cap ÷ Annual Sales
- Use: Suits Indian startups (e.g., Nykaa) with no profits.
- Example: If industry P/S is 4x and Company C’s sales are ₹500 crore, value is ₹2,000 crore.
Price-to-Book (P/B) Ratio
- Formula: Market Price ÷ Book Value Per Share
- Use: For banks like HDFC Bank, comparing market to net assets.
- Example: A lower P/B suggests undervaluation.
Price-to-Cash Flow (P/CF) Ratio
- Formula: Stock Price ÷ Cash Flow Per Share
- Use: Evaluates cash generation in capital-intensive firms (e.g., Tata Steel).

Which fits India? P/E for mature firms, P/S for startups. ezylegal.in tailors techniques to your sector.

What are the Types of the Relative Valuation Model?

Comparable Company Analysis (CCA)
- Compares BSE/NSE peers’ multiples (e.g., P/E, P/S) to estimate value.
- Use: Sets fair value ranges for IPOs (e.g., LIC’s 2022 IPO).
- Example: Peers at 10-12x EBITDA suggest a target’s range.
Precedent Transaction Analysis (PTA)
- Analyzes M&A multiples in India (e.g., Tata-Air India at 14x EBITDA).
- Use: Guides acquisition pricing with control premiums.
- Example: Recent deals at 16x EBITDA set an M&A benchmark.

Why use both? CCA reflects BSE/NSE trading, PTA informs M&A, per ezylegal.in’s expertise.

Looking to Accurately Value Your Business? Our legal experts can guide you through the relative valuation process, ensuring you're making well-informed decisions that maximize value.

Process of Relative Valuation in India

The process, facilitated by ezylegal.in, includes:

Select Peers: Identify 5-10 BSE/NSE-listed companies (e.g., Zomato, Swiggy for food tech).
Collect Data: Use BSE/NSE, Moneycontrol or SEBI filings for financials.
Choose Multiples: Select P/E, P/S or EV/EBITDA based on sector (e.g., P/S for startups).
Calculate Ratios: Compute for target and peers, adjusting for Indian market risks (e.g., FII flows).
Estimate Value: Compare ratios to derive fair value, validated by ezylegal.in’s valuers.

Cost: ₹5,000–₹50,000, with ezylegal.in’s transparent pricing.

Example of Relative Valuation in India

Consider an Indian SaaS startup:

Company XYZ: EPS = ₹10, Sales = ₹500 crore, Current Price = ₹1,200.
Peer Group: Average P/S = 5x (e.g., Freshworks, Zoho).
Calculation: Fair Value = Sales × P/S = ₹500 crore × 5 = ₹2,500 crore (₹2,500/share for 10 crore shares).
Conclusion: At ₹1,200, XYZ is undervalued, suggesting a buy opportunity.

FMCG Example: If HUL’s P/E is 30x and Company A’s EPS is ₹20, fair value is ₹600/share, per ezylegal.in’s analysis.

What is the difference between the Relative Valuation and the Absolute Valuation?

Aspect	Relative Valuation	Absolute Valuation
Basis	BSE/NSE peer multiples	Intrinsic value via cash flows
Methods	P/E, P/S, EV/EBITDA	DCF, Dividend Discount Model
Focus	Indian market pricing	Fundamental worth, SEBI-compliant
Complexity	Simple, uses BSE/NSE data	Complex, needs Ind AS projections
Use Case	IPOs, M&A, stock picks	Long-term investments

Why combine? Relative valuation aligns with BSE/NSE trends, absolute ensures Ind AS grounding.

Ensure Your M&A Deal is Based on Accurate Valuations! Whether you're buying or selling, accurate company valuation is key. Our legal team offers trusted services to help you assess fair value and avoid costly mistakes.

How is Relative Valuation Different From Intrinsic Value?

Relative valuation and intrinsic value are two distinct approaches to arriving at a company’s valuation. While relative models attempt to calculate valuation by referencing a company with its peers, intrinsic value attempts to arrive at a company’s value based on its future expected cash flows, growth prospects and risk characteristics.

The second significant difference between the two methods is the amount of complexity. Intrinsic value is a far more elaborate and time-consuming method than relative valuation.

Conclusion

The Relative Valuation of a Company is a practical and market-driven approach that helps in determining the value of the company by comparing it with other similar companies. This method is opted for by the organisations as it is simple to apply and relies upon the accessible data. With these advantages, it stands as a valuable tool for making investment-related decisions.

Frequently Asked Questions (FAQs) About Relative Valuation in India

Q1. What is the relative valuation of a company in India?

Ans1. Relative valuation of a company compares its BSE/NSE multiples (e.g., P/E, P/S) to Indian peers, estimating fair value based on market trends.

Q2. How is relative valuation calculated in India?

Ans2. Use multiples like P/E (Price ÷ EPS) or P/S (Market Cap ÷ Sales) from BSE/NSE peers.

Q3. What are the advantages of relative valuation for Indian companies?

Ans3. It’s simple, reflects BSE/NSE trends and benchmarks startups or giants like Reliance, aiding investment decisions.

Q4. What are the disadvantages of relative valuation in India?

Ans4. Risks include BSE SmallCap mispricing, lack of peers for niche firms and ignoring future growth in volatile markets.

Q5. What are the best relative valuation methods for Indian startups?

Ans5. P/S and EV/Sales suit startups like Zomato, focusing on revenue.

Q6. How to choose comparable companies for relative valuation in India?

Ans6. Select BSE/NSE peers with similar size and operations (e.g., Infosys, TCS).

Q7. Why is relative valuation used in India?

Ans7. It’s quick, supports IPOs (e.g., LIC), M&A and stock analysis, aligning with BSE/NSE pricing.

Q8. What is the difference between relative and absolute valuation in India?

Ans8. Relative valuation uses BSE/NSE multiples; absolute valuation (DCF) calculates intrinsic value per Ind AS.

Q9. How does relative valuation help Indian M&A deals?

Ans9. It sets fair prices using BSE/NSE or M&A multiples (e.g., Tata-Air India), ensuring competitive offers.

Q10. How do you calculate relative valuation using P/E in India?

Ans10. Fair Value = Nifty P/E × EPS. For example, 25x P/E × ₹20 EPS = ₹500/share.

Q11. What are commonly used relative valuation methods in India?

Ans11. P/E, P/S, P/B and EV/EBITDA are popular, tailored to sectors like IT or FMCG on BSE/NSE.

Q12. Can relative valuation be used for Indian private companies?

Ans12. Yes, by comparing to BSE/NSE peers or M&A deals, adjusted for liquidity.

Q13. What is the role of BSE/NSE multiples in relative valuation?

Ans13. They standardize comparisons, reflecting how Indian investors value firms like HUL or Zomato.

Q14. How to avoid mispricing in relative valuation for Indian small-caps?

Ans14. Use multiple ratios and cross-check with DCF to navigate BSE SmallCap volatility.

Q15. What is an example of relative valuation for an Indian startup?

Ans15. A SaaS firm with ₹500 crore sales and industry P/S 5x has a fair value of ₹2,500 crore.

Ready to Accurately Value Your Company? Unlock the true potential of your business with expert company valuation services tailored to your needs. Our legal team ensures you're making data-driven, informed decisions every step of the way. Contact us today to schedule a consultation and start your valuation journey!

Adv. Nandini Natarajan

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With 8 years of independent practice, Advocate Nandini Natarajan has gained extensive experience in handling legal cases while providing legal consultancy and advisory services with a focus on achieving results in an ethical and professional manner. Advocate Nandini Natarajan, who can speak English, Tamil, and Telugu, possesses excellent communication skills that enable her to articulate arguments persuasively in both written and verbal forms.

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