Company Analysis Reference Guide - Valuation Formulas & Frameworks

Porter's Generic Strategies

🎯 Cost Leadership

Goal: Become lowest-cost producer

Methods: Scale, efficiency, cost control

Examples: Reliance, DMart, Indigo

💎 Differentiation

Goal: Offer unique products/services

Methods: Brand, innovation, quality

Examples: Asian Paints, Titan, HUL

🔍 Focus Strategy

Goal: Target specific segment

Methods: Niche expertise

Examples: Page Industries, PI Industries

SWOT Analysis Framework

Strengths (Internal)

Brand, assets, capabilities
Competitive advantages
Resources

Weaknesses (Internal)

Skill gaps, resource limits
Operational issues
Competitive gaps

Opportunities (External)

Market trends
Regulatory changes
Technology shifts

Threats (External)

Competition
Market changes
Regulatory risks

Porter's Five Forces

Force	Key Questions	Impact
Threat of New Entrants	Barriers to entry? Capital required?	High barriers = Low threat
Bargaining Power of Buyers	Buyer concentration? Switching costs?	Few buyers = High power
Bargaining Power of Suppliers	Supplier concentration? Unique inputs?	Few suppliers = High power
Threat of Substitutes	Alternative products? Switching ease?	More substitutes = Higher threat
Competitive Rivalry	Number of competitors? Industry growth?	Slow growth = High rivalry

DCF (Discounted Cash Flow) Valuation

Free Cash Flow (FCF)

FCF = EBIT × (1 - Tax Rate) + Depreciation - CapEx - Δ Working Capital

Enterprise Value (DCF)

EV = Σ [FCFₜ / (1+WACC)ᵗ] + TV / (1+WACC)ⁿ

Terminal Value (Gordon Growth)

TV = FCFₙ₊₁ / (WACC - g) = FCFₙ × (1+g) / (WACC - g)

WACC (Weighted Average Cost of Capital)

WACC = Ke × (E/V) + Kd × (1-T) × (D/V)

Where: Ke = Cost of Equity, Kd = Cost of Debt, T = Tax Rate, E = Equity, D = Debt, V = E + D

Cost of Equity (CAPM)

Ke = Rf + β × (Rm - Rf)

Where: Rf = Risk-free rate, β = Beta, Rm = Market return

💡 Key Insight: Terminal Value typically represents 60-70% of total DCF value. Be conservative with terminal growth rate (usually 3-4% max).

DDM (Dividend Discount Model)

Gordon Growth Model

P₀ = D₁ / (Ke - g) = D₀ × (1+g) / (Ke - g)

Where: P₀ = Fair price, D₁ = Next year dividend, Ke = Cost of equity, g = Dividend growth rate

⚠️ Limitations: Only works for stable dividend-paying companies. Assumes constant growth rate forever. Not suitable for high-growth or non-dividend companies.

Relative Valuation Multiples

Multiple	Formula	Best For	Interpretation
P/E Ratio	Price / EPS	Profitable companies	Lower = Cheaper (if growth similar)
P/B Ratio	Price / Book Value	Financials, asset-heavy	Compare to ROE
EV/EBITDA	(Mkt Cap + Debt - Cash) / EBITDA	Different leverage	Capital structure neutral
PEG Ratio	P/E / Growth Rate (%)	Growth companies	< 1 = Undervalued
P/S Ratio	Market Cap / Revenue	Unprofitable companies	Use when earnings negative

💡 PEG Rule: PEG < 1 = Potentially undervalued | PEG ≈ 1 = Fairly valued | PEG > 1.5 = Potentially overvalued

Key Valuation Relationships

Margin → Valuation Sensitivity

Rule of Thumb:

1% margin drop ≈ 4% valuation drop (all else equal)

Δ Valuation % ≈ 4 × Δ Margin (bps/100)

EV/EBITDA → Market Cap

Formula:

Market Cap = (EV/EBITDA) × EBITDA - Net Debt

Higher multiple → Higher valuation

Margin Impact on EBITDA

EBITDA = Revenue × EBITDA Margin (%)

Example: ₹18,500 Cr revenue × 24% margin = ₹4,440 Cr EBITDA

If margin drops to 21%: ₹18,500 × 21% = ₹3,885 Cr EBITDA (₹555 Cr reduction)

Industry Life Cycle

Stage	Characteristics	Valuation Approach
Introduction	Low sales, negative profits, high investment	P/S, DCF with long horizon
Growth	Rapid sales growth, improving margins	PEG, DCF with high growth
Maturity	Slowing growth, stable margins, cash cows	P/E, DDM, EV/EBITDA
Decline	Falling sales, margin pressure	Asset-based, liquidation value

Quick Reference: Indian IT Services Benchmarks

Metric	Typical Range	TechNxt Context
EBITDA Margin	19-25%	24% (Premium)
P/E Ratio	18-24x	18x (Discount to peers)
EV/EBITDA	11-14x	12x (In-line)
Revenue Growth	3-6%	3.9% (Below average)
Attrition	15-25%	25.3% (High end)
D/E Ratio	0-1x	0.8x (Conservative)