NISM Series XV, Chapter 3. Updated Jun 2026, 13-minute read.
Equity Valuation Methods for Research Analysts
Chapter 3 is the most quantitative chapter in NISM Series XV — covering all major equity valuation methodologies. Both the theory behind each method and the ability to choose the right method for a given business context are tested in the exam.
Key takeaways
- DCF (Discounted Cash Flow): intrinsic value from future free cash flows discounted at WACC
- Comparable company analysis (Comps): EV/EBITDA, P/E, P/S, P/B multiples vs peer group
- DDM (Dividend Discount Model): applicable for high-dividend-paying stocks (banking, FMCG)
- Sum-of-Parts (SOTP): conglomerates valued by summing business segment values separately
- EV (Enterprise Value) = Market Cap + Debt − Cash: compares firms regardless of capital structure
- PEG ratio = P/E / Earnings Growth Rate: adjusts P/E for growth — <1 may indicate undervaluation
Discounted Cash Flow (DCF)
DCF calculates the intrinsic value of a stock based on expected future free cash flows, discounted to present value at the appropriate discount rate (WACC).
Steps in DCF
- Project Free Cash Flows (FCF) for 5–10 years
- Calculate Terminal Value: TV = FCFn × (1+g) / (WACC − g) [Gordon Growth Model]
- Discount all cash flows and TV to present value using WACC
- Enterprise Value = PV of FCFs + PV of TV
- Equity Value = Enterprise Value − Net Debt
- Per share value = Equity Value / Shares outstanding
Key assumptions: Terminal growth rate (g) is critical — small changes cause large value swings. Sensitivity analysis on WACC and g is mandatory for DCF credibility.
Comparable Company Analysis (Comps)
Values a company by comparing its multiples to peers in the same sector.
| Multiple | Formula | Used for |
|---|---|---|
| EV/EBITDA | Enterprise Value / EBITDA | Most widely used — capital structure neutral |
| P/E | Share Price / EPS | Mature, stable businesses |
| P/B | Share Price / Book Value per Share | Banks, NBFCs, asset-heavy businesses |
| P/S | Market Cap / Revenue | Early-stage, loss-making growth companies |
| EV/Sales | Enterprise Value / Revenue | Same as P/S but capital-structure neutral |
Dividend Discount Model (DDM)
Values a stock based on present value of future dividends.
P₀ = D₁ / (Ke − g)
Where D₁ = next year's expected dividend, Ke = cost of equity, g = dividend growth rate.
Applicable for: High dividend-paying, mature companies with stable payout ratios (banks, FMCG, telecom). Not useful for growth companies that pay no dividends (tech startups).
Sum-of-Parts (SOTP)
For conglomerates or companies with diverse business segments, each segment is valued separately using the most appropriate method, then summed.
Example: Reliance Industries — O&G segment (DCF), Retail (EV/EBITDA comps), Telecom (EV/subscriber comps). Add listed subsidiaries at market value. Subtract holding company discount (20–30%).
Frequently asked questions
Why is EV/EBITDA preferred over P/E for many analyses?
EV/EBITDA is capital-structure neutral (uses enterprise value, not equity value) and earnings-quality neutral (adds back depreciation and interest). Two companies with identical operations but different debt levels will have the same EV/EBITDA but different P/Es. This makes cross-company comparisons more meaningful.
How do you value a loss-making startup using these methods?
DCF with aggressive growth assumptions or EV/Sales multiples are most common for loss-making startups. User metrics (EV/GMV, EV/DAU) are used for consumer internet. Traditional P/E doesn't work (no earnings). Investors use reverse-DCF to ask: 'What growth rate would justify this valuation?'
Written by Arpan Das.
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