14.1 – The Stock Price

In the previous chapter, we understood stage 1 and stage 2 of equity research. Stage 1 dealt with understanding the business, and stage 2 dealt with understanding the company’s financial performance. One can proceed to stage 3, only if he is convinced with both the earlier stages’ findings. Stage 3 deals with the stock price valuation.

An investment is considered a great investment only if a great business is bought at a great price. In fact, I would even stretch to say that it is wonderful to buy a mediocre business, as long as you are buying it at a great price. This only shows the significance of ‘the price’ when it comes to investing.

The objective of the next two chapters is to help you understand “the price”. A valuation technique can estimate the price of a stock. Valuation per se helps you determine the ‘intrinsic value’ of the company. We use a valuation technique called the “Discounted Cash Flow (DCF)” method to calculate the company’s intrinsic value. The intrinsic value as per the DCF method is evaluating the ‘perceived stock price’ of a company, keeping all the future cash flows in perspective.

The DCF model is made up of several concepts which are interwoven with one another. Naturally, we need to understand each of these concepts individually and then place it in the context of DCF.  In this chapter we will understand the core concept of DCF called “The Net Present Value (NPV)”, and then we will proceed to understand the other concepts involved in DCF, before understanding the DCF as a whole.


14.2 – The future cash flow

The concept of future cash flow is the crux of the DCF model. We will understand this with the help of a simple example.

Assume Vishal is a pizza vendor who serves the best pizzas in town. His passion for baking pizzas leads him to innovation. He invents an automatic pizza maker which automatically bakes pizzas. All he has to do is, pour the ingredients required for making a pizza in the slots provided and within 5 minutes a fresh pizza pops out. He figures out that with this machine, he can earn annual revenue of Rs.500,000/- and the machine has a life span of 10 years.

His friend George is very impressed with Vishal’s pizza machine. So much so that, George offers to buy this machine from Vishal.

Here is a question for you – What do you think is the minimum price that George should pay Vishal to buy this machine? Obviously, to answer this question, we need to see how economically useful this machine will be for George. Assuming he buys this machine today (2014), over the next 10 years, the machine will earn him Rs.500,000/- each year.

Here is how George’s cash flow in the future looks like –

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000

I was hoping you could do note, for the sake of convenience, I have assumed the machine will start generating cash starting from 2015.

Clearly, George will earn Rs.50,00,000/- (10 x 500,000) over the next 10 years, after which the machine is worthless. One thing is clear at this stage, whatever is the cost of this machine, it cannot cost more than Rs.50,00,000/-. Think about it – Does it make sense to pay an entity a price which is more than the economic benefit it offers?

To go ahead with our calculation, assume Vishal asks George to pay “Rs. X” towards the machine. At this stage, assume George has two options – either pay Rs. X and buy the machine or invest the same Rs—x in a fixed deposit scheme that guarantees his capital and pays him an interest of 8.5%. Let us assume that George decides to buy the machine instead of the fixed deposit alternative. This implies, George has foregone an opportunity to earn 8.5% risk-free interest. This is the ‘opportunity cost’ for having decided to buy the machine.

So far, in our quest to price the automatic pizza maker we have deduced three crucial bits of information –

  1. The total cash flow from the pizza maker over the next 10 years – Rs.50,00,000/-
  2. Since the total cash flow is known, it also implies that the machine’s cost should be less than the total cash flow from the machine.
  3. The opportunity cost for buying the pizza machine is an investment option that earns 8.5% interest.

Keeping the above three points in perspective, let us move ahead. We will now focus on cash flows. We know that George will earn Rs.500,000/- every year from the machine for the next 10 years. So think about this – George in 2014, is looking at the future –

  1. How much is the Rs.500,000/- that he receives in 2016 worth in today’s terms?
  2. How much is the Rs.500,000/- that he receives in 2018 worth in today’s terms?
  3. How much is the Rs.500,000/- that he receives in 2020 worth in today’s terms?
  4. To generalize, how much is the cash flow of the future worth in today’s terms?

The answer to these questions lies in the realms of the “Time value of money”. In simpler words, if I can calculate the value of all the future cash flows from that machine in terms of today’s value, then I would be in a better situation to price that machine.

Please note that we will digress/move away from the pizza problem in the next section, but we will eventually get back to it.

14.3 – Time Value of Money (TMV)

Time value of money plays an extremely crucial role in finance. The TMV finds its application in almost all the financial concepts. Be it discounted cash flow analysis, financial derivatives pricing, project finance, calculation of annuities etc., the time value of money is applicable. Think of the ‘Time value of money’ as the car engine, with the car itself being the “Financial World”.

The concept of the time value of money revolves around the fact that money does not remain the same across time. Meaning, the value of Rs.100 today is not really Rs.100, 2 years from now. Inversely, the value of Rs.100, 2 years from now is not really Rs.100 as of today. Whenever there is the passage of time, there is an element of opportunity. Money has to be accounted (adjusted) for that opportunity.

If we have to evaluate, what would be the value of money that we have today sometime in the future, then we need to move the ‘money today’ through the future. This is called the “Future Value (FV)” of the money.  Likewise, if we have to evaluate the value of money that we are expected to receive in the future in today’s terms, then we have to move the future money back to today’s terms. This is called the “Present Value (PV)” of money.

In both cases, as there is a passage of time, the money must be adjusted for the opportunity cost. This adjustment is called “Compounding” when we have to calculate the future value of money. It is called “Discounting” when we have to calculate the present value of money.

Without getting into the mathematics involved (which is really simple) I will give you the formula required to calculate the FV and PV.

Example 1 – How much is Rs.5000/- in today’s terms (2014) worth five years later assuming an opportunity cost of 8.5%?

This is a case of Future Value (FV) computation, as we are trying to evaluate the future value of the money that we have today –

Future Value = Amount * (1+ opportunity cost rate) ^ Number of years.

= 5000 *(1 + 8.5%) ^ 5

= 7518.3

This means Rs.5000 today is comparable with Rs.7518.3 after 5 years, assuming an opportunity cost of 8.5%.

Example 2 – How much is Rs.10,000/- receivable after 6 years, worth in today’s terms assuming an opportunity cost of 8.5%?

This is clearly the case of Present Value (PV) computation as we are trying to evaluate the present value of cash receivable in future in terms of today’s value.

Present Value = Amount / (1+Discount Rate) ^ Number of years

= 10,000 / (1+ 8.5% ) ^ 6

= 6129.5

This means Rs.10,000/- receivable after 6 years in future is comparable to  Rs.6,129.5 in today’s terms assuming a discount rate of 8.5%.

Example 3 – If I reframe the question in the first example – How much is Rs.7518.3 receivable in 5 years worth in today’s terms given an opportunity cost @ 8.5%?

We know this requires us to calculate the present value. Also, since we have done the reverse of this in example 1, we know the answer should be Rs.5000/-. Let us calculate the present value to check this –

= 7518.3 / (1 + 8.5%) ^ 5

= 5000.0

Assuming you are clear with the concept of the time value of money, I guess we are now equipped to go back to the pizza problem.

14.4 – The Net Present Value of cash flows

We are still in the process of evaluating the price of the pizza machine. We know George is entitled to receive a stream of cash flows (under owning the pizza machine) in the future. The cash flow structure is as follows

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000

We posted this question earlier, let me repost it again – How much is the cash flow of the future worth in today’s terms?

As we can see, the cash flow is uniformly spread across time. We need to calculate each cash flow (receivable in the future) by discounting it with the opportunity cost.

Here is a table that calculates the PV of each cash flow keeping the discount rate of 8.5% –

Year Cash Flow (INR) Receivable in (years) Present Value (INR)
2015 500,000 1 460,829
2016 500,000 2 424808
2017 500,000 3 391481
2018 500,000 4 360802
2019 500,000 5 332535
2020 500,000 6 306485
2021 500,000 7 282470
2022 500,000 8 260,335
2023 500,000 9 239,946
2024 500,000 10 221151
Total 50,00,000 32,80,842

The sum of all the present values of the future cash flow is called “The Net Present Value (NPV)”. The NPV, in this case, is Rs. 32,80,842 This also means, the value of all the future cash flows from the pizza machine in today’s terms is Rs. 32,80,842. If George has to buy the pizza machine from Vishal, he has to ensure the price is Rs. 32,80,842 or lesser, but definitely not more than that and this is roughly how much the pizza machine should cost George.

Now, think about this – What if we replace the pizza machine with a company? Can we discount all future cash flows that the company earns to evaluate its stock price? Yes, we can, and in fact, this is exactly what will we do in the “Discounted Cash Flow” model.

Key takeaways from this chapter

  1. A valuation model, such as the DCF model helps us estimate the price of a stock.
  2. The DCF model is made up of several interwoven financial concepts.
  3. The ‘Time Value of Money’ is one of the most crucial concepts in finance, as it finds its application in several financial concepts, including the DCF method.
  4. The value of money cannot be treated the same across the time scale – which means the value of money in today’s terms is not really the same at some point in the future.
  5. To compare money across time, we have to ‘time travel the money’ after accounting for the opportunity cost.
  6. Future Value of money is the estimation of the value of money we have today at some point in the future.
  7. The present value of money estimates the value of money receivable in the future in terms of today’s value.
  8. The Net Present Value (NPV) of money is the sum of all the present values of the future cash flows.



  1. Harshad Salvi says:

    What are other valuation models which are used in equity research or say M&As?
    Hope my question is not ambiguous..

    • Karthik Rangappa says:

      There are basically two valuation techniques – Intrinsic valuation and relative valuations. DCF is the best way to do intrinsic valuations, which is what we have explained here. Relative valuation is a bit dicey as you are essentially comparing two companies by assuming they are similar. But in reality no 2 companies are similar. Not that DCF is a very clean technique..both have its drawbacks. The industry practices both these techniques.

      • Avinish Sarvaiya says:

        Do we take opportunity cost always as current fixed deposit’s rate of return at the time of calculations?
        Waiting for the reply

        • Karthik Rangappa says:

          Yes, you can.

          • Avinish Sarvaiya says:

            I have to ask one more question I hope you wouldn’t mind answering it too..?
            As you said FD rates at the time of calculations must be taken as opportunity cost.
            So the question is what about the Discount rate ?( which is cost of capital itself,right? ) As you have taken it same as the opportunity cost. Is it always the same I.e. FD rate only?
            I hope you get my point..??

          • Karthik Rangappa says:

            Considering FD rates have fallen quite a bit, I think we need to have a better discount rate :). I have a tendency to take conservative numbers, hence something like 10-12% should be alright.

      • Devaa says:

        How to Evaluate NBFC’s , PVT Banks. which model to use to get intrinsic value

        • Karthik Rangappa says:

          Devaa, like I have indicated earlier, these entities require a slightly different set of variables. I’ve been meaning to put of something on these lines for a while now 🙂

  2. Sameer says:

    Little typing mistake noticed
    No. 14.3 is missing where as 14.2 is double

  3. Abhimanyu Jamaiyar says:

    i am interested in a career in equity research. i do not have any prior experience but i am very keen to learn. Is it possible to get trained under zerodha? I am willing to join you as a fresher or even as a trainee.

    • Karthik Rangappa says:

      Thanks for the interest expressed. I’m afraid we have no such openings in Equity Research as such. Would the support desk interest you?

      • Abhimanyu Jamaiyar says:

        Dear Sir,
        Thanks a lot for your reply. Yes, i would like to go ahead with the support desk profile. Kindly share the details.Waiting for your reply.
        Abhimanyu Jamaiyar

  4. SUBHANKAR says:

    How to calculate the fair price of usd/inr currency pair? Explain with example.

  5. Sanat says:

    I am unable to understand PV properly…………please help

    • Karthik Rangappa says:

      Present value is the current value of the future payment. For example assume you are expected to receive Rs.100,000/- 10 years from now. PV helps you answer find out the worth of that Rs.100,000/- in today’s terms.

  6. BM says:

    Price of Amararaja has gone up 🙂 do you have other analysis could be shared ?? Thanks for the investor education …priceless

  7. Hitesh says:

    Shouldn’t we account inflation while calculating the present value of money?

  8. Karan Samal says:

    While calculating the Free Cash Flow, the formula is Cash Generated From Operations – Purchase of Fixed Assets
    Do we also add ‘Sale of Fixed Assets’ figure in this formula??

    • Karthik Rangappa says:

      Cash flow from ‘Sale of fixed asset’ could be a one off event. Hence, its best to ignore this one.

      • Karan Samal says:

        Thank you. While analyzing the fundamentals using all the ratios, I found a few companies that are fundamentally very sound. While doing the DCF analysis that too using very conservative assumptions (Growth rate 8% for each year till 10 years, opportunity cost @ 9%) , I found that the CMP of those stocks are less than the margin of safety price (30% discounted price from the lower intrinsic price). Shall I go ahead and accumulate these stocks?

  9. Govinda Daga says:

    please provide description of formula of finiding pv fv

  10. sammandar khan says:

    Dear Karthik
    How did you calculate the amount 7518.30? didn’t understand it

  11. Sanjay limbu chongbang says:

    Respected sir! How should I evaluate an NPV with different negative and positive cash flow? What sense does it make?

  12. Abhilash says:

    Hi Karthik, I have joined your last Live Webinar @ 12 … It was simply Superb.
    How Dividend payout coming under Financial activities, Is it operational activity ?

    • Karthik Rangappa says:

      Thanks! I’m glad you liked the webinar 🙂

      OA consists of activites which are core to the company, where as div is an optional thing for companies.


    sir thanks for this module ! it was nice to learn new things
    and sir please can you share the excel sheet format of the dcf model ?

  14. chetan says:

    hi..can i have the dcf excel sheet plz

  15. shabaz says:

    current p/e ratio is on 23.66 and current p/b is on 3.56
    is it the time that good investors doesn’t invest money and the nifty has made its top.
    Not confirm about p/b as it hasn’t crossed 4 but it still may be considered overbought and p/e should also be considered as overvalued.
    Am i right?

    • Karthik Rangappa says:

      It really depends on your time frame, Shabaz. There is no harm investing on a selective basis.

  16. Ajay says:

    Different websites (like Economic Times, NDTV Profit, Moneycontrol) having different P/E ratio, P/B value for SAME COMPANY. Why it is so??? Please share how to calculate P/E ratio, P/B values ACCURATELY from financial statements. Should we focus on Standalone balance sheet or consolidated balance sheet of company while buying a stock?? P/E ratio, P/B values are very important in fundamental analysis. Please provide detail guidance regarding this. Your help will be very useful to me. Thank you very much.

    • Karthik Rangappa says:

      Difference could be due to consolidated and standalone data? You should look at consolidated financial data. Will share a note on how to calculate these ratios sometime soon.

  17. Ajay says:

    I am studying your module 2 of fundamental analysis. I think that there is small mistake in calculating EBITDA . Please share your email id so that I can contact you. This is very important. You have taken financial cost twice.
    Total Expense – Finance Cost – Depreciation & Amortization .
    In the total Expense financial cost is already added (I think) and again Finance cost. Please clarify

  18. Ashish Gade says:

    Thanks a lot for the detailed DCF primer. I learned a lot. One question I have is :- the (reserves/Outstanding) is not added to NPV? Is it a norm or can we add it?

  19. Gourav Jha says:

    Thanks a ton for this knowledgeble detailed Varsity.
    I am willing to know that how can be accumulate data like future cash flows, discount rates etc in real practical scenarios for a company to calculate its intrinsic values.

    Is there a way to gather these data ? if so can it vary basis the assumptions of investor?

    • Karthik Rangappa says:

      This data is best if you can calculate them yourself. This is where the skill of the investor comes into play. So as a long term investor, its best if you develop these skills yourself.

      • Gourav Jha says:

        Thank you for the reply.
        But as a new investor, if I think to take a first step for valuation of any company. What factors needs to be taken into consideration? If you can give example once as to how you proceed for this exercise.

        • Karthik Rangappa says:

          Everything documented in this chapter is important Gourav, you cannot afford to ignore one over the other.

  20. Gurudutt says:

    Considering more than 3000 companies listed in the Indian stock market how to do analysis of all these stocks?

  21. Sriram Srinivasan says:

    Hi Karthick,

    Excellent work!!

    I have 2 questions :

    1.Once I start valuating a company based on DCF with annual reports for last 3 years and arrived at good MOS to buy, how can i keep check on the price based on quarterly results that will be published by the company in coming financial year? is there any data from quarterly reports that can help in DCF else I will have to wait another year to ascertain based on annual report published by the company.

    2. With growth stocks, its very difficult to value a company by DCF. In that case i just try to do reverse DCF to find out how much of growth is implied in current price or the market values it. Say for eg : Avanti feeds from reverse DCF gives me 31% growth for next 10 years in current price of 1886( TGR : 3.5%, Discount rate : 12 %,Growth I & II : 32% & 30%). Whats your take on DCF for growth stocks? How do you value growth stocks? Do you use earnings power?

    Thanks in advance.

    • Karthik Rangappa says:

      1) You will have to track new for quarterly result announcement
      2) Yes, that does make sense. Earning power, business moat, market size – these are few things that help.

      • Sriram Srinivasan says:

        Thanks for the quick reply. Regarding 1st question again: But the attributes used in DCF are not available from quarterly results report given by companies like cash from operations, CAPEX, non current debt, current debt or is it given somewhere? Please help me here.

        • Karthik Rangappa says:

          True, balance sheet items are not available during the year. But you don’t really need them as well. Once you develop the valuation model, you will have a fair idea of how much the stock is (should be) worth.

  22. Dinesh Kukreja says:

    Karthik you write the content in a very lucid manner. Thanks for helping millions understand for free!!!!

  23. Sanjay Dubey says:

    First of all, Awesome work Karthikji!
    I’m completely new to Trading/Share Market but your systematic approach has boosted my confidence in learning it.
    Second, pleasantly surprised to see the thread to be alive even after 3 years!!

    Superb work!

  24. jyotshna says:

    Hi Karthik,
    In kite we have charts of stocks, it is provided by 3rd party, It will be good if zerodha adds 1 more tab where we can get different ratios of that stock, when we click on chart- chart displays for different time frame. Similarly with the help of 3rd party or by your own 1 fundamental tab’s implantation will be very helpful.

    • Karthik Rangappa says:

      We have taken a step towards that, have you checked out the stock widget? Click on a stock widget option next to the stock name. Its in the same place where you get the options for Buy/sell/market depth etc.

      • jyotshna says:

        This suggestion is for fundamental analysis related. If a button is implemented near chart button then by clicking on that button we can get data like PE ratio, EPS, Dividend etc. of that stock.

  25. Anup Padamwar says:

    How can we use this(DCF Primer) to calculate the future price of a Stock or to know that the current price is over / undervalued.
    eg. Current price of ARBL is 771, how can we calculate the future price suppose after 2 years or , how can we say that at 771 ARBL is over valued or undervalued?

  26. tarun says:

    sir mail me the excel file of DCF MODEL.

  27. Azeem says:

    Why have you assumed that the machine will generate 5,00,000 Rs worth of revenue every year? As inflation increases price of pizza will also increase so the revenue generated will also increase from the machine. Shouldnt the revenue generated also grow at the average rate of inflation?

  28. Amith says:

    This concept is good, but It would be more helpful if the following are addressed.

    1. How to calculate the cost of a share after calculating DCF?
    2. 8.5 is a constant?
    3. How does inflation impact the model?
    4. How do we account for other risks involved in the business?
    5. What is the best source to feed in the model?


    • Karthik Rangappa says:

      1) Its explained in the chapter
      2) No, varies based on the company
      3) Yes – especially when you take the discount rate
      4) That is outside the purview of DCF, however, you can take conservative growth numbers to accommodate for this
      5) Not sure about this

  29. l_earn_err says:

    Sir, Why is impact of inflation not taken into account along with opportunity cost while calculating FV/PV?
    Is it like that opportunity cost rate of 8.5% is considered equivalent to inflation rate only?
    Need to confirm whether inflation has no role in DCF model?

  30. Dheepak says:

    Hello Karthick, As usual it is a great and easy explanation and I am reading this chapter to know about present value for Greek Calculator. And I noticed that at “14.3 – Time Value of Money (TMV)” it is mentioned as TMV instead of TVM, correct if I am wrong. Thank you.

  31. anmol says:

    thanku sir for sharing ur knowledge……..i had one qusestion, in DCF how toidentify growth rate of different companies

  32. Binu Varghese says:

    Hello karthik,

    Thanks for this excellent article..!! Just have a confusion..

    Discount rate (which is given as 8.5%) is constant or it is varies depends on the company?

    If it varies, then how to calculate it?

    Some other website shows a term called WACC as discount rate with a formulae while you assumed that discount rate is simply 8.5 – 9% relative to the FD interest rate..

    Could you please help me understand this further?

    • Karthik Rangappa says:

      The general thumb rule is that the discount rate depends on the risk-free rate prevailing in the economy.

      • Binu Varghese says:

        So you say discount rate would be same for all companies in general?

        • Karthik Rangappa says:

          Binu, in a sense yes. This is an easy approximation. The discount rate is the prevailing rates in the economy, so it remains same for all companies. However, you can also use CAPM model to arrive at the exact rate.

  33. Sagar says:

    In below formula how can I calculate capital expenditure? I did visit moneycontrol.com website to see capex but didn’t find.
    FCF = Cash from Operating Activities – Capital Expenditures

    • Karthik Rangappa says:

      I’d suggest you look for CAPEX number as indicated in “Cash flow from investing activities”, in the cash flow.

      • Sagar says:

        Thank you sir for your valuable suggestion.
        When I look for “Net Cash Used In Investing Activities” (sorry I can’t find “cash flow from investing”) of ARBL for year 2013, 2014, values showing -120.51 & -344.84 respectively. & in example those values are 72.47 & 330.3 for year 2012-13 & 2013-14.
        Can you suggest which website is good to get all values for DCF.

  34. Ram says:

    Hi Karthik,
    How do you do (^) this in a calculator ?

  35. Alok says:

    Could you please provide the excel sheet where you do the calculation

  36. Edwin says:

    Sir, while calculting DCF analysis, what is the best possible discount rate I can take? Can I use a general value of growth and discount rate for all stocks, or should I take values depending on the stock?

    • Karthik Rangappa says:

      The discount rate should be around the risk-free rate of the economy. I personally prefer to add 200 – 250 basis points to the risk-free rate to arrive at the discount rate.

  37. Dinesh Garg says:


    How to decide growth rate 1 & 2 for free cash flow & also how you decide discount rate? Intrinsic value is largely dependent on growth & discount rate and their correct estimation is very essential. Also can you provide benchmark for these rates for different industry verticals like metals, banks, FMCG etc.

    • Karthik Rangappa says:

      Dinesh, it is hard to fix a generic growth rate. This really depends on the sector and the growth stage of the company. Don’t have a ready reckoner of sorts, but will look for one and share 🙂

  38. Yogendra says:

    Sir, thanks for providing excellent platform to learn the concepts related to equity. It will be highly appreciable if you make a separate course for making financial model to analyse any stock.

  39. kiranintouch says:

    Dear Karthik,

    Request to provide if there is any link where we can obtain current “Market Cap/Market GDP” ratio. If it is in the form of a chart, even better.

    Thank You

  40. Pavan says:

    Hi Karthik,
    I have question regarding the discount rate. I read all the comments regarding this topic, but I still need a clear understanding of it.
    As far as I understand, discount rate is the rate of return the investor expects from his/her investment.
    For example: If I expect a CAGR of 15%, I would consider the discount rate to be 15. This 15% takes care of inflation and also provides me with surplus income to grow my capital. Is this understanding right?

    • Karthik Rangappa says:

      Slightly different, Pavan. The discount rate wrt to DCF is the opportunity rate. Keep this close to the risk free rate in the economy.

  41. Akhosh says:

    Hi Karthik,

    I am not able to find the Sheet for DCF calculation. Can you please help ?


  42. Vamsee KRISHNA REDDY Narahari says:

    From last 3 years the nifty indicies trading more than 25 percent … At present it’s trading 28 percent … Do you think Dynamics of the market have got changed ? I don’t think so market can go below 16 percent whether there is recession.

  43. Vamsee KRISHNA REDDY Narahari says:

    Sorry I meant P/E ratio

    • Karthik Rangappa says:

      Yes, I personally think the PE is still high, especially when you compare it to the historical levels.

  44. vinayagam says:

    Hi Karthik,

    how could handle negative value in operating activities… i got negative terninal value and share price as well…

  45. ANKIT KUMAR says:

    how to do valuation of small cap companies which have negative cash flows but huge growth potential.

    • Karthik Rangappa says:

      Companies with -ve cashflows are hard to value in a conventional way. You’ll have to take a call based on its business prospects.

  46. ANKIT KUMAR says:

    it is a good practise to do dcf for 10 years or more .because every 3 to 5 year bussiness dynamics of a company changes like management ,new products ,competition etc .if we do dcf only for 5 years .will it give us somewat right intrinsic value or not.

  47. ANKIT KUMAR says:

    how to find early signs that a business or company is reaching from growth stage to mature stage .
    plz provide points we can look in this transition .

    • Karthik Rangappa says:

      Usually, the growth starts to slow down and remains flat at an elevated level. This is a sign that the company has/may transition.

  48. Jitu says:

    While doing this analysis,we should consider standalone or consolidated reports?

  49. Jitu says:

    I have noticed that data from previous year annual report and data of previous year in current year’s annual report diifers.
    why is it so?

  50. Shreedhar says:

    Hello Karthik ,

    This Might not be related to the Subject discussed on this thread , The Reason for my comment is just this, I wanted to know the Following :

    I took the Varsity class , In the Technical Lessons , I did some what Average . While Going for the Certification Exam , I performed terribly worst . But the Question Number 13 , is Creating Confusion and frustration : Q- Identify the Pattern Highlighted in the Chart ? .

    I Answered it as Piercing pattern because the Short trend prior to this candle is Bearish the Candle pattern in Question , P1 is a Large RED Candle , P2 is a Green Candle With Both Upper and Lower Wicks , The P2 Has tried to Engulf the P1 but has not been Fully Successful But It has Closed well above the Half mark of P1 . According to your Lesson it is a piercing Pattern . But you have said in results that it is not a valid pattern as the Prior trend does not satisfy – How ? .

    If this is not a piercing Pattern then what is this ?

    • Karthik Rangappa says:

      For any candlestick pattern (except marubuzo), the presence of a prior trend is mandatory. Without this, it does not qualify as a ‘candlestick pattern’, irrespective of P1 and P2 behave.

  51. Shreedhar says:

    Also , As I have failed can I take a fresh exam with a new set of Question twisted well not a repeat. is that possible ? is it that once failed one cannot attempt a second test ? I want to again read those lessons well and make an attempt . is that possible Sir ?

  52. Shreedhar says:

    Sir ,

    In The Same Context Question Number , Q4 – At 1.14PM , a Technical Analyst is Looking at the 5- Minute Chart of Indigo . The OHLC Of this 5 Minute Candle will Represent – Selected a wrong answer but your Answer is confusing ,Could you please Explain – How can any one Know the Closing Price at 1.15.59 when the Current time is 1.14.00 ? , How can one Find a Closing price of future for sure the Difference is 1.59 Minutes . Are you saying He predicted the future ? if yes on what basis ? the Complete Candle Forming time should be 1.20.00 on a 5 minute Candle , Right ? what is the Logic behind 1.15.59PM ? . or else you were thinking of 1.14.59PM and 1.15.59PM was a typing mistake ?

    I Also Counted the Number of 5 minutes Candles not once but several times to make sure it adds up to 9.15 AM but that is where i lost my time .

    • Karthik Rangappa says:

      Can you please post this under relevant chapter? It is just that it may help other people with similar queries.



    If we want to apply DCF for listed companies, how we should get the data of next 5 years projections. I think regulators doesnt allow that to companies?


    Ya. That I have just seen in next chapter. Thanks. Its a great reading material.

  55. Pravin kumar Lakshmanan says:

    Hi sir,
    I tried calculating intrinsic value of reliance industries. In all the past three years their capex is more than their net operating cost. So the average cash flow is coming in negative value. What should i do now ??? I am awaiting for your reply !!

  56. Pravin says:

    Then what method i should use for negative cash flow ?? Or shall i use the average of operating cost ?

  57. Pravin says:

    I request you to include relative valuation technique in your module sir.

  58. Kiran Shetty says:

    Hello Karthik,

    Great content indeed!!
    1. while calculating the PV and NV, what does the opportunity cost rate and discount rate mean? Why is that you have only considered 8.5% as the value for the both?
    2. Can I also use this formulae in calculating the PV and NV of any goods in real time, like bike ? does the opportunity cost rate and discount rate will be again 8.5% in this case?


    • Karthik Rangappa says:

      1) Opportunity cost is usually the prevailing risk-free rate in the economy. I guess it was 8.5%, when I wrote this. You discount at opportunity cost, so it is the same.
      2) Depends on the current economic condition and the prevailing rates.

  59. abhinav khandelwal says:

    hi karthik
    just want to know one think
    why do we take opportunity cost rate? idoes it have something to do with adjustment of inflation?

    • Karthik Rangappa says:

      Not really. But opportunity cost is representative of what you are likely to earn if you do not take the risk with your investment.

  60. PAVAN KUMAR says:

    Hello Karthik…
    Thank you very much for neatly structured articles.
    I’ve one question regarding DFC model.
    How do adjust this model for companies with negative free cash flow?
    Companies with very high CAPEX for eg, TATA Motors.

    • Karthik Rangappa says:

      Pavan, unfortunately, DCF does not work with -ve cash flows. You can use an alternate model such as relative valuation. I’ve not discussed that here but will do in the module on Financial Modelling.

  61. PAVAN KUMAR says:

    Thank you Karthik.
    Can you kindly let us know names of some other popular modelling techniques, so that we can educate ourselves.

  62. PAVAN KUMAR says:

    Hi there…
    In previous discussions you had referred to ‘Discount Rate’ as WACC
    If i am not wrong; in simple terms , is WACC the rate at which the company is financing itself..???

  63. PAVAN KUMAR says:

    Thanks Karthik,
    In continuation of my previous query, the computation of WACC is quiet time consuming and moreover employs some estimations which are usually out of reach of retail investors to some extent.

    1. I’ve shared a link of TOPSTOCK which gives us WACC on Y-O-Y basis for Amaraja Batteries ( https://www.topstockresearch.com/INDIAN_STOCKS/AUTO_ANCILLARIES/RiskPriceAndValuationOfAmara_Raja_Batteries_Ltd.html)
    My question is according to above data WACC ranges between 13% to 17%. But in your example you had considered only 8.5%. I would like to know your views on data shared above…?

    2. Does ‘Weight of Debt WACC’ or ‘Weight of Equity WACC’ will have any impact on the Discount rate figures..?

    3. In an economy; where interest rates are falling, will not the the WACC of company automatically fall…?

    4. Higher the Discount rate; smaller (conservative) will be my intrinsic value. Am I right…?

    • Karthik Rangappa says:

      1) I had consider 8.5% 5 yrs ago, market and economic conditions have changed. Clearly that rate won’t hold now.
      2) Yes, end of the day, the risk-free rate prevailing in the economy matters
      3) Yes
      4) Nope, depends on the company’s free cash flow output

  64. Rahil says:

    Tested the DCF model with nifty 50 and to my surprise only a few companies were trading for market value less than intrinsic value even after a huge downfall due to covid ( considering 5% discount rate), So-
    1- Do I need to change future cash flow growth projection along with discount rate too? ( took 15% and 10% for 5 years each )
    2- Found out DCF doesnt work with financial companies and Banks, which will be the best way to find out their valuation.

    Thanks a lot!

    • Karthik Rangappa says:

      1) I think 15% is on the higher side now. More like a 8-10% may help
      2) Yes, that’s true. It is best to look at book value and related valuation metrics for the financial services firm

  65. Rahil says:

    Got it Thanks.
    By 8-10% you mean for the first year or all ten?
    Also, if all the years then 8% for first 5 and 10% for next five ?

    • Karthik Rangappa says:

      10% for the first 5 yrs and 8 for the remaining 5. 2 stage basically. Tweek it according to the industry and company you are working on.

  66. Srinivas says:


    How is price appreciation accounted?

    Example the earnings may not be fixed at 500000/- for next 10 years. It could appreciate, keeping the number of Pizza’s sold constant. As the proce of Pizza’s could have increased. With that in mind, the IV of machine could still be 5000000/- in 2015? Therefore, is there a need to discount the future price to ‘Present Value’?

    From a buyer perspective it makes sense, as it considers the worst case. But from a seller perspective it could be a loss?

    Stitching back to Companies/Shares – we might undermine the true value – again good for risk averse invester.

    • Karthik Rangappa says:

      Sorry, I’m not sure if I understand the query completely. Can you add more context?

  67. Aasim says:

    Hi, very good explanation.

    Could you please guide for banking and financing stocks how to evaluate as I find it difficult. Most of finance and banking shows negative cash flow. Which valuation model suits best for banking and financial. Please guide.

  68. Dhruv Chauhan says:

    Thank you so much for sharing this knowledge, though I have one small doubt.
    While calculating the net present value, the amount of 195.29 was assumed or was a fact if it was an assumption on what basis was it assumed?
    “For example in 2015 – 16 (2 years from now) ARBL is expected to receive Rs.195.29
    Crs. At 9% discount rate the present value would be –
    = 195.29 / (1+9%)^2
    = Rs.164.37 Crs”
    This is the part of from the above chapter, please help.

  69. Bhuvesh says:

    Sir from where do I find the discount rate and the opportunity rates?

    • Karthik Rangappa says:

      You will have to look at the prevailing rates in the economy and estimate these rates.

  70. Dhruv says:

    Good Evening Sir,
    I am following Zerodha Varsity rigorously, I read 8 modules during the past 2 lockdown months. Thank you for providing such valuable knowledge for free.
    I have a small doubt, what inputs will differ if we were to use DCF analysis on Finance/Banking Industry. Or will the analysis be same?

    • Karthik Rangappa says:

      I’m glad you read all the modules, Dhruv. Hope you liked these modules 🙂

      I’ve never really used DCF on BFSI, hence I’m not sure if I can comment on this.

  71. Dhruv says:

    Thank you for your quick response, and yes I absolutely loved all the modules. Again thank you for this.

    Another small quick doubt, though this is not related to Fundamental Analysis, I wanted to ask how can we download the previous Futures data from Zerodha Pi? In module ten you showed the example of SBI by downloading previous 200 days data.

  72. Hitesh Sanghvi says:

    Sir, could you please how calculate 500000* (1+8.50%)^6

    is it 500000*(1+8.50/100)^6

    i.e 47500^6

    Also let me know the meaning of this sign “^” & how to calculate ^6

    • Karthik Rangappa says:

      ^6 means, raised to the power of 6. Try the equation again by raising it to the power of 6.

  73. Hitesh Sanghvi says:

    Thank you very much sir

  74. Indranil Saha Saha says:

    Dear Karthik

    We need to focus on which shares.

    Basic or Diluted and whats the exact difference between the two??


    • Karthik Rangappa says:

      You need to look at Diluted. Diluted includes all the shares which are locked in and soon will be converted to equity shares. Basic, on the other hand, considers only the outstanding shares.

  75. Abhinav Saini says:

    Does annuity from FD gets compounded annually?

  76. Mohit Jain says:

    Sir basically it is indicating about inflation? The value of the money that we have today in future’s perspective.

  77. Varun Agrawal says:

    Hello Karthik,

    Today I noticed the premium for RELIANCE AUG 2340 CE shot up by 200% which made me wonder if stock returns are continuously compounded?

    So if I invested 100 INR in stock, my return for every 1% gain would be:

    1 INR (1% of 100)
    1.01 INR (1% of 101)
    1.0201 INR (1% of 102.01).

    Does the same happen to option premium too?


    According to the calculator, continuously compounded, your invested money would increase by 6x on a 200% gain. Is it correct or am I missing something?

    • Karthik Rangappa says:

      No, it does not work that way Varun. The returns cannot be timed and stay consistent. You may get 1.0201 after 1 year or 9 months, no one really can predict this.

  78. Varun says:

    I am new to investing in stock market. I wanted to know, Do large cap stocks (say Nifty 50) ever trade below their intrinsic value(considering margin of safety) in a normal bearish market. I felt the recent fall during March was exceptional, hence not considering that.
    Thanks in advance.

  79. Ravi says:

    First of all thank you so much for this great content in Varsity which is quite helpful for individual investors and traders.As Banks and NBFC cant be valued using DCF valued and like you mentioned in one of the comments that you are going to update something specific to these financial institute valuation technique.Can you please confirm when it will be available.If already updated elsewhere,Could you please share link or chapter name.Very happy to pickup from there.

    • Karthik Rangappa says:

      Ravi, I know this is pending for a while. Its just that I’ve not been able to do it, not because of time, but I still dont have the confidence to write about it 🙂

  80. Gaurav says:

    Hello Sir,

    Nice article, thanks for sharing such good information. I personally like value investing and after reading your article became more interested in it. Could you please share how to evaluate Banking sector companies? I saw in above comments you have been working on those, could you please share the link for the same if that work is completed.
    Awaiting for your reply.


    • Karthik Rangappa says:

      Gaurav, I’m glad you liked it. I’m not sure if I can point to a source, as I’ve not really come across any good one 🙂

  81. Shalin Gopinathan says:

    You have shown the calculation for Future value, Ex: 5000*(1+8.5%) ^5 and the answer is 7518.3. I am not a science or commerce person so can you please explain the calculation especially ^5 this part. Can you please explain as i didn’t understand hoe you got this value of 7518.3

  82. Divij says:

    I have a query regarding DCF. I noticed in your notes, while calculating the net debt, you have considered only long term borrowings. Shouldnt we consider the short term borrowings as well? And also, if there are any lease liabilities, will they be considered while calculating the total current year debt?

    • Karthik Rangappa says:

      Not really, since the short term debt will anyway be settled within a year. Lease liabilities – you need to look at the liability in relation to the overall size of the company.

  83. Divij says:

    Ihave a question regarding DCF. I have noticed in your notes, while calculating NET DEBT, you have considered only long term borrowings. Shouldnt we include short term borrowings as well? and also if there are any lease liabilities, will they be included in the debt as well?

  84. Divij says:

    Thanks for the inputs. I come from the science background and im new to investing. But your app has been extremely helpful to me. The explanation is crisp, simple and to the point. Wonderful work!

  85. Niharranjan Nayak says:

    valuable lessons

  86. alok says:

    sir can i use compounding formula to calculate future value

  87. Raj says:

    It will be good if you can explain this for one of the stock as an example.

  88. namah shivaya says:

    I’m MBA fresher I’m interested to start career in stock market. Which job profile should I look as a fresher. Recently I had passed NISM module by reading u r content it really helped me.When r u going to start finance modeling course

    • Karthik Rangappa says:

      I’m really glad you could clear NISM with Varsity’s help! Congrats 🙂

      You can start looking for opportunities in AMCs, they keep hiring MBAs. Will start Finance modelling course soon.


    Very Interesting Articles Sir.
    Regarding calculation while getting Present Value for Rs.5,00,000/- in 2 years assuming 8.5% Discount rate.
    It comes Rs.4,24,727/- know! why it is shown as Rs.4,24,808/- any particular reason or Am i missing something?
    Please clear my doubt.
    Thank you.

  90. Roshan says:

    Hello sir,
    1) Do the intrinsic value changes over time; means if I have calculated intrinsic value in march 2021 will that value remain forever?
    2). The current market price of many good stocks are far far above intrinsic value will those price come to intrinsic value range?
    3). If yes, what would the reason for for such great fall in prices of good companies stocks? (Means for which opportunities one should look for)

    • Karthik Rangappa says:

      1) Yes, with the change in stock prices, there will be a change in the intrinsic value as well.
      2) Probably, if the market corrects. Or the earnings have to increase to match up to the valuations.
      3) General market correction.

  91. Roshan says:

    1) if the intrinsic value of stock changes with market price then how frequency one need to calculate the intrinsic value of particular stock, means every year..

    • Karthik Rangappa says:

      Hence the need to arrive at the company’s intrinsic value range. The intrinsic value cannot be a single price point.

  92. Suresh Shenghani says:

    a Very good article, Thanks Karthik

  93. Mohan says:

    How to arrive at future cash flows for a company stock?

  94. Mohan says:

    1. To be on conservative side, can we take GDP rate as growth rate for future cash flows for a company stock?
    2. What is cash flow number. Is it cash flow from operations or cash & cash equivalents at the end of year?

    • Karthik Rangappa says:

      1) No, we do not take GDP as such.
      2) Do read the explanation in this and the subsequent chapter, Mohan. Thanks.

  95. Prashant R Dingankar says:

    I have gone through the Fundamental analysis and understood all the calculation except one point “Share price”. As you mentioned in PDF to get fair share price, you need to calculate as Share Price = Total Present Value of Free Cash flow / Total Number of shares. But the DCF module excel file which you uploaded for calculation. In that excel file the formula is different, it is showing as Share Price = (Total PV of Cash flow – Net Debt) * 10^7 / Total No of Shares.

    I am confused with this 10^7, Could you please explain why we have multiply 10^7 and what is 10^7 logic used for calculating to get share price value?

    Look forward for your comment.

    • Karthik Rangappa says:

      10^7 = 1 Crore. So we basically we use it to ensure we convert the numbers to the Crore denominator.

  96. Vinay says:

    A company’s cash flow change’s each year how are you taking cash flow as constant?

  97. rakhi panpaliya says:

    absolutely amazing explanation . Can zerodha launch some more training program like MS excel , financial modelling etc .

  98. Amit says:

    Sir, in the pizza example we have assumed that machine will generate 5 lakh every year but isn’t that wrong considering inflation because of which pizza price will increase and so do the total annual earning for the machine. So instead of calculating present value for future earning shouldn’t we be calculating future value for present earnings?? Hope you get my query. Waiting for the reply.
    Thank you.

    • Karthik Rangappa says:

      Ah,I do get your point. But I wanted to keep it simple with no complications (introducing inflation, etc) to help understand the concept of PV of future earning, better.

  99. Sharma says:

    Hello Sir,

    a) Are company promoters allowed to trade in their own stock?

    b) Or what if a promoter who hold 30% decides to offload all his stock in a period of 3-4 weeks, without block deal and bulk deals as block deal and bulk deals are known to the public.
    Only quarterly results tell us the shareholding pattern.

    • Karthik Rangappa says:

      a) Yes, but it has to be declared to the exchange
      b) Again, has to be informed to the exhcnages.

  100. Bijay says:

    Sir, you people did a great job here. I was into markets, but my fundamentals were not so clear. Now that I’m taking courses from Zerodha Varsity under study, I must say I’ve learnt quite a few new concepts. Moreover, the certification is a icing on the cake. Great job ! Thanks!

    Also I was keen to know if you people provide any kind of internship opportunities, I would be glad to join. I’m a MBA 1st year student at KJ Somaiya, Mumbai.

  101. Kishore dharun says:

    I hope you reply this comment
    I have a doubt in discount rate
    At the time of posting this comment discount rate is 4.35 which is quite low
    So I request you to suggest me a realistic discount rate 😊

    • Karthik Rangappa says:

      It would be company-specific Kishore, depends on the rate at which the company gets the funds.

  102. Shan says:

    In fd we get the interests plus the amount and here we are only getting the interest which is lesser than the fd rate i.e 8.5 so it would be a loss isn’t it to buy that pizza machine?

  103. Rohit says:

    How do you calculate PV of the FV if the average free cash flow of the company is negative but the company is well known?

  104. Rohit says:

    you can ignore this. Got my answer in the comments above

  105. Roshan says:

    Hello sir,
    I want to know about following ratio
    1. Free cash flow / net income
    2. Price / cash flow
    When it should be consider as idea (good)
    Thanks in advance.

    • Karthik Rangappa says:

      Roshan, I’ll try and discuss these things in the upcoming module i.e. the financial modelling one.

  106. Tanmay says:

    Hello Sir,

    I hope you are doing well.

    I was reading the balance sheet of a company and it said that it has zero long-term borrowings and zero short-term borrowings.

    However, when I was checking the quarterly results of the company it shows that it is paying interest.
    What kind of interest is this?

    If a company issues bonds like banks do, where does this show in the balance sheet? Under borrowings?

  107. Tanmay says:

    Hello sir,

    They were interest payments done.
    Interest received would come under other income.
    Interest payments done are subtracted from the Profit.
    Please see link below


    The company has zero debt so not sure how it is paying interest.

    • Karthik Rangappa says:

      Possible that they had a small outstanding debt that got cleared during the year and is now debt-free.

  108. Tanmay says:

    Hello Sir,

    Basically There was zero debt in the March 2020 balance sheet.
    There is also zero debt in the March 2021 balance sheet.

    So when exactly does the company take in debt, and when do I find out if they did and if they cleared it? What did they clear the debt with? Their profits, their cash flow?

    • Karthik Rangappa says:

      Hmm, maybe a small working capital loan? I’d suggest you keep track of the Financial modelling module, where I will talk about creating debt schedule in detail.

  109. Siraj says:

    Hello Sir,

    DCF theoretically works well.
    But in real life its just full of assumptions that one cannot make for 10+ years. You can even create a buffer range but still not entirely accurate.

    What other types of valuation methods could one use? How does one go about this?

    • Karthik Rangappa says:

      There are no valuation techniques which is accurate, its all made up of assumptions and preconceived notions 🙂

  110. Siraj says:

    Hello Sir,

    What exactly do you use to evaluate a company?

    • Karthik Rangappa says:

      Siraj, there are a ton of things that go into this. I’d suggest you keep track of both FA and the Financial modelling module to learn more about this.

  111. Shubhika says:

    when I calculate The Future value of 3280842rs , stands at 7417929 but in Above Example it is 50lakhs.

    FV – 3280842*(1+8.50%)^10
    If We calculate individually of Every 5lakhs , then value stands correct but if I take full amount , That doesn’t work

    • Karthik Rangappa says:

      That’s correct because 32L in our calculation is arrived at by taking different cashflows at different intervals, so the PV will change, its not uniform.

      Btw, you seem to be consuming everything, right from TA through options to FA. Hope you are liking the content here 🙂 Happy learning!

  112. Sidhant says:

    Is there any changes happened in module as chage in rbi Monetary policy

  113. akash c c says:

    mistake ide 3rd paragraph 2 line nalli

  114. Abhinav Barve says:

    It is TVM not TMV. 👀

  115. Manjunath Maiya G says:

    Hello sir, present FD interests are between 5-6.5 max. Hence, discount rate should be 6-7 or more?

  116. Manjunath Maiya G says:

    Opportunity cost not discount rate

  117. Santhosh says:

    I understand that Calculating the DCF on Free Cash Flow (FCF) is advisable than the DCF of Cash from operating activity (COA) as some companies require more CAPEX to grow. They need to bring more money on the table to either sustain or grow their business.

    1. So, how to calculate FCF?
    IF we do:
    In this case, we are not sure whether the Capex is incurred for the acquisition/expansion/Repairs,replace etc.
    If we deduct the capex made on acquisition or expansion, it will reduce the FCF, but in reality it will lead to more COA in future.
    If Capex is made to sustain the existing business, it will not add on to COA in the future.

    My point is if we are deducting the ‘Capex made on expansion’ from ‘COA’, we will get less FCF. If we project this Free Cash Flow and do DCF, we will get lesser present value. But in reality, the company will produce more COA.
    So what is the best way to calculate FCF of a company.

    2. In DCF how to incorporate the ROCE of the company in projecting future revenue.
    Because to forecast the future income, we need to find out what is the FCF and what is the ROCE of the company.

    I am not sure if I could clearly explain my query, but I hope you understand my doubt. Kindly comment.

    • Karthik Rangappa says:

      1) CAPEX is done today, its money already spent. Whether it will lead to more revenue/profit is doubtful right? No certainty about it. Hence you are better off factoring this in FCF today.
      2) YOu don’t really need to consider ROCE as input for FCF right? ROCE can be calculated independently of FCF.

  118. Aman says:

    Sir ,
    I am an engineering graduate but my interests are inclined towards financial markets and mostly interested in value searching of companies .P S- i do not have any prior experience.Is there any internships or traing programs at your company to work.

  119. Sivathanu says:

    Hi Karthik,

    Currently the FD rates are under 6%. You had mentioned the opportunity cost or discount rate should match with FD rates.
    So for calculating intrinsic value now does it make sense to consider the discount rate as 7%/8% instead of 10%?

  120. Darshit says:

    Dear Karthik, you have explained TMV,DCF,PV,FV in a very simplified manner! Thanks a lot for that!
    I would really appreciate, if you could add the related parameter IRR in the same pizza machine example!

  121. Vinay Sharma says:

    How do I test myself that I got what it takes to make career in share market ?
    I’m already 24 .

  122. Sreyansh says:

    Hi Kartik
    Hope you’re doing good.
    Is it possible for you to connect me to a job opportunity in equity research at your firm. I am very much interested in this field and have been investing for a while now. Academic-wise, I have my MBA in finance degree from Symbiosis, Pune and CFA Level 1. Currently, I am working as a credit manager with PNB. I have around 3.5 years of work-ex in Banking & Finance domain.
    Would be great if you could help here.

    • Karthik Rangappa says:

      Sreyansh, I’m not sure about this. You will have to keep an eye out in the market and spot these opportunities.

  123. Sreyansh says:

    Sure Karthik. Thank you for the response.

  124. Priyangshu Lodh Chowdhury says:

    Should we only buy a stock if it’s trading at its intrinsic value? What if a company has great financials but it is trading at a much higher price than its intrinsic value, Should I buy it or wait for it’s price to drop because there is very little chance than its price will drop to it’s intrinsic value and how should I determine the price at which it will be profitable for me to buy the stock if it’s price is way above the intrinsic value?

    • Karthik Rangappa says:

      The only way to tackle this situation (good companies trading at a higher valuation) is to time it. Wait for panic in the market or it could be stock specific, buy when the stock cracks close to its intrinsic value. Any other technique will not give you margin of safety or comfort.

  125. Priyangshu Lodh Chowdhury says:

    Can we use DCF primer method to value Banking stocks? If no then which method can we use instead?

  126. A says:

    Im trying to learn about equity research for the first time and I am currently making a an equity research report for my internship. This series has been very helpful so thank you.

  127. chidambaram says:

    Hi Karthik,
    Can you please help us with a chapter which could cover a good valuation method for finance companies as DCF method will not be suitable for it.

  128. Sathish says:

    Hello Sir.
    1. what about valuating bank stocks since cash flows will be negative for many banks due to the nature of its business? Is DCF method relevant here or should I go with something like book value per share or EV/EBITDA
    2. In case of other non banking stocks if the resulting intrinsic value turns out to negative value, what does it imply? Should I run away from those stocks or is that not the case?


    • Karthik Rangappa says:

      1)Yeah, DCF does not really work for bank stocks. You are better off with relative valuations or book value.
      2) In that case again, you cannot apply DCF. You will have to opt for relative valuation.

  129. chidambaram says:

    Hi Sir,
    Can you please help us with a modules for Fundamental analysis and valuation technique/method for INSURANCE business(Life,Medical,etc). How to determine its value.

  130. chidambaram says:

    Hi Sir,
    1. I will be great if you can write up a module on various relative valuation techniques with some examples for each.
    2. What is Enterprise value and how valuation of a company is done based on that.

  131. Himanshu says:

    Namaste Sir,
    Sir, there is a mistake. You accidentally wrote TMV instead of TVM in the heading and in the first line of Time Value of Money(14.3).
    Moreover, I want to thank you sir wholeheartedly. Your modules are helping me a lot. I am enjoying it.
    Thank you Sir.😊

  132. Vanshika says:

    Why have we kept 500000 constant in the cash flow example ? Can we assume that cash flow will be increasing taking in account inflation, price increase, etc. If we do so with this approach, will the calculation of NPV will still be same ?

  133. Sathish says:

    May I know your opinion about reverse DCF. Is it really necessary to learn that concept?

    • Karthik Rangappa says:

      Sometimes, it helps in understanding the growth rate at which the market is pricing the stock.

  134. Aniket says:

    Hi Karthik Sir,

    Thanks for the amazing Content,I believe it has been around 9 years when you first starting writing at Varsity, but even now reading it feels like you are talking directly to us readers, as you were present right here 🙂

    • Karthik Rangappa says:

      Thanks for the kind words, Aniket. Yes, I make it a point to answer these queries as frequently as possible 🙂

  135. Sathish says:

    I have these questions regarding DCF calculation,
    1. If the company grows its FCF at 25% CAGR, can I place the first 5 years growth assumption near this number?
    2. If so, then how much value should I input for the next 5 years in the above case?
    3. In case of small and midcaps, can I keep a discount rate of 15% and 9% to 12% for large caps.
    4. Is it advisable to keep discount rates close to the expected profit CAGR of a company? Because that might be too high.

    Thanks Sir.

    • Karthik Rangappa says:

      1) You need to assume that the growth is not sustainable and will eventually taper down. So maybe keep it high over the initial few years and taper it down?

      2) A steady 5 or 10% decline? Being conservative is always a good approach when it comes to financial modeling and valuation models

      3) Yeah, since these are riskier compared to a large cap company

      4) No, use real economy rates plus a premium to that if you wish.

  136. Sathish says:

    Hi Sir. I came across this valuation model for commodity companies by Mr.Aswath Damodaran. I would like to request for a clarification.

    According to the model for FCFF estimation, it was assumed that the company will grow its EBIT by 10%, but while calculating, I see in the table(22.1) that the EBIT was grown with a ROCE of 10.55% instead of assumed 10%, which seemed unusual. If I tried this with other stock(EBIT growth by ROCE), the value is not even looking reasonable.

    Because usually for FCF assumption we usually don’t assume the growth at ROCE.(Both ROCE of 10.55% which is calculated separately and 10% growth assumption for growing operating income are clearly mentioned, and ROCE calculation was done for calculating reinvestment rate in this model).

    So could I request You to see this link I have posted and give your view as to whether we have to grow the EBIT with a conservative approach or with ROCE as portrayed in the PDF.
    (In case if you are caught up with work, I totally understand) Thank You

    Page 19 – Just above the table titled, “Table 22.1: Operating Income and Expected Free Cashflows to the Firm” its mentioned. “We assumed that the firm would maintain this return on capital and grow 10% a year, in real terms”. But if you look at the table the EBIT column is grown at ROCE of 10.55% and not 10%. ((You can find ROCE calculation on the same page))


    • Karthik Rangappa says:

      Sathish, will try to go through this. But generally speaking a conservative approach is better when it comes to valuation and this is particularly true with commodities companies where the growth and business trends tend to be cyclical in nature.

  137. Sathish says:

    Sure Sir. Got it. I would have ignored this had it been a random article. But since its Mr.Aswath Damodaran’s teaching in his university, I was concerned that I missed something. I will keep it simple as always.

  138. Sathish says:

    I’m trying to value this company called Dr.LalPath Labs. I could run a DCF since the cash flow growth is pretty decent. But I see that the goodwill is more than 30% of its company’s networth and also the intangible asset is around 35% of the total assets. I feel that this company might have overpaid for its acquisitions given the fact that the company has around 10 subsidiaries.
    I guess you are not a fan of companies with many subsidiaries, but if you were to value this company, is there any way to subtract this effect of goodwill? Or would you still don’t mind this huge goodwill and value using a traditional DCF?

    • Karthik Rangappa says:

      It really depends on the kind of acquisitions the company has made. If its strategic to its core operations then paying a goodwill is fine. But if the acquisitions are tangential, you are better off discounting it.

  139. SANKAR P V says:

    Is opportunity cost and discount rate the same?
    If not what’s the difference and where will I be able to find the discount rate for a period
    (Here, I am assuming discount rate will vary periodically, Please correct me if I am wrong 🙃🙃)

  140. Sathish says:

    Understood sir. But my question is if I were to discount that goodwill factor, how should I proceed with it? Our traditional DCF methods doesn’t include goodwill. So any other method that you would suggest to reduce that goodwill factor?

    • Karthik Rangappa says:

      No, actually, if its present in the balance sheet, then you will have to include it. Removing it will alter the balance sheet dynamics. For this reason, I’d suggest a range for final valuation and not really a specific number.

  141. Sathish says:

    I do use your method of 10% range calculation above and below intrinsic value for all valuation methods. But I don’t understand as to where we need to enter this goodwill in DCF.
    Let me summarize. We enter 3 years of FCF, average it, enter growth percentage for 1st 5 and next 5 years, input discount rate(I use WACC), terminal growth rate, enter cash and cash equivalents and then current total debt for net debt calculation.
    All the present value of future CF is calculated using these values only. So where is the place that I need to enter goodwill? This is what I don’t get sir. Thanks.

    • Karthik Rangappa says:

      You can leave goodwill at the DCF stage, but you can factor that in while calculating free cash flows, which in turn impacts your DCF. Goodwill is cash out, so tends to reduce the cash levels.

  142. Swapnil says:

    Hi Karthik,

    Thanks for the guide, only one question from where we will get the current risk free rate? At the time you published this module it was around 9%. If someone need the latest one then how to get it?

    Thanks & Regrads,

    • Karthik Rangappa says:

      You can check the RBI website for the 10 year Gsec yeild and take that as a proxy for risk free rate.

  143. Kartik says:

    In your Pizza machine example, wouldn’t it be better for the buyer to do a FD of ~221150 for 10 years with risk free return rate of 8.5%??
    It will compound annually and amount to sum of 5000000 after 10 years so why the price of pizza machine today should be more than 221150 if it’s lifespan is 10 years?!

    • Karthik Rangappa says:

      Hmm, you mean to ask – why did he choose to start a pizza business as opposed to doing an FD?

  144. Rahul Garg says:

    1.How to Analysis Financial And NBFC Company like Interest Coverage Ratio, Debt to Equity Ratio, also tell any other Key Point Different from Normal industry.

    2. What is Mean of Negative FCF and How to treat it.

    3. How to Calculate Intrinsic Value for NBFC and Finance Company. I have got Big Negative Intrinsic value of these companies like IRFC, PFC, REC Ltd

    4. Reliance Industries Intrinsic Value also negative and I felt doubt on DCF method for Intrinsic Value.

  145. Rahul Garg says:

    As Per Data Reliance Free Cash Flow
    FY2021 Negative 78879 crore
    FY2022 Positive 10509 crore
    FY2023 Negative 25956 crore
    Cash Balance FY 2023 187137 crore
    Total Long Term Debt 312253 Crore
    No. of Shares 745.28 Crore
    I put these figure in Excel sheet given by you and got Negative Intrinsic Value.
    Kindly help me to rectify my mistakes

  146. Rahul Garg says:

    Which assets take ?
    And where add/less assets amount in DCF Excel Sheet

    • Karthik Rangappa says:

      I mean, generally when you consider networth of a business, especially like RIL, you cant really ignore the assets it holds.

  147. Darshan Kapasi says:

    Hi, why we have taken same cash flows (500000 INR) for future as well? Ideally it should increase considering inflation. Is my understanding correct? Please correct if not.

  148. Kireeti Dannasi says:

    the net present value =32.8Lakhs, is the total earnings that it can earn in it’s entire life.
    1. how can we calculate NPV 5lakhs everytime as it is not possible in real life, like
    what if he cannot sell 5Lakhs every time, when demand is low or it maybe outdated in 5years

    so i think considering all the above problems we need to further discount the NVP=32.8L

    • Karthik Rangappa says:

      Yes, I agree with you. But at some point you have to assume a steady state and factor in a discount rate to reflect the steady state reality. Yes, being on the conservative side does help.

  149. Paritosh says:

    Hi Karthik,
    I have a fundamental (read silly) question: For George, all the cashflows the investment (the pizza machine) would generate, were fully his (Rs5L would be hitting his bank account yearly).
    But for a retail investor like you and me, the cash the company generates won’t come to us. So how can we use that number to calculate the intrinsic value of the stock?
    I know for sure I am missing something here. Is it dividend payouts or something else?

    • Karthik Rangappa says:

      Cashflows in turn dictate the valuation of the company, which in turn impacts the share price, which you and I hold. Therefore, it matters 🙂

  150. shlok says:

    If i apply formula of compound interest on 32,80,842 at interest rate 8.5%,then after ten years the amount I’m getting is 74,17,929 and not 50,00,000.Price of 32,80,842 is loss for him

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