15.1 – Getting started with the DCF Analysis

We discussed “The Net Present Value (NPV)” in the previous chapter. NPV plays a vital role in the DCF valuation model. Having understood this concept, we now need to understand a few other related topics to the DCF valuation model. In fact, we will learn more about these concepts by implementing the DCF model on Amara Raja Batteries Limited (ARBL). With this, we will conclude the 3rd stage of Equity Research, i.e. ‘The Valuation’.

In the previous chapter, to evaluate the pizza machine’s price, we looked at the future cash flows from the pizza machine and discounted them back to get the present value. We added all the present value of future cash flows to get the NPV. Towards the end of the previous chapter, we also toyed with the idea –What will happen if the company’s stock replaces the pizza machine? In that case, we just need an estimate of the future cash flows from the company, and we will be able to price the company’s stock.

But what cash flow are we talking about? And how do we forecast the future cash flow for a company?


15.1 – The Free Cash Flow (FCF)

We need to consider the cash flow for the DCF Analysis is called the “Free Cash flow (FCF)” of the company. The free cash flow is basically the excess operating cash that the company generates after accounting for capital expenditures such as buying land, building and equipment. This is the cash that shareholders enjoy after accounting for the capital expenditures. The mark of a healthy business eventually depends on how much free cash it can generate.

Thus, free cash is the amount of cash the company is left with after paying all its expenses, including investments.

When the company has free cash flows, it indicates the company is healthy.  Hence investors often look out for such companies whose share prices are undervalued but who have high or rising free cash flow, as they believe over time, the disparity will disappear as the share price will soon increase.

Thus the Free cash flow helps us know if the company has generated earnings in a year or not. Hence as an investor to assess the company’s true financial health, look at the free cash flow besides the earnings.

FCF for any company can be calculated easily by looking at the cash flow statement. The formula is –

FCF = Cash from Operating Activities – Capital Expenditures

Let us calculate the FCF for the last 3 financial years for ARBL –

Particular 2011 -12 2012 -13 2013 -14
Cash from Operating Activities (after income tax) Rs.296.28 Cars Rs.335.46 Rs.278.7
Capital Expenditures Rs.86.58 Rs.72.47 Rs.330.3
Free Cash Flow (FCF) Rs.209.7 Rs.262.99 (Rs.51.6)

Here is the snapshot of ARBL’s FY14 annual report from where you can calculate the free cash flow –


Please note, the Net cash from operating activities is computed after adjusting for income tax. The net cash from operating activities is highlighted in green, and the capital expenditure is highlighted in red.

You may now have a fair point in your mind  – When the idea is to calculate the future free cash flow, why are we calculating the historical free cash flow? The reason is simple while working on the DCF model; we need to predict the future free cash flow. The best way to predict the future free cash flow is by estimating the historical average free cash flow and then sequentially growing the free cash flow by a certain rate… This is a standard practice in the industry.

Now, by how much do we grow, the free cash flow is the next big question? Well, the growth rate you would assume should be as conservative as possible. I personally like to estimate the FCF for at least 10 years. I do this by growing the cash flow at a certain rate for the first 5 years, and then I factor in a lower rate for the next five years. If you are getting a little confused here,  I will encourage you to go through the following step by step calculation for better clarity.

Step 1 – Estimate the average free cash flow.

As the first step, I estimate the average cash flow for the last 3 years for ARBL –

= 209.7 + 262.99 + (51.6) / 3

=Rs.140.36  Crs

The reason for taking the average cash flow for the last 3 years is to ensure we are averaging out extreme cash flows and accounting for the business’s cyclical nature. For example, in ARBL, the latest year cash flow is negative at Rs.51.6 Crs. Clearly, this is not a true representation of ARBL’s cash flow; hence, for this reason, it is always advisable to take the average free cash flow figures.

Step 2 – Identify the growth rate.

Select a rate which you think is reasonable. This is the rate at which the average cash flow will grow going forward.  I usually prefer to grow the FCF in 2 stages. The first stage deals with the first 5 years, and the 2nd stage deals with the last 5 years. Specifically, concerning ARBL, I prefer to use 18% for the first 5 years and around 10% for the next five years. If the company under consideration is a mature company that has grown to a certain size (as in a large-cap company), I would prefer to use a growth rate of 15% and 10%, respectively. The idea here is to be as conservative as possible.

Step 3 – Estimate the future cash flows.

We know the average cash flow for 2013 -14 is Rs.140.26 Crs. At 18% growth, the cash flow for the year 2014 – 2015 is estimated to be –

= 140.36 * (1+18%)

= Rs. 165.62 Crs.

The free cash flow for the year 2015 – 2016 is estimated to be –

165.62 * (1 + 18%)

= Rs. 195.43 Crs.

So on and so forth. Here is a table that gives the detailed calculation…

An estimate of future cash flow –

Sl No Year Growth rate assumed Future Cash flow (INR Crs)
01 2014 – 15 18% 165.62
02 2015 – 16 18% 195.43
03 2016 – 17 18% 230.61
04 2017 – 18 18% 272.12
05 2018 – 19 18% 321.10
06 2019 – 20 10% 353.21
07 2020 – 21 10% 388.53
08 2021 – 22 10% 427.38
09 2022 – 23 10% 470.11
10 2023 – 24 10% 517.12

With this, we now have a fair estimate of the future free cash flow. How reliable are these numbers, you may ask? After all, predicting the free cash flow implies predicting the sales, expenses, business cycles, and literally every aspect of the business. Well, the estimate of the future cash flow is just that; it is an estimate. The trick here is to be as conservative as possible while assuming the free cash flow growth rate. We have assumed 18% and 10% growth rate for the future; these are fairly conservative growth rate numbers for a well managed and growing company.

15.2 – The Terminal Value

We have tried to predict the future free cash flow for upto 10 years. But what would happen to the company after the 10th year? Would it cease to exist? Well, it would not. A company is expected to be a ‘going concern’ which continues to exist forever. This also means that as long as the company exists, some amount of free cash is generated. However, as companies mature, the rate at which free cash is generated starts to diminish.

The rate at which the free cash flow grows beyond 10 years (2024 onwards) is called the “Terminal Growth Rate”. Usually, the terminal growth rate is considered to be less than 5%. I personally like to set this rate between 3-4%, and never beyond that.

The “Terminal Value” is the sum of all the future free cash flow beyond the 10th year, also called the terminal year. To calculate the terminal value, we just have to take the cash flow of the 10th year and grow it at the terminal growth rate. However, the formula to do this is different as we are calculating the value literally to infinity.

Terminal Value = FCF * (1 + Terminal Growth Rate) / (Discount Rate – Terminal growth rate)

Do note, the FCF used in the terminal value calculation is that of the 10th year. Let us calculate the terminal value for ARBL considering a discount rate of 9% and terminal growth rate of 3.5% :

= 517.12 *(1+ 3.5%) / (9% – 3.5%)

= Rs.9731.25 Crs

15.3 – The Net Present Value (NPV)

We know the future free cash flow for the next 10 years, and we also know the terminal value (which is the future free cash flow of ARBL beyond the 10th year and upto infinity). We now need to find out the value of these cash flows in today’s terms. As you may recall, this is the present value calculation. Once we find out the present value, we will add these present values to estimate the net present value (NPV) of ARBL.

We will assume the discount rate at 9%.

For example, in 2015 – 16 (2 years from now), ARBL is expected to receive Rs.195.29 Crs. At a 9% discount rate, the present value would be –

= 195.29 / (1+9%)^2

= Rs.164.37 Crs

So here is how the present value of the future cash flows stack up –

Sl No Year Growth rate Future Cash flow (INR Crs) Present Value (INR Crs)
1 2014 – 15 18% 165.62 151.94
2 2015 – 16 18% 195.29 164.37
3 2016 – 17 18% 230.45 177.94
4 2017 – 18 18% 271.93 192.72
5 2018 – 19 18% 320.88 208.63
6 2019 – 20 10% 352.96 210.54
7 2020 – 21 10% 388.26 212.48
8 2021 – 22 10% 427.09 214.43
9 2022 – 23 10% 470.11 216.55
10 2023 – 24 10% 517.12 218.54
Net Present Value (NPV) of future free cash flows Rs.1968.14 Crs

Along with this, we also need to calculate the net present value for the terminal value. To calculate this, we simply discount the terminal value by discount rate –

= 9731.25 / (1+9%)^10

= Rs.4110.69 Crs

Therefore, the sum of the present values of the cash flows is = NPV of future free cash flows + PV of terminal value

= 1968.14 + 4110.69

= Rs.6078.83 Crs

This means standing today and looking into the future; I expect ARBL to generate a totally free cash flow of Rs.6078.83 Crs, all of which would belong to the shareholders of ARBL.

15.4 – The Share Price

We are now at the very last step of the DCF analysis. We will now calculate the share price of ARBL based on the firm’s future free cash flow.

We now know the total free cash flow that ARBL is likely to generate. We also know the number of shares outstanding in the markets. Dividing the total free cash flow by the total number of shares would give us the per-share price of ARBL.

However, before doing that, we need to calculate the value of ‘Net Debt’ from its balance sheet. Net debt is the current year total debt minus current year cash & cash balance.

Net Debt = Current Year Total Debt – Cash & Cash Balance.

For ARBL, this would be (based on the FY14 Balance sheet) –

Net Debt  = 75.94 – 294.5

= (Rs.218.6 Crs)

A negative sign indicates that the company has more cash than debt. This naturally has to be added to the total present value of free cash flows.

= Rs.6078.83 Crs – (Rs. 218.6 Crs)

= Rs.6297.43 Crs

Dividing the above number by the total number of shares should give us the company’s share price, also called the intrinsic value of the company.

Share Price = Total Present Value of Free Cash flow / Total Number of shares.

We know from ARBL’s annual report the total number of outstanding shares is 17.081 Crs. Hence the intrinsic value or the per-share value is –

= Rs.6297.43 Crs / 17.081 Crs

~ Rs.368 per share!

This, in fact, is the final output of the DCF model.

15.5 – Modeling Error & the intrinsic value band

The DCF model though quite scientific, is built on a bunch of assumptions. Making assumptions, especially in finance, takes on an art form. You get better at it as you progress through and gain more experience. Hence, we should assume (yet another assumption ) that we have made a few errors while making the intrinsic value calculation for all practical purposes. Hence, we should accommodate for modelling errors.

A leeway for the modelling error simply allows us to be flexible with calculating the per-share value. I personally prefer to add + 10% as an upper band and – 10% as the lower band for what I perceive as the stock’s intrinsic value.

Applying that on our calculation –

Lower intrinsic value = 368 * (1- 10%) = Rs. 331

Upper intrinsic value = Rs.405

Hence, instead of assuming Rs.368 as the stock’s fair value, I would now assume that the stock is fairly valued between 331 and 405. This would be the intrinsic value band.

Now keeping this value in perspective, we check the market value of the stock. Based on its current market price, we conclude the following –

  1. If the stock price is below the lower intrinsic value band, we consider the stock to be undervalued. Hence one should look at buying the stock.
  2. If the stock price is within the intrinsic value band, then the stock is considered fairly valued. While no fresh buy is advisable, one can continue to hold on to the stock if not adding more to the existing positions.
  3. If the stock price is above the higher intrinsic value band, the stock is considered overvalued. The investor can either book profits at these levels or continue to stay put. But should certainly not buy at these levels.

Keeping these guidelines, we could check for Amara Raja Batteries Limited’s stock price as of today (2nd Dec 2014). Here is a snapshot from the NSE’s website –


The stock is trading at Rs.726.70 per share! Way higher than the upper limit of the intrinsic value band. Clearly, buying the stock at these levels implies one is buying at extremely high valuations.

15.6 –Spotting buying opportunities

Long term investment and activities surrounding long term investing are like a slow-moving locomotive train. Active trading, on the other hand, is like the fast bullet train.  When long term value opportunity is created, the opportunity lingers in the market for a while. It does not really disappear in a hurry. For instance, we now know that Amara Raja Batteries Limited is overvalued at the current market price. It is trading way higher than the upper limit of the intrinsic value band. But the scene was totally different a year ago. Recall based on FY 2013- 2014, ARBL’s intrinsic value band is between Rs. 331 and Rs.405.

Here is the chart of ARBL –


The blue highlight clearly shows that the stock was comfortable trading within the band for almost 5 months! You could have bought the stock anytime during the year. After buying, all you had to do was stay put for the returns to roll!

In fact, this is the reason why they say – Bear markets create value. The whole of last year (2013), the markets were bearish, creating valuable buying opportunities in quality stocks.

15.7 – Conclusion

Over the last 3 chapters, we have looked at different aspects of equity research. As you may have realized, equity research is simply the process of inspecting the company from three different perspectives (stages).

In stage 1, we looked at the qualitative aspects of the company. At this stage, we figured out who, what, when, how, and why of the company. I consider this an extremely crucial stage of equity research. If something is not really convincing here, I do not proceed further. Remember, markets are an ocean of opportunities, so do not force yourself to commit to an opportunity that does not give you the right vibe.

I proceed to stage 2 only after I am 100% convinced with my findings in stage 1. Stage 2 is basically the application of the standard checklist, where we evaluate the company’s performance. The checklist that we have discussed is just my version of what I think is a fairly good checklist. I would encourage you to build your own checklist, but make sure you have a reasonable logic while including each checklist item.

Assuming the company clears both stage 1 and 2 of equity research, I proceed to equity research stage 3. In stage 3, we evaluate the stock’s intrinsic value and compare it with the market value. If the stock is trading cheaper than the intrinsic value, then it is considered a good buy. Else it is not.

When all the 3 stages align to your satisfaction, you certainly would have the conviction to own the stock. Once you buy, stay put, ignore the daily volatility (that is, in fact, the virtue of capital markets) and let the markets take its own course.

Please note, I have included a DCF Model on ARBL, which I have built on excel. You could download this and use it as a calculator for other companies as well.

Key takeaways from this chapter

  1. The free cash flow (FCF) for the company is calculated by deducting the capital expenditures from the net cash from operating activates.
  2. The free cash flow tracks the money left over for the investors.
  3. The latest year FCF is used to forecast the future year’s cash flow.
  4. The growth rate at which the FCF is grown has to be conservative.
  5. The terminal growth rate is when the company’s cash flow is supposed to grow beyond the terminal year.
  6. The terminal value is the value of the company’s cash flow from the terminal year upto infinity.
  7. The future cash flow, including the terminal value, has to be discounted back to today’s value.
  8. The sum of all the discounted cash flows (including the terminal value) is the total net present value of cash flows.
  9. From the total net present value of cash flows, the net debt has to be adjusted. Dividing this by the total number of shares gives us the per-share value of the company.
  10. One needs to accommodate for modelling errors by including a 10% band around the share price.
  11. By including a 10% leeway, we create an intrinsic value band.
  12. Stock trading below the range is considered a good buy, while the stock price above the intrinsic value band is considered expensive.
  13. Wealth is created by long term ownership of undervalued stocks.
  14. Thus, the DCF analysis helps the investors identify whether the company’s current share price is justified.


  1. Harshad Salvi says:

    Hi, Few Questions…
    1. On what basis should one select the future growth rate of FCF? Has it got to do anything with Profit growth rate(NP or GP)? if not, then
    how should we determine the growth rate?
    2. Why did you select the discount rate of 9%? Is it related to Cost of Capital (or WACC) of the Co.?
    3. The above exercise is based upon FY14 results summary. The results must have been out somewhere in the month of April or so. Then,
    how could one have purchased the stock in FY13-14 only without knowing what the results are going to be? And also, the stock was seen
    trading closer to the upper band of the intrinsic value (in the month of February-March), which doesn’t warrant adding stock to one’s
    kitty. In other words, it appears to have traded at around fair value. Then why would one invest in the said stock once results were out.

    • Karthik Rangappa says:

      My answers in line –

      1) This is the hard part, there is no clear basis that is prescribed. I personally prefer to be as conservative as possible when it comes to setting the FCF rate. I never exceed 20%. Besides, I prefer the 2 stage DCF process where I have two different FCF rate.

      2) Yes, the discount rate is nothing but the weighted average cost of capital (WACC). 9% is probably a bit low, I should kept it at probably 10 -11%. In fact this is the reason why I have given the excel link, people can feed in their desired rate and play around.

      3) You maybe right on the 3rd point, not sure how I erred here. Let me re-look and if required rewrite.

  2. Harshad Salvi says:

    Would you pls explain what constitutes Large Cap, Mid cap & small cap cos?

    • Karthik Rangappa says:

      I personally use this classification –

      1) Between 50 – 500 Crs of MC – Ultra Micro Cap
      2) Between 500 – 2000 Crs of MC – Micro Cap
      3) Between 2000 – 10K Crs MC – Small Cap
      4) 10K to 25K MC – Mid Cap
      5) Above 25K MC – Large Cap

      Note MC = Market Capitalization.

  3. Keerthan says:

    Karthik, from FCF that is Cash from OA-Capex you have arrived at Cash from Op Activity-Capex-Net Debt that is FCFE right? Why is Interest*(1-t) missing in the equation?(FCFF). Could you explain these concepts? FCF,FCFF and FCFE?

    • Karthik Rangappa says:

      FCF/FCFF = Free cash flow to the Firm. A firm includes both deb holders and equity holders. FCF conveys to us how much cash the company is generating for both these types of holders. However if we have to find out the cash component specifically for equity holders then we got to look at ‘Free Cash flow to Equity’ or FCFE. FCFE gives us the cash component applicable to the equity holders of the firm. Yes, taking interest*(1-tax rate) makes sense but I guess since the interest component was very low, I must have skipped it. By taking interest*(1-tax rate) we are actually accounting for the tax shield the company enjoys by paying an interest to debt holders.

      • Keerthan says:

        OK. I just came across Zerodha Varsity last weekend and I must say I am very impressed with the material. It is very simple, lucid and clear. I have some suggestions for you. Both TA and FA modules are very good.
        1) In TA you could also look at adding a chapter on Elliot Waves. It is an extremely helpful tool.
        2) In FA you could also add a module on relative valuation methods, (P/E, EV/EBITDA, Market capitalisation/Free cashflow yield, Enterprise value/Free cash flow yield etc). These valuation methods are equally good especially the one’s involving cashflow yields.
        3) You could also be a module on valuation metrics in different sectors for general understanding (Cement, IT, FMCG, Realty etc).
        4) There could be a brief write up on taxation as well( LTCG,STCG etc)
        Even if you so not add any of these, It is still an excellent job so far.

        • Keerthan says:

          3) There could be a module/ write up on valuation metrics in different sectors for general understanding (Cement, IT, FMCG, Realty etc).

        • Karthik Rangappa says:

          Thanks for you kind words. Zerodha has taken a lot of efforts to build Varsity…it is still in a early stage, it will have a lot more content as we go forward. Will try and include all the topics you have suggested, please stay tuned. Right now the focus is on Futures and Options as there are many request coming in for these modules.

  4. Keerthan says:

    Hi Karthik, I was looking at the attached cash flow statement, Could you tell me whether Purchase of Fixed Assets Including Capital work in progress and Capital advances can be considered as CAPEX for finding out the FCF or should we take out CWIP and Capital advances from the given value?

    • Keerthan says:

      Hi Karthik, another question related to the above image.
      In the attached image above, as you can see there is a significant Finance cost involved. So I take it that we add (1-tax)*Interest to FCF to calculate FCFE. That is FCFE=CFOA-Capex+(1-tax)*Interest+NetDebt.
      I have the following questions – 1) For Interest*(1-tax), I consider only Interest costs out of total finance costs right? The other cost in the total Finance cost here is Foreign exchange loss.
      2) (1-tax), here is the tax rate; Current tax/EBT? or Total tax(Current +Deferred+Taxes of earlier year)/EBT?

      • Karthik Rangappa says:

        Yes, you will have to account for the benefit of tax shield that the company enjoys by virtue of paying interest. The formula what you have stated is correct. Forex loss should not be included in this calculation. (1-tax), here the tax referred to is not the tax amount, it refers to the corporate tax rate, which is a % figure. Usually about 34%.

    • Karthik Rangappa says:

      Keerthan – You can include this in FCF calculation.

  5. Keerthan says:

    Hi Karthik, Instead of taking the projected values of FCFF , finding the NPV and then subtracting Net Debt to find FCFE, can’t we calculate FCFE for say 5 years, find the average and then project the future values on this average growth value?

    • Karthik Rangappa says:

      You can, if fact that is what you do when you build a financial model. I dint discuss that as I thought it could be a bit heavy. Maybe I’ll introduce a module on Financial Modelling at some point in the future 🙂

  6. pravin kumar solanki says:

    In “= 9724.89 / (1+9%)^10” what mean of symbol of “^”. pls explain because I no read it in normal maths.

    • Karthik Rangappa says:

      The symbol ‘^’ means – raised to the power of. So in the mathematical expression – “9724.89 / (1+9%)^10”, it means the number 9724.89 is divided by (1+9%) which is (1.09) raise to the power of 10.

  7. Keerthan says:

    Hi Karhtik,
    I have a query on DCF calculation. Here goes the question
    1) When a company like for example KNR constructions has subsidiaries and hence consolidated financial statements, then do I use the values from consolidated balance sheets for DCF calculations?
    2) In case of KNR, if I use the consolidated statements I get a negative value for average free cash flow (I took 3 years, then 2 more years making it 5 year average) and hence negative PV’s. However If I take the standalone values which are much better I get a positive value and considering the results of the 2 quarters of FY2015 which have already passed and estimated 3QFY15 values, the stock price comes very near to what it is presently trading at in the spot markets. I would like to have your view on this.

    • Karthik Rangappa says:

      It is always a good practice to look into the consolidated numbers. Imagine this – a person could be earning a great salary on a month on month basis, but if he lives in a joint family with 10 dependents on him, draining away all the money he earns, then obviously his salary pales in comparison to his monthly liabilities. The family is his, and one cannot really separate it from him. Like wise with standalone and consolidate numbers. In fact there are companies which on a standalone basis has horrible numbers but on a consolidated basis the whole scene changes.

  8. Massood says:

    In case of banks and Financial Institutions, mostly CashFlow is negative and excel sheet shows wrong Valuation data.
    Any idea how can we do valuations in case of negative net cash flow ??

  9. kishna04 says:

    How does greece crisis affect the indian share market?

    • Karthik Rangappa says:

      Experts suggest that Greece is not a major trading partner with India…so it should not really affect us much.

  10. Nikhil says:

    Bro for DCF analysis which report is more suitable?
    Standalone or consolidated??

  11. Nikhil says:

    Bro when you was explaning DCF analysis taking example of ARBL
    you calculated Net Debt=Total Debt-Cash and cash Balances

    Here you took total debt= Long term Borrowings

    But it should be Long term Borrowings+Short term Debt

    • Karthik Rangappa says:

      Yeah, I guess I omitted Short term debt because it does not exist for ARBL. Also the ‘short term borrowings’ present in BS is ‘Current’, which is not really considered in DCF.

  12. Matrix says:

    Hi Kartik,

    Can you please explain, how to calculated Current Year Total Debt & Cash & Cash Balance.
    Is Current Year Total debt = Current Liability + Non Current Liabilities ?
    and Cash & Cash Balance = Reserves and Surplus ?


    • Karthik Rangappa says:

      Total Debt = Long term debt + short term debt

      Cash & Cash balance = As stated in the Balance sheet, no need to calculate. However you can consider adding ‘Investments’ to Cash & Cash balance provide the investments are all liquid in nature (such as liquid funds, short term debt products etc).

  13. Priyank019 says:

    I think the figures of future cash flow are wrong, there may be calculation mistakes. Please check as I am getting these, please see the attached file

  14. Priyank019 says:

    517.12* (4.5)/(9-3.5). Is not equal to 9000 crores, please rectify the figures, m getting doubt over my calculations

  15. nishu says:

    respected sir, you have derive FCF = Cash from Operating Activites – Capital Expenditures, for the year 2013-14 i.e. Cash from Operating activities (after income tax) Rs.278.70 and Capital Expenditures Rs. 330.30 in P&L statement for the year 2013-14 i could not understand. please calculate Rs. 278.70 and 330.30 how it comes? Thanks a lot.

    • Karthik Rangappa says:

      Sure, will check again and get back as soon as I can. Thanks.

    • Suchetha says:

      Hi Nishu,

      The Free cash flow (FCF) represents the total value of the business. It is calculated as follows :
      FCF = Net cash from operating activities – Amount paid to purchase tangible fixed assets
      FCF (2013) = 335.46 – 72.47 = 262.99
      FCF (2014) = 278.75 – 330.36 = (51.66)

      Please click on this link from the ARBL Cash flow statement to understand the computation.

  16. nishu says:

    respected sir,………… if possible please give my answer as early as you can………..please…….thanks

  17. Billa says:

    Hi Karthik,

    I am doing DCF analysis for L&T with the excel sheet provided above and Free Cash Flow average is Negative value for L&T. So the approx. share price is showing wrong values.
    1) Can you explain how to do DCF analysis for companies with Negative Cash flows ?
    2) If DCF analysis can’t be applied for Negative Cash flow means, is there any other method to determine approx. values ? Any specific method names ?

    • Karthik Rangappa says:

      Billa -its hard to model companies with -ve cash flow since most of the input variables are ‘rough estimate’. Also the reliability is mainly on the terminal value in case of -ve cashflows…also do remember terminal value is sensitive to discount rate.

      In such situations I usually go by other valuation techniques – P/E, comparables, P/BV etc.

  18. divya agarwal says:

    as said by you sir
    FCF is the base for dcf, but why do I have to forecast my future FCF on an average historical FCF

    • Karthik Rangappa says:

      Without forecasting how else would you gain visibility on the future cash flow? The idea is to keep it ultra conservative and realistic.

  19. Akshay says:

    Sir how accurate are the intrinsic values that are provided by screener.in ?

  20. Suresh.ks says:

    While calculating Net debt should we deduct Cash and cash balance from long term borrowing?
    why we will not consider short term borrowing?

    • Karthik Rangappa says:

      Because, short term debt is a current item, however Net Debt represents a longer term picture.

  21. suresh.ks says:

    How do we get information about company’s auditors,bankers whether they good or not?

    • Karthik Rangappa says:

      You will get to know the names in the Annual Report. How good or bad they are is something you will have to figure out by means of research 🙂

  22. rohan says:

    If I would have calculated future value and PV for infosys 15 yrs back and eicher motor 6 yrs back. chances were that it intrinsic value of stock may have come in overvalued range after 1-2 yrs of calculation.

    So I would have exited, but How to know that its not overvalued and still potential growth is left in stock/company?

    • Karthik Rangappa says:

      Such investment decisions go beyond number crunching abilities. You should be able to assess companies management, business model, scale etc. This is where qualitative research comes into play.

  23. mehmood1 says:

    Sir…What is the ”Diluted” number of share ?
    Is that this kind of share count when finding intrinsic value per Share?(in case of infosis)

    • Karthik Rangappa says:

      Diluted generally includes the total shareholding plus the authorized shares for issuance.

      • mehmood1 says:

        That mean they do not counting for calculation of intrinsic value per share?
        Ex….Number of share used in computing earnings per share (Infosis)
        Basic 1148472332 (only this are count)
        Diluted 1148487674

  24. suresh.ks says:

    what are the major global events and regulatory statements impact on Indain stock market? how can get this information on website?

  25. suresh.ks says:

    How to see Indian economic and global events ? any web link?

  26. Ranjan says:

    Please elaborate the term WACC. How to calculate it ? or find it for Terminal Growth Value ?

  27. Sai Sreedhar says:

    Can we infer that the more the difference in CMP to Intrinsic Value, the better stock to BUY, than vice-versa?
    Scrip-A. CMP 100, IV 1000
    Scrip-B. CMP 900, IV 1000

    Can we infer that buying Scrip-A would be a better choice?

    • Karthik Rangappa says:

      If the difference (scrip A) is so much, then you need to dig deeper and figure out why the difference is so much. But generally yes, higher the difference better it is !

  28. paresh_poojari says:


    Can you elaborate on WACC or discount rate that is used in Terminal value calculation. Can we always keep it 9% to 10% or will it vary from company to company?

    • Karthik Rangappa says:

      Weight average cost of capital (WACC) gives us an idea of the rate at which the company is borrowing funds. To put it in a simple way – if you avail a personal loan form the bank at 12%, then WACC in your case is 12%.

      Terminal Value – a company is expected to exist to perpetuity. So if it continues to exist forever, then it is supposed to grow at a certain rate. The average rate at which it will continue to grow is called ‘Terminal Value’.

  29. ybirajdar21 says:

    Hello Karthik,
    What are your criteria for selecting growth rate for first 5 years??Is it vary from company to company??Same question for Discount rate??

    • Karthik Rangappa says:

      Yes, it would vary company to company, sector to sector. This would largely depend on your understanding of the business and the sector. There are no set rules here. However, keeping the numbers conservative is the key.

  30. RD3032 says:

    What is Discount Rate?

  31. Shaun says:

    What does the lower price band and upper price band on NSE site indicate ?

    • Karthik Rangappa says:

      Stock price movement on a daily basis can be controlled by exchanges to curb excess volatility. If a stock has a 5% upper and lower price band, then it means it can move up by a maximum of 5% and down by 5% for the given day.

  32. rishi Mishra says:

    can we take 5 years average free cash flow in place of 3 years ?

  33. Akshay says:

    should we use tangible fixed assets only or Purchase of fixed assets, including capital
    work–in–progress and capital advance ? If so , how do we find only the Tangible fixed assets ?
    Thank You .

    • Karthik Rangappa says:

      The schedule associated to Fixed assets usually gives this information along with the accumulated depreciation as well. Suggest you look into it. Thanks.

  34. Chad says:

    First of all Karthik, I would like to thank you very sincerely and literally from the bottom of my heart for putting the entire module of fundamental analysis together. I have minutely followed till financial ratios (chapter 10) and have skimmed through the rest of the chapters due to prior familiarity with DCF and CAPM. And I can tell how much effort you must have put in to compile all this write-up.
    I also started as an enthusiast, did a finance basics course, learnt a theory about present values, asset pricing and CAPM but still in practice, somehow I used to get stuck till Anual Report analysis (I have not yet done corporate finance course.) Somehow, I was not getting the link of connecting the real financial statements of a company to theoritical financial models.
    I feel this is yet another reason to respect your effort as you have seamlessly tied all the three important aspects of fundamental analysis together.
    1. Reading anual reports and financial statements
    2. Using and moreover deriving financial ratios and taking out meaning of it, and
    3. Fair value calculation.

    Hats off!
    If you wouldn’t mind I have few tweaking suggestions and requests for individual topics in the chapters. I will put individual comments wherever applicable (and as I read again :D). I genuinely feel that will make this material even more well rounded.

    Thanks and Regards,

    • Karthik Rangappa says:

      Many thanks for the very kind words and the encouragement Chad.

      I know the efforts are worth it when people take time to read this…and more importantly benefit from it. Please do share your feedback and I’ll be happy to work around it.

  35. sammandar khan says:

    Dear Karthik
    The % no. like you took 18%, 9%, 8.5% those things are you took by yourself or by any rules & regulations?
    Thanks a lot

  36. sammandar khan says:

    One another question my is that, I’m going to read FA of a company So first I conclude the intrinsic value or read whole financial statemynts and ratios like first you described all statements and ratios of Amara Raja and in the end of time the intrinsic value is showing not capable to buy the shares right now. Please suggest me I’m beginner. Sorry for my bad English as I already asked you about Hindi modules
    Thanks a lot dear

    • Karthik Rangappa says:

      Its exactly the same Sammandar. You have to start with the basic financial statements and progress towards identifying the intrinsic value.

      • sammandar khan says:

        Thanks a lot dear first and I still have some doubts before going further as you described about the Amara Raja in your modules. According to my understanding all stuffs were well & good at this point and in the end after evaluating intrinsic value we are not able to invest right now because of overvalued then in this case, Will we wait till undervalued if will wait then how much time because the difference is too much between current stock price(around 700 & intrinsic value (around 350), . Please tell me what is the right decision in this situation.

        • Karthik Rangappa says:

          Yes, usually its a good idea to wait till you get the right opportunity. However, this valuation model is old now, we have lot more data points (in terms of financial data). We need to use this information to check the latest intrinsic value.

  37. vimal says:

    Is there anyway to find the intrinsic value of bank stock. From my view, DCF valuation doesn’t work for banking sector.So pls provide me any source or idea to find the intrinsic value of the bank stocks or any other valuation methodology. Thanks in advance.

  38. John says:

    current year total debt = 75.94 which is also the long term borrowings
    but long term term in non current debt. and current year debt is always short term borrowings.
    can you please explain this.
    thanks in advance

  39. vimal says:

    How to take the intrinsic value when the free cash flow is negative because intrinsic value is also negative or there is another method to calculate the intrinsic value when FCF is negative

  40. vimal says:

    Thanks a lot for your response all the time.My question is while calculating the intrinsic value we take growth rate for 5 or 10 years.So the value we got is that the growing rate of the company we take and its value is after 5 or 10 years i.e. is we are calculating the present value for fcf of after 5 years.So how we conclude the present worth of the company in today’s term in current financial position.Please correct me if I am wrong.

    • Karthik Rangappa says:

      You add up all the PV of FCF along with cash in bank. Divide this over the existing number of shares and you get an idea of its intrinsic value (based on expected cashflow).

  41. Nishigandha says:

    Hi Karthik,
    For me it is getting difficult to calculate Infosys intrinsic value. To calculate Net debt when i check total debt , I did not find any debt as such hence I took value as 0. and then cash & cash balance as 32697 hence net debt comes (32697) Please can you check and confirm. This is from annual report 2016

    • Karthik Rangappa says:

      Net debt is Debt – Cash, since Infy does not have any debt, there is no point calculating this at all.

  42. Prathvi.R says:

    In FCF , only Purchase of tangible fixed assets is considered as capital expenditure. Why are the rest of the expenditures not included ( Purchase of intangible fixed assets,Increase in capital work-in-progress ) ?

    • Karthik Rangappa says:

      What we are essentially looking for is the cash flow generated from operations, essentially current items. Things like fixed asset belongs to non current items.

  43. Prathvi.R says:

    How do you calculate the discount rate ?

    • Karthik Rangappa says:

      You have to make in intelligent guess. Alternatively, you can take in WACC (weighted average cost of capital) to estimate this. My advise would be to take a number that makes sense and then build a data table which would reflect the changes in the discount rate versus the share price.

  44. vimal says:

    How do we calculate the working capital change or we simply take the working capital change in cash flow statements. Please provide me the formula for net working capital where I had lot of confusions here. Thanks in advance.

    • Karthik Rangappa says:

      Working Capital change captures the effect of cash on the cash position.

      Anything that tends to increase the cash flow needs to be added and items which tends to decrease the cash position needs to be deducted. I guess the same has been explained earlier in this chapter.

  45. Dhinakaran says:

    Karthik, I am not quite clear on the denominator part of the terminal value formula. I understand that the numerator part is the FCF till infinity.(Discount Rate – Terminal growth rate) – What does this logically mean? Also, If the interest rate reduces, DCF suggests to pay more price for the same stock. Correct? Thank you! P.s: I am soon going to open an account with Zrodha. Thanks for all your help 🙂

    • Karthik Rangappa says:

      Sure Dhinakaran, Zerodha will be happy to have you as a client! We look forward to your account 🙂

      The formula is mathematically deduced from a longer expression (to begin with). I suppose to understand the logic, you will have to understand this derivation. Unfortunately, I don’t have an online link, else I’d have pointed you to the same.

  46. Matrix says:

    Hi Kartik,

    What if Cash Flow is negative number, as in for example of REC.

    • Karthik Rangappa says:

      Well, in that case its hard to estimate a fair value using the DCF approach.

      • Matrix says:

        I would really appreciate, if you can guide on how to discover intrinsic value of such companies.
        Also, i think similar would be the case for financing companies.

        • Karthik Rangappa says:

          I should have mentioned this earlier –

          1) If the CF is -ve for 1 or 2 years but +ve for rest, then it is not a problem. DCF is applicable, just follow the regular steps involved

          2) If its -ve all through, I’d suggest you look at relative valuations

  47. MSP says:

    Hi Karthik,

    WACC , from where we would get for a particular company.


    • Karthik Rangappa says:

      You need to calculate this. It is the weighted average of cost of debt and equity. Usually it is around 10-12% for any company.

  48. Rakesh says:

    In topic 15.4, net debt = current year total debt – cash & cash balance. If it’s in brackets, it’s a negative value, right?……. If the net debt which is -218.6crs, is added to the total present value of free cash flow, it must be 6078.83 – 218.6 = 5860.23crs.
    But you have added it giving a value of 6297.43crs……. Can you please explain the calculation, karthik???

    • Karthik Rangappa says:

      Net debt = Total debt minus cash and cash equivalent

      In case of ARBL,

      Net Debt = 75.94 – 294.5

      = Minus Rs.218.6 Crs


      6078.83 minus of minus 218.6

      = 6297.43crs 🙂

  49. Vijay karamchandani says:

    Hi there,

    I have estimated the average cash flow of the company , but as per analyzing the growth rate of the 2 Phases {Phase 1 – Explosive growth , Phase 2 – Moderate Growth } , you in the above example we have used a rigid % figures for the 2 Phases ., now i just want to ask or suggest would it be better if we used the industry standards., as in we just get the average historic growth average (of FCF ) of all the peers .? or maybe any other way you can discuss .? And please submit your response as whether my suggest idea is doable ./feasible and how your suggested idea of using a rigid % growth figures for the 2 phases is more superior/inferior to the idea .?

    Looking forward for a satisfying idea !

  50. SANKAR B says:

    Dear karthik,
    Good job. Easy understanding. I am new to FA.
    How one can identify, the transaction of capital expenditures?. I see in annual report, in various titles.
    Pl. explain.

    • Karthik Rangappa says:

      Thanks Sankar.

      Usually, an associated note will give you the details. Capex, for instance will be mentioned in the Gross block section, which is on the asset side of the balance sheet.

  51. tanveerstg says:

    Dear Karthik,
    I feel there is an error in table (15.3 – The Net Present Value (NPV)) growth rate you have mentioned 18% and subsequent 10% but entire calculation is done on the base of 9% to get the “Present value”.

    I request you kindly recheck this…. Tanveer.

    • Karthik Rangappa says:

      Tanveer, 9% is the discount rate, which helps us bring back the future cash flow to present rate. The 18% and 10% used earlier is the growth rate of the the future cashflow.

  52. MSP says:

    Hi Karthik,

    Total Debt every where you are taking Long Term+Short term, however, at DCF calculation you are taking only long term debt, why so?


    • Karthik Rangappa says:

      For most of the ratios calculation we take total debt, however for DFC we can consider just the long term debt, especially if the short term debt is negligible.

  53. Pavan says:

    Is this the only method to find the intrinsic value? If any other methods are there, then please share link sir.
    thank u.

  54. James says:

    Respected Sir,
    Thanks a lot for such valuable info & all modules.
    I programmed two DCF calculators in excel that helped me & I hope will be useful to others as well. I would like to share it on this platform.
    Here are links –
    1) 2 Stage DCF Value Calculator (Portable, simple with only takes 3 years data inputs) – bit.ly / 2muDWyv
    2) 2 Stage DCF Value Calculator with Margin of Safety (extended for multiple years data inputs) – bit.ly / 2muLuBi
    (input cells are highlighted grey color, rest is calculated automatically)
    Once again thanks to Zerodha team for great efforts !!!

  55. akashbarman says:

    Great Job , karthik Sir . I am really inspired by your write ups .
    Sir , i understood the things in complete except the arriving at the FCF.
    You said that Free cash flow = Cash flow from Operating activities + CAPEX.
    But you added only increase in the tangible fixed assets with CF from operating activities for ARBL’s FY14.
    Why dint you add Purchase of Intangible assets or for that matter the purchase of Capital work in progress ??
    Are they not a capital expenditure?

    • Karthik Rangappa says:

      Yes, we only take the differential of cash. And CAPEX includes long term expenditures. WC is a short term in nature.

  56. akashbarman says:

    Sorry that would be FCF = Operating activities CF – CAPEX
    then why the other two are not subtracted.

  57. pravin says:

    SIR ..Not able to understand discount rate for dcf method ….is discount rate equal to risk free interest rate…??

    • Karthik Rangappa says:

      No, it’s not the same as risk free rate. Discount rate is the rate at which you will discount the future cash flow. It can be considered as the opportunity cost.

  58. Nirmal says:

    Hi Sir,
    Was performing FA for IOC, i am getting a total present value 908023 and total number of shares is 243 (both values in crores).
    The intrinsic value is 3741.34 with upper limit 4115.47 & 3367.20, however the share price is hovering around 406 (when am writing this).
    i can see that the intrinsic value has its decimal place shifted to right by 1 position when comparing with actual share price.
    Are these decimal point shifts expected in DCF or Should I consider these stocks to be massively undervalued or is it that my calculations has gone wrong somewhere (has double checked, everything looks fine :))

    Also, i am seeing 2 types of EPS values (basic & diluted) in the annual reports of many companies, which one should be considered for EPS Growth calculation?



    • Karthik Rangappa says:

      I’d suggest you take the diluted EPS.

      I’m guessing you would made an inadvertent error while converting lakhs in crores or some division somewhere….leading to the decimal shift.

  59. Jaideep says:

    Sir, if we calculate the valuation of Sintex industries by the same valuation model, it comes out to be a negative value owing to high value of debt and small operating cash flow. Could you please explain in detail.

  60. Ayush says:

    what’s the difference between growth rate and dimnishing rate?
    How to assume the dimnishing rate?

    • Karthik Rangappa says:

      Growth rate is the rate at which any variable growing – could be EPS, Margins etc. Not sure about diminishing rate.

      • Ayush says:

        How we will know the discount rate through which we have to calculate present value?

        • Karthik Rangappa says:

          You can do this via WACC basis. But I’ve not discussed this. You can assume a 10-12% rate for most of the stocks.

  61. Vignesh Supali says:

    In today’s high speed technology big players or institutions will get intrinsic value (as per model) through alerts and algorithms which may create arbitrage opportunity between IV and CMP and they will be the first to fill that gap and take profit, do retail investors have an edge after doing all the hard work (fundamentally) in today’s trading environment?

    • Karthik Rangappa says:

      Of course, FA is anything but an HFT environment. When a stock is trading at sub IV, then that price stays. For example if the IV of a stock is 100 but its current market price is 85, then the stock wont be in a hurry to jump to 100. It may happen gradually over few trading sessions. You will be in a comfortable position to grab that stock at attractive valuation.

  62. Ravi says:

    Hello Karthik,

    Why intangible assets cost is not considered in calculating FCF?

    Thanks and Regards,


    • Karthik Rangappa says:

      Ah! I’m guessing its because FCF considers only cash expense towards current and real assets. I’ll have to do some research myself. Thanks for asking this question.

  63. Shravan Vohra says:

    Respected Sir,
    Thanks a lot for educating all of us. I have a confusion. I performed the DCF for Akzo Nobel and the price band came around 2000-2500. Current price is around 1800, that is below the lower band which somewhat signifies that the stock is undervalued. While, the PE ratio of the stock is 35 which means the price is too much according to its earnings. What should we as an investor interpret in such a situation?

    • Karthik Rangappa says:

      Hmm, assuming you’ve done it right, then it suggests that the stock is undervalued. However, PE has nothing to do with this. It could be that the undervalued price itself is trading at a higher multiple.

      • Shravan Vohra says:

        Thank You so much sir for your reply. Just a clarification. According to the DCF the stock seems to be undervalued but according to the PE, the valuations seems expensive as we usually don’t buy stocks above the PE of 30.

  64. umang akash says:

    hi ,

    i was going through intrinsic value calculation method. i have a follow up question
    in today’s scenario should i consider 7 percent as discount rate(since you considered 9% in 2014-15??

    • Karthik Rangappa says:

      No harm is being a little conservative. I’d still stick with 9%.

      • umang akash says:

        is this method universal for all kinds of companies like service companies , news paper, banks etc..
        For them what is actual capital expenditure (considering their fixed assets are very less).
        i calculated intrinsic value for sandesh(a gujrati news bulletin ) and it looks very undervalued ..

  65. rajnish bansal says:

    What growth rate and terminal growth rate should i take into calculation ?

    • Karthik Rangappa says:

      Its best if you keep the numbers very conservative. This also depends on the the industry/sector and the growth stage the company is in.

  66. Javid Ishraque says:

    Just wanted to ask. When there are different types of share class like in Tata Motors, which share class’s no of shares outstanding should i take.

  67. Shaj says:

    Hi Karthik,
    Thanks for the excellent chapter.
    I was calculating the share value Coal India using the method described and got a value of around 550.
    As the share is currently selling around 250, will you consider it as a good buying opportunity.
    Please let me know your thoughts

    • Karthik Rangappa says:

      If you have done it right, then probably its massively undervalued. You may want to double check all the variables before buying it. Good luck.

  68. Shaj says:

    I did it using the consolidated statements in coal India annual reports

  69. Rushikesh says:

    As told earlier u have explained everything in great detail, thanx a lot for the same. I only have one doubt, I have downloaded the excel sheet given at the end, in that sheet- u have divided the total share capital with face value so as to find out number of shares. Can u pl explain me why u have done so, till now I was thinking that share capital= total no of shares .M I wrong?

    • Karthik Rangappa says:

      Share capital is the total nominal Rupee value of the outstanding shares ….for example if I have 10 shares worth 1000, then in a crude sense, share capital is 10000 and number of shares is 10.

  70. Amit gupta says:

    Sir calculation of free cash flow made here is done with annual report .But most of the companies for eg Amara Raja didn’t come up with annual report of 2017.
    How can we calculate free cash flow using statement of audited financial results published after quarter on bse.
    If possible then please let me know the formula.
    Thanks a lot for educating us.

    • Karthik Rangappa says:

      I think the AR is available. CF / BS is not published quarterly. Till you get the latest data, you have to depend on the previous year’s numbers.

  71. amit chawla says:

    Please suggest the site from where i can get the Annual report with full bifurcation of listed companies?

    • Karthik Rangappa says:

      What exactly do you mean by full bifurcation?

      • amit chawla says:

        i am using moneycontrol site .
        I this site they give investing Activity but they do not give the bifurcation of the investing activity like purchase of tangible fixed assets etc
        i.e they do not give full bifurcation of the header
        so for comparing the different data in the P/L statement, balance sheet and cash flow statement which site you refer?

  72. Anubhav Rawat says:

    Hello, Karthik! Thank you for a splendid article on Equity Research. I would appreciate it if you could shed some light on the cost of debt. How should one calculate it in an Indian scenario? What if the company is not paying any interest or is debt free? Is it in any way related to the Government bonds? If so, what should be an ideal spread for it?

    • Karthik Rangappa says:

      Cost of debt really depends on the company and the kind of realtion/reputation it has in the debt market. Ideally for a well managed company, the cost of debt (under current economic scenario) should be around 9-10%.

      • Anubhav Rawat says:

        All right. But how can I estimate that 9-10% on my own? Do I look at the financial statements? Or is there a website/journal which updates the Cost of Debt figures for the firms? I would be glad if you could direct me to any website or written material on this subject.

        • Karthik Rangappa says:

          You will have the make this assessment yourself. This varies according to to the company you are dealing with…which further depends on the industry it belongs to.

  73. Ashutosh Gupta says:


    Please suggest that how can i download this Fundamental Analysis PDF file, i am unable to download it.


  74. Ravi says:

    Regarding the capital expenditure, what if in the Cash Flow Statement, they are included with intangible assets, capital work in progress and capital advances. How do we calculate purchase of the tangible fixed assets??

    • Karthik Rangappa says:

      You need to look at the note (or schedule) associated with the gross block. This will include the all the details, including the depreciation bit.

  75. Arghya Das says:

    Hii If Free Cash Flow Is A Negative Number Is There Any Way 2 Calculate Share Price?

    • Karthik Rangappa says:

      Nope, not that I know of.

      • Arghya Das says:

        Ok, Sir But If A Company Is Satisfying Most Of The Checklist But Unable 2 Generate Free Cash Flow, Should I Stay Away From Investing In Them? In The Same Context I Want 2 Ask U If A Company Is Great In All Parameter But Last 5 Year Revenue & PAT Growth Is Flat. What Should I Do?

  76. gowtham says:


    Hats off to you for the kind of work you have done! Really Splendid. I have become a everyday follower of Zerodha.
    This excel is really great, can I have similar excel for all the important financial ratios, which can be used for any company?

    That would really great.

    Thanks and Keep doing good work!

  77. Vidur Saini says:

    Hey Karthik,

    Your work is completely outstanding. I’m grateful to you for teaching the way you do.

    I just had one more favor to ask of you. Can you please convert all the Chapters in Module 9 into a PDF as well? It makes it really convenient to read without an internet connection.

    P.S – I’m getting a Zerodha account just because I got to learn so much from the Varsity.

    • Karthik Rangappa says:

      Hey Vidur, thanks so much for the kind words 🙂

      And, thank you so much for choosing us as your broker. I’m sure you will be equally amazed by all our other offerings.

      Chapter 9 PDF will be ready once the module is completed. Right now, its work in progress.

  78. Aviral says:

    I did a DCF valuation analysis for a financial services stock and the valuation is coming out to be 1300 while the stock price is 40. It can be noted that the FCF was only positive this year and negative the past two years. What do you think of such a scenario. Is it a legit valuation?

  79. Mohit Khandelwal says:

    I am getting confused between FCFF and FCFE model. Is this the FCFF model? As you removed the debt part after the discounting?

  80. Jaideep says:

    Hi sir..i am a bit confused here…you say DCF would help in calculating fair value in case the company is generating negative free cash flows…but in this chapter u have used DCF method only, and as per your previous reply, u said its difficult to calculate the IV in case of negative cash flows..is there any other method in DCF to calculate IV in case of negative free cash flows…can u please elaborate on this sir..

  81. Jinal says:


    I so grateful to you and Zerodha for the amazing explanation in all chapters, I am learning so much.

    I have a doubt in the calculation of FV of estimated cash flow in the table when the growth rate is 10% for 6th year.
    the formula would be 140.36*(1+10%)^6 , right? I am getting 248.65 rs instead of 353.21. Where have I gone wrong?

    Thank you

  82. Anand says:

    A real gem! I have been going through DCF model in many sites, videos, podcasts, but never through anything explained so well. Kudos!

  83. balu says:

    while trying to find “Cash from Operating Activities (after income tax)”
    In Ashok leyland annual report
    In 2014-15 annual report, it is shown as 49560.90 lakhs as on mar 31 2015, but
    In 2016-17 annual report it is shown as 132,449.57 lakhs as on mar 31 2015.

    why there is a change?
    Which one do I have to consider for calculation ?

  84. Nancy says:

    Where can I get the “intrinsic value band” of a stock?

  85. V Vivek says:

    Hi Kartik,

    You State that there is an excel download available for DCF. I’m unable to find it here.

  86. kesav says:

    Hi Karthik,

    Thumps up to your work.
    But I was unable to convince myself to the terminal value concept in intrinsic value calculation. One may forecast next 10 years FCF with investible due diligence but estimating total FCF post 10 years in calculation of FCF, does this a dependable idea to calculate the terminal value as there will be so many dynamics far from 10 years. As in case Amar raja, the terminal value(which calculated with least certainty for post 10 years FCF) is a major portion in intrinsic value i.e ~60% rather than next 10 years FCF(which were calculated with most reasoning) .

    And secondly can we apply DCF model to all companies the same way.As Newbie growing companies may not have a healthy FCFs, so many promising young companies will have a negative recent avg FCFs.

    • Karthik Rangappa says:

      In fact, this is exactly the drawback in DCF valuation. It relies heavily on terminal value! Unfortunately, there is no way around it. Yes, you can apply DCF to all companies, except on Banking/Financial services firm.
      Also, if you are not convinced with DCF, you may want to check out relative valuation techniques. I missed including that in this module, but maybe I will one of these days. Good luck.

      • kesav says:

        Dear sir

        As the intrinsic value by DCF seems too far low from it’s market price for the most of the companies, practically can we find good companies which are selling below intrinsic value ( based on DCF). Does we find the situations often? or is it difficult to find such opportunities?

        • Karthik Rangappa says:

          Yes, the situation is quite often in a bear market, but in a bull market such as the one we are in now, the occurrence is not too often, as the prices would have run up quite a bit.

          • kesav says:


            If one is long term investor, What would be the stock picking strategy in bull markets. and when we can say the market is too hot to fresh investments and instead should consider selling.

          • Karthik Rangappa says:

            Irrespective of the market cycles, your stock picking techniques should stem from basic fundamentals and valuations. Given this, valuations do tend to shoot up in a bull market. So you may find fewer opportunities. The market is considered too hot when stock prices can no longer explain the stock valuations.

  87. Gulshan says:

    hello sir , sir i am college student and i already studied about pv & fv but the way teached it i never forget these concepts
    my qustion is
    1.can we use free risk rate (govt bonds rate ) as discount or weighted cost of capital ?
    2. how you calculate growth rate (like 18% , 10%)
    3. sir can i work under you as a intern ? i have winter vocation from jan onwards
    thank you
    # graet treacher @ Karthik sir

    • Karthik Rangappa says:

      1) No – the cost of capital will be much higher than that, upwards of 10%, at least.
      2) This has to come from your research experience, the company you are studying, and the sector the company belongs to
      3) Unfortunately, we do not take interns. But I’m almost always available on this forum. Ping me anytime you need, will be happy to share whatever I know.

      • Gulshan says:

        sir i completed module 1,2,3 ,4,5,9 but module 9 is toughest to understand
        i have some questions
        1. if i do position sizing on momentum trade on the bases ATR ?
        2. sir i’m using pi it only scan 50 stock how can i increase the limit ?
        3. how much internet speed requied for easy flow of pi ?
        4. sir can you recommend any book on momentum to me for future learning

  88. Gulshan says:

    sir i got confuse please check below solution

    i try to find out DCF of bpcl of (current year 2016-17),past year 2014-15,2015-16

    rate as (15%for first five year) , (10% next five year), discount rate – 9%,terminate rate – 3.5%

    net operating 18,194.41 10,233.90 7,881.93
    caital expenditure -8,034.94 -9,374.49 -8,982.42
    FCF 10,159.47 859.41 -1,100.49

    avreage fcf 3306.13
    terminate 201534.8768
    pv of terminate 85130.50994

    PCF is 412614.3699

    pv 497744.8798
    debt 62256.56
    total pv 435488.3198
    no share 144
    share price 3024.224443

    lower 2721.801999
    upper 3326.646888

    1. sir above calculation is right or wrong ?
    2. bpcl is trade at 550 so it is undervalued stock ?
    3.please guide if i done wrong


    • Karthik Rangappa says:

      It would be very difficult to validate this, Gulshan. But on the face of it, the steps looks correct. However, I would not consider 15 & 10% growth rate for a company like BPCL. More like 10-8% would be more realistic I guess. Also, 3.5% for the terminal is a bit of stretch, I’d be inclined to keep it sub 3%.

      • Gulshan says:

        sir how can estimate growth rate of company ? basically steps correct as per your checklist but i not getting about growth rate calculation and terminate rate of stock

        please help me sir

        • Karthik Rangappa says:

          Growth rate can be assigned based on your expectation of how the company will grow. Typically, for a large well-established company, the growth rate is quite low, sub 10%. For a small to mid-size company, the rate can be higher. Essentially, this number will come from your expectations of well the business is likely to do in the future.

  89. Gulshan says:

    all above calculation in Crore

  90. Manish says:

    Hi Karthik
    what opportunity cost should I take in my calculation of DCF and also at what rate should I discount the terminal value? Is there any fixed Opportunity cost and discount rate?

  91. Sarthak Laddha says:

    How to calculate the intrinsic value in case company is having negative free cash flow and it is raising funds from financing activities and by using the fund from OA & FA, company is investing in fixed assets (IA) ?
    Since company is in initial phases, company is not paying any dividends (which is good that company is utilizing its reserve to earn extra from future, also known as funding from retained earning), hence dividend growth model not applicable.
    Net asset method not applicable, since we dont know the market value of its assets.
    Example of such company – 8K miles.
    The only way i see here to calculate the intrinsic value is by P/E ratio.
    PER = 1/Required return
    Price (Fair) = PER*EPS.
    RR would be the required return for the investor based on growth rate and ROE of last 5 years.
    Is it Correct?

    • Karthik Rangappa says:

      That would be difficult in case the company has -Ve free cash flow. I’d suggest you do the relative valuation here. I’ve not discussed this on Varsity, maybe I will soon.

  92. Manish says:

    Hi Karthik,

    My DCF analysis is sometimes giving the desired result but sometimes just the unexpected numbers which is not matching to some of fundamentally strong companies. How much should we trust on DCF analysis?

  93. John says:


    I have tried making the Share price
    Lower intrinsic value
    Upper intrinsic value
    Margin of safety
    but a lot of companies share price is coming in negative am i making any mistakes. I will give you the names of companies like Apollo Tyres, Reliance, NTPC, ACC .. etc

    And if the company is purchasing more assets than its cash flow from operating activities, then what does that mean?

    kindly help me.

  94. Manish says:

    Hi Karthik,

    The intrinsic lower and upper value are coming quite low for a company stock. Does it signify that the future of company is not good or in future the stock will trade in that low range only?

    • Karthik Rangappa says:

      If the numbers are right, then yes, the future may not be that great for the company you are evaluating.

      • Manish says:

        Thanks Karthik, this model has been very helpful to understand stocks. Just 15 days back i was ignorant about what are stocks and stock market. When my other colleagues talked about the share market I felt that I am just a kid in front of them. I always tried to abstain from their discussions of stocks because of having no knowledge of it. But the arms and ammunition you have provided through your Varsity is sufficient to fight the battle of stock market. Now just because of you I am able to advise my those colleagues about the selection of right stocks and they are just awestruck “How” !! . Just in 15 days 🙂 Thanks again.

  95. shashi says:

    Hi Karthik,

    Is there a service which provides DCF model in excel. I will like to dnld and tweak them for valuation ranges. Please advise.Thanks.

  96. Manish says:

    One more question-
    While reading Cash Flow statement which figure do we have to take from Cash from Operating Activities. Would that be Net Cash inflow from Operating Activities? and Which figure to pick for Capital Expenditure (would that be Purchase of Property, Plant & Equipment / increase in Capital WIP ?)

  97. Manish says:

    Can Trade Receivables be counted under Cash & Cash Equivalents (Cash & Bank Balance)?

  98. Manish says:

    In cash flow statement, there are negative sign on capital expenditure. Do we have to take the negative value
    of capital expenditure for DCF calculation? or we have to ignore the negative sign and put the positive value?

    • Karthik Rangappa says:

      This is the change in capex wrt to the previous year. If yes, the you can ignore the -ve sign and take the number directly.

  99. Manish says:

    How important is the Face Value of a stock?
    when I am doing DCF analysis for Borosil glass, the face value in March was 10 Rs. and after a split in September the current FV is Rs. 1 which is impacting very heavily on future stock price. Rest of the fundamentals are ok but still the CMP is coming out to be overvalued due to face value of Rs. 1. On the contrary If I take FV 10 the future valuation shoots up to 5 times of the CMP (coming undervalued when taking FV Rs. 10). Please advise.

    • Karthik Rangappa says:

      Always take the latest FV. In this case, it would be Rs.1. This does not have any impact on valuations as everything else gets adjusted proportionately.

  100. Manish says:

    Hi Karthik,

    More questions for DCF

    1. the average of cash flow is coming out to be a negative value. is that considered a negative cash flow?
    2. Some companies use the word “Net Cash Flow Generated from Operating Activities” and some write like “Net cash flow from/(used in) operating activities”. What is the difference between the two?
    3. What is the method of valuation for companies having negative cash flow?
    4. A company is investing hugely in CAPEX due to which its DCF valuation is appearing lower than CMP. Rest of the Fundamentals are good. What can we understand from this?

    • Karthik Rangappa says:

      1) Yes – not a great sign and you cannot really apply DCF for companies with -ve cash flow
      2) Hmm, I guess both are same
      3) You could opt to do a relative valuation technique. Have not really covered this in Varsity, will do sometime soon
      4) This could imply the company is going through a major capex cycle, which also means that the spend on capex ‘may’ taper down over the coming years.

      • Manish says:

        Thanks a lot Karthik.
        Concepts are are quite clear to me now.
        I am waiting very eagerly to learn relative valuation technique. I request you to please publish that as soon as possible.
        many thanks in advance.

        • Karthik Rangappa says:

          Glad to not that, Manish. Yes, will try and do that as soon as I can. My current focus, however, in on Trading Systems.

  101. nandhan A says:

    Hi karthik
    Could you share the link of DCF calculation Excel sheet to download since i could not find it here .

    • Its available at the end of the chapter before the key takeaways.
      You can also download it from here

      • nandhan A says:

        Thanks for sharing the excel sheet
        I have used this sheet for control print company
        I have taken data from FY16-17 ,FY16-15 ,FY 15-14
        But this calculation shows error .the share price is showing as 8.62
        note: the company have no long term debt but it has short term debt (14 crore ) but i have omitted short term debt for calculation

        This share is trading near to Rs 500 . but the intrinsic value is showing as rs 8.6
        Why this difference ?

        • Karthik Rangappa says:

          This is quite a big difference, I get a feeling you may have made mistakes in the discount, growth rates. Can you double check again, please? Thanks.

  102. Rohan Bhandari says:

    What is ideal frequency and period for calculating Beta for a company stock?
    Also what is the ideal period should be considered for calculating the market rate of return?

    The above two questions are in relation to CAPM to calculate Cost of equity for discounting rate of cash flows!


  103. Sanjay Kadam says:

    “Please note, I have included a DCF Model on ARBL, which I have built on excel. You could download
    this and use it as a calculator for other companies as well.”
    From where I can download excel sheet mentioned here?

  104. Anand Dubey says:

    Hi , I am new to equity market and I have failed to make any successful investment yet .
    I am full time employee work in a IT firm . Zerodha varsity is best platform for freshers and i have also recommended many of my friends to visit this site .

    My main concern is that, there is so much to learn on this platform starting from technical analysis to fundamental analysis .
    when it comes to investing in a company it is very difficult for me ,
    1.To evaluate a company on the basis of every financial ratios mentioned varsity .
    2. To go through all the financial instruments ,financial research and balance sheet .
    Can you tell me how can I evaluate a company or equity through few checkpoints rather than reading all the historical background of it , reason being I dont get that much time to do analysis and I am really willing to invest and scared at the same time .

    • Karthik Rangappa says:

      Glad you like Varsity, and thanks for sharing this with your friends.

      Unfortunately, there are no shortcuts, Anand. Investment analysis is a time-consuming process, but if done right, it can reward you extremely well. Here is a suggestion – break this down into a smaller task and try to accomplish this. Remember, you only need to identify one of two good investment ideas in a year. However, this idea should be developed backed by conviction and solid thesis.

  105. Supriyo Chatterjee says:

    How many types of valuation techniques are there ?

  106. Aashish Rana says:

    As u said,its good to invest in companies who has monopoly,duopoly and oligopoly in the market.but what I f the company have competitors which are not listed in bse or nse.how do we take this into consideration?

  107. Azeem says:

    Hi, I tried to calculate intrinsic value for All cargo logistics
    Average free cash flow of 4 years is 26,594 Lakhs
    I have taken growth rate 15% for 4 years and 10% for another 4 years
    So cash flow at the end of 8 years comes to 68,099 Lakhs
    NPV comes to 2,56,695 Lakhs
    terminalgrowth rate value comes to 12,81,499 Lakhs
    After reducing net debt i.e 34,422 Lakhs final value comes to 15,03,772 Lakhs
    Total no. of shares is 2,456.96 Lakhs
    Intrinsic value = 612 CMP = 194
    Can you please recheck and verify if this is correct ??


    • Karthik Rangappa says:

      NPV is higher than the CF at the end of 8 years? Otherwise it seems alright to me.

      • Azeem says:

        Sorry cash flow for 8th year is 68099 Lakhs
        Total cash flow for 8 years is 3,90,163 Lakhs
        Can you recheck and calculate the numbers from the annual report of the company ? I have done the calculations for the first time so i am not sure if i did it right 😛

  108. sandipan says:

    Sir, i am a beginner here…. please help me with the discount rate that you used in the main article while calculating terminal value..
    you used 9% and also mentioned int he previous reply it is nothing but the WACC , but i am in a maze, how to find the wacc!!

    • Karthik Rangappa says:

      I’ve not touched upon WACC, but roughly, you can use the discount rate at around 3% higher than your bank FD rate.

  109. Sarvasva says:

    hi Karthik,
    I am curious to know that how can you do valuation of companies which use thier free cash in investment activities.
    For hero motocorp they keep very less cash and use most of the cash is investment activities.

    • Karthik Rangappa says:

      You stick to the same methodology, Sarvasva.

      • Sarvasva says:

        Kartik if i stick to same methordology wont valuation of hero motars come very low. What i was thinking that we should add cash is in investment activities as positive cash flow. So could you tell the reason of not including cash used in investing activities as positive cash flow?

        • Karthik Rangappa says:

          Not really, remember, while doing DCF, we are taking cash flow from operations in perspective. Go ahead and run these calculations and see what numbers you get.

  110. Mayur says:

    WACC = E/V*RE + D/V*RD*(1-TC)

    Re = cost of equity
    Rd = cost of debt
    E = market value of the firm’s equity
    D = market value of the firm’s debt
    V = E + D
    E/V = percentage of financing that is equity
    D/V = percentage of financing that is debt
    Tc = corporate tax rate

    karthik had a question on cost of debt

    when we calculate this will we be only considering long term borrowing and ignore the short term one or we have to consider both
    and ignore the other line items under ( non current liabilities and current liabilities )

    2nd question

    regarding the cost of equity

    ke = RF +B (RM-RF)

    rF = Risk free rate
    b = beta
    rm = market rate of return

    while calculating the cost of equity will be considering the 10 yer yield on government of India debt or the 1 year bank FD rate

    & market rate of return – is it correct that we consider compounded annual growth rate for index Nifty which is 13.84% in market rate of return

  111. Mayur says:

    while calculating the cost of equity will be considering the 10 yer yield on government of India debt or the 1 year bank FD rate – this is related to risk free rate

    • Karthik Rangappa says:

      You can take either, again for a conservative approach, you can take 3% higher than the risk-free rate prevailing in the economy.

  112. Manish Srivastava says:

    Hi Karthik,

    Does the DCF model work for Commodity goods like “Chemicals” to determine future value of their stocks?

  113. Shankar says:

    Hi Karthik,
    Good read.. How did you come to the conclusion of 75.94 cr as the outstanding debt. I’ve gone through the earlier chapters also, but couldn’t see it

  114. Shankar says:

    I see. You are taking long term borrowings with Current cash flow

  115. Shankar says:

    Hi Karthik,
    I was looking at the 2017 Annual report of Suven life sciences ltd. The cash inflow of annual results of 2016-17 8.68crs with purchase of investment of about 300crs. Otherwise the cashflow for previous years were 200+crs. I took 170 crs as current year inflow and calculated 12% increment in first 5 years & 10% for next years.

    Cash Flow@2017 190 Future Cash Flow Present Value of Future Cash Flow

    2018 218.5 200.4587156
    2019 251.275 211.4931403
    2020 288.96625 223.1349645
    2021 332.3111875 235.4176231
    2022 382.1578656 248.3763914
    2023 420.3736522 250.6550739
    2024 462.4110174 252.9546617
    2025 508.6521191 255.2753467
    2026 559.5173311 257.6173223
    2027 615.4690642 259.980784

    Terminal Value at 2027 11582.00875 4892.365663

    Net debt 1725 7287.729686

    Intrinsic Value 5562.729686

    Fair value/Share 435.2002571

    Even with 3-5% growth this looks compelling buy at current levels of 190/- or am i wrong somewhere

    • Karthik Rangappa says:

      Hard to say unless one puts these numbers on excel, Shankar. On the face of it, the calculations looks alright.

  116. sohail says:

    Hi Karthik,

    Can you throw some light on how to calculate Discount rate for any company? In the above example of ARBL you have taken it as 9% ,is it purely on assumption basis or any facts lying behind it ?

  117. S.Satheesh says:

    Thank you so much Karthick. If it was not for your efforts i would have never understood these concepts !
    Please help me with a doubt. Why is ‘Cash used from Financial Activities’ not considered while calculating the ‘Free Cash Flow’ ?

    Thank you Again !

    • Karthik Rangappa says:

      Free cash is generated by operating activities alone. Remember, operating activities represents the core business of the company.

  118. Sohail says:

    Is this DCF model applicable to all companies and sectors ? or are there any exemptions ?

  119. Sohail says:

    Hi Karthik,

    In above example of ARBL , you have calculated the Average cash Flow (historic) for 3 years , but you have predicted the Future Cash Flow for 10 years , Is’nt it the Average Cash Flow (historic) should be calculated for 10 years and then predict the future Cash flow on that value ?

    • Karthik Rangappa says:

      Over the last few years (after I wrote this piece), I’ve come to he conclusion that the average should be for 5 years for predicting for 3 years.

      • sohail says:

        I did not get that karthik , Are you telling to predict 3 years future cash flow data we have to take the average historic cash flow of 5 years ? Correct me if I am wrong.

  120. Patel says:

    Do we have any other excel sheets which can be useful for us? if, yes then please provide us.

  121. ashish says:

    lets suppose in april-may, i have calculated intrinsic value using previous FY annual results, now how should i adjust the quaterly results as an input into your excel sheet..i mean what data should be tweaked or it only works with annual results when cash flow etc. is available

    • Karthik Rangappa says:

      Ashish, you work with the previous year’s cash flow. Also, you will have a fair idea on how the cash flow structure, in case of any major change during the year, then the company will make announcements and you will have to incorporate the same in your excel model. The point is that the cash flow will not change drastically if there are events which impact the cash flow, then you will know.

  122. seema hegde says:

    Great Article and very informative karthik.
    What are the other valuation techniques apart from DCF ? can you cover that as well ?

    • Karthik Rangappa says:

      You can do a relative value analysis, Seema. This has been on my list of things to do, hopefully, sometime soon 🙂

  123. Prakhar Pandey says:

    The current year total debt will be same as the current year liabilities (Total Liability = Shareholders’ Funds + Non Current Liabilities + Current Liabilities) or not??
    As in chapter 6 total liabilities was 2134 Cr. and in the present chapter debt is written as 75.94 Cr (which is long term borrowing) .
    Please clarify.

    • Karthik Rangappa says:

      Debt can be long term and short term in nature. Long-term debt is classified under long-term liabilities and short-term (less than 1 year) goes to current liabilities.
      Total debt is a sum of both these types of liabilities.

  124. Sougata says:

    DCF modelling is not appropriate for Financial Institutions.Free cash flow will come always negative for loans given by them.Kindly discuss some other valuation model for Financial Institution.

    • Karthik Rangappa says:

      Sougata, I’m yet to get comfortable with that myself. Hopefully sometime soon 🙂

      • Sougata says:

        Thanks for your reply at least.Following formula can give some light on it but I don’t how to calculate it

        Free Cashflow to Equity = Net Income – Net Capital Expenditures – Change in non-cash
        working capital – (Debt repaid – New debt issued)

        • Karthik Rangappa says:

          All these data points are available in the financial statements and with that, you can easily calculate the same.

  125. Mayank Kansal says:

    Hello Karthik,
    Thank you for such a detailed explanation.
    I got confused while I calculating the share price for ARBL based on data till 2016-17.
    Cash From Operating Activities After Tax(starting from 2016-17 to 13-14) are : 552.89, 554.71, 388.220, 278.750
    Capital Expenditures(starting from 2016-17 to 13-14) are : 438.16, 517.18, 455.387, 330.366
    Groth rate are: 18%, 10%
    Discount Rate: 9%
    Terminal Growth Rate: 3.5%
    Total Of Long Term Borrowings till 2016-17: 69.01
    Cash And Bank Balance till 2016-17: 170.92
    Total Number Of Shares: 17.08

    All figures are in Rs. cr.
    Based on the above data when I calculated stock price it came out as: 27.19
    But this stock price is wrong I guess.
    Could you please check, is the price really come out as 27.19 or I am missing something.

    • Karthik Rangappa says:

      Clearly, something is amiss here, Mayank! Are you sure you about the Capex numbers? Looks a bit off for me.

      • Mayank Kansal says:

        I will check again and let you know, Thank you for a quick reply.

        • Mayank Kansal says:

          Hi Karthik,
          Reverified the numbers again from the annual report 2016-17, 15-16, and 14-15. Numbers are correct.

          • Karthik Rangappa says:

            Hmm, I’m not sure, Mayank. Have you look at the share capital number again. Make sure you’ve divided the face value correctly.

          • Mayank Kansal says:

            The stock value 27.19 is correct based on the data. I also checked some online tool https://www.safalniveshak.com/introducing-dcf-calculator and this tool take the same kind of inputs as we use as per your calculations, and giving the nearly same stock price. Can you please check what wrong here?

          • Karthik Rangappa says:

            The calculator will give the same value for the same set of inputs. Can you double check on that again, Mayank?

          • Mayank Kansal says:

            Hi Karthik,

            Cash From Operating Activities After Tax(starting from 2016-17 to 13-14) are : 552.89, 554.71, 388.220, 278.750
            Capital Expenditures(starting from 2016-17 to 13-14) are : 438.16, 517.18, 455.387, 330.36
            The calculation was correct. The stock price is 27 rupees with data from year 13-14 to 16-17 and this is because of the large amount is spent on the capital expenditure if you see from above data.

            When I added three last more years for calculation means from 11-12 to 15-16 and calculated the stock price came out as 216.
            Current stock price for amaraja battery is 800 rupees. And I don’t think I will ever get this stock at 216 price.

            Do you still think this way of DCF calculations will work for the fair value of a stock? Or if you know any other method please please suggest.

          • Karthik Rangappa says:

            Well, DCF is one of the most standard valuation technique. Apart from this, there is relative valuation technique. I’ve not covered this yet, hopefully, will do sometime soon.

  126. Satya Koneti says:

    Hi Karthik Sir,

    ICICI bank posted loss yesterday, but share price is going up. What could be the possible reason?


  127. abhish says:

    Hi Sir,

    Your material is great! thanks for sharing it.
    I have a few questions to ask –
    Q 1) I cannot make myself understand why we compare the current market cap. with the NPV of FCF’s, like how are these two related? why we don’t consider PAT as a parameter instead of FCF (right now DCF does not make any sense for me).
    Q 2) Also to my understanding I think the most important part should the brand name and if the company enjoys long-term MOAT which should be kept in view while doing valuations and during DCF calculation we don’t add any goodwill value, please correct me if I am wrong and help me understand the concept.
    Thanks in advance! 🙂

    • Karthik Rangappa says:

      1) Where are we comparing MC with NPV?
      2) Yes, the brand name is quite important. However, DCF is purely based on numbers. Think about it this way – if the company is valued purely based on numbers and you find it at a discount, then you can be doubly sure about the margin of safety concept.

      I’d suggest you value a company completely based in DCF, you will get a hang of it 🙂

      • abhish says:

        We are calculating the intrinsic stock price by dividing the NPV/ Number of shares outstanding and current market price is market cap./number of shares outstanding. So aren’t we generating a relationship between the current market cap with the NPV?
        Also please help me understand why we consider FCF and not PAT while evaluating the NPV of a company?

        • Karthik Rangappa says:

          No, the number of shares is basically Share Capital / FV.
          DCF as a technique looks are future cash flow, discounted back to today’s terms. PAT, on the other hand, is just relevant to the current year’s performance.

  128. Parinita Matharu says:

    Hello, would you be uploading a chapter on Financial Modelling?

  129. Anahita says:

    As of today-18th May 2018, do the rates of growing FCF hold good i.e. 18% for the first 5 years and around 10% for the next five years.
    Or would you recommend using higher/lower rates as per the present economic scenario?

    • Karthik Rangappa says:

      This depends on the company you are looking at. Holds true if the company and the sector are both promising.

  130. l_earn_err says:

    Why did you calculate the PV of terminal value (clause 15.3) by simply discounting the terminal value by discounting rate??

    = 9731.25 / (1+9%)^10
    = Rs.4110.69 Crs

    If this is right way of calculating the PV of terminal value (which is sum of FCF) then…..

    (1) Refer Table of Chapter clause 15.3 – The Net Present Value (NPV)

    Why don’t we get NPV (= Rs.1968.14 Crs) by simply discounting the sum of FCF (=Rs. 3339.71) with 9% rate by using the formula
    PV = FV / (1+ discount rate) ^ No. of years ??
    or conversely…
    why don’t we get Net FCF (=Rs. 3339.71) by compounding the NPV (=Rs. 1968.14) with 9% rate by using the formula
    FV = PV (1+ growth rate) ^ No. of years ??

    (2) Refer Table of Clause 14.4 (previous chapter):

    According to the simple discounting by you for terminal value,
    In table of clause 14.4 also, we should be getting NPV (=Rs. 32,80,842) by simply discounting the total FCF (=Rs. 50,00,000) with 8.5% rate and vice-versa….BUT, We do not. Why ?

    Why formulae of PV/FV don’t seem to work the way you’ve used to calculate NPV of terminal value?

    • l_earn_err says:

      Please Note that in my Question above by FCF, I mean Future Cash Flow (which is basically FV), not Free Cash Flow.
      Sorry for similar abbrev.

    • Karthik Rangappa says:

      There is a mathematical derivation (which I’ve not discussed) to arrive at the formula for estimating PV of terminal value. I’d suggest you look it up online.

      1) We cannot really compound at a constant rate in 2 stage (or multi-stage) DCF since there are varying rates
      2) When it comes to terminal value, remember this CF is to perpetuity – so things get a little complex here. I’d suggest you look up this derivation for better clarity.

  131. Abudhar al Hassan says:

    Hey Karthik,
    I am back with another silly query (pls dont hate me). 😛
    Could you tell us the criteria based on which one can pick up stocks to trade INTRADAY? I am interested in INTRADAY because as I mentioned elsewhere…”I NO MONEY HAVE!”.. 🙂
    Also, it would be a great help if you could dedicate an entire module to Intraday trading…covering all aspects from picking stocks, trading hours, booking profits/losses etc. Of course, only if and when you find time…but please do advise on how to pick stocks for Intraday..please. Thank you very much!

    ~Abudhar al Hassan

    • Karthik Rangappa says:

      No place for hate in this forum, Abudhar 🙂

      The best stocks to trade intraday are the Nifty 50 stocks, it has the liquidity required for intraday trading. Will try and put up a module on intraday trading one of these days 🙂

  132. Arunodh says:

    The snapshot (snapshot of ARBL’s FY14 annual report from where you can calculate the free cash flow –) has capital expenditures data which I’m unable to find anywhere. Plz tell where to find it to continue the calculations. Also tell from where has this snapshot been taken from.

    • Karthik Rangappa says:

      All snapshots are from the Anual Report only, Arunodh. You can find this information in the AR itself.

      • Arunodh says:

        Thanx karthik for the clarification, and I’ve found it on AR. Though I’m unable to find the “purchase of tangible fixed assets” in many ARs. Then in that case what value should I look for ?
        Another doubt, from the very beginning of DCF we’ve applied the analogy with the example of pizza machine. Basically net cash flow is discounted, and here we’ve taken only operating activities, but what if there are some other cash flows from financing and investing activities which are totally neglected here ? Shouldn’t they be included anywhere in calculation? Shall we not simply take net cash flow from all the three activities and then carry forward the calculation ? Looking forward for the explanation, thanx in advance. 🙂

        • Karthik Rangappa says:

          For a business, cash flow from operating activities is what really matters. CF from investing and financing activities are important, but that is something I won’t base my valuation on.

  133. Himanshu says:

    Hi Karthik,

    The actual Cash flow for ARBL for F.Y. 2014-15, 15-16 & 16-17 has been quite contrary (forecasted sum of 3 years- 592 crs., actual 85 Crs.) to what was predicted by DCF model in the module here. Though, it was never a buy at that time at that price but my concern is about the accuracy of DCF model. Especially when we considered 18% GR as conservative for first 5 years for this particular company.

    In the interest of your valuable time pls. let me know if you’d want me to share the calculations and screenshots taken from the ARBL’s annual report for the said F.Ys’


    • Karthik Rangappa says:

      Himanshu, in most cases, once a DCF model is set up, it acts a ‘Base Model’, the Base model is updated as and when quarterly results are announced. All these things are a part of Financial Modelling. Clearly, we have not done that, hence I’m not surprised if the numbers are off.

  134. Shivaya says:

    When will be the financial modeling Karthik sir

  135. Hammad says:

    Hi 😀

    For computing DCF is it okay to consider more than 3 years (let’s say 6 years) of financial data, because in doing so “Avg Free Cash Flow” will incorporate fluctuations due to cyclical changes in industry and it will give a better estimate for buying price. What will you prefer ?

    • Karthik Rangappa says:

      Of course you can, Hammad. Take 5 or 6 years data and try to project for 3 years and not more than that.

      • Hammad says:

        what is your rationale behind projecting FCF for 3 years only (instead of 10)?

        • Karthik Rangappa says:

          This is a personal opinion, I think it is quite tricky to project for more than 3 years considering the dynamic nature of businesses.

          • Hammad says:

            1) I am a little confused now. In the blog post you’ve mentioned that you like to do projection for 10 years and in the comment thread you are saying you prefer forecasting for 3 years. Is it because market has changed since the blog post was written ?

            2) You mentioned that we need to update the model whenever new data is available, so we need to compute new FCF. Whenever company publishes quarter results Cash flow statement is missing from it. So how will you compute new FCF for the model ? Is there some other way for updating the intrinsic value band based on quarter results ?

          • Karthik Rangappa says:

            1) Yes, Hammad. My views changed since then….and it is not because of the markets, but because of my own understanding of how business work 🙂
            2) The only update would be on the P&L side which is made available on a quarterly basis.

  136. Guru says:


    How to identify if the stock is only Buy or only Sell trend for a day frequency?
    Is there any option in Zerodha to identify this?


    • Karthik Rangappa says:

      You just have to look at the price movement and take a call, Guru.

      • Guru says:

        Thanks Karthik.

        But price fluctuations aren’t indicate Buy or Sell trend right. If my understanding is wrong then can you tell the logic to identify based on price movement?
        How to find particular stock bid orders and analyse Buy or Sell trend? As few stocks always has Buyer only one day and other day Seller only. Because of this i got huge loss in 2 stocks.

        Appreciate your response.

        • Karthik Rangappa says:

          The trend can be identified in many ways technically- moving averages, ADX, RSI etc.
          Bid-Ask does not really help in identify longer-term trends.

  137. Rushil says:

    sir, according to the calculation amara raja was higher than its value ,bt after that it never touched down to the levels that were calculated in this chapter, what conclusion should be formed out of this .
    Did the conservative calc. made us to think the company is overvalued.

  138. Ram says:

    how did you come on 294.5 in cash &cash balance

  139. Pulkit says:

    Hi Kartik,

    How did you get the Terminal value as 9731?? I’m doing the calculation and it shows 6162. What am I missing here can’t figure out. According to formula Fcf (1+rr%)/disc rate-rr%) . So 517.12 x (1+3.5%) / (9%-3.5%) gives me 6162.5699


    • Karthik Rangappa says:

      I need to run through the math again, it been a while since I looked at this 🙂
      Meanwhile, can you please check the placements of brackets and numbers again? Thanks.

  140. Palak says:

    Hi Sir,

    First of all great initiative 🙂
    I have one query:
    If promoters don’t have any holding in the company and 100% holding is with public, should we invest in that company or not?


    • Karthik Rangappa says:

      Well, the shareholding pattern is just one of the variable required while looking at a business. You need to at other variables as well, like how the business is doing compared to peers.

  141. Shantanu says:

    Thanks for such a detailed analysis but I have the following questions,

    1) Why did we consider the time period of 10 years ?

    2) Can we select the time period of 1-2 years ? In that case how would the calculations vary?

  142. SR says:

    Sir, will the free cash flow to equity numbers calculated from EBITA reconcile with the numbers obtained from Cash flow from operations minus Capital expenditure ?
    And another question : is it better to take geometric mean of the actual numbers of say EBITA instead of arithmetic mean in order to nullify the chances of outliers to skew the data ?

    • Karthik Rangappa says:

      Ah, interesting. I’m guessing it should. Frankly, I’ve not used geometric mean in this case, so I cannot really comment.

  143. manash mukherjee says:

    Dear Sir,

    Thank you very much for making a non-commerce background person like me interested in such a topic. amazingly simplified way… but sir, I was trying my hand on applying the theories to other companies. But how can I calculate the free cash flow for the finance companies? e.g. DHFL. because I saw the annual report of DHFL but did not find anything like capital expenditure. Now the formula is FCF=net operating cash flow-capital expenditure.. so, how can i calculate this for finance companies or banks etc??

    • Karthik Rangappa says:

      Manash, it can get a little tricky for finance companies. I’ll try and add supplemental notes to cover this. Thanks.

  144. Mehb says:

    Needless to praise your work, it’s priceless. People commenting on it for over 4 years now shows that what value it has.

    Query – ARB’s share traded in the zone for 5 months & let’s assume someone buys it. But soon it broke out of the band. Someone who would have followed this method would have got out @ around 450 & missed on the bigger rally towards +600. Pls let us know your thoughts.

    Request – will be great if you can refresh the whole model. I know it’s going to be hectic but will do a world of good for us readers 🙂

    • Karthik Rangappa says:

      Thanks for the kind words 🙂

      Well, the idea is to follow the method, not all will turn into winners 😉

      Refresh will take away a lot of bandwidth, but you do have a point. Will give it a thought. Thanks 🙂

  145. sunil kumar says:

    sir,Is dcf method applicable for banking stocks?

  146. sunil kumar says:

    sir, in free cashflow why did you not subtract the purchase of intangible assets? why the intangible assets come under capital expenditure?

  147. sunil kumar says:

    let’s take a look on benjamin graham intrinsic value formula: eps*(8.5+2g)4.4/bond yield of 30 yrs :here g is the assumed growth
    now 18+18+18+18+18+10+10+10+10+10=140/10=14 here 14 is our assumed growth rate
    now take eps of 2013-14 which is of both yrs= 15.11+20.96=36.07/2=18.035 our current Eps is 18.035

    Current bond yield of 20 yrs of bond yield of india is= near 8

    now put all the elements formula=18.035*(8.5+2*14)*4.4/8
    =362.052 which is near to your dcf value 368

    now apply margin of safety minimum 10% then it will be= 328 near this value the stock would be undervalued.

  148. sunil kumar says:

    sir one last question ,(1) Is purchase of non current investments come under the capital expenditure, when we calculate the free cashflow?

    (2) please tell about which all expense come under capital expenditure?

    • Karthik Rangappa says:

      Sunil, I think the best way to understand this is by looking into the notes defining the CAPEX. Pick up any annual report of a company and look at these note, you will be able to get this.

  149. Shrey Bhandari says:

    Hello Sir,

    Is this same method and process to do fundamental analysis of all stocks in different sector for a beginner?

  150. Shrey Bhandari says:


    While calculating value of FCF, if the final value is in negative, then how to take calculation further and find out estimate of future cash flow?

  151. Ankit Shukla says:

    Hello Sir,
    Thanks a lot for such an enlightening tutorial. No tutorial would be as simplified as this one!

    I have a bit of confusion on the growth and discount rates considered in the example

    Growth Rate: 18% and 10% that is fair assumption
    Terminal Growth Rate of 3%- 4%(3.5% here) is understood
    Discount rate for Terminal Value as well as the discount rate for NPV both are 9.
    is this 9% related to any of the numbers above? How did we arrive at this.

    We Compound with 18 and 10 and then discount everything with 9.
    Please help me understand if there is any co-relation here.

    • Karthik Rangappa says:

      Glad you liked the content.

      These are the rates prevailing in the economy, usually the risk-free rate. I guess when I wrote this, it was around 9%.

  152. Shrey Bhandari says:

    Hello Sir,

    All the above stated values as same till now, like growth rate, discount rate ,etc? Or there is any changes with change in time and regulations.

  153. Varun Singh says:

    I found this series of articles very useful. Thanks a lot Karthik. Based on example given above, I tried to find out reasonable price of Star Cement. However, the my target price is way off compared to CMP and equity research from others. I assumed the following:

    Growth rate 1st 5 years: 10%
    Growth rate next 5 years: 5%
    Terminal growth rate: 3.5%
    Discount rate: 7%

    The company’s numbers are as follows:
    Avg. free cash flow of last 3 years: Rs. 20487 Cr.
    Net Debt: Rs. 27023.96 Cr.
    Total Shares: Rs. 4192.29 Cr.

    Based on these numbers I get following share price band:
    Low: Rs. 177
    Mid: Rs. 197
    High: Rs. 217

    Whereas CMP is just Rs. 98 as of today!
    I read some equity research articles and they suggested target price of around Rs. 120. Only if I bring down the numbers significantly, do I get numbers that match with others. I found the company has following pros and cons:

    Largest market share in north-east in cement sector
    Govt keen on developing infrastructure in north-east to counter China

    Company only recently managed to bring down its debt with the help of government subsidies.
    Govt ended transport subsidy which will have an impact in future
    Increasing cost of raw materials will have impact of margins

    So I have a feeling that my numbers are over-optimistic. So I am not able to decide whether DCF is applicable to all types of companies in all situations. What other factors should I look at other than looking at ratios, reading about business and management and performing DCF?

    Thanks once again for such informative posts.

    • Karthik Rangappa says:

      Varun, I think the terminal rate is slightly on the higher side and the discount value is on the lower side. Maybe you should try tweaking these?

      • Varun Singh says:

        Thanks for replying Karthik. I will look into terminal rate. However, I have kept discount at 7% considering current FD rates. Should we determine terminal rate in some other way instead?

  154. Ram says:

    Hi Karthik,
    Should buying of debt mutual funds be included in capital expanditure while evaluationg the free cash flow?

  155. Kumar says:

    what if FCF is negative ? if suppose how the company performing ? Shall we take this stock for further consideration? Can you please let me know…..

    • Karthik Rangappa says:

      DCF does not work if the FCF is negative. You will have to stick to other valuation techniques such as the relative valuation.

  156. Pradeep Patidar says:

    Hello Sir,
    I Was Calculating the Intrinsic value of avanti feeds ltd, and it is coming as 1656, why so high ? i am confused, and also face value of stock on nse is showing as 1 and in annual report it is showing as 2. why are they different?

    • Karthik Rangappa says:

      I think there could be few errors in the DCF inputs. The difference in FV could be because of the delay in updates, I’m guessing NSE is latest.

  157. Ashwani Kumar Rai says:

    for a particular point of time how we can check that whether the pledged shares of promoters are sold by lenders of not .

    • Karthik Rangappa says:

      You will have to track this from the exchange circulars I guess.

      • Ashwani Kumar Rai says:

        1. why don’t we get interest on the cash fund on our trading account.
        2. where exactly (the cash funds of trading account ) is physically stored at zerodha .

        thanking you

  158. Saurav says:

    Hi Karthik,

    Say, I followed the above steps, and found the intrinsic value of a share.
    This intrinsic value calculated today is valid till what time frame ? I mean, after how many years do we need to re analyse the stock and find the new intrinsic value ? (Because a company may perform extremely good (or bad) which can drastically change the intrinsic value, e.g. Tata Motors.

    Please throw some light on this


  159. Sivagurunathan says:

    This is great resource,Indeed. Thank you very much for giving this great knowledge. 🙂
    I got a doubts.
    Sir, When you calculating FCF, you prefer with 2 statges ,you said first 5 years you calculate with 18% next 5 years you calculate with 10%. Below you calculate 18% in both statges. Kindly clarify my doubts
    We know the average cash flow for 2013 -14 is Rs.140.26 Crs. At 18% growth, the cash flow for the year 2014 – 2015 is estimated to be –

    = 140.36 * (1+18%)

    = Rs. 165.62 Crs.

    The free cash flow for the year 2015 – 2016 is estimated to be –

    165.62 * (1 + 18%) ****** (Is this 10% or 18%, Because you said first 5 years you go with 18% next 5 years you go with 10%)

    = Rs. 195.43 Crs.

    So on and so forth. Here is a table that gives the detailed calculation…

  160. Sivagurunathan says:

    Sorry Sir Kindly ignore the above doubts, I was wrong, Sorry

  161. Ashwani Kumar Rai says:

    suppose a stock is sold (CNC ) at rs 50 and qty 1000. and it goes to rs 120 then the loss would be more than the value of holding .
    so if there is not enough cash in account .how the broker or exchange will recover that money.

    thank you sir

    • Karthik Rangappa says:

      To sell in CNC means, the stock should be available in your DEMAT. Once it gets sold from CNC, then you need not have to worry about recovery.

  162. santhosh says:

    Sir, I am not a big fan of DCF because of the following reasons. Please do correct me wherever I am wrong as I am still trying to understand this financial things.
    1. Terminal value on the basis of assumed growth rate after 10 years is meaningless. A small change in the assumed growth rate makes huge difference on intrinsic value as TV forms the major portion of the PV of the FCF. It is nothing better than a guess work.
    2. Considering FCF based on last three years data is not at all sufficient. There could have been major change in the income, cost, expenses on tangible assets etc in any one particular year.
    3. We are assuming the growth rate of a company for 5 years-10 years when even the company management itself is not sure of their performance in the next quarters. We can see the difference between the estimated earnings and actual earnings of a company in broker reports even on quarterly basis; some times the difference is as high as 50%. And they have lots of information about the company which a retailer can not obtain.
    4. one more assumption on discount rate.
    5. Why should one take 10 years. why not 5 years or 15 years?
    6. should be we not consider the assets of company while evaluating the value of a company? DCF considers just cash flows. why consider only long term debts leaving aside it asset parts?
    Hence we are trying to derive the results when we have all the variables which are just assumed.
    I dont know if any one has validated the DCF method by back testing on several companies using historical data (3-5 years data rolling method). Means, what was the IV of a stock 5 years back based on its previous three years data vs its market price and how it has grown after 5 years.
    I feel a simple DCF is very weak in providing us even close to the real picture. We need to add something more to it to provide us the clear image. I dont know what!!

    • Karthik Rangappa says:

      1) Agree to this completely. DCF is highly sensitive to terminal growth rates.
      2) You can work around this by eliminating any on-off transaction or incomes
      3) Same as 1
      4) DCF is riddled with assumptions
      5) I’d stick to 5 yrs, estimating anything beyond this can be pointless as the business environment is quite dynamic.
      6) Considering assets can be tricky as you’d need to price in the asset, it is not as straight forward as cash or cash equivalents

      Personally, I use DCF only as a reference, it provides some insights which can be useful while investing. Never depend on DCF on its own.

  163. HUJUR SHAIKH says:

    Hi sir, i have calculated the share intrinsic value as on 23-03-2019. i got the result as below . Are this correct result:
    Company Name: Exide industies FY2017-18
    Lower Intrinsic value band 108.8
    Upper Intrinsic value band 133.0

    • Karthik Rangappa says:

      Well, I’ve not really worked on Exide, Hujur. So I’d not know if the range is right or not 🙂

  164. Yash says:

    I was calculating capital expenditure for swaraj engines, in their cash flow statement they have shown net of investment purchased and sold under CFIA , how i will calculate cap exp. in such case

  165. Pavan Gumaste says:

    Sir, thanks form making fundamental Analysis in simple terms. It will helpful for buying the stock for 1yr or short term trend ? If it is ok than can we do FCF & terminal value only 5 years .Is there possible to get intrinsic value ?

  166. santhosh says:

    Capital expenditure considers the investment made in the company. If a company is making new investments for capacity expansion like buying new machines, acquiring other small companies etc to see the big the returns in the future; obviously its FCF will be lesser or even negative. This gives us an impression that it is not throwing back cash to the investors. But fast growing companies need to keep on investing to fuel the big growth. How do we tackle that kind of situation?

    • Karthik Rangappa says:

      In such situations, you can probably take slightly higher growth rates for the future, Santhosh. But this can always be tricky. Another option is to check if you can bump up the sales growth in later years.

  167. Aditya says:

    Sir while calculating Net Debt why did you include only the short term borrowing and long term borrowings and not the total of current and non current liabilities which include things like trade paybles as well ?
    You included just the long and short term borrowing part not the total of current and non current liabilities ?

    • Karthik Rangappa says:

      Debt means the loans taken from banks which includes both short term and loan term. Liabilities is a broader term. Net debt refers only to loans.

      • Aditya says:

        1. Also sir can you explain the difference between “Owner Earnings” and FCFE ?

        2. Also can I take an average of FCFE OF last 5 years of cash flow statements and then predict the future FCFE ?

        3. Will it be okay if i ignore the interest (1-tax) part from the formula if not then what should be the interest and tax ?

        • Karthik Rangappa says:

          1) Owner earnings = Share capital. FCFE is the free cash flow to the firm
          2) Hmm, you can. However, i’d suggest you take the growth rate and increment the FCFE accordingly
          3) Why would you want to do that?

          • Aditya says:

            I am having the following problems during my analysis of the FMCG SECTOR :-

            1. I am calculating the FCFE for the previous 5 years to come up with an average FCFE to start my future growth with .
            But is it right to subtract net debt for each back year as some loans are carried forward to the next year and we are subtracting them again and again ?

            2. Should I take current borrowing or not if they are more than long term loans and if i should not take them then why ?

            3. Instead of taking the growth rate to be 15 or 18 % is it a way to approximately calculate the growth rate WHICH I AM considering by checking previous increase in the FCFE ? I am doing analysis for FMCG sector

            4. To calculate the FCFE should i add or subtract the net debt it’s very confusing ?

            Sir it will be very helpful if you can explain these points in detail thanks in advance .

          • Karthik Rangappa says:

            1) No, subtract the net debt from the starting year and then project at the growth rate
            2) Current by definition has to be settled within the year. Given this, it may not be a good idea to consider in FCFE
            3) You can take the average industry growth rates, btw, 15-18% maybe too much for an FMCG firm
            4) Subtract

  168. Bineeth Mistry says:

    HI Karthik,
    I’m employing DCF to the script Avanti Feeds, using the downloaded excel sheet given in the link.
    The following has been extracted from the Annual reports from the company’s website for 2016-2018.
    FCF for 3 yrs
    ’16 : 174.47
    Cash and cash equivalent for 2018: 5.9443.
    The intrinsic value arrived is INR ~2k.

    Free Cash Flow Estimate (In INR Crs)
    2015 – 16 2016 – 17 2017 – 18
    Net cash from Operating Activities 174.5 284.5 327.8
    Capital Expenditures 49.8 32.0 52.7
    Free Cash Flow (FCF) 124.7 252.4 275.1
    3 Year Average Free Cash flow 217.4

    Inputs Cash flow & Present Value Table
    Number of years considered 10 Sl No Year Cash flow PV of Cash flow
    FCF Growth rate for first 5 years 18% 1 2018 – 19 256.55 236.45
    FCF Growth rate for last 5 years 10% 2 2019 – 20 302.73 257.15
    Terminal Growth Rate 4.00% 3 2019 – 19 357.22 279.67
    Discount Rate 9% 4 2020 – 20 421.51 304.15
    5 2020 – 19 497.39 330.78
    6 2021 – 20 547.13 335.36
    7 2021 – 19 601.84 339.99
    8 2022 – 20 662.02 344.69
    9 2022 – 19 728.22 349.46
    10 2023 – 20 801.05 354.29
    Intrinsic Value Calculation (INR Crs, unless indicated)
    Total PV of cash flow 11,320.07
    Total Debt –
    Cash & Cash Balance 5.94
    Net Debt (5.94)
    Share Capital 9.083
    Face Value (INR) 2.00 Terminal Year 2023 – 20
    Number of Shares 454,15,000 Terminal Value 18,513.08
    Share Price (INR) 2,493.89 PV of Terminal Value 8,188.06

    Intrinsic Value Band
    Model Error leeway 10%
    Lower Intrinsic value band 2,244.5
    Upper Intrinsic value band 2,743.3

    I feel that i may have gone wrong somewhere because the current market price is ~400.00 which is much lower than the lower intrinsic value.
    Please advise me where i may have gone wrong?

    • Karthik Rangappa says:

      I think you need to relook at these numbers –

      FCF Growth rate for first 5 years -18%
      FCF Growth rate for last 5 year – 14%
      Terminal Growth Rate – 4%

  169. Bineeth Mistry says:

    Hi Karthik,
    While using DCF to ascertain Intrinsic value, i read under Equity share capital header the following,
    accordingly have considered The Share capital :908.3 lakhs with FV;2 Rs.
    Would the data be affected on the event of Bonus shares being given in the interim ~ June 2018?,
    and the Annual report for 2018-2019 is not available.
    13 Equity share capital
    As at 31st March, 2018
    Issued, subscribed and paid up
    4,54,15,210 fully paid up equity shares of ` 2/- each (31st March, 2017
    4,54,15,210; 1st April, 2016 4,54,15,210)
    908.30 ( all amounts in lakhs)

    • Karthik Rangappa says:

      Yes, if there are interim corporate activities, then the share capital would change. You need to check the latest values. You’ll get this in the updated shareholding pattern published during the quarterly results.

      • Bineeth Mistry says:

        Hi Karthik,

        If the company has declared Split (1:1) and Bonus shares(1:2) for DCM method for Intrinsic value computation.

        The company has fixed June 27, 2018 as the record date for the purpose of ascertaining the eligibility of the members for sub-division of equity shares from face value of Rs 2 each to Re 1 each and issue of bonus equity shares of Re 1 each in the ratio of 1:2, i.e. one equity share of Re 1 each for every two equity shares of Re 1 each (i.e. after sub-Division of shares).

        It’s Annual report for 2017-2018 has the following for Equity share capital:

        13 Equity share capital
        As at 31st March, 2018 As at 31st March, 2017 As at 1st April, 2016
        Authorised capital 1,585.00 1,585.00 1,585.00
        7,92,50,000 fully paid up equity shares of ` 2/- each
        (31st March, 2017; 7,92,50,000;
        1st April, 2016: 7,92,50,000)
        Issued, subscribed 908.30 908.30 908.30
        and paid up
        4,54,15,210 fully paid up equity shares of ` 2/- each
        (31st March, 2017 4,54,15,210; 1st April, 2016 4,54,15,210)

        Now, please enlighten me on how to consider the values for Equity share capital and FV( Spilt and Bonus shares)
        while computing for DCF.

        • Karthik Rangappa says:

          Bineeth, you should just take the latest share capital after all the splits and bonuses. No point looking at the older transactions.

  170. Hirak says:

    I did not get the calculations of termibal growth of rs 9731.25crs. Please elaborate the calculation .

    • Karthik Rangappa says:

      The terminal growth rate is the rate at which free cash flow will grow over the years at the terminal growth rate.

  171. Aditya says:

    Why can i not start by dcf model for company and see if it is undervalued or not and then do the rest of the analysis instead of this why do i have to consider other tenants before the valuation model ?

    • Karthik Rangappa says:

      Well, in my opinion, DCF (or valuation in general) is lower in the order of priority. You need to check for the quality of business, management, and the industry before starting on valuation.

      • Ram says:

        I can’t quite agree with you, as you have quoted that ‘If the stock is trading cheaper than the intrinsic value, then the stock is considered a good buy. Else it is not.’
        Then I don’t get it why should we first analyse all the fundamentals and then come to the price because what if the company has great fundamentals but is overpriced then there is no sense in buying.
        Your comments?

        • Karthik Rangappa says:

          what if the company has great fundamentals but is overpriced then there is no sense in buying – Of course, why would you want to pay more than what it deserves? In case of great business, you can add a premium and then price it for intrinsic value. What you pay should be within this.

  172. parikshit says:

    Well written and very useful. I have been trying to calculate most of your calculations but not getting values posted by you. What is the meaning of * in this equation? 517.12 *(1+ 3.5%) / (9% – 3.5%). sorry for my ignorance.

    • Karthik Rangappa says:

      The equation is the formula for terminal value calculation. Its explained in the chapter 🙂

  173. ROBIN THOMAS says:

    what if FCF is negative due to high capital expediture ? How will be use DCF analysis in such cases?

  174. Manu Khandelwal says:

    Dear Sir,

    Well written and well explained. I would like to ask -what is your qualification?

  175. BEGINNER says:


  176. Ram says:

    Hey Karthik, I had a few questions,
    1) Can we substitute the DCF model for the Graham number?
    2) Is it normal for a company having a market cap of 320 crs to have a debt of 80 crs and have a P/E ratio of 1.68 and a exponentially high ROE and ROCE of 50% both

    Thanks in advance.

    • Karthik Rangappa says:

      1) Yes, you can. However, please be aware that the economic situation is a lot different now, so ensure the numbers are relevant for the current economic environment
      2) A debt of 80Cr against a market cap itself of 320crs itself is a large red flag. I’d not waste much time on this. High ROE is due to leverage, and P/E of 1.68 is self-explanatory.

      • Ram says:

        Karthik so what should be the debt of a copmany like having a market cap of 300cr

        • Ram says:

          And one more thing
          Debt is current liabilities+ non current liabilities . But by this formula when I calculated Inox leisure’s debt it came to be 615 Cr and on Screener the debt is only given as 75 cr. Why is there a change?

          • Karthik Rangappa says:

            Not sure, I’d suggest you look at the balance sheet in the annual report for the correct information.

        • Karthik Rangappa says:

          If you ask me, I’d say none 🙂

  177. kaushal says:

    Sir, why am I not able get annual reports for FY18-19 of any company?I am trying to get annual reports of Justdial,JK tyres and Techm. When is an annual report officially published on the website?

    • Karthik Rangappa says:

      Maybe they are not updated yet. I’m guessing it should be available by (or before) the end of next month.

  178. Ram says:

    Hey Karthik if the net debt is positive then should it be added or substacted from the total present value of free cash flows ?

  179. Ram says:

    Karthik do you think that the growth rate for very small cap companies like INOX Leisure should be more than 18% ?

    • Karthik Rangappa says:

      There is no right answer to this, because frankly, your guess is as good as mine. However, I’d rather be on the conservative side, 18% is slightly on the higher side in my opinion 🙂

  180. karthik kaushal says:

    Sir, can you please explain how to calculate total debt.You have mentioned in one of the above comments that total debt=Long term borrowings(in non current liabilities)+short term borr.(in current liabilities). But in the illustrated calculation of net debt you choose 75.94 Cr as total debt(which is only long term borrowings of AMRL),it has to be long +short term borrowings right? i.e 75.9+8.3Cr =84Cr, where 8.3Cr is a number obtained from short term borrowings of annual report.

  181. Sudhakar says:

    Hello Karthik Sir,

    I have one doubt , while calculating using this formula ( FCF = Cash from Operating Activities – Capital Expenditure).
    In capital expenditure why we are considering purchase of fixed tangible asset .Because few company will buy asset and few will not buy they will keep cash idle .Buying asset also will added value addition to the company right.
    This will add large impact in intrinsic value.

    How free cash flow will be linked to share value ?

    • Karthik Rangappa says:

      Yes, but that is a cash outflow, right? Remember, the objective here is to find out the free cash after all the CAPEX.

  182. Manu MN says:

    Hello Karthik,

    i have doubt on calculating net debt, in that we need to take both current and non current liability or only non current liability ?
    from your explanation you took non current liability. Please let me which is correct formula ?

    • Karthik Rangappa says:

      Manu, Net Debt = Long term debt + short term debt – cash & cash eqyivalents.
      So yeah, you need to take both.

  183. VISHANT says:

    how to decied discount rate of and terminal growth rate?

    • Karthik Rangappa says:

      The discount rate is usually the cost of capital, approximately in the region of 10-12%. The terminal growth rate is usually the long term inflation average.

  184. Vinay Mittal says:

    In first image cash flow from operating Activities for FY14 is different from the next snapshot data of cash flow from operating activities(green highlight) for same FY , Why?

    • Karthik Rangappa says:

      They both are different, Vinay. The first image is the Free cash flow (FCF) which we calculate while the 2nd is the operating cash flow which the company reports.

  185. Suman Chatterjee says:

    Firstly, thanks a lot sir for this wonderful material which deals right from the very basics to the expert level. It has helped many amateurs, like me, to come in terms of the share market.
    Sir, I wanted to know what is actually the discount rate which we have assumed at 9% in the given module of FA?

    • Karthik Rangappa says:

      Thanks for the kind words, Suman.
      The discount rate is usually the risk-free rate in the economy plus a few additional % points. For example, if the risk-free rate is 8%, the discount rate can be around 10-11%.

  186. Ram says:

    Hey Karthik,
    As mentioned in the Financial Ratios analysis Part 2 the formula for Total debt is = Long term+ Short Term borrowings
    but while calculating the Net debt which is Current year total debt- Cash and Cash Balance in the equity research part 2 the value of current year total debt is given as 79.54 Crs which is only the long term borrowing.

    • Karthik Rangappa says:

      Ram, current debt formula considers only long term debt into consideration and not the short term debt.

  187. Ram says:

    Thank You 🙂

  188. Jitu says:

    I was calculating share price of ONGC through DCF analysis with growth rate 10 and 5%,terminal rate-2.5% and discount rate 9%.
    Calculated share price was too too much then the current market price.

    Sir pls give advice on assumption of growth rate each type of company like growth rate for matured company etc .
    First time it seems we are speculating while going through DCF analysis.

  189. Jitu says:

    Can you provide please other valuation model explanation in detail like EV/EBITDA model?
    Which also may be helpful in calculation of IV of -ve FCF business.

  190. Rahul says:

    Hi Karthik. Again thank you for the modules and its simplicity.

    My question is regarding estimating average for FCF. You have used arithmetic mean (average) to estimate. Considering the fact that FCF values are quite extreme (form 200 levels to -51), would it help to take geometric mean instead for past 3-year values?

    Similar question was asked earlier but that was on EBIDTA.

  191. Ashwani says:

    how long term ,will be considered if a stocks is being averaged over 2 years,
    a stock at 100 rs bought
    1>40 qty in july 2018
    2>60 qty in dec 2018
    3>100 qty in nov 2019

    and the avg cost of script is x/2

    • Karthik Rangappa says:

      The ageing of the stock works on FIFO basis. The average is based on a value-weighted basis which is basically total Qty * Price / total Qty

  192. Nikhil says:

    Hi Karthik,

    I was comparing the Consolidated cash flow statement of HDFC LTD. for FY 17, 18 and 19 for the DCF model. I think HDFC went through some changes in accounting practices in 2019.

    The net cash flow from operations for 2018 is 28333.23 cr in 2018 Annual report. However, it is shown as 3237.56 cr in 2019 Annual report.

    How do we deal with such situations?


  193. Nikhil says:

    Hi Karthik,

    There are no notes associated with the cash flow statement in the AR of FY19 for HDFC LTD.

    Also, can you tell me how to reply on the same thread? I clicked on the “reply” below your comments but it is directing me to start a new thread.


  194. Nikhil says:

    Ok. Will check back later for that.

    Also, I was going through the comments made by other users and I came across one where you had mentioned that the valuation of Banks and finance companies is done in a different way.

    Since HDFC is a finance company, I guess the DCF model won’t come in handy.

    Is there any new module for that in the pipeline currently?


    • Karthik Rangappa says:

      That’s right. Financial modelling is on the cards, I’ve started preparing the groundwork for it, hopefully, should start posting chapters by early next year.

  195. Vedant says:

    Can you explain the term of total present value of free cash flows. In above case net debt is added but sign is different (-).

  196. Vedant says:

    I’m getting totally confused.

  197. Nikhil says:

    Hi Karthik,

    I am really grateful to you for this module. The greatest benefit I got from this module was in differentiating between companies which have strong growth prospects and companies which have a sound business but the growth has kind of saturated.

    A lot of companies I did FA on, cleared Stage 1 and 2. That reassured my belief that these companies are fundamentally strong. But after stage 3, I was just shocked at the valuation the DCF model gave. It was 4-5 times lower than the current share price.

    Just to make sure I wasn’t doing anything wrong, I rechecked it multiple times. I even went way too generous on the growth rates and made the discount rate very low. Also, reduced the debt to zero just for testing. Even then, the model’s price was way lower than the current share price.

    I think this was happening because I was looking mainly at blue Chip companies. What do you think?


  198. Nikhil says:

    Hi Karthik,

    I have a few doubts regarding the variables in the DCF Model.

    1. What all should be included in Capital Expenses? In the ARBL example, you have only included “Purchase of tangible assets” but other purchases also cost money. Should these not be included under CapEx?

    2. Total Debt – In the ARBL example, you have only included Long-term Debt. While analysing some balance sheet, I found that the Short term debt is way higher than the Long term debt for some companies. What’s the rationale for not including short term debt.

    3. Also, in most BS, there is an entry called “Other financial liabilities” under both current and non-current liabilites and the notes usually say these are loans and advances from creditors and others. Should these not be included as well under Total Debt?

    4. Cash and Cash equivalents – Most BS have this entry along with another entry that says “Bank balances other than Cash and Cash equivalents”. Should these be included in the Cash and Cash equivalents for the DCF Model?


    • Karthik Rangappa says:

      1) Usually, CAPEX involves purchasing of plants, adding machinery, land, and other heavy-duty expenditure. The idea with CAPEX is to figure how much the company is investing today in the business so that can reap its benefits in the coming years.
      2) Hmmm, I think in ARBL’s case there is no short term debt if not for very little
      3) You can leave this since these are settled (or likely) to be settled within a year. Current item sorts.
      4) Yes, the bank balance is cash

  199. Nikhil says:

    Thanks for the clarifications Karthik.

  200. Nikhil says:

    Hi Karthik,

    Thanks a lot for all your inputs over the past few days. You sir, are truly amazing.

    I had a couple more doubts on some qualitative aspects of a business. Would request your thoughts on the below.

    How is the decision making different in a family run business than in a business run by a board?

    While doing FA, how should I go about analysing this entire point of whether a company is run by a family or a board?

    Would also request you to share your thoughts about a company that was started of as a family business and the family members still hold most of the shares, but they have kind of stepped into the background and appointed a board to manage the daily running of the business, e.g. Dabur.


    • Karthik Rangappa says:

      1) Like a family, the head of the family makes a call here but with a board, the decision will be voted by the board members, so a big difference there 🙂

      2) Look at the management structure and you’ll know how the company is set up

      3) Many in India are family led, promoter driven companies. Companies such as Nestle, Colgate, Bosch etc are board run businesses.

  201. Shubham Jhawar says:

    1. While taking the growth rate, you advised to take 15% for the first 5 years and then 10% for the next 10 years. But shouldn’t we take CAGR of growth rate for the past 5 years?
    2. Why have you divided the terminal value by 10 while calculating its NPV?

    • Karthik Rangappa says:

      1) This depends on the sector and the company. On hindsight, even 10% looks aggressive now. Yes, the CAGR helps. I’d probably take the CAGR minus few basis points.
      2) Hmm, I’m unable to spot this in the NPV section

  202. Kiran Shetty says:


    1. “For example in case of ARBL, the latest year cash flow is negative at Rs.51.6 Crs. Clearly this is not a true representation of ARBL’s cash flow, hence for this reason it is always advisable to take the average free cash flow figures.”

    In the above statement you made, why do you say that the cash flow in minus is not a true representation of ARBL?

    2. In case of IRCTC, I see that the cashflow has been in single digit for the last to last 2 years and for the last year it was in minus. So does this count as a heavy point enough to ignore investing in it?

    • Karthik Rangappa says:

      1) Could be a one-off year…or could be cyclical. Hence average.
      2) You need to see why this is -ve. Usually, the notes will have the reason for this. You need to look at this and assess to figure if this one-off year or is it because of a serious business issue.

  203. ayush garg says:

    Hey great work there, really enjoyed learning
    Though i have one question
    Why is the share price of amara falling from 2015 when its fundamentals are so strong as researched by you? The company’s profits are increasing year on end with no red signals in its financials and ratios yet the share hasnt been performing all these years

    • Karthik Rangappa says:

      Ah, I’ve not really looked at this stock after the module was done. Maybe there is new information which is not factored in.

  204. Ayush says:

    Hi Sir,

    As we know that the lock down and virus has affected most of the companies – big and small. How can we still predict the growth of the company at this time. What growth rate percent do we use now?

  205. vivian says:

    while calculating fcf
    in RIL for last 3 years cap exp is more than cash from operating activites so fcf is negative for 3 years and even the IV is in negative
    please help

    • Karthik Rangappa says:

      Hmm, it is really complex to model a company like RIL, it has several moving parts to it, Vivan. You cant stick to conventional DCF technique here.

  206. Amit Tiwari says:

    Hi Kartik,

    I am using screener.in to screen the stocks and ideally want to get the required numbers from there itself instead of opening the annual reports, etc. Need to understand a few things:
    1. For any company’s balance sheet as shown here https://www.screener.in/company/CAPLIPOINT/consolidated/#balance-sheet – can you tell me the calculation for the Net Debt (which has to be put in the excel)
    2. Screener also provides intrinsic value of each stock. Is that calculation reliable?
    3. They also provide Graham Number – I see considerable difference between Graham Number and Intrinsic Value. Which is more reliable as a quick way to identify stocks trading below fair value?

    • Karthik Rangappa says:

      1) Net Debt is short term +long term liabilities minus the cash and cash equivalent
      2) I suppose so although I’ve not used it myself
      3) Both are different techniques, hard to choose one over the other

  207. Raman says:

    Does the above formula to calculate F.C.F applies for banking companies also ?

  208. Vaishakh Menon says:

    Hii Mr.Karthik,

    Firstly,huge THANK YOU for this entire Modules on stock market. I appreciate it.
    Secondly, While calculating FCF the Capital expenditure was reffered to as ‘Purchase of tangible fixed assets’
    why is that so ? Why other similar expenses have not taken into account ??

    • Karthik Rangappa says:

      Capex is nothing but building/purchasing long term assets which is most commonly knows as tangible fixed assets. Other short term expenses, does not make an impact on long term valuations, hence the model tends to ignore that.

  209. shivam says:

    Sir does this FCF analysis applies for all sectors or are there different valuation metrics for different sector companies ?

  210. Harris Vardhan says:

    Hi Karthik,

    Just a point-out.

    Under the Share Price calculation, the Net Debt is given as Current Year Total Debt – Cash & Cash Balances. However, the Current year total debt points out to 8.38 Crore Rupees (Short term borrowings under Current Liabilities section) and not 75.49 Crore Rupees (Long term borrowings) in the FY14 ARBL Balance sheet. So the result for the Net Debt would be,

    8.38 – 294.5 = (286.12) Crore Rupees.

    Which would, in turn, produce the Total Present Value of Free Cash flow as,

    6078.83 – (286.12) = 6364.95 Crore Rupees.

    At last, the intrinsic value for a share would be,

    Share Price = Total Present Value of Free Cash flow / Total Number of shares
    Share Price = 6364.95/17.081 = Rs 372.63 per share

    I notice that this is not much of a difference. But if anyone would mistakenly use the long term debt of a company (for instance, if that company’s long term debt is too high) then it would affect the intrinsic value of the share thereby partially voiding the calculation done.

    Please correct me if I am wrong. Thanks!!!

    • Karthik Rangappa says:

      Thanks Harris for pointing this, I need to go through the numbers again, it been a while now.

  211. Akash says:

    I the example for calculation of Terminal Value, you have assumed discount rate (9%) which is greater than terminal growth rate (3.5%). What if discount rate is less than terminal growth rate, in that case (Discount rate – Terminal growth rate) will be negative ?


    • Karthik Rangappa says:

      Ah, that will be an interesting situation. However, my guess is that in such a scenario, the terminal growth rate will be lower than the discount rate. For example, in US the terminal growth rates is assumed sub 1% right now. By the way, this also depends on the industry and the specific company.

  212. Akash says:

    In the example above, growth rate of future cash flow is taken as 18% and 10% (for first five and next five years respectively) but discount rate is assumed as 9%. I think discount rate is inverse of growth rate. Correct me if I am wrong.

    Secondly is there any concrete basis to take discount rate as 9% only, why not 1% which is even less than terminal growth rate?


    • Karthik Rangappa says:

      This is the growth rate of the free cash flow. Also, why do you think the discount rate should be inverse of growth rate? The thumb rule for discount rate is to take the risk-free rate in the economy.

  213. Akash says:

    In your reply to Sh. Harshad Salvi dt. 10 Dec 2014, you classified companies into Large, mid, small, micro cap etc. in terms of rupee value of market capitalization (500 crore, 2000 crore etc.) I think as per recent SEBI circular, the top 100 companies in terms of market cap are regarded as Large Cap, 101 to 250 companies in terms of market cap are regarded as Mid Cap, 251 and below are regarded as Small Cap companies irrespective of rupee value of market capitalization. Correct me if I am wrong.


  214. Akash says:

    Kindly include a module to determine the intrinsic value of stocks of banking sector and NBFCs also.


  215. Akash says:

    Some people use historical P/E of the company to compute intrinsic value of a stock. As compared to DCF model, how much accurate is the historical P/E method for computing the intrinsic value of a stock ?

    Do both the methods with give the same intrinsic value?


  216. Shardul Joshi says:

    which method is reliable to find intrinsic value? DCF method or Ben Graham’s intrinsic value formula?

    • Karthik Rangappa says:

      Hard to call one more reliable over the other. End of the day, they are all susceptible to modelling errors.

  217. Daniel Abraham says:

    What is the reason behind selecting 9% as Discount rate? In today’s situation what should the DR be ?

  218. Daniel Abraham says:

    Sir, my question is what is the reason for choosing 9%? And what should the present DR be since it would change over time.

  219. Rahil says:

    Little late on the ride! Amazing content, but got 2 doubts.

    1- Considering current risk free return rate is 6.35% as on 19 april 2020, you mentioned in the comments above to take 150-200 basis points, Which makes it roughly 8%. Then why do you recommend in the comment above to take it as 5%?
    2- There seems to be little confusion in the comments regarding one should include short term borrowing while calculating net debt or not, please specify.

    Thanks a lot for wonderful info!

    • Karthik Rangappa says:

      1) Because of the times, we are living in, where growth rates are muted. 5-6% is not bad given the uncertainties around. Also, better to be conservative while calculating the intrinsic value
      2) You can ignore the short term debt unless its way too large.

      Happy reading!

  220. Prabhu says:


    Thanks for the analysis, really liked the way you have explained.

    Please could you help me download the excel sheet.

    Thanks in advance


  221. Rahil says:

    Got it thanks,
    1-So considering today situation 5% cool but once the market recovers from corona we can take it back to 6.5-7 %?

    2-I recently also finished reading Coffee can investing and foundout on twitter that smallcase had portfolio based on CCP but its not available now. Can you please check and if possible list any website which can help me filter stocks by the same criteria mentioned in the book because doinf it manually for 5000+ stocks is not practical. ( except screener )

    Thanks a lot!

    • Karthik Rangappa says:

      1) You will have to assess it from time to time perspective.
      2) Not sure about that, but you can check with smallcase support, they will help you with it.

  222. Prateek says:

    Hi Karthik – I understand the importance of Stage 1,2, and 3 analysis for long-term investment. I wanted to know whether we can possibly tweak and use Stage 2 and Stage 3 analysis for short-term trading i.e. 1-3 months?


    • Karthik Rangappa says:

      That would not be a great idea I think. Having said that, I’ve not used, so I cannot really comment on it.

  223. Aravinth kalaiselvan says:

    hey Karthik,

    Assume I did my fundamental analysis, my background check and everything is satisfying from a long term investment perspective. At what percentage from the buying price should I put my stop-loss?

    And also tell me if that stop-loss changes if we are at some crisis(like COVID-19).

    • Karthik Rangappa says:

      When you buy at a margin of safety, its implied that you have a wide safety net. I know people who keep about 25% SL from the entry price, some with higher tolerance extend this up to 50%, so this depends on your risk perspective.

      The COVID scenario is very different, SL does not help her, what helps is how well you know the company and your conviction on the business growth.

  224. Bhanu Prasad says:

    Hi karthik,
    For every company the growth rate is different based upon their life cycle. so we cant take 18% or 15% to every company.
    So how can we find that certain company or industry is at growth stage, maturity stage in order to estimate their growth rate???

    For eg:
    You have valued the ARB stock in 2014 and used growth rate as 18%,now (2020) we cant assign the same rate.

  225. maneesh says:

    sir, plz provide valuation for Banking/NBFC

  226. Tanveer says:

    Hi Karthik,
    I was on the Net debt portion of the course, and just wanted to make sure that as for net debt we only consider Long term borrowings as you did on the example of ARBL.
    Please advice

  227. Shashank says:


    I think there is an error. You mentioned that stock was trading a year back (A year back from the date at which this post was published) at fair price but you didn’t considered that before that one year company didn’t had the same cashflow and profit as it had on the date you wrote this. So how could that year old price be considered correct after an year.

  228. Suraj says:

    You said Net Debt = Current Year Total Debt – Cash & Cash Balance
    Here for ARBL, Current year debt was greater than cash & cash balance then why don’t they pay off the debt with that money.
    Thank You

  229. Suraj says:

    Hello Sir!
    Thanks for the earlier reply.
    While calculating Net debt I see that we used long term debt, shouldn’t we use short term debt too.
    i.e the current year total debt= Long term debt + short term debt
    Thank You

    • Karthik Rangappa says:

      Long term suffices, the short term debt includes working capital debt as well, which wont matter for net debt.

  230. Prateek says:

    Hi – While considering Terminal value, will it be more effective/realistic to use calculation based on total 5 years or should we stick to 10 years? If yes, in what ratio should we split the growth rates in 2 stages let’s say for a growing company?


    • Karthik Rangappa says:

      Terminal value is more dependent on the terminal growth rate. I’d suggest you take the 10 year period.

  231. Prateek says:

    But, I remember reading in some of your blog posts, that it is tricky projecting TV for more than 3 to 5 years considering the dynamic nature of businesses. So, I’m a little confused.

  232. Prateek says:

    Ok..so, if 3 years is too short and 10 years is too long..settle somewhere between 5 to 10 years for calculating TV depending on the nature of the business?


  233. Prateek says:

    Ok. I understand that currently there’s no module on Relative Valuation techniques. Can you please share any source from where we can get more info about relative valuation techniques and how to use them?


    • Karthik Rangappa says:

      Information is scattered Prateek, not available in 1 spot. YOu will have to search and assimilate. Will try my best to put up something on this soon.

  234. Prateek says:

    Ok..looking forward to seeing that module soon.


  235. Debabrata Ghosal says:

    Hi Karthik…
    Hope you are all well in this difficult time…I have a question regarding TATACHEM…on calculating the intrinsic value using DCF, I got it about Rs1100…so why doesn’t the stock look attractive to the investors…is it for the poor growth rate?

    • Karthik Rangappa says:

      There could be multiple reasons –

      1) Your model may be inaccurate
      2) Maybe the market has not realised the true potential
      3) Poor growth rates
      4) Qualitative factors weighing heavily

      Point is, DCF is just one metric to look at along with many others. DCF is not the only measure to base your investment on.

  236. Rushiraj Bhusare says:

    In the net present value calculation, shouldn’t the power for terminal value be ^11 as it is after the tenth year and the tenth year cash flow present value has already been calculated in the table.

  237. Rushiraj Bhusare says:

    I think I failed to communicate my question correctly, In the net present Value calculation when we calculate the present value of the terminal value, i.e 9731.25 / (1+9%)^10 = Rs. 4110.69 Crs, shouldn’t it rather be 9731.25 / (1+9%)^11= Rs. 3771.18 Crs as it is after the 10th year and the calculation for the 10th year has already been done in the table above it. (The power 10 should be changed to power 11).

    • Karthik Rangappa says:

      I need to think through this, but intuitively, 10 makes sense as our point of reference is 10 years. But yeah, let me run through this again.

  238. Kapindar A. Sharma says:

    Hello Kartik,

    Thanks for this interesting session. It helped me a lot in starting the research, however I’m unsure if the said analysis will also work for the banking stocks. Unlike other companies, Banking companies have deposits on their balance sheet which is a huge liability & have the same features of borrowings.

    It would be great, if you can throw some lights on it.

  239. Kapindar A. Sharma says:

    Hi Karthik,

    What about the companies that are generating negative cash flow from operating activities. The DCF result of those companies will also be a negative figure which will also lead to a negative valuation at the end. Also how to determine the discount rate used for discounting the cashflow.

    It would be great if you can help on this.

    Thanks in advance!

    • Karthik Rangappa says:

      Kapindar, you cannot apply DCF to companies with -ve cash flows. In fact, this is one of the drawbacks of DCF.

  240. Kapindar A. Sharma says:

    Thanks for the details Karthik! Can you please help me in understanding this analysis works well for which all industries or sectors.

    Also Karthik, just wanted to know if possible for you to make me understand how loss making companies & companies with -ve cashflows are valued. In recent times, we’ve seen many such companies grabing great deal from investors like PayTm & Flipkart.

    Thanks in advance.

    • Karthik Rangappa says:

      This can be applied to any simple business, but not banking and NBFCs. Unfortunately, for companies which make -ve cashflow, this cannot be used. You will have to use a relative valuation technique for this.

  241. Arjun says:

    Hi. As you said towards the end of the chapter that there was a 5 months window to but ARBL stocks and stay put. Now considering that I am a long term investor, then while buying the stock, where should i put the stop loss ? Because if you see in the 5 months window, the stock price did go down and could have triggered my stop loss considering that I bought the stocks in the beginning of the window and set the trigger at the LOW of the candle patterns formed then (as suggested in TA).

    • Karthik Rangappa says:

      You need to set exit criteria, Arjun. Your exit should be based on whether these criteria are triggered or not.

  242. Harshal says:

    Hi Karthik,

    With respect to the Terminal Value, you mentioned that “as companies mature, the rate at which the free cash is generated starts to diminish”. But when we apply this to various existing companies, isn’t this relative?
    For example, a company like Maruti Suzuki is a quite established company and has been present for a long time. Is assuming a growth rate of 18% & 10% for 1-5 and 6-10 years respectively, followed by a growth rate of 3-4% correct? Isn’t these companies already at a matured stage. Shouldn’t we assume a growth rate of FCF of about ~5% from the 1st year itself for such companies?


    • Karthik Rangappa says:

      Absolutely. For companies such as this, you will have to look at the company’s own trend and also the industry trend and take a call.

  243. Radhika Azhagar says:

    Hi Karthik,

    Thanks for the very useful module on the fundamental analysis. I have a very basic doubt, i learnt DCF method(before seeing Zeordha)
    they are using current cash flow from operations for the calculation and terminal growth values are considered in the calculation.all else is the same. When i calculate the intrinsic value for TCS in that method it comes around 1082Rs. But, in our method it comes around 3178.9rs. there is huge difference since ,i dont understand if there is really two methods available. Can u pls clarify me?

  244. Radhika Azhagar says:

    Sorry, terminal value not considered. Discounted cash flow calculated for 10yrs

  245. Anad Ahamed Aslam says:

    Morning karthik 😊
    1.Here while assuming growth rate….. Is there any specific rate for different industries or business???
    Like 18% to 10% for manufacturing sector
    X% to Y% for Z sector….????

    2.After calculating intransic value, we came to know that ARBL LTD is trading at very high level…..
    In case what if ARBL LTD is trading at 500, and we know that it will grow further……..
    Should we really drop or loose this trade only because of intransic value???
    Thank you

    • Karthik Rangappa says:

      1) Yes, it is dependent on the industry.
      2) What is the fair value estimation based on your calculations? This really depends on that.

  246. Anad Ahamed Aslam says:

    How is fair value calculated?

  247. Sohan Kumar says:

    Hi Karthik,

    Where can I get Beneish Score for free. Does Zerodha have any tool which can give me that score ?
    Beneish scores require subscriptions from sites like guru focus … which is quite expensive. Thanks

    • Karthik Rangappa says:

      We don’t provide this, Sohan. You will have to look at fundamental data providers for this.

  248. sohan says:

    Ah ok … Thanks Karthik

  249. Nishita says:

    When will u start with new registration plzz let me know?

  250. Nishita says:

    User new registration …..login or sign up….when will this new sign up will be open?

  251. Sunny Rai says:

    hello sir,I’m calculating Free Cash Flow for TCS company,There CAGR of free cash flow is around 12% and it is also old company.
    so,what Growth Value should i opt for first 5years and for another 5 years.
    plz reply soon

  252. Sunny Rai says:

    sir,I was calculating NET DEBT=Total DEBT-Cash & Cash equivalent,But TCS Company does not have any Borrowing.
    So,can i Simply put Total Debt=0,and Find out Net Debt?

  253. Nishita says:

    I want for certification purpose…… that’s why new registration is required an?

  254. Khushabu says:

    Hello Sir, I hope you are doing well. I have below query with excel sheet(download form). Please guide.

    1. To calculate DCF, should we refer company standalone balance sheet or consolidated balance sheet?
    2. Also please guide about intrinsic value calculation. What reference/document to use

    Thank you.

    • Karthik Rangappa says:

      1) You need to look at the consolidated financials
      2) We have discussed IV calculation in detail here, right?

  255. Khushabu says:

    thank u for reply.. i will go thru one more time.. if i have doubt i will ask for guidance.

  256. Indranil Saha Saha says:

    Dear Karthik

    Its was certainly a good Discussion.

    I have few doubts from the above topic.indly share your inputs for the same.

    1)I am unable to get the link of your excel file calculation.Can you kindly share it over here.

    2)For calculating the total debt in the above calculation , do i need to take the long trm debt + short term debt.

    3)Dont you feel the discounting rate shuld be current FD rate at bank, since thats the oppurtunity cost we are missing.

    4)The total outstanding share which is shown over here..Can we take it from NSE website under List Issued Capital (Shares).Is it the normal shares or preferential included.

    Thanks in advance for your reply.

    Indranil Saha

    • Karthik Rangappa says:

      1) Search for ‘Download’, and you’ll get the link.
      2) Long term debt
      3) FD rate is also roughly equal to the risk-free rate in the economy
      4) I’ve not seen the NSE website, I’d suggest you take the data from AR

  257. Indranil Saha Saha says:

    Thanks Karthik for your overwhealming response…

    1)For the total shares can we take the total outstading shares shown in the AR or we need to sustract the preferential shares from the same.
    2)So by risk free rate do you mean by the 9% which has been taken into this calculation.


    • Karthik Rangappa says:

      1) Take the total shares, Indranil
      2) No, you can consider the current risk free rate, around 5.5% – 6% I suppose.

  258. Pulkit Sharma says:

    I did this for coal india considering 2019 report as the starting point and i see outstanding shares at around 616 cr, eventually i get 48 as the intrinsic value which makes me believe i’m doing something wrong . below is my data

    Sr no Year growth rate FCF PV
    1 2020 18 767 645.5685548
    2 2021 18 905 761.7203939
    3 2022 18 1067 898.0725528
    4 2023 18 1260 1060.516792
    5 2024 18 1486 1250.73647
    6 2025 10 1634 1375.305109
    7 2026 10 1798 1513.340628
    8 2027 10 1977 1664.001347
    9 2028 10 2175 1830.653985
    10 2029 10 2393 2014.140224
    11 TV 3.5 45066 37931.15058

  259. Pulkit Sharma says:

    yes Karthik, i realised that , so changed that to 12% and 7% , got reasonable results.
    Now my question is how do i decide this number for diff companies in diff sectors ?

    • Karthik Rangappa says:

      Depends on your overall portfolio. If the idea is to have about 10-12 stocks, then 1 or 2 stocks per sector should do. Higher the number of stocks in the portfolio, higher the exposure.

  260. Shashwat says:


    I didn’t understand why didn’t we add depreciation to the purchase of fixed assets while calculating CAPEX. Isn’t CAPEX equal to change in PPE + Depreciation Expense?

    • Karthik Rangappa says:

      But why do you want to add Depreciation to CAPEX? Isn’t the purpose of CAPEX to give you a clear view on the actual spend? Remember depreciation is an accounting expense and it is treated separately in the expense side of P&L.

  261. Shashwat says:

    Yes…I understand but as you mentioned in your previous articles, the fixed assets reported on Balance sheet (PPE) are depreciated before posting on the sheet (the gross block concept). So..the capital expenditure will be equal to the change in PPE + Depreciated Amount. Don’t you think so? Please don’t confuse my question with your calculation…the purchase of fixed asset reported in cf statement is definitely equal to the Capex coz it is not depreciated? But just suppose a scenario where we have to calculate CAPEX using only the BL sheet and PL statement.

  262. Adhikari says:

    I didn’t understand. how come the result is 9731.25 cr instead 97.31 cr ?

    = 517.12 *(1+ 3.5%) / (9% – 3.5%)
    = Rs.97.3125 Crs

    could you please explain as 517.12 is already in crore

    • Karthik Rangappa says:

      Hmm, I guess you are missing on some parenthesis. Can you please calculate the numerator and denominator separately and do the division again?

  263. Adhikari says:

    correct .. my bad

  264. Hardik says:

    Hey Karthik!
    Great work on the article…

    Also, I wanted to ask that whether items like unclaimed dividends and money held by banks as margin will be added to the value of cash and cash equivalents in the DCF model ?
    And if Current Maturity of Long-Term Debts will also be added to the amount of total debt ?

    Looking forward for you reply 🙂

    • Karthik Rangappa says:

      All of that will be covered in cash equivalent bit. You can actually check the notes associated with the cash equivalent bit to figure the details.

  265. Indranil Saha says:

    Dear Karthik

    One very basic doubt 🙂

    When am taking these two below parametrs from Balance sheet for calculating the DCF , to reach the absolute value i have to subtract the last year values from this year value right..and then i have to include those values in the excel model

    1)Longterm loan( secured+unsecured)
    2)Cash & Cash Balance from the balance sheet

    For Example : In Balancesheet if the values shown are like this
    Longterm loan( 2019) : 76 Cr
    Longterm loan( 2018) : 45 Cr

    Then the absolute value for 2019 would be ( 76-45=31 Cr) and 31 Cr need to be added into the model ??

    Kindly share your views.


  266. Indranil Saha says:

    Dear Karthik

    Please correct me if am wrong.
    Balance sheet for the existing year comprises of the data where existing year’s financial component gets added up on top of the cumulative performance till last year since balance sheet shows the overall performance of the company from the date of its incorporation.

    So if we need to find existing year’s debt and cash balance we need to subtract cummulative value of 2018 from cumulative value of 2019.

    Am i thinking on the right track or i have to take whatever is shown in the balance sheet.

    Please suggest.


    • Karthik Rangappa says:

      That’s correct. The balance sheet is carried forward while the P&L/cash flow is for the current year. To get the difference (balance sheet) you need to subtract this year’s from the previous year numbers.

  267. Shashwat says:

    Yes…correct. I wish to calculate CAPEX using BS and PL statement.

    • Karthik Rangappa says:

      The easiest way is to look at the netblock from the fixed asset side of balance sheet. That will give you CAPEX.

  268. Ritik says:

    Karthik do we need to look at the cash and cash equivalents balance from the balance sheet or the one which is mentioned in the closing balance of cash and cash equivalents

    • Karthik Rangappa says:

      This is actually derived from the cash flow, but yeah, the final number sits directly from cash flow to the balance sheet.

  269. Indranil Saha Saha says:

    Dear Karthik

    Thanks for your inputs.

    So in DCF model..for the Cash and Cash Balances & Long term debts..do i need to set the values as whatever being shown in latest year in the Balancesheet (the cumulative one)
    I have calculate the diferenece from Balance sheet (of the closing balance for this year and last year ) for Cash and Cash Balances & Long term debts and then will set them in the DCF model.

    Please explain


  270. Sandeep Joel says:

    Best article in wonderfully explaining DCF concept. I really love your other articles as well. Keep up the extraordinary work guys !!

  271. Virendra says:

    Dear sir.

    How do you calculate Intrinsic value through DCF for housing finance companies like INDIABULLS, REPCO , PNB. All these companies have negative cash flow from operating activities from past 3-5 years. Is it possible?

    • Karthik Rangappa says:

      The regular DCF method may not work, Virendra. I’m not really sure about a good way to value these companies. Have been trying to put up some content around this, but that has not happened 🙁

  272. Kaizer Dave says:

    Where is the excel file? I am not getting it. Thank You

  273. Shubham Jhawar says:

    While calculating the Present Value for the Terminal Value, why do we discount it for 10 Years?
    As the terminal value is the value that free cash flows will be generated till infinity.

  274. satish says:

    Hi Karthik, i have few questions from this chapter.
    1. why we calculated FCF for only 10 years? why not more than that?
    2. Why you just removed net debt from total present value? why not total debt ?
    3. why only purchases of fixed tangible assets are considered as expenses why not other expenses in investing expenses?
    4. why terminal value is discounted back for only 10 years when it is calculated for infinite years?

    • Karthik Rangappa says:

      1) You can. Remember, higher the number of years, higher is the modelling error. You need to strike a balance somewhere.
      2) Debt has to be repaid at some point right?
      3) The formula requires you to take only the CAPEX, which is the fixed tangible assets
      4) To get the present value.

  275. satish says:

    2. debt needed to be repaid at some point. what I think is we are calculating how much money shareholder will be left with after all the expenses. In that case total debt is needed to be repaid not only current debt to know what is the true value that shareholder will get.
    3. Capex is total expenses occured. In that case cost of intangible assets is also needed to be considered right? as company is paying for that also.

    • Karthik Rangappa says:

      1) True
      2) Hmm, but how will you aggregate the cost of intangible? For example, band building can be done via a celebrity endorsement.

  276. satish says:

    Since there are some expenses related to intangible assets. If they are available can i consider it. I’m trying to be as conservative as i can and i wanted to get as much as true value i can by removing all the expenses.

    • Karthik Rangappa says:

      Yes, you can. Look for it in Óther expense’ section in the liabilities side of the balance sheet.

  277. Malarkodi S says:

    I have a questions,

    When calculating ‘Net Debt = 75.94 – 294.5’ I can see from the balance sheet that only the Long Term Borrowings as taken. Why are the other current and non current liabilities not taken as part of this calculation?

    • Karthik Rangappa says:

      You dont need to consider the short term liabilities (current liabilities) since these are expected to be get settled within a year.

  278. rahul says:

    sir do we need to add tagible and intangible assets for capital expenditure or only tangible assets

  279. Ravindra kesarwani says:

    What if the average free cash flow came negative? I am doing it for Reliance Industries ltd., it has negative average free cash flow for last 10 yrs too.

    • Karthik Rangappa says:

      Unfortunately you cannot apply DCF to -ve cashflow situations. YOu will have to do a peer or relative valuations.

  280. Nishu says:

    How to use it to calculate intrinsic value of a bank?

  281. Smeet says:

    hi, quick question. How did you come up with current year total debt to be 75.94? That figure is same as Long-term borrowings of Non-current liabilities.

  282. Sunny Bhadra says:

    Sir, while calculating FCF why are we not considering investments in intangible fixed assets and only reducing the tangible assets investements from CFO ?

  283. Soham says:

    can you explain on what basis should we consider the discount rate ?

    • Karthik Rangappa says:

      Usually, the risk-free rate in the economy plus the risk premium of 2-3% works as the discount rate. This is a thumb rule though.

  284. Sunny Bhadra says:

    Ok Sir. Thanks.
    Sir, How do you classify a company as a small cap/mid cap/large cap company ?
    What cut-off market cap is usually followed ?

  285. Neeraj says:

    Why we assume the FCF growth rate??? Does we can’t calculate the past 10 year growth rate and take that growth rate for future?????

    • Karthik Rangappa says:

      You can take that as an average, Neeraj. However, the general expectation is that as the business matures, the growth rate tends to decline.

  286. Sunny Bhadra says:

    Thank You Sir.

  287. Sunny Bhadra says:

    Sir, in one of the comments you had once mentioned some website name for video courses and now I am not able to recall which website it was. Can you share the website name again ?

  288. Sunny Bhadra says:

    Yes Sir, this is the one.
    Thanks alot.

  289. Sunny Bhadra says:

    Sir, What will be the CAGR in this case over a 4 year period since there is no particular trend :

    03/17 – 5,982.58
    03/18 – 4,961.73
    03/19 – 5,324.74
    03/20 – 4,770.59

    CAGR = (4770.59/5982.58)^1/4 – 1 = -5.5%
    is this correct ?

  290. Sunny Bhadra says:

    OK Sir, means it does not matter whether there is a particular trend (uptrend or downtrend) or not (in the above example) you just have to take (Final Value/Beginning Value) ^ 1/n – 1 ?

  291. Sunny Bhadra says:

    Got it Sir. Thanks for the clarification.

  292. Sunny Bhadra says:

    Sir, What Checklist/Points you will suggest to look into before investing in Mutual funds ?

  293. Sunny Bhadra says:

    Cool Sir.

  294. Pooja T S says:


    In the above example of ARBL intrinsic value band was at Rs 331 – Rs 405. When I did the DCF analysis (ARBL, 2019-20) with an average FCF of Rs 154.4 cr (FY 2011-12 to FY 2019-20, 9 year average), intrinsic value band came at Rs 361 – Rs 441. My questions are

    1. For ARBL, consistently the stock price has been higher than the IVB (apart from the crash in March 2020). The investor who missed the opportunity at March 2020, when can he/she will be able to buy ARBL? Wouldn’t it be an endless wait?

    2. How important is IVB while picking a business to invest?

    • Karthik Rangappa says:

      1) If you think the stock price is worth it at this price, you should go ahead and buy. No one can estimate the waiting part of investing 🙂
      2) Quite important as it gives you a sense of how wide the intrinsic price band can fluctuate.

  295. rajiv says:

    hi sir, Thank you.

    while calculating the net debt why only using Long term borrowings and not including Short term borrowings ?
    Also can we include intangible assets also to calculate Free Cash Flow.


    • Karthik Rangappa says:

      Short term is expected to get settled within the year, so no point taking the short term debt to perspective.

  296. Ajith Sargur says:

    I tried to apply the formula “FCF = Cash from Operating Activities – Capital Expenditures” onto the SpiceJet’s earnings. In their Consolidated Cash Flow Statement, the “Cash from Operating Activities” was clearly listed, but I could not find any line entry as “Purchase of Tangible Fixed Assets” or as Capital Expenditures.

    In this case, how do you arrive at the second element of the equation?

    • Karthik Rangappa says:

      YOu’ll have to look at the increase in gross block and take the difference between this year and the previous year. That will give you capex.

  297. Omi says:

    Hii, I have a query everything is okay but by what percentage should I expect my stock to grow. I am talking about CAGR, suppose I put every value according to model you mentioned and intrinsic value comes at 500-550. I am getting stock at 500. How will I estimate it’s CAGR for a period of time say 10 years.

    • Karthik Rangappa says:

      CAGR is historical. You need to have an estimate over the growth rate of the P&L, price is just a function of the market’s demand and supply.

  298. Moses says:

    How do you come up with the opportunity rate & discount rate of a company.

  299. Moses says:

    Hello on the Computation of net debt (Total debt for the year- cash & cash equivalents) you were not able to incorporate the short term debt on the total debt for the year does total debt should be 84.33.

  300. subham sunam says:

    = 209.7 + 262.99 + (51.6) / 3

    =Rs.140.36 Crs how did u come up to this amount i calculated it over and over again but i count find the answer that u did plz reply need help no being able to understand this point

  301. Harsh says:

    I have 2 questions-
    1. Why while calculating capital expenditures only expenditures on tangible assets are considered and not those on intangible assets?
    2.What is the logic behind calculation of net debt and adding it to npv

    • Karthik Rangappa says:

      1) Both can be considered for capital expenditure
      2) You mean the enterprise value? That’s because the debt holders have a higher claim on the company’s value. But if its NPV you mean, remember all that matters in NPV is the amount of cash you have, hence.

  302. Niharranjan Nayak says:

    valuable lessons

  303. Vinay says:

    Hi Karthik,

    1. Why we have used the discount rate(9%) 2 times to calculate the Terminal value?
    -> one time while calculating the terminal value and other to discount it to PV

    2. Why you have taken 10yr time frame to calculate the PV of the Terminal value?

    Thanks in Advance.

    • Karthik Rangappa says:

      1) That’s the PV of the terminal value and the present value of the future cash flow.
      2) Terminal value incorporates all the future value after the 10-year time frame (or any time frame you’d like to consider).

  304. Tushar Sharma says:

    Sir, How to calculate Intrinsic Value of a company which has negative free cash flows.

    • Karthik Rangappa says:

      You cannot apply DCF here, hence you need to look at comparable or relative valuation techniques.