How to unlock the true value of your company?


Compiled by Dharini Desai & Neel Vora

What is Valuation?

The analytical process of estimating the worth of a company or an asset is known as valuation. There are numerous methods for performing an evaluation. In addition to other factors, an analyst putting a value on a firm considers the management of the company, the make-up of its capital structure, the likelihood of future earnings, and the market worth of its assets. A measurement of an asset’s value is its intrinsic value. The intrinsic value will show how much a business is worth. Instead of using the asset’s actual market price, this metric is calculated objectively or through the use of a complex financial model. The market value is the current price of the company’s stock. The market value will not always reflect the true value of the company. If the market value is higher than the intrinsic value then it is overvalued and if it is less than the intrinsic value then it is undervalued.

There are some factors that determine the value of the company which is:

EBITDA, Revenue Trends, Growth Prospects, Earning History, Management, Competitive Advantage, and Reputation.

If one wants to unlock the true value of a company they need to consider some of the aspects which are:

  • Sustainability
  • B2C, B2B, C2B, C2C

sustainability – how will your product or service survive in the market, how unique is the thing that you are selling, is your company’s growth rate in line with sector/ industry growth rate, and what type of business model company is using like B2C- Business to consumer, B2B- Business to Business, C2B- consumer to business, C2C Consumer to Consumer. All the aspects require a different type of valuation method which help the analysts to determine the value of the company.

Let’s take the example of both undervaluation and overvaluation.

Overvaluation – Uber

Aswath Damodaran is known as the “Dean of Valuation” and in his blog about Uber’s Coming out Party: Personal Mobility Pioneer or Car Service on Steroids? He explains how uber is overvalued. Uber followed Lyft in launching an IPO and to understand where the company stands Damodaran looked at the prospectus in which he listed down all the things that he found to be overvalued in the financials. Uber has portrayed itself as not just a car servicing company but as a transportation service. Uber’s catchword, repeated multiple times in its prospectus, is that it is a personal mobility business, with the tantalizing follow-up that its total market could be as large as $2 trillion if you count the cost of all money spent on transportation (cars, public transit, etc.). Damodaran then goes on to explain which approaches he used to value Lyft as well as Uber. Uber, one of the world’s largest ride-hailing companies, expects the price of its initial public offering to range between $44 and $50 a share, giving it a valuation of up to $91 billion when stock options and restricted stock are taken into account. Although this is less than the anticipated $100 billion valuations, it still qualifies as one of the biggest offerings in history. Aswath Damodaran, a professor at NYU Stern and one of the country’s foremost valuation specialists, estimates that the high-profile IPO is more worth $60 billion.

Undervaluation- ITC

ITC is regarded as undervalued stock for many years by many pundits of the stock market as it has been most consistent in the price that it has shown over the years. The ITC stock has always been undervalued in terms of valuation. In terms of cash flow, ITC has consistently created more cash and free cash, which has benefited a slew of other businesses. Given the lack of obstacles on both the investing and business sides, money has now begun to flow into ITC, and there is where we have seen the activity. It also holds based on the Intrinsic value it has at this point. The company has a huge portfolio of products in its basket also the company is profitable at the moment. Ex: – Classmate, Aashirvad Wheat flour, Jhon Players, Sunfeast, etc. These all indicators refer that the intrinsic value is more than the current market value which states that ITC is undervalued.

As of Jun 24, 2022,

The Intrinsic Value of ITC is Rs. 374.03 determined based on the Median of the 3 historical models.
Fair Value [Median EV / EBIDTA Model]: Rs. 290.19
Fair Value [Median EV / Sales Model]: Rs. 374.03
Fair Value [Median Price / Sales Model]: Rs. 379.32
Median Fair Value of ITC: Rs. 374.03

As of Jun 24, 2022, ITC is trading at a discount of -29% based on the estimates of Median Intrinsic Value!

Source: Smart Investing

To Conclude, one can say that some companies are overvalued and some are undervalued based on different assumptions, aspects, and factors. Everyone has their own approach to valuing a particular company and it is important to have an expert with you to evaluate your company’s true value.