Discounted cash flow

Valuing a business as the present value of the cash it will produce for its owners over its life. The idea is uncontroversial and the execution is where all the difficulty sits.

Mechanically, there are three steps. Forecast free cash flow for an explicit period, usually five to ten years. Estimate a terminal value for everything after that. Then discount both back at the cost of capital and add them up.

Here's a small piece of one. Three years of ₹325 crore, ₹350 crore and ₹375 crore, discounted at 11.5%, are worth ₹844 crore today, and the terminal value would go on top.

Most of the value doesn't come from the years you worked hardest on. In a typical model built over ten years, 60% to 80% of the answer is in the terminal value, which means the majority of the number rests on a growth rate and a discount rate applied to a year nobody can forecast. The work goes into the explicit forecast, while the answer comes from the terminal assumption.

Build it to understand the business, not to produce a target price.

Three steps. All the difficulty is in the second.

Before you touch a spreadsheet, write down what the business has to do for the model to be right. Revenue at some rate, margins at some level, capital spending at some ratio, and returns holding for some number of years. Those four sentences are your investment case, and the spreadsheet only turns them into a number. It's the most useful habit you can build here. If you start from the spreadsheet instead, you'll find yourself adjusting assumptions until the answer feels comfortable. It's a familiar failure, and it produces a valuation that says more about the analyst than the company.