Glossary
Sum of the parts
M3.06 · M5.10Also called SOTP, sum-of-the-parts valuation.
Valuing each business of a diversified group separately and adding the results, then adjusting for debt and central costs.
A group with a chemicals business worth ₹6,400 crore, a consumer business worth ₹3,200 crore, a stake worth ₹1,800 crore and ₹900 crore of net debt is worth ₹10,500 crore.
It is the right method whenever the parts deserve different multiples, which is whenever growth, returns or risk differ materially between them. A single blended multiple applied to a group with a 25% return business and an 8% return business is a number that describes neither.
The traps are consistent. Central overheads have to be allocated or capitalised and subtracted, because they are real. Cross-holdings must not be counted twice. And the sum almost always exceeds what the market pays, which is the conglomerate discount rather than an error.
Show the discount rather than arguing it away.