Which Valuation Method to Use and When
After Company Valuation in the Indian Context, the next decision is practical: which valuation method should you use in a given scenario, and which method will distort the answer. In interviews, this matters because no single method is definitive; the right answer matches the company context to the method that best reflects how value is actually being assessed.
- Stable, predictable business (utility, NBFC): use DCF + DDM because of predictable FCF and long history; avoid high multiple comps because it distorts.
- IPO pricing (e.g., Hyundai India): use Trading Comps (EV/EBITDA, P/E) because it is market-benchmarked and reflects what investors will pay; avoid DCF alone because it is too theoretical for market.
- M&A; fairness opinion: use all three - DCF + Comps + Precedent - because of regulatory/legal requirement for range; avoid a single method only.
- Conglomerate (ITC, Reliance): use SOTP + Holdco Discount because diverse segments mean no single multiple fits; avoid pure P/E because it is distorted by segment mix.
- Distressed company / liquidation: use Liquidation Value and EV/Assets because going concern assumptions break down; avoid DCF because it overstates value.
- Pre-revenue startup (Series A): use Venture Capital Method and Scorecard because there are no earnings and valuation is future exit-based; avoid P/E and EV/EBITDA because they are meaningless.
- Bank / NBFC / Insurance: use P/B, P/ABV and Residual Income because it is balance sheet centric; avoid EV/EBITDA because debt is operating and cannot be removed.
The Big Picture: Match the Method to the Scenario
In practice, investment bankers use a valuation football field - showing the range of values from multiple methods. No single method is definitive. The DCF anchors fundamental value while trading and transaction comps provide market context.
The decision is not about naming every valuation method; it is about knowing when a method gives a less distorted answer and when it should be avoided.
Scenario-Based Valuation Method Selection
How to Read the Method Choice
For a stable, predictable business such as a utility or NBFC, DCF + DDM works because there is predictable FCF and a long history. The avoid column matters here: high multiple comps can distort the answer.
For IPO pricing such as Hyundai India, Trading Comps using EV/EBITDA and P/E are preferred because the valuation is market-benchmarked and reflects what investors will pay. DCF alone is avoided because it is too theoretical for market.
For M&A; fairness opinion, the answer is not one method. Use all three: DCF + Comps + Precedent, because there is a regulatory/legal requirement for range. A single method only should be avoided.
For a conglomerate such as ITC or Reliance, SOTP + Holdco Discount is preferred because there are diverse segments and no single multiple fits. Pure P/E is avoided because it is distorted by segment mix.
For a distressed company / liquidation, Liquidation Value and EV/Assets are the right methods because going concern assumptions break down. DCF is avoided because it overstates value.
For a pre-revenue startup at Series A, Venture Capital Method and Scorecard are preferred because there are no earnings and valuation is future exit-based. P/E and EV/EBITDA are meaningless in this scenario.
Bank, NBFC and Insurance Valuation
INTERVIEW CLASSIC - "How do you value a bank?" Answer: Unlike regular companies, for banks you CANNOT use EV/EBITDA because debt IS their operating raw material (deposits).
Instead use: (1) P/B or P/ABV (Adjusted Book Value) - subtract stressed loans/NPAs. (2) Residual Income/Gordon ROE Model - P/B = (ROE - g) / (Ke - g). (3) DDM (Dividend Discount Model) - banks pay regular dividends with predictable payout ratios.
Key driver: if ROE > Ke, bank should trade above book value (P/B > 1x).
Related Method Logic
Trading comps value a company by applying the valuation multiples of similar public companies. The art is in selecting the right peer group and using the right multiple for each sector.
Precedent transactions value a target company based on multiples paid in past M&A; deals for similar companies. Transaction multiples are typically higher than trading comps because of the control premium - typically 20-40% above market price.
SOTP is used for conglomerates with diverse, non-comparable business segments. Each business unit is valued independently using the most appropriate method, then summed.
Conclusion
The core rule is simple: match the company context to the valuation method that gives the least distorted answer, then clearly state what to avoid. A strong answer does not force one model everywhere; it uses the scenario, business model and available financials to choose the method.
The most frequent error is using a single method only, especially when the scenario requires a range or a sector-specific approach. It costs points because it ignores clear distortions such as pure P/E for conglomerates, DCF for distressed companies, or EV/EBITDA for banks where debt is the operating raw material.