Module 06 · Valuation¶
What this module does. Builds valuation from first principles — value is discounted cash, and growth creates value only when returns exceed the cost of capital — through cost of capital, a full DCF (built line by line on Kaveri and reproducing the course's ₹320 reference), DCF in practice (sensitivities, scenarios, the fifteen mistakes), relative valuation, reverse DCF and expectations investing, the other methods (DDM, residual income, SOTP, asset-based, capacity multiples, options), and margin of safety as a distribution.
Why it matters. Everything before this module produces inputs; everything after uses outputs. The module's central move — reading the price as a forecast and disagreeing with it specifically — is the investor's version of implied volatility.
Lessons¶
| # | Lesson | One line | Time |
|---|---|---|---|
| 06.1 | What value is | Intrinsic vs relative vs book; the value-driver formula; price, value, expectations | 75 min |
| 06.2 | Cost of capital | rf, ERP, beta (three ways), cost of debt, WACC; Indian ranges; WACC as a hurdle | 90 min |
| 06.3 | DCF step by step | Drivers, explicit forecast, terminal value done right, discounting, the bridge; ₹320 reproduced | 120 min |
| 06.4 | DCF in practice | Sensitivity grids, scenarios and weights, sanity checks, the fifteen mistakes, honest presentation | 90 min |
| 06.5 | Relative valuation & multiples | Every multiple matched; justified P/E and P/B derived; peers, bands, why Indian multiples are high | 90 min |
| 06.6 | Reverse DCF & expectations | Price → implied growth/margin/WACC; variant perception; a live-data reverse DCF | 90 min |
| 06.7 | Other valuation methods | DDM, residual income, SOTP and holdco discounts, NAV/replacement/liquidation, EV/tonne, Merton, real options | 100 min |
| 06.8 | Margin of safety, expected value & asymmetry | Downside first; expected value and payoff asymmetry; Monte Carlo; the price at which Kaveri works | 80 min |
Connections¶
- Back: 04.3 (ROIC and reinvestment), 05.3 (the fade), 01.5 (discounting).
- Forward: Module 07 adapts the methods to lenders, insurers, cyclicals, loss-makers, holdcos and infra; Module 10 builds the model; 11.3–11.4 turn the distribution into a memo and a size.
- Reference: Kaveri valuation page;
tools/fi/valuation.py.
You're ready to move on when you can…¶
- Derive the value-driver formula and show why growth at ROIC = WACC is worthless.
- Build Kaveri's WACC (12.19%) and defend each input with a current source.
- Reproduce ₹320/share from the drivers, decompose it by period and by assumption, and state the implied exit multiple.
- Produce the WACC × g and growth × margin grids and the three-scenario weighted value (₹306).
- Compute justified P/E and P/B and explain what a 26x or 35x multiple assumes.
- Reverse-solve ₹390 for implied growth (14.1%), margin, WACC and terminal g, and write a variant perception.
- Value a lender by residual income, a holdco by SOTP with an argued discount, and explain equity as a call.
- Compute expected return and upside/downside from an entry price and state the price at which Kaveri is a bet worth taking (~₹220–260).
Tested by: Mock 3 — Valuation.