Numbers and Narratives: A Simple Discounted Cash Flow (DCF) Model for Equity Valuation

What should be the value for Ashok Leyland?

Hi Karthick,

I would much rather than you use the template provided and narrate your own story. I’d be happy to help, of course. I say this, because nothing beats the satisfaction of your story making it out as the final Value of a company. I hope that’s acceptable.


@dineshssairam I couldn’t find any minority interest part in KRBL balance sheet . Could you please share where did you get the value of 19.22 ? Also should we add interest expenses back to PBT to get Operating Income ? Or should we go with Operating Income from screener(Sales - Expenses) without considering other income, depreciation and finance costs?

KRBL has two subsidiaries and I have valued them as follows. The original figure of Rs. 19.22 crores appears to me to be a Majority Interest (Using a slightly different P/B, which I don’t recall now), which was a mistake from my side. This is the actual Minority Interest calculation for KRBL:

In essence, since we’re calculating the value for KRBL, KRBL DMCC and KB Exports together (Consolidated Financial Numbers), we need to remove the portion of KRBL DMCC and KB Exports that KRBL doesn’t own.

I think I updated the KRBL excel to this effect, although this shouldn’t have any material impact.

Take PBT and add Interest Expense. That’s the easier approach.

I’ve personally found Screener to be inaccurate, at least at this level. In fact, even for Balance Sheet data, Screener generalizes a lot of things. I like to read the Annual Report / Quarterly Report and fill in the numbers from there.

Could you please let me know why are you subtracting cash and cash equivalents while calculating capital turn over? Could you please explain a bit more on capital turnover calculation you used?

Capital Turnover = Sales / (Equity + Debt - Cash & Cash Equivalents)

In my model, this ratio is used to determine how much capital reinvestment (i.e. Working Capital and Capex combined) a company should make to obtain 1 unit of Sales/Revenues. So, a 2 Capital Turnover essentially means that the company can generate a Revenue of Rs. 2 from Rs. 1 of invested capital. If the company manages to contain its expenses and taxes within, say, Rs. 1.80, then its profits would be Rs. 0.2, which is representative of a 20% return on invested capital. I hope it’s clear up until this point.

The reason behind deducting Cash and Cash Equivalents is that, in any sensible Valuation, income generated from cash and cash equivalents (Such as dividends, interest income) are supposed to be ignored. Instead, Cash is simply taken at Face Value (Nothing more, nothing less). This is because the business and the cash do not carry the same amount of risk.

Say, if a company invests Rs. 100 Cr in Machinery and Rs. 15 Cr in Government Bonds, a logical conclusion is that the Rs. 100 Cr is at a far greater risk (Business Risk) than the Rs. 15 Cr (Governmental Default Risk–which is almost zero). Therefore, it makes sense to say that the proceeds from the Rs. 100 Cr should be discounted at the WACC and the proceeds from the Bond Investment at the Risk-free Rate. We do discount the proceeds of the ‘Machinery investment’ i.e. The Free Cash Flow at WACC.

But what about the relatively riskless Bond Investment? If the Bond Investment earns at the RfR and gets discounted at the RfR, its Value remains the same. That is, assuming a RfR of 8%, (15 Cr * 0.08)/0.08 = Rs. 15 Cr. This coincides with our logic of taking all Cash and Cash Equivalents at Face Value.

With that said, there is definitely a catch-22 situation with regards to Cash holdings. Prof. Aswath Damodaran addressed this problem in one of his blog posts:

He also wrote an extensive paper on the topic, if you’d like to go through it: SSRN-id841485.pdf (1.9 MB) (Warning: It’s 55 pages long)

The TLDR is: If you trust a company to reinvest cash holdings appropriately, it makes sense to simply ignore cash-related income and consider cash at Face Value. If you don’t, then it makes sense to ‘penalize’ the excess cash by reducing the Value of cash:

Say, a company has Rs. 100 Cr. You don’t trust the company to reinvest this cash properly. Assume that the WACC is 12% and RfR is 8%. You will simply do 100 * 0.08 / 0.12 = Rs. 66.67. So, in line with your doubts, you ‘penalized’ Rs. 33.33 worth of Cash holdings from the company. You can now use this reduced Value of Rs. 67 Cr in the Capital Turnover formula instead of the Rs. 100 Cr (Which will results in a lower Capital Turnover and so, lesser free cash flows).

Alternatively, you could include the earnings from cash and cash equivalents (Dividends, interest income) and let it all get discounted at the WACC. You don’t adjust anything. But the risk here is that you are also projecting income from cash out for many years, whereas income from cash tends to be very fickle. This is a part of the discussion I was having in another thread:

If all this is too complex, a simple thumb-rule is to ignore Cash completely from the equation. Use the ‘Non Operating Asset’ field in the model to populate Cash balance. Don’t include Cash while calculating Capital Turnover. This is a very conservative approach. The impact of this kind of a method can range from minimal (For a company like KRBL) to enormous (For a company like Cochin Shipyard).

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Hi Dinesh,

Thanks Dinesh for your all your help and explanation on your valuation model i.eNumbers and Narratives. Appreciate your help in handholding novice like me on various aspects of valuation for organisations. I am sure other members like Me( new to investing) will get good insights on valuation from this model.



Happy to help an enthusiastic person like yourself, Ashit. :slight_smile:

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Answering both of these posts here, because I don’t want the Mods removing any such comments (Rightfully, however) and then get blamed for ‘getting them removed’.

The ‘model’ isn’t something I fashioned myself out of thin air. It is based on widely known financial theory. I cannot quote a “success rate”, because the model being ‘good’ or ‘bad’ entirely depends on how it is used (That is to say, depends on the insights, financial acumen of the person using it). Someone may use it way, way better than me. In fact, it’s assured that someone will.

Time and again, I have claimed that the model is simply a tool. Say, it’s like a wrench. How silly do you think is asking “What is the success ratio of a wrench?” The wrench itself does not fix stuff wonderfully, the person who handles the wrench does. I really hope I have made myself clear.

Of course, I understand that there’s the chance of the wrench itself being faulty or in this case, my model itself being faulty. I will be more than happy to discuss along these lines. In fact, that is what I have been doing in this thread.

I just think it’s quite silly and impossible to calculate how ‘successful the model was’. If there was any such way, please do let me know.

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It looks like the new rules require Indian companies to report Financial Position (Balance Sheet) as well during Quarters. I just realized this after looking at a couple of Quarterly filings.

It’s a long way to go to meet the standards set by the USA’s 10-K. But yes, a minor victory for those interested in stock valuation :slight_smile:

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Hi Dinesh

Can you please tell first step in dcf valuation…I started learning…I am novice…need to understand step by step…

First step please advise…once I am comfortable with step 1 will go to step…

Please help me

“The Dhandho Investor” by Mohnish Pabrai contains some simplistic explanations on how a DCF is done, in case you’d like to check that out.

I would also suggest the following course:

ASimpleModel is an amazing tool/website to learn financial modelling. It has courses and tools to learn financial modelling step-by-step. In fact, it’s being used by several famous MBA institutions around the world (Harvard, Wharton, Berkeley to name a few). Their annual subscription charges are around $2.75 i.e. ~Rs. 2400 pa or ~Rs. 200 pm, which I think is a low price to pay for such a resourceful website.


Great site just bookmarked

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Thanks Dinesh ,
I am on learning curve, I have some query what I found in number section is very fine and I am sharing with fellow VP’s to understand it better

1 Query
The cost of debt if calculated
is it justified or correct ?

2 Query
Where from one can find the data for Minority Interests however as you mentioned
“Actual Minority Interests of 4.27 multiplied by 4.5, the Basmati Rice industry’s average P/B Ratio”
3 Query
Based on what criteria debt is classified as a b c d and so on
Could you please suggest good book or online resource for advance excel



Thank you. I’m sure it’ll be quite useful to boarders here.

I think you’ve missed two decimal places. :slight_smile: KRBL’s Interest Payments (From Screener) is ₹69 Crs, not ₹6924 Crs. So the Book Cost of Debt is ~6% or so. I’ve used a 8.5% Cost of Debt to value KRBL’s Borrowings.

Search for ‘Subsidiaries’. In every Annual Report, there’s a table which mentions the brief financials of Subsidiaries. I usually tend to take the Book Value of these Subsidiaries (Assets - Liabilities), multiply it with the industry P/BV and then multiply that final figure with the minority interest percentage (The percentage stake which the parent doesn’t hold). Here’s how I did it for KRBL:

As far as Advanced Excel is concerned, I would say simple YouTube courses should be very helpful. In case you’re looking for Finance oriented excel knowledge, please refer to the below:


That is really helpful thank you Dinesh so kind that you find time to answer

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Prof. Aswath Damodaran has been putting up his Spring 2019 classes online. I think they offer immense value to those willing to look and learn. Seeing as how my model is largely based on the Professor’s own, I think it will offer a good opportunity to round things up for interested folks.

Valuation - Undergraduate

Valuation - MBA

Corporate Finance - MBA


Thanks for sharing the links!

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Once of the key inputs to the Damodaram model is the “Corporate Bond Spreads”. How do we get these values in the Indian context?
Thank you.

If you mean the Cost of Debt used to calculate Cost of Capital, then you can try searching ‘Corporate Bond Trading Data’ in Google. You will usually end up in these websites:



For instance, I would calculate the Cost of Debt for Reliance Industries as follows:

  1. Note down the Last Traded Yield for all plain vanilla Debt Instruments issued by Reliance
  2. List them down from both NSE and BSE. However, if there are duplicates, feel free to ignore one.
  3. Take a simple average.
  4. This should give you the cost of debt for Reliance i.e. The average percentage at which the market would subscribe to a new issue of Debt from the company.

The problem in the Indian scenario is that Corporate Bond issuance isn’t as rampant as it is in the developed nations. So, you may not be able to get it for ~99% of the listed universe. In that case, I generally try to:

  1. Find bonds issued by competing companies
  2. If that is not possible, find bonds issued by companies in the same/similar industry
  3. If none of that is possible, take the Risk-free Rate of GOI and add 2-3% based on my guess of how risky the company’s Credit is (Generally, higher Debt / lack of supporting assets means higher Credit Risk)