Different Stock Valuation Methods – Reliance Industries

In this article, I will be discussing the various stock valuation methods used to arrive at a fair value or the target price for the company. To illustrate this, I will take Reliance Industries to explain the different stock valuation methods.

[1] Stock Valuation Method – Peer Comparison

In this valuation method, we compare a company’s value to that of its peers. One of the most popular relative valuation multiples is the price-to-earnings (P/E). The P/E multiple allows to know how the stock is trading as compared to its peers.

Reliance Industries peers includes Indian Oil, BPCL, HPCL, MRPL and Chennai Petroleum. In comparison to its peers, Reliance is trading at premium.

Please note that the premium is due to the Company’s presence in retail and digital space.

Company Name	Market Data		Valuation
	Price (Rs.)	Market Cap Rs. Cr.)	EPS TTM (Rs.)	P/E (x)
Indian Oil Corporation	148.0	139,282.48	17.8	8.3
Bharat Petroleum	335.7	72,810.97	34.0	9.9
Hindustan Petroleum	249.3	37,988.90	31.5	7.9
Mangalore Refinery	70.5	12,355.82	3.2	22.2
Chennai Petroleum	252.4	3,757.78	0.1	–
Reliance Industries	1370.8	868,915.92	66.8	20.5

Based on this method, the implied value of Reliance Industries will be calculated as Industry Average PE * Reliance Industries’ EPS TTM.

[2] Stock Valuation Method – Enterprise Value/EBITDA or EV/EBIT

Enterprise Value (EV) = market capitalization + preferred shares + minority interest + debt – total cash

This valuation method is used as a valuation tool to compare the value of a company, including debt, to its EBITDA or EBIT. Just like the P/E ratio, the lower the EV/EBITDA, the cheaper the valuation for a company. It is best to use both valuation methods simultaneously.

Company Name	Market Data	Financial Data – TTM basis			Valuation
	EV (Rs. Cr.)	Sales (Rs. Cr.)	EBITDA (Rs. Cr.)	Margin %	EV/EBITDA (x)
IOC	203,080.44	519,016.80	35,326.09	6.81%	5.7
BPCL	110,359.51	288,396.70	10,753.59	3.73%	10.3
HPCL	57,219.08	268,068.71	2,909.53	1.09%	19.7
MRPL	22,417.12	61,900.33	1,897.04	3.06%	11.8
Chennai Petroleum	6,137.98	41,178.90	761.85	1.85%	8.1
Reliance Industries	1,141,625.92	581,020.00	83,918.00	14.44%	13.6
Median					10.3
Average					11.1

How to Arrive at Price per Share Using EV/EBITDA?

• Step 1 – Multiply Company’s EBITDA or EBIT with the average EV/Mutiple to find the enterprise value.
• Step 2 – Then subtract the net debt (Debt – Cash) of the company to find the equity value of the business.
• Step 3 – After that point, divide by shares outstanding to find the equity value per share.

Different Stock Valuation Methods – Reliance Industries – Click for the valuation template.

[3] Stock Valuation Method – Sum of the Parts Valuation

This valuation method is used to value a company with business segments in different industries that have different valuation characteristics. This method values each individual business of a diversified company. Later, all businesses are clubbed together to calculate the total value of the diversified company.

Depending on the nature of business, relevant multiples like P/E, EV/EBITDA, EV/ EBIT, EV/ Sales, EV/net Income can be used for valuation.

SOTP Valuation – Segment A Valuation + Segment B Valuation+ Segment C Valuation – Net Debt = Equity Value of the Company

Take for instance, Reliance Industries’ main business is oil refining and petrochemicals but the Company has also diversified into oil and gas exploration, retailing and recently telecom. This is the most appropriate method to arrive at the fair value of Reliance as it takes into account all of its businesses.

Reliance Industries – SOTP Valuation
Segment	Revenue (In Rs. Cr.)	EBIT   (In Rs. Cr.)	Multiple (x)		Enterprise Value (In Rs. Cr.)
Petrochemicals	172,065	32,173	EV/EBIT	14.8	476,937
Refining	393,988	19,868	EV/EBIT	13.6	270,751
Oil and Gas	5,005	1,642	EV/EBITDA	5.4	8,914
Organized Retail	130,566	5,546	EV/Sales	2.8	365,166
Digital Service	46,506	8,784	EV/Sales	6.3	293,245
Others*	22,151	1,230	EV/Sales	1.0	22,151
Total Enterprise Value (In Rs. Cr.)					1,437,164
Less: Net Debt (In Rs. Cr.)					264,430
Debt (In Rs. Cr.)					271,942
Cash (In Rs. Cr.)					7,512
Market Cap (In Rs. Cr.)					1,172,734
Number of Shares in Cr. (as on 31st Dec 2018)					634
Price per share (Rs.)					1,850

*Other business segments includes media business like TV18, Network18, MoneyControl etc.

**Revenue, EBITDA and EBIT Numbers are of FY 2019.

 

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