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You are here: Home / valuation / Different Stock Valuation Methods – Reliance Industries

Different Stock Valuation Methods – Reliance Industries

April 23, 2019 by Rajat Sharma Leave a Comment

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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Last updated: 23rd April, 2019

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Filed Under: valuation Tagged: valuations

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About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

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