Is Your Stock Overvalued or Undervalued? Understand Equity Valuation with Dr. Sarfaraz Sir

Hinzugefügt: 2026-05-23

[00:00:00][music] [music] >> Last 5 years A company Eternal Zomato formerly it was known as Zomato.

[00:00:38]Last 1 year may the company have shown the growth in share price 345 is the highest. So your price 200 say start okay 345 per day.

[00:00:56]118,500 jump it with the market cap. Save 2,370 crores rupees. 1.5 crore at a company Geo Financial just got market cap 1.5 lakh crore.

[00:01:12]Price save 234 Yeah, good questions.

[00:01:18]Price or value collector.

[00:01:20]A company in Dubai key just may Dubai banking group just may RBI may recently 3 billion dollar investment here. 74% stake Equity stake India is it Reliance industry industry Reliance Industries Limited.

[00:01:37]I believe it has been announced that 10 lakh crore rupees invested almost almost 110 billion dollar investments in AI and data infrastructure. It never brought investment. A particular a segment. The year to investment year to prices year to change here. as a high valuation loss making companies to actual business losses we are currently but they were huge huge fluctuation in the prices to price fluctuate any questions I am discussing a lot of important concept valuation just me and say CFA level one can you equity valuation what important topic I'm just going to discuss equity valuation is it open but first I will explain you about value prices and valuation and different types of valuation so let's discuss value so how this value changes over the period of time and how this value is calculated this is very very important to and believe me financial world cup valuation a topic is so successful realistic topic and very very important because it actually talks about the real worth of any asset real worth of any asset technically it is known as intrinsic value will understand later in this particular video so is valuation so much earlier we are going to discuss value drive value change so how value changes first we talk about how value is calculated but the most important thing is what actually creates value what actually create what is the main factor which actually creates value so this is something that we have to discuss first which factor is responsible which factor is responsible creating this value taking an example of cricket in India because IPL season Vaibhav Suryavanshi ek aisa cricketer the most youngest great cricketer in IPL history. It has been taken by Rajasthan Royal at 1.1 crore rupees. And on the other hand KKR KKR have taken one player named Cameron Green. It was taken by KKR at a price of 25.20 crore rupees. Now what happened after this? Tera in India but Vaibhav Suryavanshi has almost scored near 100 near to 600 runs having a average of 45 and Cameron Green who have who have taken 25.20 crore rupees was made last 15 last 11 or 12 innings made 39 average made 39 Yeah the given 350 runs made score here. Now in this in this example what where the value lies where the value lies so in case of Vaibhav Suryavanshi a high performance plus low expectation because it has been given only 1.1 crore rupees by the franchisee a high performance batsman which have now massively oh no great history and scored run right so and with very low expectation initially and this actually creates a massive value which we call it over delivery right on the other hand Cameron Green a moderate performance but having a very high expectation which actually equals the deficit in the perceived value under delivery performance right so we can say now what we can say is the value is actually equal to the performance over expectation right so what I believe value if you just simply discuss what is value it is nothing but the performance over expectation. How you are expecting expectation.

[00:05:54]Performance over expectations. If you are very expecting some some something very high in future, so it is actually you know, so if you see the relationship between value and expectation, it is uh uh you know not directly proportional, but performance high performance and high value. It is showing a direct proportion, right? So basically value is nothing but a reward. Now talking about in terms of finance, value is nothing but a reward that investor expects to receive in future, right? And asset derives value. Any asset derives value from the future benefit or future cash flows that investors expect to generate.

[00:06:35]So this is the real foundation of value valuation topic in fact evaluation topic. Now talking about something uh the different different uh assets like a stock, we see the future earning. And other asset excel may it is increasing to a very high level and again going down and again increasing.

[00:06:57]So this is something what? This is uh value value that we have to just bond same case goes with that interest income is something that we are expecting in future. Real estate case may there is a rent and appreciation. Right? That what exactly we are expecting as a uh owner of a of a flat or a house which we can give on rent or capital appreciation be so we future expectation we investor will get future prices we will teach to value they not start or is what core concept we go we will go business we will go we will go future may Apple pick cash flow generate a is nothing but future future expectation future expectation in terms of reward in terms of reward right but now let us take this I'm taking this topic now so now we have we have we have already created a framework that what exactly the value is now let us understand the value and price so what is the difference between value and price right so that is also we need to understand so value is actually what we get what what we get and price is something that we paid so what we what we pay or what we paid is something called price so value and price uh we just understand it so and it is equal to the future expectation now connecting all these points and taking you to the equity valuation part right now coming on to the valuation part valuation now valuation in finance is can be done there are three approaches that actually one is discounted cash flow method discounted cash flow method just we understood it is based on future expectation right so if we just taking this particular methodology it is value it is equal to uh the reward that we are going to get in future so future cash flows the based on future cash flow future cash flow divided by 1 + R to the power N right now I'm not explaining this because we'll be discussing this discounting factor later in this >> power in. Right now, I'm not explaining this because we'll be discussing this discounting factor later in this particular video. Second approach is relative valuation.

[00:09:46]Relative valuation.

[00:09:47]This is valuation by comparison. This is nothing but valuation by comparison. So, if I'm comparing to make your own valuation, it is relative valuation.

[00:09:57]Very simple example, if I'm going to purchase a house nearby my locality, This is valuation by comparison.

[00:10:17]Although it's me there are two approaches that will come later on that is trading comps and transaction comps, but right now it is not the matter for discussion.

[00:10:26]We will discuss in some other video.

[00:10:29]Third one is asset based valuation.

[00:10:31]Asset based valuation.

[00:10:36]Asset based valuation is basically net asset value. And this type of approach is commonly used when we are doing the valuation of real estate company and some companies which is asset based company like mining companies and some companies which are managing the portfolio, financial portfolio. So, these are the companies we generally take when you use this asset based valuation approach. So, DCF, relative valuation, and asset based valuation, these are the three different approaches to do the valuation. Our point of discussion today is discounted cash flow method, DCF method. In this DCF method, as we discussed that value is nothing but future based on future cash flow. Now, what we do to this future cash flow to get the to get the actual worth of the asset, right? The purpose of this method is to find out is to find out intrinsic value.

[00:11:38]Intrinsic value. Now, this intrinsic value is the real worth of any asset.

[00:11:43]Real worth of any asset. It is a theoretical value based on certain assumptions. We call it intrinsic value.

[00:11:49]Now, what is the importance and significance of this intrinsic value?

[00:11:52]Suppose I'm going in a market, which is a short credit near or a short car a price just so much like that I can short other 1500 rupees car market quoted here to ask you actual worth 1500 rupees here yeah you will say that I got yeah you will say come guy is that only can make a short video that a market will pay come pay girl right so this is the method that takes you to the original value of the asset. We call it intrinsic value or in other terms we call we can call it fair value right so we can also call it fair value. So, the method which actually take us to the fair value of any asset is DCF method. Now, how this fair value comes right what is the method? So, for example, I'm investing in a particular share just get it my price market 500 rupees is 500 rupees a share market listed here or may say this is the car.

[00:12:47]Now, if I'm if I'm able to buy this particular share at 500 rupees, what exactly is in my mind as an investor that if I'm buying if I'm giving this 500 rupees to a particular share, whether it is actually worth it or not worth it. Now, this thing can be answered in this particular method that whether to pay for 500 is worth or not worth.

[00:13:12]The outcome and the objective of this particular method is simply to get the intrinsic value fair value of the asset.

[00:13:19]Now, we can compare after calculating this intrinsic value, what happens we actually compare it with the market price right the market price comes from the market participants. Market participants, buyers and sellers. Now, these market participants can buy and sell as per their their own uh you know factors which is responsible for this. Sometimes there's a hike in the price because there are too too much of demand of a particular product. So, seller apni prices ko high put karta hai. Or sometimes there is a too much supply in the product. Bahut zyada supply hoti hai to uski price normally kam hoti jati hai because we have seen when the in any of any of this season, right?

[00:14:03]Just like mango. When it is coming off season mango 200 rupees kg lekin jab season iski supply badh jati hai to yahi mango 40 or 50 rupees per kg to it is just simply a matter of demand and supply. When there is a too much of demand and there is a less supply, price increases. And the vice versa. If there is a too much of supply and less buyers are there, so price automatically goes down. It is simple economic phenomenon. Right? So, this is responsible of price increasing and price decreasing in the market. So, it has own factor. But what price I need to pay I need to pay to buy something, that actually creates a question in the mind what is the right price that I can pay for the product. And the answer lies in this method. Okay. So, value in this particular method, if we call it discounting method, we call it discounting method. Because what we are doing, we are actually discounting the future cash flow. So, suppose in the first year this particular investment or some investment is giving me some cash flow in future. First year, I'm taking cash flow in the first year, cash flow in the second year, cash flow in the third year, cash flow in the fourth year, and cash flow in the fifth year.

[00:15:25]This 5 years I'm generating different different cash flows.

[00:15:29]What is the method that actually gives me the today's present value? The main concept lines where is the present value concept? So, what I'm doing I will be discounting this cash flow with some discounting rate.

[00:15:46]And I'm adding.

[00:15:47]So, this is discounting. This is discounting. I'm doing the discounting.

[00:15:53]I'm discounting with some rate. What exactly is the rate? We'll discuss.

[00:15:57]So, every year it is for 5 years I need to discount it by five different factors. And this is called present value factor. I discounting factor I'm doing. It is simply 1 upon 1 + R to the power 1 upon 1 + R to the power n.

[00:16:15]Right? So, suppose I'm investing in a bond that right now is giving me interest for the 5 years. And then after it it is redeemable bond at the same fair value.

[00:16:26]Same face value. Suppose I'm investing today 100 rupees in a bond that is giving me 7% interest every year, 7% cash flow every year. And at the end this bond is redeemable at face value.

[00:16:40]Right? So, the last year cash flow is 7 + 100. 7 is the interest, 100 is the principal amount that I'm getting back.

[00:16:47]Right? So, when I'm discounting it by certain rate, for example, 8%.

[00:16:57]So, it gives me it gives me the present value of the bond. The present value of the bond that the investor can pay in the market to buy these bonds. So, every year I'm discounting it by 8% like this.

[00:17:16]The last year cash flow is 107.

[00:17:19]Which is again which is again discounted by 8%. So, this give roughly the calculation, whatever the answer is, is giving me some value. Right? We call it present value of the bond. For example, I'm not calculating right now. For ex- For example, I'm uh simply just uh take this. There are two situation I'm taking. On calculating this particular premium, suppose I get 95 rupees. Right?

[00:17:49]95 rupees is the total sum. Or in the other case, if I get the value Okay, let it be. Let us just first take this. 95 rupees is the present value that I calculated with this. Now, I go in search in the market.

[00:18:07]So, this is the present value. This is a present value of bond. This gives me the fair and intrinsic value of the I can say the original uh the price that the investor should enter the investment in the bond is 95 rupees. Now, it is available in the market. It is available in the market. Suppose this bond is tradeable, and I'm getting this particular bond in the shares, I need to pay 90 7 rupees. So, the present worth is coming 95, but in market in market, it is available at 97 rupees.

[00:18:36]It is higher. Uh now, my intrinsic value, that is 95, is less than the market value. This is market value. This is market value. 97 is market value. So, this market value is higher. My intrinsic value is lower.

[00:18:53]In this situation, what I call it, is this particular bond is having less value than uh sorry, less value, less intrinsic value, and a higher market value. I will call it overvalued. I will call it overvalued. Because market is giving some premium to this particular bond. I can call it overvalued, right?

[00:19:16]And if if the situation is reversed, suppose in market, suppose in market this bond is available at 92 rupees, right? In that case, my intrinsic value is 95, which is higher than the market value. Now, this situation becomes where the market value where the market value is less than intrinsic value, it is called as undervalued. It is called as undervalued. Now, this is worth investing. So, when your intrinsic value is less than the market value, it is it is overvalued. And when your intrinsic value is higher than the market value, we call it undervalued.

[00:19:52]So, here we have learned about the overvaluation overvaluation and undervaluation roughly.

[00:20:01]Undervaluation, which is actually the core purpose of this particular model.

[00:20:05]This particular model, DCF model, right?

[00:20:08]Now, coming on to the real example, taking a stock, right? Because equity investment equity valuation. Let us take an equity valuation. Now, any stock which is traded in the market, we can calculate the value, equity valuation. Same way, same way, we just we we need what? We need future cash flows, future cash flows. So, future cash flows future cash flows in case of equity.

[00:20:34]Future cash flows in case of equity is what?

[00:20:38]It is either dividend cash dividend the company is uh paying cash dividend.

[00:20:46]And there is another term called free cash flow, free cash flow. So, these are the two different future cash flows that could be the future cash flows to the investors. This is something which is paid to the investor. This is a theoretical future cash flows which we assume that the company retain in the business and it belongs to the shareholder. It belongs to the shareholder, but the purpose to have this free cash flow to a growth purpose, right? It will be again reinvested in the business, right? So, when to take dividend and when to take FCFF as a future cash flow, we will discuss it now. Second thing, what will be the discount rate over here? Because in case of bond, we have simply discounted it discounted it by some rate, discounting rate. Now, here if you talk about the discounting rate, what will be the discounting rate here to discount this future dividend and free cash flow to firm, right? So, there are two things here in this, right? It is free cash flow to firm.

[00:21:49]And there are this is second category here, free cash flow to equity, right?

[00:21:54]Free cash flow to equity. So, this is the free cash flow available to the entire firm, right? In which we include the debt also and equity also. And this is purely an equity uh side when you remove the impact of debt.

[00:22:09]So, whatever the free cash flow which is left for the equity uh shareholders, we call it FCFE FCFE and FCFF, right? So, discounting rate, what will be the discounting rate when will be So, it could be it could be WACC, weighted average cost of capital, and it could be cost of equity.

[00:22:30]Cost of equity. Now, this will be the discounting rate where we can discount this future cash flow. So, when we are discounting when we are discounting the dividend, when we are discounting the dividend, we use cost of equity as a discounting factor.

[00:22:50]And when we are taking FCFF as our future cash flow, we use weighted average cost of capital. Weighted average cost of capital is nothing but it is the sum of cost of equity, cost of equity, and cost of debt.

[00:23:13]It is taking weighted average because this equity and data in different different proportion. Sometimes 70 40, sometimes 70 30 and 60 40. So, it is in different different proportion. The investment from the debt side and equity side is different. Therefore, we are taking weighted average cost of Now, what will be What will be the equation?

[00:23:33]How we can do the equity valuation?

[00:23:35]Right? So, first let us understand the dividend side. Let us understand the dividend. So, the approach that we use to find out the equity valuation taking dividend as a factor is dividend discount method, DDM method, dividend discount method.

[00:23:51]Dividend discount model, right? Dividend discount model, in which in which the future cash flow is taken dividend and the discounting rate is cash flow to equity. So, what will be the equation over here?

[00:24:11]It is value of share.

[00:24:14]What What we are doing? We are actually calculating the present value of future dividend, right? Present value of future dividend in this. Present value of future dividend.

[00:24:25]Now, for this, when we can use this present value of future dividend?

[00:24:30]Obviously, a company who has a dividend distribute a company market leader who company has a cash flow steady cash flow or who company has last year last 5 years continuously dividend pay every year next 5 years dividend pay pay कर सकती है. Who's company this method is good, but other who company new is growing company it is startup.

[00:24:57]So, in that case, uh this method I mean, if the company is not even distributing dividend, how we can apply this particular method, right? So, in that case, we will be using FCF method, free cash flow to firm method, right?

[00:25:10]So, here, we will take the dividend of first year, we will discount it by 1 + KE, that is cost of equity.

[00:25:19]Second year dividend divided by 1 + KE to the power 2, and third year dividend same way, 1 + KE to the power 3. This is nothing but cost of equity.

[00:25:34]Cost of equity. Now, this cost of equity comes from where? Who decides this cost of equity?

[00:25:41]Obviously, now I'm talking about the discounted Let us come back to our original discussion, that is expectation, right? What we are expectation is investing in a particular share, right? What will be the cost that I expect from the company? So, it is the expected return, which is, right? Of this cost of equity is nothing but the expected return.

[00:26:05]That investor expects, so investor expectation, investors' expectation. How this investors' expectation? So, it's a theoretical It's a something that how we can calculate, right? Being an investor, I can expect anything. So, there is one famous one famous model that is called CAPM method, right? Capital asset pricing model that gives us this. Now, this capital asset pricing model gives us the expected return of the investor, expected return of the investor. How investor expects? Basically, the investor start expecting from risk-free rate of return. You been a risk free get now return will be now risk free risk-free rate of return.

[00:26:46]For example, if I'm investing in a government bond, I'm getting 7% return.

[00:26:50]That is the risk-free rate of return without without taking risk. Without taking risk, I'm investing in this.

[00:26:56]Plus, if I'm taking risk, then what happens? So, I'll charge some premium.

[00:27:01]So, being an investor, I will charge some premium on behalf of taking my own risk. So, I'm taking risk, so I'm charging more return. I'm expecting more return, and that is nothing but the return which is given by the market and the difference between it. For example, the market is giving me 14% return, right? Nifty Sensex, this market is giving me 14% or 15% return. Right? So, my reason for taking risk is 14 minus 7% because 7% in any way I'm getting it, right? So, this is my This is my expected return. So, I'll start by creating my expectation from the risk-free rate of return.

[00:27:42]Okay, risk-free rate of return. It's the only way I can easily invest in the market. But if I take a risk, the market will premium charge.

[00:27:50]This is known as risk premium. You can invest charge risk in the market. Now, I'm investing in any security. Let us suppose ICICI Bank.

[00:28:07]Market say Now, I'm investing in a particular security. Now, this security is two times risky.

[00:28:13]The security is two times risky two times risky than the market. Suppose, so market is uh giving a market assumption 14% up or risk assumption to make a security investment in the market which is two times risky. So, what I will charge? I will increase I will multiply my I will increase my uh risk premium.

[00:28:38]Okay, so what I will do? I'll simply take this two over here. This two is nothing, a very famous term in finance called beta.

[00:28:46]Plus beta. So, this beta is nothing but the relative risk the investor assume as compared to the market. Right? So, this becomes my RM minus RF.

[00:28:58]This is CAPM equation which actually gives you the cost of equity, cost of equity. From here, we use this cost of equity to discount to discount to discount this. So, this is nothing but that cost of equity coming from coming from coming from the CA- CAPM model, CAPM model. So, this is coming from CAPM model, CAPM model. And this is nothing but expected return of investors. So, this is how the value of securities can be can be calculated. The value of securities can be calculated with the help of dividend discount model.

[00:29:45]So, we found that the value of equity, value of equity is nothing but the present value of future dividend or future cash flow. Today, we discussed the one of the method, dividend discount model, in which we have taken future cash flow as the dividend. And we have which we have discounted it back with the help of with the help of CA- with the help of equity cost of equity that comes from the CAPM model. Now, we found that uh equity valuation, present value of equity is nothing but the discounting of future dividend.

[00:30:21]Dividend discount model hum is safe formula name. This is not only the formula that we have learned. Right? It is not only the formula. This is we Sometimes the equation we found that it is only the DCF. Right?

[00:30:34]Yes, it formula name is right. You have a investing actually mindset but that is stock real value is key current price may money order but key was future cash flow may what do you do investor come in the weather market may short term in the short term may emotions but just after but long term may value ultimately cash flow or fundamental say he decided what do you or is he really DDM that is dividend discount model how many powerful lesson that price is what you pay but value is what you receive but you job of the kiss is talk or they can share if Oscar market price money they can so much money for she is key the company key future may shareholder school kid in a reward create credit this is the real essence of valuation and this is where the intelligent investing begins thank you so much >> [music] [music] [bell] [music]