Sectoral Analysis Of Key Sectors Of Indian Markets Using Discounted Cashflow Valuations
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Abstract
This study looks into the use and application of the discounted cash flow (DCF) method for valuing firms across various industries. When valuing a company using the DCF method, future cash flows are predicted and a risk-adjusted discount rate is applied to estimate intrinsic value. However, the effectiveness of this method is highly dependent on the industry in question. The study analyzes DCF valuations and market price comparisons across sectors including Banking and Financial Services, Healthcare and Pharmaceuticals, Information Technology, Fast-Moving Consumer Goods (FMCGs), and Automobiles. It is also worth mentioning that Healthcare and especially the IT industry are sectors with stable revenues and, thus, more predictable cash flows. In contrast, the FMCG and Automobile industries contain more intangible assets and exhibit more volatile cash flows on a cyclical basis. The Financial Services industry also has cash flow volatility due to direct dependence on regulatory and economic cycles. The primary conclusion of such studies published is that while DCF can capture value, the precision with which they do so is industry specific and in certain industries, a multi-model approach including other models will be necessary to capture the value of the firm.
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