This is a hypothetical situation wherein Sam , India’s best financial analyst and a firm believer in fundamental analysis(DCF valuation) is being interviewed in the Devil’s Advocate show by our own Karan Thapar..
After all the formal introduction about the guest is done , CNN IBN cameras now focus on the two persons in the closed room : Karan and Sam…
Karan : Sam …Do you think discounted cash flow valuations can work?
Sam : Why not?...(Usual stuff for about 15 seconds before Karan interrupts)
Karan : Then what is the reason you valued ‘Adani and Co’ at 2500 crore about an year ago and today you are valuing it at 600 crore..Are you factoring in the public sentiments..
Sam:(Like a typical guest who faces Karan thapar) : My valuation was not 2500 crore..Media had interpreted it wrongly.
Karan:(Takes out the report prepared by Sam an year ago and reads it for him)..So what does the last statement mean? Why have you reduced the value by 75% today
Sam:(Some usual stuff..not very convincing though)
Karan: Ok , Sam ..the critics of DCF point out that it is not possible to find a reasonable estimate beyond three-four years..But you seemed to have predicted a high growth cash flows till 15 years before assuming a stable period(terminal value)..How on earth can you predict the absolute cash flow for 15th year from today
Sam:Karan..But we had sufficient assumptions which justify the growth and the cash flows(Very unsatisfactory answer indeed…But that’s the way it happens when you are caught offguard)…
Karan : What do you think about the market? Are they driven by sentiments or are they driven by fundamentals…
Sam(Like a batsman who has been long waiting long for that one loose delivery …pounces upon this)………..So I would say its completely driven by fundamentals…Markets are efficient Karan!!
Karan(He never asks a question without a follow up..and here it comes precisely)..So how on earth will you justify the 2000 point rise of the market when the election results were announced and UPA was elected back to power…Were they sentiments or did the cash flows of the Indian companies as a whole change all of a sudden…Are you not making a strong statement when you say that markets can’t be driven by sentiments…
Sam(tries to save his face…justifies for about 30 seconds before karan interrupts again)
Karan: I want to interrupt you here Sam…But if you can’t justify everything through fundamentals then relative valuation seems to be a better choice for investors..Compare two companies based on their multiple ratios…That seems to be efficient, time saving and also easily interpretable…
Sam: But it can’t justify the real value of a company…If a sector is completely overvalued then you can’t really identify it…
Karan throws a couple more questions before shaking hands with Sam towards the end of the show…
After all the formal introduction about the guest is done , CNN IBN cameras now focus on the two persons in the closed room : Karan and Sam…
Karan : Sam …Do you think discounted cash flow valuations can work?
Sam : Why not?...(Usual stuff for about 15 seconds before Karan interrupts)
Karan : Then what is the reason you valued ‘Adani and Co’ at 2500 crore about an year ago and today you are valuing it at 600 crore..Are you factoring in the public sentiments..
Sam:(Like a typical guest who faces Karan thapar) : My valuation was not 2500 crore..Media had interpreted it wrongly.
Karan:(Takes out the report prepared by Sam an year ago and reads it for him)..So what does the last statement mean? Why have you reduced the value by 75% today
Sam:(Some usual stuff..not very convincing though)
Karan: Ok , Sam ..the critics of DCF point out that it is not possible to find a reasonable estimate beyond three-four years..But you seemed to have predicted a high growth cash flows till 15 years before assuming a stable period(terminal value)..How on earth can you predict the absolute cash flow for 15th year from today
Sam:Karan..But we had sufficient assumptions which justify the growth and the cash flows(Very unsatisfactory answer indeed…But that’s the way it happens when you are caught offguard)…
Karan : What do you think about the market? Are they driven by sentiments or are they driven by fundamentals…
Sam(Like a batsman who has been long waiting long for that one loose delivery …pounces upon this)………..So I would say its completely driven by fundamentals…Markets are efficient Karan!!
Karan(He never asks a question without a follow up..and here it comes precisely)..So how on earth will you justify the 2000 point rise of the market when the election results were announced and UPA was elected back to power…Were they sentiments or did the cash flows of the Indian companies as a whole change all of a sudden…Are you not making a strong statement when you say that markets can’t be driven by sentiments…
Sam(tries to save his face…justifies for about 30 seconds before karan interrupts again)
Karan: I want to interrupt you here Sam…But if you can’t justify everything through fundamentals then relative valuation seems to be a better choice for investors..Compare two companies based on their multiple ratios…That seems to be efficient, time saving and also easily interpretable…
Sam: But it can’t justify the real value of a company…If a sector is completely overvalued then you can’t really identify it…
Karan throws a couple more questions before shaking hands with Sam towards the end of the show…
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