📚 PASS Research Analyst Certification Examination Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 10.2 — Why Valuations are required

Imagine you are drafting an initiation report for a mid-cap IT firm listed on the NSE. Your senior analyst asks for a valuation range, prompting you to choose between a Discounted Cash Flow (DCF) model and a Peer-based Price-to-Earnings (P/E) multiple approach. While both methods attempt to quantify the firm’s worth, they operate on fundamentally different philosophies that every NISM-certified analyst must navigate to form a balanced thesis.

Intrinsic valuation, primarily represented by the DCF model, views a company as the present value of its future cash flows. It requires you to make granular assumptions regarding revenue growth, operating margins, and the weighted average cost of capital (WACC). This approach is robust when you have deep insight into the firm’s long-term competitive advantage, as it relies on the internal financial performance of the entity rather than market sentiment.

In the Indian context, DCF is essential for infrastructure or utility projects where cash flow predictability is higher than peer-group consistency.

Conversely, relative valuation—often called ‘market-based’ valuation—estimates value by comparing the target to similar listed companies. You look at benchmarks like P/E, EV/EBITDA, or Price-to-Book ratios to see how the market prices comparable risks. This method is highly effective for sectors like FMCG or banking, where historical trading multiples are well-established and investor sentiment is a significant driver of price discovery.

However, relative valuation assumes the market is generally efficient and that the peer group is accurately priced; if the entire sector is in a bubble, your relative valuation will simply mirror that overvaluation.

In practice, a rigorous research report rarely relies on one method in isolation. Most professional analysts use relative valuation to check the ‘reasonableness’ of their intrinsic model results. If your DCF yields an intrinsic value significantly higher than your peer-based estimate, you must reconcile that discrepancy. You might find that the market is overlooking a specific growth catalyst for your target firm, or perhaps your own growth assumptions in the DCF model are overly optimistic.

Triangulating these methods allows you to present a defensible investment recommendation that stands up to institutional scrutiny. 1 2

Nuance

⚠️ Nuance
The most common pitfall is the belief that ‘Relative’ valuation is merely a shortcut to avoid complex modeling. In reality, selecting a peer group is a sophisticated qualitative task; including firms with different cyclicalities or capital structures will render the multiple meaningless. Analysts often fall into the trap of ‘cherry-picking’ peers that align with a pre-existing bullish or bearish view, which compromises the integrity of the valuation range.

Check Your Understanding

Practice Question 1

An analyst is valuing a loss-making start-up in the Indian e-commerce sector using a series of industry-standard metrics. Which valuation methodology is most appropriate, and why?

Practice Question 2

Which of the following describes a primary limitation of using a relative valuation approach for an Indian manufacturing company?

This is a companion read for Section 10.2 — Why Valuations are required from PASS Research Analyst Certification Examination by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.

  1. WACC (Weighted Average Cost of Capital) represents the minimum return a company must earn on its existing asset base to satisfy its creditors and shareholders. ↩︎

  2. EV/EBITDA is frequently preferred over P/E as it is capital structure neutral, making it superior when comparing companies with different levels of debt. ↩︎