How to value HDFC & Reliance Industries?
Sum of the parts (SOTP) valuation is one of the valuation technique of calculating intrinsic value of a company/ business. Let us discuss about SOTP valuation technique. We will also take a look at how HDFC Limited and Reliance Industries are valued.
- Sum of the parts (SOTP) valuation , as its name suggests, is basically valuing each business segment of a company separately and then adding them together to get the intrinsic value of the company.
- This type of valuation technique is especially useful while valuing a conglomerate i.e. company having businesses in different segments.
- While carrying out SOTP valuations, we usually discount the entire valuation by 20%. This is also called as conglomerate discount.
- By dividing the SOTP valuation of the company by number of shares, we get the intrinsic value per share.
- Whenever a company announces its results, if it has a subsidiary it reports standalone as well as consolidated financial statements.
- Consolidated financial statements are basically created by combining company’s various segments , subsidiaries, etc to give an idea about a company’s financial performance as a whole.
- On the other hand, standalone financial statements just include the performance of core company without including subsidiary’s performance.
- Recently, we have seen the discussions around SOTP valuation , mainly w.r.t Reliance Industries. Let us take a look at how it is valued with this approach.
- It has mainly two subsidiaries – Reliance Jio and Reliance Retail.
- It is a perfect example of conglomerate with business segments operating in telecom , retail and petrochemical sectors.
- To value Reliance Industries, it is better to value each segment individually and then add the valuation of three segments to get the total intrinsic value.
- Currently, overall it is being valued at ~ INR 13 lakh crore. This translates to a valuation of ~ INR 2100 per share.
- It has a core business of housing finance. Its subsidiaries like HDFC Bank, HDFC Life, HDFC AMC, etc operate in various business segments.
- Thus, to value HDFC Limited better, we can value each segment separately and then add the valuation of four segments to get the overall valuation.
- Currently, it is being valued at ~ INR 4 lakh crore on the basis of SOTP valuation. This roughly translates to value of INR 2200 per share.