In my humble opinion all mathematical valuation techniques are based on historical correlation. In business past does not necessarily repeat in future. For evaluation metrics like PEG, DCF etc are good to give comfort in making final buying decisons but real rational should be dependant on many facets like understanding of business model, scalability opportunity etc.

 

In fact valuation techniques vary greatly from  sector to sector. I recommend you to read a book Beating Strat from Peter Lynch. Its a great book in which Peter has opened his heart on various types of companies and explained how he come acrss a valuation of them.

 

A must read for all!

 

I am giving below once example for right prise evluation. Let me know if you see any flaw here:

 

Today's prise: 600

PE: 28.6

MktCap/Sales(FY08-09) : 8187/1770 = 4.6

 

Historical data:

 

	Mar '05	Mar '06	Mar '07	Mar '08	Mar '09
EPS	8.33	10.12	11.78	17.04	21.34
CAGR %	26.51%

 

I am assuming a safe growth rate of 20% and PE of 20 as worst case scenario for next 3 years. It gives me following:

 

P/E by 2012	20
EPS Growth rate	20%
	2009	2010	2011	2012
EPS	21.34	25.608	30.7296	36.87552

 

So EPS of 36.87 gives me following:

 

Prise by 2012	737.5104
Current Prise	600
CAGR	7.12%

 

So if i get the Col-Pal by say 550 then i will be earning CAGR of 10.27% for 3 years.

 

Is something wrong above, am i seeing a margine of safety above? Typically FMCG scrips gets PE of 25-30 in best time so upside is also look higher.

 

Looking forward to your comments.