The Peers’ Perspective - Relative Valuation

Welcome back. In the previous chapter, we mastered Valuation Multiples-the "language" of the market. Today, we apply that language through Relative Valuation.

If DCF (Intrinsic Valuation) is like valuing a house based on the rent it will generate over the next 30 years, Relative Valuation is like valuing it based on what the house next door just sold for. In the fast-paced 2026 market, this is the most common method used by investment bankers and retail traders alike because it reflects real-time market sentiment.

1. The Core Philosophy: "The Law of One Price"

The underlying assumption of relative valuation is that similar assets should sell at similar prices. If two companies have the same growth, same risk, and same cash flows, they should theoretically trade at the same multiple.

• The Goal: To determine if a specific stock is "Relatively" undervalued or overvalued compared to its peer group.
• The Reality: No two companies are identical. Therefore, the "art" of relative valuation lies in making adjustments for differences in growth, risk, and quality.

2. The Four-Step Workflow of Relative Valuation

To perform a professional relative valuation in 2026, follow this sequence:

Step 1: Identify "Comparable Companies" (Comps)

You need to build a "Peer Group." A good peer has:

• Same Industry: Don't compare a Steel company to a Software company.
• Similar Size: Compare Mid-caps with Mid-caps.
• Similar Growth Profile: A startup growing at 50% shouldn't be compared to a legacy firm growing at 5%.

Step 2: Select and Calculate Multiples

Choose the multiples that matter for that industry (P/E for IT, P/B for Banks, EV/EBITDA for Manufacturing). Ensure you use Forward Multiples (based on 2026/27 estimates) to capture future potential.

Step 3: Standardize and Benchmark

Calculate the Mean (Average) and Median multiple for the peer group. The median is often better as it isn't distorted by one "outlier" company with a crazy valuation.

Step 4: Apply the Multiple to Your Target

If the median P/E for the sector is 20x, and your target company earns ₹50 per share, its "Relative Fair Value" is ₹1,000.

• If current price < ₹1,000: The stock is relatively cheap.
• If current price > ₹1,000: The stock is relatively expensive.

3. Comparing the Two Worlds

4. The 2026 "Sectoral Premium"

In the 2026 Indian market, we often apply a "Quality Premium" or a "Governance Discount."

• If Company A has much better management than its peers, we might give it a 10% premium over the industry average P/E.
• This is why Asian Paints or Titan often trade at much higher multiples than their competitors-the market is willing to pay more for their "consistency."

Equiscale Tip: Be careful of "Comparative Overvaluation." If an entire sector is in a bubble (like the 2026 "AI-Hype" stocks), a company might look "cheap" relative to its peers, even though the whole group is massively overpriced. Always use a DCF as a "Sanity Check."

5. Summary: The Practical Shortcut

Relative valuation is the most efficient tool for:

• Initial Screening: Quickly finding the cheapest stocks in a sector.
• Pricing IPOs: Deciding what price a new company should list at.
• M&A Deals: Determining a fair "takeover" price.