Relative Valuation

A relative valuation methodology compares a company's value to that of its rivals or industry
peers to determine the financial worth of the business. Absolute value models, which attempt
to calculate a firm's intrinsic value based on its projected future free cash flows discounted to
their present value, without any reference to another business or industry average, are an
alternative to relative value models. Investors can use relative valuation models, much like
absolute value models, to decide whether to acquire stock in a firm.
The price-to-earnings (P/E) ratio is one of the most often used relative valuation multiples. It
represents a company's share price as a multiple of its earnings and is computed by dividing
the stock price by earnings per share (EPS). A firm with a high P/E ratio is viewed as
overpriced since it sells at a greater price per dollar of profits than its competitors. Similarly,
a firm with a low P/E ratio is considered cheap since it trades at a lower price per dollar of
EPS. This framework can use multiple prices to determine relative market value. As a result,
if an industry's average P/E is 10x and a particular business sells at 5x earnings, it is
undervalued compared to its competitors.
In the Relative valuation model, we have made, we have compared the relative valuation of
Nestle with various industries that have a very similar business model to Nestle’s, such as
Dabur India, Britannia Inds, Bambino Industries, and Tata Consumer Products.
The following table shows the relative valuation of Nestle along with that of similar
industries
EV /
    CMP Rs. P/E PEG EBITDA P/ BV
1 Dabur India 567 55.63 7.82 38.04 11.96
2 Britannia Inds. 3747 61.67 5.42 39.17 35.28
3 Bambino Industries 300 26.18 1.39 12.32 3.18
4 Tata Consumer Products 840.25 73.37 3.63 39.63 5.11

Market Average 54.21 4.57 32.29 13.8825

NESTLE INDIA 79.8 4.4 49.89 78.68

Since a firm with a higher P/E value is trading at a higher price per dollar of earnings than its
peers is considered to be overvalued, here the P/E value of Nestle is 79.8, which is higher
than its peers. Therefore Nestle is trading at a higher cost and is thus overvalued.