Appropriation of valuation methods to the economic conditions

Abstract

From the early 21st century, the Indian economy has witnessed frequent ups and downs in its growth. There have been much economic expansion and recessions cycles from 1995's Dot com bubble to today's novel covid pandemic. But in recent pandemic times, even if the covid crashed the markets contrarily, the Reserve bank of India, through the Indian economic report of the month August, said that 2021 could turn out to be India's year of IPO booms". So, significant turbulence gets created in the investors to value the stocks appropriately to the economic conditions. Debut offerings made from the unicorns - basically unlisted start-ups - which has been kicked off by Zomato's exceptional IPO that people have oversubscribed 38 times is setting domestic stock markets on fire and global investors in a frenzy. The phenomenon amazed the investors because the economy and the stock markets were moving in contrary directions. Investors were in a dilemma on how to react to the peculiar economicmic behavior. Without knowing the proper value of stocks, investors are hard-pressed to know when to ouy or sell sha. lnvestors may miss the buying and selling opportunities if their investment decision is based only on a stock's market value. Therefore, investors need a standardized rule book explaining the valuation of the listed companies in sync with the movement of the economy. This research tries to conclude on "selection of appropriate valuation method in sync with the economic cycles (expansion or recession)." The work has focused on identifying different economic cycles and various equity valuation methods through secondary research. To test the assumed hypothesis, nine FMCG peer companies were chosen and tested upon multiple valuation methods to find the accuracy of results compared with the actuals within the sample time frame from FY 2013 to FY 2022. Primarily, the research concludes that the Discount cash flow method is effective in predicting the undervalued companies in the times of economic expansion. It also concludes that the P/B valuation ratio supports the results of the DCF method. Secondly, comparable company analysis will be reliable during recession periods because those multiples account for the current market situations for valuations. The research also provides the reference for future research and concludes the need for future literature in the Indian Context in this area.