Valuation is often presented as a precise figure: ₹500 per share, 12× earnings, or a 15% expected return.
In reality, valuation is a range because the future is uncertain.
A discounted cash flow model depends on assumptions about growth, margins, reinvestment and the discount rate. Even a small change can materially affect the result.
For example, imagine a business expected to generate ₹100 crore in annual free cash flow:
- At a 10% required return, that cash flow could be worth roughly ₹1,000 crore.
- At a 12% required return, its value falls to about ₹833 crore.
- That is a 17% difference caused by just a two-percentage-point change.
Market Cycles Change the Price Investors Will Pay
The same company can receive very different valuations at different points in a market cycle.
During optimistic periods, investors may accept a lower margin of safety and pay 25× earnings. When liquidity tightens or expectations weaken, that multiple might fall to 18×—a decline of 28%, even if the company’s earnings have not changed.
This is why I separate:
- Business value: what the company may reasonably be worth.
- Market price: what investors are willing to pay today.
- Margin of safety: the gap between the two.
A good company is not automatically a good investment. The price still matters.
My Approach
I prefer to build base, bull and bear cases instead of relying on one target price.
If my estimated value is between ₹450 and ₹550 per share, buying at ₹520 offers limited protection. Buying at ₹350 creates a more meaningful margin of safety if the underlying thesis remains intact.
The goal is not to predict the future perfectly. It is to understand the range of possible outcomes, recognize where we are in the market cycle and avoid paying a price that assumes everything will go right.
Valuation is not about false precision. It is about disciplined decision-making under uncertainty.