DCF valuation — plain English
A DCF model is the closest thing investing has to a first-principles calculation of value. But it is only as good as the assumptions you put in — and those assumptions are where it gets honest.
The core idea: money now vs money later
₹1,000 in your hand today is worth more than ₹1,000 promised three years from now. Because you could invest the money today, and because the future is uncertain. This is the time value of money, and it is the foundation of all DCF valuation.
A Discounted Cash Flow (DCF) model asks: what is the sum of all the future cash flows this business will generate, converted back into today's rupees? That sum is its intrinsic value.
Intrinsic value = Present value of all future free cash flows. "Present value" means we shrink future cash flows to account for time and uncertainty — we discount them.
The three inputs that drive everything
1. Revenue / earnings growth rate. How fast will the business grow over the next 5–10 years? This is the most powerful lever. A small change in assumed growth rate produces a very large change in intrinsic value. Stay conservative.
2. Discount rate (WACC). This is your hurdle rate — the minimum return you require. For Indian companies, a 10–12% discount rate is common. A higher discount rate makes future cash flows worth less today.
3. Terminal value. At some point you assume the business will grow at a slow, stable rate forever (3–5%). This terminal value often represents 60–80% of the total DCF output.
Why the terminal value is both important and dangerous
A small change in terminal growth rate — from 4% to 5% — can change the intrinsic value by 20–30%. That is a feature, not a bug. It forces you to be honest about how much confidence you have in the long-term story.
If your DCF says a stock is worth ₹1,000 but tiny changes to your assumptions put it anywhere from ₹700 to ₹1,400, you don't have a precise value. You have a range — and that range is the honest answer.
How to actually use a DCF
The most useful thing a DCF does is reverse valuation. Instead of asking "what is this company worth?" ask: "What does the current price imply about growth?"
Use DCF as a sanity check, not a target price machine. If the market price implies assumptions you find unrealistic, that is useful signal.
What a DCF cannot do
A DCF cannot account for regulatory changes, a new competitor, a founder leaving, technology disruption, or a recession. A DCF is a structure for thinking, not a substitute for thinking.
See it in practice
Try the interactive DCF for Tata Motors