Valuation

Common methods include P/E ratio, P/B ratio, DCF (discounted cash flow), and comparing with peers.

A stock can be 'overvalued' (price higher than worth) or 'undervalued' (price lower than worth).

Valuation is an estimate, not a fact. Different analysts can reach very different numbers.

In the Indian market, the most popular valuation metric is the P/E ratio. But different sectors require different approaches. For banks like HDFC Bank or ICICI Bank, analysts prefer Price-to-Book (P/B) ratio because banks' assets are mostly financial instruments with clear book values. For real estate companies, Net Asset Value (NAV) is the preferred method.

The Nifty 50 index itself has a valuation that tells you whether the overall Indian market is cheap or expensive. When the Nifty P/E is around 18-20, the market is considered fairly valued based on historical averages. When it crosses 25-28, many value investors start reducing their equity exposure and moving to cash or debt instruments.

A common mistake Indian retail investors make is confusing a cheap stock price with a cheap valuation. A stock trading at ₹10 per share is not automatically cheaper than one trading at ₹5,000 per share. What matters is the valuation multiple. Infosys at ₹1,500 with a P/E of 25 could be cheaper than a penny stock at ₹5 with a P/E of 100 or no earnings at all.

For long-term wealth creation in India, buying quality companies at reasonable valuations has historically been the most reliable strategy. Investors who bought HDFC Bank, Asian Paints, or TCS during market corrections, when valuations dipped below their historical averages, and held for 5-10 years have consistently earned excellent returns on both NSE and BSE.