Multiplier Approach Vs Constant Growth Model: Valuation of Selected Indian Pharma Stocks

Valuation is the first step towards intelligent investing. When an investor attempts to determine the worth of his shares based on the fundamentals, it helps him to make informed decisions about what stocks to buy or sell. The investment decision to buy or sell a security is always based on the comparison of its intrinsic value with that of its market value. Because Fundamental analysts believe that market value of each share follows it intrinsic value. The intrinsic or the fundamental value is the realization of all the future cash flows in the form of capital appreciation and dividend. This empirical study aims at assessing the fundamental value or intrinsic value of a share using Gordon and Shapiro model (1956) of general dividend discounted model (the model assumes a unique dividend growth rate as “g) and Multiplier Approach of valuation using P/E ratio. Both the approaches are based on the principle that the value of any investment is the present value of all its future cash flows. The present study used t-test to check the deviation between the calculated values with that of market value in order to check any significance difference is present or not. It focuses on Indian Pharmaceutical sector taking “A” category shares into consideration. The present study checks whether the share is overpriced or under priced by comparing the calculated fundamental value with that of the market value.