Standard Assumptions — Important Notice
The assumptions documented on this page are our standard defaults — applied consistently across all companies we analyse. They are based on Damodaran's corporate finance framework as taught at NYU Stern School of Business. Where a company's specific characteristics require a deviation from these defaults — a different beta, a different Lambda, a non-standard tax rate — we document that deviation explicitly in the relevant report and explain the reason. Valuations are sensitive to assumptions. A 1% change in terminal growth rate or WACC can move intrinsic value by 15-30%. We show sensitivity tables in every valuation report so you can see the range of outcomes under different assumption sets and form your own view.
Risk Free Rate
How we estimate the risk-free rate for India
Method — Credit Default Swap (CDS) Spread Differential
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We derive the India risk-free rate by stripping the default spread from the observable India 10-year government bond yield. The default spread is computed as the difference between India's Credit Default Swap (CDS) spread and the USA's CDS spread.
India Risk-Free Rate (RFR) = India 10yr Yield − (India CDS Spread − USA CDS Spread) — CDS = Credit Default Swap, a market measure of country default risk
= 7.03% − (1.38% − 0.58%) = 6.23%
= 7.03% − (1.38% − 0.58%) = 6.23%
We use this approach because India does not issue dollar-denominated sovereign bonds. The direct USD comparison method — used for countries like Brazil or Mexico — is not available for India.
Source: India 10yr yield — Investing.com · CDS spreads — World Government Bonds
Nominal vs Real Terms
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We value all companies in Indian Rupees in nominal terms. All cash flows, growth rates, and discount rates are expressed in nominal INR. Valuing in real terms would require converting every number in the financial statements — adding complexity without adding insight for the companies we cover.
The risk-free rate, Equity Risk Premium (ERP), growth rates, and FCFF (Free Cash Flow to the Firm) projections must all be in the same terms — nominal or real. We consistently use nominal throughout.
When we deviate
Company-specific
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The standard assumption is that the risk-free rate is the same for all Indian companies — it is a macro input, not a company input. We do not deviate from this unless there is a specific reason — for example, if we are valuing a subsidiary of a foreign parent in a different currency.
Equity Risk Premium
How we build the India Equity Risk Premium (ERP)
Mature Market Equity Risk Premium (ERP) — Damodaran implied ERP
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We use Damodaran's implied ERP for the United States as the mature market premium. This is the ERP backed out from current S&P 500 prices and expected cash flows — a forward-looking estimate rather than a historical average.
We use the January update from Damodaran's annual dataset. The mature market Equity Risk Premium is refreshed once a year at the start of each calendar year and held constant for that year's analyses.
Mature Market Equity Risk Premium — ERP (Jan 2025) = 4.18%
Source: Prof. Aswath Damodaran — damodaran.com — January dataset
Country Risk Premium for India
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The country risk premium captures the additional return investors require for investing in India relative to a mature market. We derive it from the default spread adjusted for the relative volatility of Indian equities to Indian government bonds.
CRP = Default Spread × (σ Nifty 500 / σ India Bond)
= 0.80% × (38.67% / 16.67%) = 1.86%
= 0.80% × (38.67% / 16.67%) = 1.86%
We use the Nifty 500 as the Indian equity index — not the Nifty 50 — because it is a broader representation of the Indian market. Standard deviations are computed from weekly returns annualised by multiplying by √52.
India ERP (Equity Risk Premium) = Mature Market ERP + CRP (Country Risk Premium) = 4.18% + 1.86% = 6.04%
Beta
How we estimate systematic risk
Bottom-up Beta — not regression beta
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We use a bottom-up beta rather than a regression beta. Beta measures how much a stock moves relative to the overall market — a beta of 1 means it moves in line with the market; above 1 means more volatile; below 1 means less volatile. Regression betas are noisy — they depend heavily on the time period chosen, the index used, and the return frequency. A single company's regression beta has a large standard error.
Bottom-up betas start with the unlevered sector beta from Damodaran's annual dataset for the relevant industry. This is then relevered (adjusted back for the company's own debt level) using the company's actual debt-to-equity ratio and marginal tax rate via the Hamada equation.
Levered β = Unlevered β × [1 + (1 − Tax Rate) × (D/E)]
Source: Sector unlevered beta (beta before accounting for the company's debt) — Prof. Aswath Damodaran (damodaran.com) · Company and peer betas collected manually from Yahoo Finance / Investing.com
When we deviate
Company-specific
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For conglomerates operating across multiple segments we compute a weighted average beta (market risk measure) — each segment's unlevered beta weighted by the segment's proportion of total revenue or operating income. We document the segment weights used in the report.
Lambda
Country risk exposure — not the same for every company
Lambda — Country Risk Exposure, based on revenue geography
Company-specific
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Lambda measures what proportion of the Country Risk Premium (CRP) a specific company should bear — based on what proportion of its revenues come from India versus internationally. This is always company-specific — it is never a standard assumption.
Cost of Equity (Ke) = Risk-Free Rate (Rf) + Beta (β) × (Mature Market Premium (MMP) + Lambda (λ) × Country Risk Premium (CRP))
λ = proportion of revenues exposed to India country risk
λ = proportion of revenues exposed to India country risk
A company earning 100% of revenues in India carries a Lambda of 1.0 — it bears the full country risk premium. A company earning 100% of revenues outside India carries a Lambda of 0.0 — it bears none of the country risk premium despite being listed in India.
We estimate Lambda from the geographic revenue breakdown in the segment reporting note of the annual report. Where geographic breakdown is not disclosed we default to Lambda of 1.0 and note this in the report.
Cost of Equity
What return does an equity investor require from this business?
Cost of Equity (Ke) — CAPM with Country Risk
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The Cost of Equity is the minimum return an equity investor expects from holding shares in this company — given the risk they are taking on. We compute it using the Capital Asset Pricing Model (CAPM), extended to account for India's country risk.
The formula brings together four inputs we compute separately — the risk-free rate, beta, the mature market equity risk premium, and India's country risk premium adjusted for this company's geographic exposure via Lambda.
Cost of Equity (Ke) = Risk-Free Rate (Rf) + Beta (β) × (Mature Market Premium (MMP) + Lambda (λ) × Country Risk Premium (CRP))
Where: Rf = India risk-free rate · β = company beta · MMP = USA implied ERP · λ = revenue-weighted country risk exposure · CRP = India country risk premium
Where: Rf = India risk-free rate · β = company beta · MMP = USA implied ERP · λ = revenue-weighted country risk exposure · CRP = India country risk premium
For example — if the risk-free rate is 6.23%, beta is 0.90, the mature market premium is 4.18%, Lambda is 1.0, and the country risk premium is 1.86%, the cost of equity works out to: 6.23% + 0.90 × (4.18% + 1.0 × 1.86%) = 6.23% + 5.44% = 11.67%. This means equity investors in this company require at least 11.67% per year to justify holding the stock.
Source: All inputs computed from preceding sections — risk-free rate, beta, ERP, Lambda, CRP
Cost of Debt
How we estimate the pre-tax and after-tax cost of debt
Synthetic Rating — Interest Coverage (IC) ratio to default spread table
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Most Indian listed companies do not have external credit ratings. For unrated companies we use Damodaran's synthetic rating approach — mapping the interest coverage ratio to a credit rating and then to a default spread from his IC-to-spread table.
Pre-tax cost of debt (Kd) = Risk-Free Rate + Default Spread (from Interest Coverage ratio)
After-tax Kd = Pre-tax Kd × (1 − Marginal Tax Rate)
After-tax Kd = Pre-tax Kd × (1 − Marginal Tax Rate)
For companies with external credit ratings from CRISIL, ICRA, or CARE we use the rated cost of debt directly — derived from the interest expense divided by average total borrowings.
Source: Prof. Aswath Damodaran — Ratings, Interest Coverage Ratios and Default Spreads — January update
Marginal tax rate
Company-specific
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We use the Indian statutory corporate tax rate of 25.17% (including surcharge and cess) as the default marginal tax rate. Where a company is in a tax holiday, uses the old tax regime, or has a significantly different effective tax rate, we note the deviation and adjust accordingly.
WACC
Blending the cost of equity and cost of debt into one discount rate
Weighted Average Cost of Capital (WACC)
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WACC is the blended rate of return that a company must earn on its invested capital to satisfy both its equity investors and its debt holders. It is the rate we use to discount future free cash flows back to today's value. A higher WACC means a lower valuation — because investors are demanding more return to compensate for the risk they are taking.
WACC = [Cost of Equity (Ke) × E/(D+E)] + [After-tax Cost of Debt (Kd) × D/(D+E)]
Where E = market value of equity · D = market value of debt · D+E = total capital
Where E = market value of equity · D = market value of debt · D+E = total capital
We use market values — not book values — to weight equity and debt. Book value of equity is an accounting number that reflects historical costs; market value reflects what investors believe the business is worth today. Using book value would distort the WACC for companies trading significantly above or below book.
Source: Cost of Equity from preceding sections · Cost of Debt from IC ratio / credit rating · Market values from NSE/BSE on analysis date
Free Cash Flow
Which cash flow measure we use — and why
We use FCFF for most companies — FCFE where appropriate
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Free Cash Flow to the Firm (FCFF) is the cash the business generates after all operating expenses, taxes, and reinvestment — before any payments to debt or equity holders. It belongs to all providers of capital. We discount FCFF at WACC (Weighted Average Cost of Capital) to arrive at the total value of the firm, and then subtract net debt to get the value of equity.
FCFF = EBIT (Earnings Before Interest & Tax) × (1 − Tax Rate) + Depreciation − Capital Expenditure − Change in Working Capital
Firm Value = FCFF discounted at WACC · Equity Value = Firm Value − Net Debt
Firm Value = FCFF discounted at WACC · Equity Value = Firm Value − Net Debt
We use FCFF as the default for most Indian listed companies because it is cleaner — it is not affected by how the company is financed, making it easier to compare across companies with different debt levels. It also makes the capital structure analysis and valuation consistent.
Free Cash Flow to Equity (FCFE) is the cash left over after paying interest and repaying debt — the cash that belongs only to equity shareholders. We use FCFE instead of FCFF for companies where the financing structure is central to the business model — primarily banks, non-banking financial companies (NBFCs), and other financial institutions where debt is not a financing choice but an operating input. In those cases FCFF is not meaningful and FCFE discounted at the cost of equity gives a more accurate picture.
FCFE = Net Income + Depreciation − Capital Expenditure − Change in Working Capital + Net Borrowings
Equity Value = FCFE discounted at Cost of Equity (Ke) — used for banks and NBFCs
Equity Value = FCFE discounted at Cost of Equity (Ke) — used for banks and NBFCs
We always state clearly in the report which cash flow measure we have used and the reason for the choice.
Source: Financial statements — P&L, Balance Sheet, Cash Flow Statement
Terminal Value
The most important — and most sensitive — assumption
Gordon Growth Model — stable growth perpetuity
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Terminal value is computed using the Gordon Growth Model — FCFF (Free Cash Flow to the Firm) in the terminal year divided by WACC (Weighted Average Cost of Capital) minus the terminal growth rate. Terminal value typically represents 60-80% of total firm value. This is why the terminal growth rate assumption is the single most important number in any DCF.
Terminal Value = FCFF(terminal) / (WACC − g) where WACC = Weighted Average Cost of Capital, g = terminal growth rate
where g = terminal growth rate ≤ nominal GDP growth rate
where g = terminal growth rate ≤ nominal GDP growth rate
Terminal growth rate is capped at India's long-run nominal GDP growth rate — we use 6-7% as the upper bound. A company cannot grow faster than the economy it operates in forever. In practice we use 5-6% for most mature Indian businesses.
Sensitivity analysis — always shown
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Because terminal value is so sensitive to the growth rate and WACC assumptions, we always present a two-variable sensitivity table — intrinsic value per share across a range of WACC (Weighted Average Cost of Capital) and terminal growth rate combinations. This lets you see the range of possible outcomes and form your own view on the right assumptions.
We also back-calculate the implied growth rate at the current market price — showing exactly what growth assumption the market is embedding in the price today.