Sector-Specific Valuation (Banks, Insurance, Real Estate)
Intuition
The same valuation multiple applied to a bank and a software company would be meaningless. Different industries have fundamentally different economics, how they use assets, how they earn returns, what risks they face, and what drives long-term value. Standard EBITDA-based frameworks break down for financials because debt is an operating input for banks, not just a financing choice.
Learning sector-specific valuation frameworks is a prerequisite for serious equity analysis. An analyst covering HDFC Bank needs to think in terms of Net Interest Margin, Return on Assets, and Price-to-Book, not EV/EBITDA. An analyst covering an insurance company needs to understand embedded value and value of new business (VNB).
India's listed equity market is heavily weighted toward financials, which makes understanding bank and NBFC valuation particularly important.
Mechanics
Banks and NBFCs:
- Primary metrics: NIM (Net Interest Margin), GNPA (Gross Non-Performing Assets) %, PCR (Provision Coverage Ratio), ROA, ROE
- Primary multiple: P/BV (Price-to-Book Value), justified by ROE:
Justified P/BV = (ROE − g) ÷ (Ke − g) - NEVER use EV/EBITDA for banks: debt is an operating input, not just capital structure
- Gordon Growth: Equity value = Book Value × P/BV multiple
Insurance Companies:
- Valuation basis: Embedded Value (EV) = Net Asset Value + Value in Force (VIF)
- VIF = PV of future profits from existing policy book
- Key multiple: P/EV and P/VNB (Price to Value of New Business annualised)
- Growth driver: VNB Margin = VNB ÷ Annualised Premium Equivalent (APE)
Real Estate:
- Listed developers: NAV-based (Net Asset Value = GDV of projects − construction costs − net debt)
- GDV = Gross Development Value (saleable area × expected realisation)
- REITs: Yield-based (Distribution yield, cap rate)
Oil & Gas / Commodity:
- EV/2P Reserves, EV/EBITDA at mid-cycle prices
- Strip pricing DCF: discount cash flows at forward commodity curve
Telecom:
- EV/EBITDA, EV/Subscriber; ARPU growth is the key revenue driver
From the research
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