Factors Influencing Pricing Multiples in India†

Bhargav Maniar*

The study attempts to understand the various factors influencing popular pricing multiples in the Indian context. The
accounting fundamentals, as observed by earlier researches, and return on investment are considered as factors
influencing pricing multiples. The reference securities are adopted from the Nifty index. 1-year return found
significance in three models—P/E, EV/EBITDA and Price to Sales. Next year growth in earnings, market beta,
dividend payout ratio, return on equity and profitability margin are important for certain specific multiples. The models
follow intuitive inferences (e.g., margin as a factor influencing sales multiple), show importance of absolute return on
investments and analyst forecasts (growth next year) vis-à-vis earlier researches.

Introduction
Valuation of equity shares is an important aspect of corporate finance. Valuation analysis is
performed on a number of corporate events such as public issue, merger, de-merger and ESOP
issuance. Analysts also value listed securities frequently to give their views on respective
securities (Buy/Sell/Hold/Overweight/Underweight). There are various techniques for valuing
an equity share. The most fundamental technique is discounting of future cash flows associated
with such equity share. However, estimating future cash flows involves multiple assumptions
and hence becomes highly subjective.
Multiple studies show a general preference towards more transparent and objective
measures like relative price to earnings ratio (P/E ratio) as compared to the more complex
valuation techniques like discounted cash flows (Lie and Lie, 2002). Barker (1999) studied
the various approaches used by different analysts and inferred that P/E ratio was of primary
importance, and technical analysis, and beta analysis are of little practical importance to
investment decisions. A similar study by Demirakos et al. (2004) also indicated preference for
multiples—67% of the analysts studied by the authors used multiples for valuation analysis.
Security analysts in India have been using multiples quite significantly as their international
counterparts. The author observed select analyst reports and found extensive usage of multiples
for valuation analysis.
The multiples are one of the simplest tools to compare the value of a firm. A multiple is
simply the ratio of a market price variable (e.g., stock price) to a particular value driver
(e.g., earnings) of a firm. Practitioners can compare firms within the same industry or past
transactions based on a value driver and calculate multiples. Such multiples can be applied to
the company under study and an estimate of its value can be generated. This methodology is

* Senior Associate, Investment Banking, ICICI Securities Limited, Mumbai, Maharashtra, India.
E-mail: maniar.bhargav@icicisecurities.com

† Disclaimer: This paper is prepared by Bhargav Maniar in his personal capacity. The opinions expressed in this
article are the author’s own and do not reflect or should not be construed as views of ICICI Securities Limited
or ICICI Bank Limited or any entity in ICICI Group in any manner whatsoever.

© 2014 Influencing
Factors IUP. All Rights Reserved.
Pricing Multiples in India 23
applied for fundamental analysis of listed companies, valuation analysis for unlisted companies
during mergers and acquisitions, equity investments, ESOP valuations, mergers, acquisitions, etc.
This brings us to the next question—What will be driving these multiples? How is a
security which is traded at 25 times its earnings different from the one which is traded at 10
times its earnings? There could be many fundamental factors which one can use to justify
differences in multiples such as profitability, strength of business model, cost structures, and
uniqueness of product portfolio. Many of them reflect in various financial ratios such as
profit margins, return on equity and relative growth forecasts, and could have bearing on
multiples. Popular multiples and the factors influencing such multiples are the subject matter
of this study. Specifically, the study intends to understand: What are the relevant fundamental
factors in the Indian context? Which factors have higher bearing on which multiple? And is
it possible to predict multiples using combination of various fundamental factors?

Literature Review
There have been various studies to understand what factors influence various multiples. One
of the most widely known and applied studies has been the Damodaran’s Regressions of Multiples
on Fundamentals being published in January every year since 2005. Damodaran has been
creating regression models on multiples including Price to Equity, Price to Book Value, Price
to Sales, Enterprise Value (EV)/Invested Capital, EV/Sales, and EV/EBITDA. The
fundamental parameters used to estimate these multiples include: Return on Equity (ROE),
[Dividend] Payout Ratio, Expected Growth in Earnings Per Share (EPS) for next five years,
Return on Invested Capital, Operating Margin, Beta, and Reinvestment Rate.
In one of the earlier studies, Kisor and Whitbeck (1963) developed a regression model of
P/E ratios with independent variables growth rate in earnings, dividend payout ratio and
standard deviation in EPS changes. They used data from the Bank of New York for 135 stocks
as base. A similar analysis by Cragg and Malkiel (1968) established growth rate, payout ratio
and beta for stocks as dependent variables. Zarowin (1990) studied the relationship between
P/E ratios and analyst forecasts of growth and concluded that long-term growth has a positive
impact on P/E ratios.
Leibowitz and Kogelman (1990), (1991) and (1992) studied the relationship between P/E
ratios and the excess returns earned on investments, which they titled franchise opportunities,
in a series of articles on the topic, noting that for a stock to have a high P/E ratio, it needs to
generate high growth in conjunction with excess returns on its new investments.
Beaver and Morse (1978) correlated P/E ratios of a particular portfolio for 14 years and
observed that the P/E ratios show greater correlation with each other in the near term. The
correlation reduces as the time progresses. This implies that near term forecasted earnings
could have higher influence on P/E ratios vis-à-vis long-term growth forecasts. Kane et al.
(1996) showed the influence of aggregate market risk and volatility, and conveyed that P/E
ratios decrease as volatility increases. Liu et al. (2002) compared different multiples of select
firms between 1982 and 1999 and suggested that multiples of forecasted EPS do best in
explaining pricing differences.

24 The IUP Journal of Applied Finance, Vol. 20, No. 1, 2014

 In the Indian context, Zahir and Khanna (1982) observed dividend per share as a significant
determinant of share price. Kumar and Hundal (1986) looked at the influence of various
factors such as dividend per share, EPS, net sales per share, book value per share, net worth,
retention ratio, leverage ratio and growth in total assets on market price of shares in a
regression model. The analysis highlighted dividend per share and leverage as important
factors. Tuli and Mittal (2001) studied the factors influencing P/E ratios of Indian equities
and observed variation in market prices and dividend payout ratios as important factors.
Sehgal and Pandey (2007) observed the behavior of multiples, their means and standard
deviation for the period 1990 to 2007. They also created regression models for various
multiples on dividend payout, EPS and market capitalization based on BSE 30 securities.
Their study indicated that the price to earnings multiples do not show greater influence of
the above-mentioned fundamentals. Price to book value and price to sales showed greater
relationship with these fundamentals. Their inference was that price to book value and price
to sales were more objective multiples—P/E could be influenced by arbitrary factors and
market sentiments.
Gillan (1990) observed the impact of size and low/high P/E ratio on securities listed on
New Zealand Stock Exchange and concluded that neither the size nor the fact that the P/E
ratios was high or low had any considerable impact on return generated by a security or a
portfolio thereof. Obaidullah (1991) and Mangala and Mittal (2005) observed listed securities
in India and found that stocks with low P/E ratios have outperformed those with high P/E
ratios. Dhankar and Kumar (2007) examined monthly P/E ratios of BSE 100 companies over
10-year period (1996-2005) to conclude that expected return does not have consistent
relationship P/E ratios.

Methodology
The current analysis intends to examine the factors influencing different multiples. Hence,
two statistical tools, namely, correlation and regression, have been used. These tools have
been used by earlier researches as well—notably Kisor and Whiteback (1963), Liu et al.
(2002), and Damodaran (2005)—who observed various fundamental factors and derived
relevant factors in their respective contexts. The author maintains similar methodology—
selecting factors from earlier researches and adding return on investment dimension to
the analysis.
The following multiples were found popular in the Indian context: Price to Earnings
(P/E), EV/ EBITDA (found more relevant to manufacturing or engineering companies),
Price to Sales (found more relevant in trading and manufacturing companies) and Price to
Book Value (popular in companies engaged in financial services like banks, NBFCs). The
study uses these four multiples as dependent variables in four different regression models.
The National Stock Exchange (NSE) is the dominant stock exchange in India with market
share of 74% in equity market and 98% in equity derivatives. Nifty is the index developed by
NSE representing the top 50 companies traded on the exchange weighted by market
capitalization. The Nifty securities cover 22 sub-sectors of the Indian economy and represent

Factors Influencing Pricing Multiples in India 25

67.27% of the free float market capitalization of the stocks listed on NSE as on September 30,
2012. The author uses these securities as dataset for analysis. The entire base data (pricing,
fundamental as well as return parameters) were collected from the Bloomberg terminal
accessed at different intervals during March 2013. Bloomberg is one of the popular data
source for security analysis.
The following financial figures have been used in the analysis for Nifty securities:
• Trailing 12 Months Sales;
• Trailing 12 Months Operating Profit After Tax;
• Trailing 12 Months Earnings Before Interest, Tax, Depreciation and Amortization
(EBITDA);
• Book Value or Total Equity (Shareholders’ Funds) as on March 31, 2012; and
• Total Debt to Equity Ratio as on March 31, 2012.
Taking a note of the previous works, Table 1 presents the fundamental factors observed for
the above multiples:

Table 1: Fundamental Factors and References

Fundamental Factor References

Unlevered Beta (Beta)*
Best estimate of growth rate in earnings
per share for next financial year
(next year growth)
Best estimate of growth rate in
earnings per share for next five
years (5-year growth)
Cragg and Malkiel (1968), Kane et al. (1996), Tuli and
Mittal (2001) and Damodaran (2005 onwards)
Cragg and Malkiel (1968), Beaver and Morse (1978),
Zarowin (1990), and Liu et al. (2002)
Cragg and Malkiel (1968), Beaver and Morse (1978),
Zarowin (1990), and Liu et al. (2002)

Dividend Payout Ratio Kisor and Whitbeck (1963), Cragg and Malkiel (1968),
Zahir and Khanna (1982), Kumar and Hundal (1986)
and Tuli and Mittal (2001)

Return on Equity (ROE) Leibowitz and Kogelman (1990), (1991), and (1992),
and Damodaran (2005)

Return on Capital Employed (ROCE) Leibowitz and Kogelman (1990), (1991), (1992), and
Damodaran (2005)

Trailing 12 Months Net Margin Damodaran (2005)

(Net Margin)
Trailing 12 Months EBITDA Damodaran (2005)
Margin (EBITDA Margin)

Total Debt to Equity (Leverage) Damodaran (2005)

Note: * The ratio showing higher correlation has been used in regression models for respective multiples.

26 The IUP Journal of Applied Finance, Vol. 20, No. 1, 2014

 While the fundamental factors are important, there is one more perspective which can be
added to the analysis: the fact that the securities are also an investment instrument. The
performance may not be compared as against a fundamental parameter but on absolute return
the security could have yielded in a reference period (long term or short term). The author
introduces two factors to capture this perspective:
• Previous business year return (1-year return)
• Previous 5 business years’ return (5-year return)
The study will deploy two-step analysis. The first step will be to check how the factors
correlate with the chosen multiples and choose the most correlating variables in order to
avoid cluttering of regression models. The second step will be to generate regression models
for respective multiples. The resultant regression model can be specified as follows:
Mit = t + tXit +it
where M stands for the multiple,  captures the average effect of those factors that are not
explained by respective fundamental factors, X stands for fundamental factors deployed in
the model and  is the coefficient of the fundamental factor on the multiple.

Results
The study intends to explain the variations among the multiples. Table 2 shows the mean
and deviations from mean among the multiples under study.

Table 2: Mean and Standard Deviation of Multiples Used

Multiple Mean SD Coefficient of Variation
Price to Earnings 16.94 10.29 0.61
EV/EBITDA 12.05 6.14 0.51
Price to Book Value 4.03 4.40 1.09
Price to Sales 2.61 2.10 0.80

The highest variability, as measured by coefficient of variation, is observed in the price to book
value multiple and the least within EV/EBITDA.1 The variability is considered important by
analysts, especially when the security under observation is to be benchmarked against an industry
average. As EV/EBITDA has least variability, it is more popular with analysts. This multiple
focuses on operating performance and negates the potential impact of capital structure decision.

Correlations
The influencing parameters have been segregated into:
1. Accounting fundamentals such as profitability margin, leverage, ROE, and ROCE.
2. Market risk—Beta.
1
The author has excluded banking stocks in the entire analysis pertaining to EV/EBITDA multiple as the
EVITDA or EV is not relevant in banking sector.

Factors Influencing Pricing Multiples in India 27

 3. Growth parameters—1-year growth, 5-year growth.
4. Return parameters—1-year return, 5-year return, and dividend payout.
Correlations between the multiples and the chosen factors are as mentioned in Table 3.

Table 3: Correlation Between Multiples and Fundamentals

Accounting Fundamentals Risk Growth Return

Multiple Profit- Lever- Next Long 1st 5th Dividend
ROE ROCE Beta
ability age Year Term Year Year Payout

Price to 0.04 –0.38 0.40 0.51 –0.56 0.69 0.26 0.64 0.58 0.48
Earnings

EV/ –0.02 –0.14 0.32 0.41 –0.42 0.31 0.27 0.65 0.52 0.43
EBITDA

Price to –0.10 –0.30 0.65 0.76 –0.50 0.32 0.25 0.44 0.52 0.58
Book Value

Price to Sales 0.47 –0.21 0.22 0.29 –0.37 0.32 0.16 0.56 0.47 0.32

Note: Profitability indicates PAT margin, except EV/EBITDA multiple for which the reference is EBITDA
margin.

The highest correlation is observed between price to book value multiple and ROCE,
followed by ROE and price to book value multiple. ROE and ROCE are measures of capital
efficiency and hence could be a proxy for how two companies with same amount of net worth
could be differentiated.
All the multiples show notable correlation with market beta. P/E ratio is the most sensitive
to market beta, followed by price to book value ratio. Negative correlation indicates general
risk aversion—securities with higher beta or higher risk would command lower value.
Significant correlation can be observed between P/E and earnings forecast for next financial
year. In general, next year growth appears to be more important than long-term growth in
pricing of securities.
Return provided by the security in last financial year (return is a composite of change in price
of the security net of any bonus and dividend paid during last one year) showed higher bearing on
all multiples, except price to book value which was more correlated to dividend payout.

Regression Models
The influencing factors were arranged as independent variables in decreasing order of their
correlation with the respective multiple, and regression exercise was run. The factors showing
less than +/– 0.2 correlations were ignored for modeling purpose. Table 4 presents the outputs
of the models of each multiple.

28 The IUP Journal of Applied Finance, Vol. 20, No. 1, 2014

Factors Influencing Pricing Multiples in India Table 4: Regression Models

Dependent Variables

Independent Variables Price to Earnings EV/EBITDA Price to Book Value Price to Sales

Coefficients p-Value Coefficients p-Value Coefficients p-Value Coefficients p-Value

Intercept 17.89 6E-05* 11.31 1E-03** 2.99 1E-01* 0.89 3E-01*

1-Year Return 0.20 8E-04* 0.15 4E-03* 0.05 0.1*** 0.04 1E-03**

Margin 0.07 5E-07*

5-Year Return –0.13 0.25 –0.02 0.86 –0.01 0.78 0.02 0.50

Beta –6.29 0.05** –2.1 0.39 –3.12 0.04** –0.06 0.93

Growth Next Year 0.11 3E-04** 0.00 0.84 –0.01 0.35 0.00 0.92

Dividend Payout 0.11 0.14 0.06 3E-01* 0.07 5E-02** 0.01 0.44

ROE 0.07 0.37 0.05 0.45 0.14 3E-04* 0.00 0.93

Leverage 0.00 0.8 0.00 0.79 0.00 0.02**

Long-Term Growth –0.06 0.6 –0.01 0.9 –0.02 0.66

R2 0.72 0.49 0.63 0.66

Significance F 4E-09 8E-04 7E-07 2E-07

Note: * Significant at 1% level, ** Significant at 5% level, *** Significant at 10% level.

29
 All the models showed considerable R2—a metric which shows how much of the variations
in the dependent variable are explained by the model. The parameters used explain 72% of
the variations in P/E multiple (the highest among all multiples), followed by price to sales
(66%), price to book value (63%) and EV/EBITDA (49%).
F-Statistic is a result of F-test and indicates the probability of the results of the model
being just a matter of chance. Value less than 0.05 indicates that the model fits the dependent
variable well and the probability of it being merely a chance is less than 5%. All the four
models were meeting this test.
In terms of significance of individual model elements (indicated by p-value), the intercept
for all the models was significant. In P/E model, the significant variables were growth next
year, 1-year return and market beta. In EV/EBITDA model, 1-year return and dividend payout
were significant.
1-year return shows higher influence of stock movement during last year. A stock which
has been performing well—as measured by various technical parameters like moving averages
(e.g., when a research indicates the stock is above 200 day moving average), levels (support,
barriers, etc.), stock movement (2% up, 5% up, breaching circuit levels), etc.—is likely to
garner greater investor attention. Especially, investors who have a short-term perspective
are more likely to take decision based on such indicators. This could be one of the reasons
why 1-year return comes up as a significant influencing factor for both P/E and EV/EBITDA,
the more popular among multiples. Dividend payout is also a reflection of short-term return
on investment, and could be of similar use as the technical parameters. Growth next year has
found significance in P/E multiple, which could be a reflection of extensive reference of next
year growth forecast developed by various analysts.
In price to book value model, ROE, dividend payout and beta were significant variables.
Price to book value reflects the premium paid over net-worth of a company. The companies
generating higher return on net-worth (ROE) are likely to be valued higher (analogy to yield
to maturity and bond prices).
In price to sales model, 1-year return, margin and leverage were significant. Profit margin
is an important factor for valuing the quality of earnings. Higher margin would reflect higher
operating strength, better bargaining power, higher value addition, etc. Significance of profit
margin in the model corroborates intuitive judgment. Leverage also finds reflection in this
model. Sales reflect a general perception about size of the business. For two comparable
companies of equal sizes, the one with higher leverage is expected to be riskier and may
command a lower multiple.

Conclusion
On the whole, 1-year return, growth estimate for next year, dividend payout and market beta
found place in more than one model. This indicates that market considers these four factors
as critical in valuing a stock—irrespective of which multiple is deployed.

30 The IUP Journal of Applied Finance, Vol. 20, No. 1, 2014

 The study shows a departure from Damodaran’s regression models for emerging markets
(refer Appendix for latest available models – January 2012) in terms of margins as an
influencing factor and the relative importance of return on equity/return on invested
capital.
We may also infer a bias towards short-term performance—given the importance attached
to 1-year return and growth forecast for next year vis-à-vis 5-year return and long-term
growth. This is in line with Beaver and Morse (1978), who indicated that market values are
near term forecasts more than long-term growth forecasts. The study also indicates general
preference for absolute returns on investment vs. fundamental performance—given the
importance attached to 1-year return across multiples.
The study is an attempt to understand investors’ perspective on valuing securities in
India. The technique used and parameters discovered can be deployed by analysts to add a
perspective to their stock analysis. They may estimate various multiples with the regression
models and compare the resultant price with the current price and bring out any potential
upside/downside.
The source data, however, represents the state of affairs at a particular point in time
(March 2013). The results may change if the study is done in retrospective or going forward.
The exercise can be performed again and/or at particular intervals, e.g., Damodaran has been
performing and publishing such regressions every year.
The study can be extended by comparing results at different points in time to analyze
how the factors change over time and figure out if at all there is any shift in investors’
perspective. 

References
1. Barker R (1999), “The Role of Dividends in Valuation Models Used by Analysts and
Fund Managers”, The European Accounting Review, Vol. 8, No. 2, pp. 195-218.

2. Beaver W and Morse D (1978), “What Determines Price-Earnings Ratios?”, Financial

Analysts Journal, Vol. 34, No. 4, pp. 65-76.

3. Cragg J G and Malkiel B G (1968), “The Consensus and Accuracy of Predictions of the
Growth of Corporate Earnings”, Journal of Finance, Vol. 23, No. 1, pp. 67-84.

4. Damodaran A (2005), Valuation Approaches and Metrics: A Survey of the Theory and
Evidence, Now Publishers, Hanover, Massachusetts.

5. Demirakos E, Strong N and Walker M (2004), “What Valuation Models Do Analysts

Use?”, Accounting Horizons, Vol. 18, No. 4, pp. 221-240.

6. Dhankar Raj S and Kumar Rajesh (2007), “Determinations of Price-Earnings Ratio”,

Decision, July-September, pp. 150-162.

Factors Influencing Pricing Multiples in India 31

 7. Gillan (1990), “An Investigation into CAPM Anomalies in New Zealand: The Small
Firm and Price-Earnings Ratio Effect”, Asia Pacific Journal of Management, Vol. 7,
December Special Issue, pp. 63-78.

8. Kane A, Marcus A J and Noh J (1996), “The P/E Multiple and Market Volatility”,
Financial Analysts Journal, Vol. 52, No. 4, pp. 16-24.

9. Kisor M Jr. and Whitbeck V S (1963), “A New Tool in Investment Decision-Making”,

Financial Analysts Journal, Vol. 19, No. 3, pp. 55-62.

10. Kumar and Hundal (1986), “Stock Market Integration Examining Linkages Between
India and Selected Asian Markets”, Foreign Trade Review, Vol. 45, pp. 3-18.

11. Leibowitz M L and Kogelman S (1990), “Inside the PE Ratio: The Franchise Factor”,
Financial Analysts Journal, Vol. 46, No. 6, pp. 17-35.

12. Leibowitz M L and Kogelman S (1991), “The Franchise Factor for Leveraged Firms”,
Financial Analysts Journal, Vol. 47, No. 6, pp. 29-43.

13. Leibowitz M L and Kogelman S (1992), “Franchise Value and the Growth Factor”,
Financial Analysts Journal, Vol. 48, No. 1, pp. 16-23.

14. Lie E and Lie H (2002), “Multiples Used to Estimate Corporate Value”, Financial Analysts
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15. Liu J, Nissim D and Thomas J (2002), “Equity Valuation Using Multiples”, Journal of
Accounting Research, Vol. 40, No. 1, pp. 135-172.

16. Mangala D and Mittal R K (2005), “Anomalous Price Behavior: An Evidence of Monthly
Effect in Indian Stock Market”, The Indian Journal of Commerce, Vol. 58, No. 2,
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17. Obaidullah M (1991), “The Price/Earnings Ratio Anomaly in Indian Stock Markets
Decision”, A Journal by IIM Calcutta, Vol. 18, July-September, pp. 183-192.

18. Sehgal S and Pandey A (2007), “The Behavior of Price Multiples in India
(1990-2007)”, Asian Academy of Management Journal of Accounting and Finance, Vol. 5,
No. 1, pp. 31-65.

19. Tuli N and Mittal R K (2001), “Determination of Price-Earnings Ratio”, Finance India,
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20. Zahir M A and Khanna Y (1982), “Determinants of Stock Prices in India”, The Chartered
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32 The IUP Journal of Applied Finance, Vol. 20, No. 1, 2014

Websites and Databases
1. http://people.stern.nyu.edu/adamodar/
2. http://www.nseindia.com/content/indices/ind_niftylist.csv

Select Analyst Reports

1. GEPL Capital, “Venkys India: Initiating Coverage”, December 5, 2011.
2. Goldman Sachs, “India: Insurance: Life”, October 26, 2012.
3. ICICI Securities, “Voltas: Initiating Coverage”, April 22, 2013.

Appendix
Damodaran’s Emerging Market Regressions – January 2012

Model R2 (%)

Price to Earnings = 15.48 + 9.03 ROE – 2.77 Beta + 2.91 Payout 4.3

PBV = 0.77 – 0.17 Beta + 1.16 Payout + 5.78 ROE 20.8

PS = 1.30 – 0.18 Beta + 0.63 Payout + 7.80 Net Margin 32.1

EV/Invested Capital = 1.28 – 0.40 RIR + 4.64 ROIC – 0.03 (Debt/Capital) 27.4

EV/Sales = 1.67 – 2.70 t + 8.25 Operating Margin – 0.002 IC – 0.29 RIR 31.7

EV/EBITDA = 15.01 – 10.70 t – 3.04 RIR 2.2

Note: RIR = Re-Investment Rate; ROIC = Return on Investment Capital; IC = Interest Coverage
Ratio; t = Tax Rate.

Reference # 01J-2014-01-02-01

Factors Influencing Pricing Multiples in India 33

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