Part III · Investing · M06 · week 3 · 20 h

Fundamental analysis and valuation

Reading Indian listed companies; the three statements as one system; DCF and the value-driver formula; cost of capital for India; multiples and reverse DCF; margin of safety as a distribution; forensic accounting; quality frameworks; sector cycles; the Jhunjhunwala, Satyam and Yes Bank cases.

Start reading · Learning outcomes

Builds on M02 Statistics of returns

Prerequisites M02 (returns, compounding, sample statistics). Discrete sums and geometric series, derivatives, convexity, root-finding, basic Monte Carlo. Mean–variance optimisation is used in 6.5 and proved in full in M14 · 14.1. Time: ~20 hours (week 4). Half of that should go to the main exercise: value one real NSE-listed company end to end with the tools here. Primary texts: Damodaran, Investment Valuation (3rd ed., Wiley 2012), chs. 2–12 and 17–18; Koller, Goedhart & Wessels, Valuation: Measuring and Managing the Value of Companies (McKinsey, 7th ed., Wiley 2020), chs. 2–3; Schilit, Financial Shenanigans (4th ed., 2018); Mukherjea, Coffee Can Investing (2018).

You already read a P&L as an operator. This module teaches you to read one as an outside minority shareholder: someone who cannot see the ledgers, must infer the business from filings, and pays a price that already embeds the market's forecast. The questions change from "how do we grow?" to "what growth is the price assuming, how much capital does that growth consume, and can I trust these numbers?"

Learning outcomes

Derive the identities linking the income statement, balance sheet and cash-flow statement, and prove that free cash flow to the firm equals the cash paid to all capital providers.
Derive the present value of a growing annuity and a growing perpetuity, and value a company with a two-stage FCFF DCF whose timing convention you can state exactly.
Derive the value-driver formula $V = \text{NOPAT}_1(1-g/\text{ROIC})/(\text{WACC}-g)$ and prove that growth adds value if and only if ROIC exceeds WACC.
Derive the justified P/E and P/B multiples from the Gordon model and use them to read what a market multiple implies.
State the CAPM, sketch its derivation from mean–variance optimisation, and build an INR cost of equity from Damodaran's July 2026 India equity risk premium.
Solve a reverse DCF for implied growth by root-finding, and prove the root is unique.
Express a margin of safety as a probability statement using a Monte Carlo distribution of intrinsic value, and prove that point estimates understate mean value when value is convex in the discount rate.
Compute the Beneish M-score and Piotroski F-score from two years of statements, apply the Coffee Can filter exactly, and run the India red-flag checklist on a real annual report.

Sections ≈ 2 h 45 min of study

Foundation 4 sections · ≈ 30 min
Core 11 sections · ≈ 2 h 5 min
Advanced 1 section · ≈ 10 min

Learning outcomes Foundation 5′
6.1 Reading an Indian listed company from the outside Foundation 10′
6.2 The three statements as one system Core 10′
6.3 Discounting: perpetuities, Gordon growth, and the two-stage DCF Core 10′
Figure DCF sensitivity to WACC and terminal growth
6.4 Growth, reinvestment and return on capital Core 10′
Figure Growth creates value only when RONIC exceeds WACC
6.5 Cost of capital: CAPM, India's equity risk premium, WACC Core 10′
6.6 Multiples as compressed DCFs, and the reverse DCF Core 10′
Figure Reverse DCF: the growth a price implies
6.7 Margin of safety as a statistical statement Advanced 10′
Figure Intrinsic value as a distribution
6.8 Forensic accounting: Beneish, Piotroski, and an Indian checklist Core 15′
6.9 Quality frameworks: moats, Coffee Can, Lynch, Fisher, Kedia, Prasad Core 10′
6.10 Sector cycles: capex, credit and PSU banks Core 10′
6.11 The index baseline Foundation 5′
6.12 Case studies Core 30′
Summary of key results Foundation 10′
Readings and resources Core 5′
Facts that change Core 5′