§ 01 — Two Different Claims
Each method is an argument, not a formula.
A discounted cash flow analysis asserts something specific: this business is worth the cash it will generate over its life, discounted back at a rate that reflects the risk of actually receiving it. It is an argument about the future — about revenue the business can win, margins it can hold, capital it must reinvest, and how confident anyone can honestly be about any of that.
The comparable company method asserts something entirely different: this business is worth what the market is paying, today, for similar earnings or revenue elsewhere. It is an argument about the present — that observable prices for listed peers or recent transactions carry information about your business, once size, growth, margin and liquidity differences are adjusted for.
Neither claim is inherently superior. Each is only as strong as the evidence behind it, and the evidence available differs sharply from business to business.
§ 02 — Where DCF Leads
When the future is the best evidence
DCF earns primacy when the business has genuinely differentiated economics — a contract book, a regulatory position, a product transition, a turnaround — that no peer multiple can capture. It also leads when true peers barely exist: a niche manufacturer or a single-product technology company may have no honest comparable, and forcing one produces a number that only looks rigorous.
The condition is that the projections can be defended. A DCF built on management forecasts that were never stress-tested is arithmetic performed on hope. And there is a structural failure mode every reviewer knows to look for: when the terminal value contributes the overwhelming share of the concluded figure, the valuation is really a bet on a single growth-and-margin assumption in perpetuity, dressed up as a ten-line model. Garbage in remains garbage out, however elegant the discounting.
§ 03 — Where Comparables Lead
When the market is the best evidence
Comparables earn primacy when there is an active market speaking clearly — liquid listed peers in the same economic reality, or a run of recent transactions in the sector at disclosed values. In those conditions, the market approach is not a shortcut; it is direct evidence of what informed buyers pay, and a DCF that departs wildly from it owes everyone an explanation.
The failure mode is false comparability. Two companies can share an industry classification and share almost nothing economically — different customer concentration, different capital intensity, different growth. In India this bites hard for niche sectors: the listed universe is thin, and analysts too often stretch a peer set until it includes companies five times the size with entirely different margin structures. A multiple borrowed from the wrong peer is not evidence. It is decoration.
§ 04 — Why Credible Reports Triangulate
The reconciliation is where the thinking shows
This is why a credible valuation report rarely "chooses a method" at all. Standards — IVS, the ICAI Valuation Standards — expect the valuer to consider all applicable approaches and to reconcile them into a concluded range, weighting each by the quality of its evidence for this business, on this date, for this purpose.
The reconciliation section is where an experienced reviewer goes first, because it is where thinking cannot be templated. A reviewer looks for four things:
- Do the methods talk to each other? If the DCF and the comparables diverge by a wide margin, the report must explain why — not quietly average the gap away.
- Are the weights reasoned? "60/40" is a conclusion, not a justification. The report should say why the income approach evidence deserves more (or less) confidence than the market evidence here.
- Is the terminal value disciplined? Implied exit multiples from the DCF should be sanity-checked against the peer multiples actually used — a growth assumption that implies a multiple no peer trades at is a red flag.
- Were peers screened or collected? A defensible peer set documents who was excluded and why, not just who made the list.
A single-method report can be right. But a triangulated report shows its work — and when the number is challenged by an auditor, a tax officer, a counterparty or a court, showing the work is most of the defence.
§ 05 — The Real Question
Not "which method" — "which evidence"
So the honest answer to "DCF or comparables?" is that it is the wrong question. The right question — the one the valuation standards, the reviewers and ultimately the courts are all asking — is: which evidence deserves the most weight for this business, on this date, for this purpose? Sometimes that is a forecast you can defend line by line. Sometimes it is a market speaking plainly through prices. Usually it is both, weighed openly against each other. A valuer's job is not to pick a formula. It is to make that weighing explicit — and to stand behind it.
CA Devansh Shah — Chartered Accountant (Member, ICAI) · IBBI Registered Valuer, Securities or Financial Assets