Understanding Relative Valuation Multiples Through Real-World Examples!

In the previous article we looked at the various types of relative valuation multiples such as earnings multiple, revenue multiple and how and when they should be used and if you haven’t read that already here’s the link: Relative Valuation: Different Types, Usage, and Understanding Multiples in Detail!  Now in this article we’ll look at some of the practical examples where we will be using relative valuation multiples.

To provide context, we’ve focused on the IT-Software industry and selected companies with a market capitalization above Rs 50,000 crore for simplicity. Firms trading above the average or median P/E such as Persistent Systems and Coforge are likely priced for higher earnings growth, which may also indicate overvaluation. In contrast, companies like TCS and Infosys trade below the peer average, suggesting potential undervaluation, though this may reflect their maturity and slower growth prospects.

While EV/EBITDA is useful when capital structures vary, the uniformly low debt (as seen in D/E ratios) across IT firms makes the P/E multiple an appropriate valuation metric here and if the D/E ratios would’ve been varied significantly then EV/EBITDA would’ve been more appropriate to use.

P/E and EV/EBITDA Table:

(Source: Screener.in)

Book Value-Based Multiples

To assess relative valuation among private sector banks, we’ve selected listed banks with market capitalizations above Rs 50,000 crore. We’ve used the Price-to-Book (P/B) ratio, which is a key metric for valuing financial institutions since their asset base drives performance. Banks like ICICI Bank (3.23x) and HDFC Bank (2.96x) trade above the average (1.99x) and median (1.76x), indicating the market assigns them a premium due to stronger return ratios, franchise quality, and growth potential. Conversely, banks like IndusInd Bank (1.05x) and Federal Bank (1.53x) trade below average, which may reflect concerns around asset quality, growth consistency, or capital efficiency.

(Source: Screener.in)

Other Relative Valuation Multiples:

Apart from P/E, P/B, and EV/EBITDA, other relative valuation multiples are used based on specific business models or financial situations. Price-to-Sales (P/S) and EV/Sales are most useful when companies are not yet profitable, common in high-growth tech, e-commerce, or biotech firms, where sales reflect market potential even if earnings are negative. Cash flow-based multiples like Price-to-Cash Flow or EV/Operating Cash Flow are preferred in capital-intensive industries or when earnings are distorted by accounting treatments, as cash flows offer a clearer picture of operational strength. Industry-specific multiples (e.g., EV/Subscriber in telecom, EV/Bed in healthcare, EV/BOE in oil & gas) are used when traditional financial metrics don’t fully capture the business’s value drivers, and such operational metrics serve as better comparables within the sector.

What’s Next?

Now that you’ve understood what relative valuation is, how it works, and when to use it across different companies and industries, we’ll move on to Asset-Based Valuation in the next article. Stay tuned as we work on that and meanwhile, try applying relative valuation yourself, analyse why some companies command higher multiples while others trade at a discount.