Which is the appropriate terminal growth rate and market premium for DCF Valuation for Indian Companies?
The assumption in your question is that Indian companies, and by extension the market in general, are in the middle of a growth phase and so it is difficult to determine the appropriate terminal growth rate and MRP. I would argue that it’s a moot point. I would also argue the fact that they are Indian is a moot point. Presumably you are looking at multiple companies in the same or similar industries or at least using DCF as part of a relative valuation. If that’s the case, then the starting points don’t really matter. What matters is the consistency of the process. The best way to go about it is to make a set of assumptions about what you think the base case is for cash flow growth rate, discount rate and terminal growth rate. I would probably use US numbers or UK since the markets are the largest and oldest and have the most empirical data to support them. But it doesn’t really matter what the number is – just use the same number for each company, whether its 2% or 10%. I would think
