DCF (Discounted Cash Flow) analysis estimates what a business is worth today based on the cash flows it will generate in the future. Every rupee earned in the future is worth less than a rupee today — DCF accounts for this time value of money by "discounting" future cash flows back to the present.
It is the most theoretically rigorous method of stock valuation and forms the bedrock of fundamental analysis. When done carefully with conservative assumptions, it gives you an evidence-based anchor for the fair value of a business — independent of what the market is currently pricing in.
The Two-Stage DCF Model
Most real businesses go through two phases of growth, which is why the two-stage model is the standard starting point for stock valuation:
Stage 1 — High-Growth Phase: A defined period (typically 5–15 years) where the business grows faster than the economy. During this phase, each year's projected cash flow is discounted back to today at your required rate of return (WACC). The sum of these discounted cash flows gives you the Present Value of the Growth Phase.
Stage 2 — Terminal Value: After the high-growth phase, the business is assumed to grow at a stable, perpetual rate in line with long-run GDP. The terminal value captures the present value of all cash flows from year N onwards, compacted into a single number using the Gordon Growth Model formula. This is then discounted back to today.
The intrinsic value is the sum of both stages: PV of high-growth cash flows + PV of terminal value.
Intrinsic Value = Σ [FCFₙ / (1+r)ⁿ] + [TV / (1+r)ᴰ]
where TV = FCFₚ₊₁ / (r − g)
FCFₙ = Free Cash Flow (or EPS) in year n of the high-growth phaser = Discount Rate / WACC (your required rate of return)g = Terminal Growth Rate (long-run perpetual growth)N = Number of High-Growth YearsTV = Terminal Value at end of high-growth phase
How to Choose Your Inputs
The quality of a DCF output is only as good as the quality of the inputs. Here are the three most important assumptions and how to think about each:
WACC (Discount Rate): Use 12% for large-cap Indian blue chips such as TCS, HDFC Bank, or Hindustan Unilever — companies with stable, predictable earnings. Use 14–15% for mid-cap and small-cap companies where business risk is higher. The discount rate reflects the return you demand for the risk you are taking.
Terminal Growth Rate: Stay at 3–5% in nominal terms. This should not exceed the long-run nominal GDP growth rate of India (~6–7%). Anything above 5–6% will significantly inflate the valuation, especially for long high-growth periods. Be conservative here — terminal value can be 60–80% of the total intrinsic value.
High-Growth Rate: Cross-check with the company's historical 5-year EPS or revenue CAGR from screener.in. Also check analyst consensus estimates. Always be conservative — if the historical CAGR is 20%, model at 15% to build in a cushion. Avoid projecting a growth rate you cannot justify with evidence.
Important — DCF Sensitivity Warning:
DCF is highly sensitive to assumptions. A 1% change in WACC or terminal growth rate can swing the intrinsic value by 20–30%. Always insist on a margin of safety of at least 20% before investing. Use the sensitivity table below to see how the valuation changes under different scenarios.
DCF Intrinsic Value Calculator
Enter EPS or FCF per share, growth assumptions, and WACC to find fair value and margin of safety
Use Trailing Twelve Months (TTM) EPS or normalised FCF
Expected annual growth over the high-growth period
Typically 5–15 years
Long-run growth after high-growth phase (3–5% typical)
Your required rate of return (12–15% for Indian equities)
For margin of safety calculation
Sensitivity Analysis — Intrinsic Value at Different Assumptions
Rows = Discount Rate (WACC) | Columns = Terminal Growth Rate | Highlighted cell = your base case
Learn Fundamental Analysis — Read the Complete Guide
DCF is one of many tools. Our complete guide covers PE ratio, EPS, ROE, ROCE, balance sheets, cash flows, competitive moats, and how to analyse any Indian stock from scratch.
You need EPS or free cash flow per share (use TTM figures), the high-growth rate for the next 5–15 years, the number of high-growth years, a terminal growth rate (3–5% long-term), your required discount rate or WACC (10–15% for Indian equities), and the current market price.
Most Indian equity investors use 12–15% as the discount rate, reflecting the risk premium over the risk-free rate (10-yr G-sec ~7%) plus a market risk premium. For large-cap blue chips, 12% is common; for mid/small-caps with higher risk, use 14–15%.
The terminal growth rate should not exceed the long-run GDP growth rate. For India, 4–5% in nominal terms is a reasonable assumption. Using a rate higher than ~6% will significantly inflate the valuation.
Margin of safety is the percentage discount between the intrinsic value and the current market price. A 20–30% MoS means you are buying ₹1 of value for ₹0.70–₹0.80, protecting you against estimation errors. Benjamin Graham popularised this concept as the cornerstone of value investing.
DCF is highly sensitive to assumptions — a 1% change in WACC or terminal growth can swing valuations by 20–30%. It works best for stable, cash-generative businesses and is less reliable for early-stage, cyclical, or asset-heavy companies. Always use it alongside other methods (P/E, EV/EBITDA, comparables).
