Intrinsic value estimates and its accuracy: Evidence from Indian manufacturing industry

The purpose of this article is to empirically examine the comparative accuracy of income oriented (Free cash flow to equity, Residual income model) and market oriented (Price to earnings multiple, Price to book value multiple and Price to sales multiple) valuation models for the Indian manufacturing industry, and propose a composite valuation model (CV) to explore whether combining value estimates may improve valuation accuracy. Data are drawn from a sample of 3756 Bombay Stock Exchange (BSE) listed manufacturing companies from 1997 to 2012. Findings from the empirically analysis indicate that residual income model is better than free cash flow to equity model under income oriented valuation model, whereas both Price to earnings multiple and Price to book value multiple are superior to Price to sales multiple and are equally likely under market oriented valuation model. Finally, the empirical findings suggest that CV provides better value estimates for Indian manufacturing industry. Further, lag of PE and profitability are the two probable determinants of prediction error of the model.