How to value stocks properly | how to value the stocks | how to know the real share price | how to know the real value of a share | Sum Of Parts Valuation | valuation | SOTP technique | what is breakup valuation of stocks

Sum Of Parts Valuation (SOTP)

Sum of Parts Valuation

It is also called break-up valuation which is used to value the companies which have multi-division or if they are holding companies such as Bajaj Holdings or Godrej Industries which have their investments in many other companies.

It can also value Conglomerate (the companies which contain many companies under one brand) companies such as Reliance.

Multi-Division companies / Conglomerate Companies 

• First you have to note the divisions in a company and then list them out. 
• Then you have to take out the valuation of each division in that company.
• After that, add every value you got of each division.
• Then you have to compare that value with the market cap of that company.
• If the market cap of that company is high than the added value then the company is listed on a high price than its real value and if the market capitalization is lower then it means that the company is at a cheaper cost as compared to its value.
• So this is the process to value any company which has multi divisions or which company is a conglomerate such as Hindustan Unilever, Marico, GlaxoSmithKline, Reliance, and many more.

Holding Companies

• Firstly, in these types of companies the usual market capitalization should be 30% less than the value of the holding because these companies have to pay more taxes.
• Then the next thing is that every company in this sector has a less market cap than its value of holdings approx.30% less. 
• Therefore, you have to choose any company which has its market capitalization less than almost 45% to 60%.
• Then firstly you calculate the percentage of holdings in other companies by the selected company.
• Then you have to calculate the value of the total holdings that the company owns.
• Then you have to add that value which you got after calculation.
• After adding you will get one number which you have to compare with the market cap of the Holding company.
• If the market capitalization is bigger than that value then it's not a cheap stock to buy.
• And if you got a company which has market capitalization less than 40%-50% then you have to do one last step.
• Now you analyze the holdings of the company and identify that the investments of the company in the stocks are overvalued or not.
• If it is overvalued then you have to buy that stock on even 20% more discount which will decrease your risk totally.

There are many holding companies which are now available on an 80%-90% discount because that companies have invested in very bad stocks or such things which are not promising when it comes to returns. Therefore you also have to check that thing and the key statement is that you should never compromise on the quality.

Thank you for reading my blog.