Sum-of-Parts vs Relative Valuation
Sum-of-parts (SOTP) valuation values each business segment of a conglomerate separately and aggregates them, while relative valuation benchmarks a company's multiples against peers; each approach fits different situations and both are widely used in Indian equity research.
The choice between sum-of-parts and relative valuation (also called comps or peer multiples) depends on the nature of the business being valued and the purpose of the analysis.
Relative valuation is the dominant approach for focused, single-business companies. If an analyst is valuing Marico, which derives most of its value from FMCG branded products, comparing its EV/EBITDA or P/E against Dabur, Emami, and Hindustan Unilever gives meaningful context. The assumption underlying relative valuation is that similar businesses trading in the same market should, in equilibrium, attract similar multiples adjusted for growth rate and return quality differentials.
Sum-of-parts is appropriate when a company owns materially different businesses that would command different multiples if listed separately. Indian conglomerates are prime candidates: ITC has tobacco (high cash generation, low growth, regulatory risk), hotels (capital-intensive, cyclical), FMCG (growth, brand value), agribusiness (commodity, lower margins), and IT (growth services). Applying a single P/E to ITC would blend these fundamentally different businesses into an incoherent number. SOTP assigns each segment its own multiple — tobacco might be valued at 10x EV/EBITDA, FMCG at 40x, IT at 20x, hotels at EV/room — and aggregates them after deducting holding company discount and net debt.
Holding company discount is a critical SOTP adjustment for Indian business groups. When a listed holding company owns stakes in operating subsidiaries, markets typically apply a 20 to 40 percent discount to the fair value of the investment portfolio, reflecting illiquidity of the holding, governance risks, potential capital misallocation by the parent, and the cost of an unnecessary intermediary layer.
The two approaches are complementary rather than competing. A well-constructed SOTP should be internally consistent with relative valuation for each segment — the segment multiples used in SOTP should be calibrated against what comparable listed peers trade at in the market. Discrepancies between SOTP-derived value and overall peer multiples can highlight either a genuine mispricing or a flaw in the assumption set.