The study attempts to understand the various factors influencing popular pricing multiples in the Indian context. The accounting fundamentals, as observed by earlier researches, and return on investment are considered as factors influencing pricing multiples. The reference securities are adopted from the Nifty index. 1-year return found significance in three models—P/E, EV/EBITDA and Price to Sales. Next year growth in earnings, market beta, dividend payout ratio, return on equity and profitability margin are important for certain specific multiples. The models follow intuitive inferences (e.g., margin as a factor influencing sales multiple), show importance of absolute return on investments and analyst forecasts (growth next year) vis-ŕ-vis earlier researches.

Valuation of equity shares is an important aspect of corporate finance. Valuation analysis is performed on a number of corporate events such as public issue, merger, de-merger and ESOP issuance. Analysts also value listed securities frequently to give their views on respective securities (Buy/Sell/Hold/Overweight/Underweight). There are various techniques for valuing an equity share. The most fundamental technique is discounting of future cash flows associated with such equity share. However, estimating future cash flows involves multiple assumptions and hence becomes highly subjective.

Multiple studies show a general preference towards more transparent and objective measures like relative price to earnings ratio (P/E ratio) as compared to the more complex valuation techniques like discounted cash flows (Lie and Lie, 2002). Barker (1999) studied the various approaches used by different analysts and inferred that P/E ratio was of primary importance, and technical analysis, and beta analysis are of little practical importance to investment decisions. A similar study by Demirakos et al. (2004) also indicated preference for multiples—67% of the analysts studied by the authors used multiples for valuation analysis. Security analysts in India have been using multiples quite significantly as their international counterparts. The author observed select analyst reports and found extensive usage of multiples for valuation analysis.

Applied Finance Journal, Factors Influencing, Pricing Multiples, India, Price to Equity, Price to Book Value, Price to Sales, Enterprise Value (EV)/Invested Capital, EV/Sales, and EV/EBITDA, Return on Equity (ROE), [Dividend] Payout Ratio, Expected Growth in Earnings Per Share (EPS).