Valuation as Moving Target

I was going through the idea of valuation, a topic I’ve spent years studying and applying rigorously in my work. I was thinking to write about valuation which I learnt from veterans like Warren Buffett and Professor Damodaran—two individuals whose insights shaped my understanding early on. Yet over time, I realized that valuation is not a gospel one memorizes but a mindset one internalizes. What follows is my own interpretation, drawn from that foundation and built through years of mistakes and different market iterations.

Valuation is at the heart of every decision I make at Verma Research Capital. Over the years, I have come to understand that valuation is not merely about calculating a number using a model. It is an evolving, interpretive, and often subjective process that demands an in-depth understanding of finance, behavior, market psychology, and strategic business foresight. Valuation models may appear objective because they are quantitative, but the inputs we feed into them are deeply subjective. Growth rates, discount rates, margins, terminal value assumptions, reinvestment risks—these are all influenced by our beliefs, information access, and even emotional biases. I’ve seen many investors fall into the trap of believing that because a model is spreadsheet-driven, it must be free of bias. In truth, it's often the case that an investor sets the desired price first and then tailors the assumptions to support it. The financial industry is not immune to this. Sell-side equity research is notoriously optimistic, and many analysts, under subtle or overt pressure from investment banking divisions or portfolio managers, lean towards issuing favorable valuations. In extreme cases, the valuation exercise becomes a mere formality to justify pre-decided narratives. To manage this bias, I personally avoid forming strong opinions before completing my valuation work. I also make it a point to disclose and challenge my own assumptions, and I periodically revisit them to ask: if I had no position in this stock, would I still arrive at the same conclusion?

Another critical learning over the years is that valuation is not timeless. A well-done valuation ages quickly as new information flows in. Company earnings, regulatory announcements, macroeconomic data, sector shifts, and competitive actions can all significantly alter the intrinsic value of a business. Hence, the idea of a static, final "true value" is misleading. Valuation must be viewed as a moving target, one that should be recalibrated regularly. For instance, a rate hike by the RBI, a change in the bank'sprovisioning norms, or an unexpected default by a major borrower can quickly render yesterday’s valuation obsolete. I always ask: what has changed since I last valued this company, and does it materially affect the assumptions I used? This is particularly important in banking, where systemic risks and credit cycles play a significant role. One misstep in underwriting can take years to repair. Thus, a quarterly earnings update is not just a report card; it is a valuation update trigger.

There is a widespread belief that the more granular a model, the more accurate the valuation. This is dangerous. As we increase the number of inputs, we also increase the margin for error. Over-engineered models often lead to overconfidence and can hide massive uncertainties under layers of assumptions. I practice what I call "valuation parsimony" – using only the most essential variables to arrive at a range rather than a precise point estimate. I would rather be approximately right than precisely wrong. Especially when dealing with young, turnaround, or distressed companies, a wide range of outcomes is the norm. Attempting to produce a single figure suggests a false level of certainty. In our portfolio strategy, this translates into requiring a higher margin of safety when investing in companies with volatile cash flows or opaque governance. Acknowledging what we don’t know is often more important than refining what we do.

There is also the question of whether valuation even matters in efficient markets. The answer, in my experience, lies in a nuanced understanding of efficiency. Yes, markets maybe efficient most of the time, especially in liquid, large-cap stocks. But they are also driven by behavior, news flow, and herd dynamics. And it is in those moments of dislocation, overreaction, or neglect that valuation becomes a powerful tool. Valuation is not about assuming markets are always wrong. It is about identifying when they are likely to be, and acting with discipline. Even if I believe a stock is undervalued, I ask: why is the market missing this? What do I know that others don’t? Is this a durable mispricing, or just a temporary anomaly? Valuation only becomes profitable if markets eventually recognize the mispricing. In that sense, one must believe in the eventual efficiency of markets, even while taking advantage of their short-term inefficiencies.

One of the most underappreciated aspects of valuation is that the process itself delivers insights far beyond the number it produces. Going through a valuation helps me understand how value is created or destroyed in the business, what the key levers of profitability are, how sensitive the company is to macroeconomic variables, and where management is likely to invest capital. This understanding informs not just buy/sell decisions but also position sizing, holding periods, and expectations for volatility. In other words, valuation is not just a number—it's a narrative grounded in logic and probabilistic thinking.

To ground this discussion, let me turn to two live examples: Bank of India and Yes Bank. Both are Indian banks, but they tell very different valuation stories. Bank of India reported a net profit of ₹9,552 crore in FY25, showing a significant improvement in performance. The bank’s market capitalization stands at ₹56,590 crore with a P/B of 0.71x and P/E of 5.93. It trades at a significant discount to its book value, which would traditionally be seen as undervaluation. But as I apply the valuation framework, I ask: is the improvement in NPAs durable or cyclical? Can the bank grow credit at a rate that exceeds the cost of equity? Is the bank reinvesting its retained earnings at acceptable returns? Given the improving asset quality and decent CASA ratio of 41.18%, there is a case to be made for rerating. But the government ownership, limited pricing power, and bureaucratic capital allocation still temper my optimism. Valuation here must factor in both the turnaround potential and the structural handicaps. Yes Bank, on the other hand, reported a net profit of ₹2,446 crore in FY25. Its market cap is around ₹65,387 crore with a P/B of 1.37x and a P/E of 26.83. Its NPA issues have improved,with net NPA at 0.3% and CASA ratio at 34.3%. After a near-death experience, it has staged a partial comeback. NPAs are down, profitability is back, and CASA has improved. But the market still struggles to believe in its sustainability. Is this truly a new Yes Bank, or are we just past the worst of a long shadow? When I model Yes Bank, my inputs have wider ranges. I assign probabilities to outcomes: base, optimistic, and pessimistic. I also model scenarios where it is acquired, merged, or recapitalized again. Because in this case, valuation is not about spreadsheet arithmetic—it's about business viability and investor trust.

Valuation is not just about getting the price right. It’s about understanding businesses, thinking probabilistically, and allocating capital rationally. The price-to-earnings ratio or the price-to-book ratio may give you an anchor, but they never tell the full story. At VRC, we do not chase value for its own sake. We seek mispriced quality. We embrace uncertainty by building valuation ranges, not single-point estimates. And we always respect the market—but never revere it. Valuation is not a one-time event. It is an ongoing dialogue between expectation and reality. Between what is and what could be. Between price and worth. And it is through this lens that I make every investment decision.

Divyanshu Verma

CEO, Verma Research Capital LLC