Time to buy? Harini Dedhia decodes gap between stock prices & actual value

If you are an investor who believes that buying equity is being a part-owner in a business, this fall in prices demands that you look beyond the prevailing narrative

Photo: Tamohara Investment Managers

Harini Dedhia Mumbai

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The recent war in West Asia brought transit of shipping vessels through the Strait of Hormuz to a standstill. 15 million barrels of crude oil (25 per cent+ of crude oil in transit), 5 million barrels worth of petroleum derivatives and 20 per cent of the world liquefied natural gas (LNG) trade used this passage for transit, daily. 40 per cent of this product in transit is headed for Chinese and Indian refineries.

Without standing still for a minute, the equity markets in India panicked and cracked over 11 per cent in a couple of weeks. The narrative of restaurants shutting down due to LPG shortage, neighboring countries announcing truncated work weeks due to fuel shortage, further exacerbated the fall in stocks that have been taking a beating since September 2024.

If you are an investor who believes that buying equity is being a part-owner in a business, this fall in prices demands that you look beyond the prevailing narrative and understand the change in the intrinsic value of the businesses as a result of these disruptions. The intrinsic value of any business or any asset is reliant upon the cash flows it can generate in the future and discounting those future cash flows to ascertain a value presently.

While discounted cash flows (DCF) is not a tool we refer to fix a precise price for a business, it is a useful mechanism to understand the direction and velocity of the growth in value of the asset.

Let’s take a base case scenario of a company in India that operates at 20 per cent return on capital employed (RoCE), 4 per cent terminal growth rate (post 15 years), and a 12.5 per cent weighted cost of capital currently that falls to 9 per cent after 15 years. Cetirus paribus,

Companies that are entirely reliant on domestic consumption with no petrochemical raw materials are likely to see the least impact. Beyond crude prices impacting general inflation (higher fuel and packaging costs) in the country, they are unlikely to see a profit impact of beyond 10 per cent. Even with a 10 per cent reduction in profits vs. normal levels, there is less than a percentage point impact in the value of the company (see table below). FMCG companies and domestic consumer services companies are likely to fall in this category.

Companies that are export-oriented see higher freight rates and reduced ordering due to shipping delays, and that might also be exposed to some petrochemical input costs, can see a 50 per cent erosion of the coming one year's profit given this disruption. Even then, the erosion in value is 4.3 per cent. Export-oriented manufacturing companies that rely on natural gas as feedstock for their furnace, etc., are likely to fall in this category.

Table: DCF Value Erosion matrix for varying growth rates and annual profit impact

Assuming prices at the end of February were fair to begin with, if the distortion in prices is far higher than the erosion in value as per the matrix shown above, it is time to buy these businesses. Dislocation in the intrinsic value of businesses is perhaps in the range of 0 to 5 per cent as a result of this war. Fear mongering has however, led to a much steeper distortion in prices in most cases. (Disclaimer: This article is by Harini Dedhia, head of research, Tamohra Investment Managers. Views are her own.)

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First Published: Mar 18 2026 | 1:40 PM IST