INNOVISION Journal of Management Research

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This paper discusses the proper application of PEG ratio, which is one of the popular relative valuation techniques amongst professional investors. Many professional investors in India have a tendency to use PEGt ratio of 1 for all stocks irrespective of their beta and profitability. In this paper PEG bands for different beta and profitability are determined using three stage discounted cash flow (DCF) models using suitable assumptions. This will establish the fact that some stocks can trade at higher PEG ratio (even greaterthan 2) and still may not be overvalued. In the second part of the paper, the PEG ratios are measured for stocks from few sectors (with different betas) and the empirically observed PEG ratios are quite similar to the one predicted by three stage DCF model.

Keywords

PEG, PEGT, Beta, DCF, ROE, FMCG, IT, Pharmaceutical.
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