What WACC should I use for Indian businesses?

WACC = (E/V × Ke) + (D/V × Kd × (1 – tax rate)), where E = equity value, D = debt, V = total capital, Ke = cost of equity (using CAPM: Risk-free rate + Beta × Equity Risk Premium), Kd = cost of debt. For Indian businesses in 2026: Risk-free rate ≈ 6.9% (10-year G-Sec yield), Equity Risk Premium ≈ 6–8%, resulting in Ke of 12–16% for most sectors. WACC for Indian companies typically falls between 11–16% depending on leverage and sector.

What are common DCF mistakes for Indian SME valuations?

Key mistakes: (1) Using revenue growth rates without cash flow conversion discipline — Indian SMEs often have working capital intensity that consumes 40–60% of EBITDA; (2) Terminal growth rate too high — using 6–7% growth in perpetuity inflates value significantly; use 4–5% max; (3) Ignoring promoter salary normalisation — owner-operated businesses often pay below-market promoter salaries; (4) Not adjusting for India's country risk premium in WACC; (5) Projecting years 1–5 without sufficient detail on capex and working capital needs.

Corporate Finance

DCF Valuation: Step-by-Step Guide for Indian Businesses

Q: What is DCF valuation and how does it work?

Discounted Cash Flow (DCF) valuation estimates the intrinsic value of a business by projecting its future free cash flows and discounting them back to today at the Weighted Average Cost of Capital (WACC). The formula is: Enterprise Value = Σ[FCFt / (1+WACC)^t] + Terminal Value. It is the most fundamentally sound valuation method because it is based on the actual cash a business generates, not accounting profits or market comparables.

FININ2MIN RESEARCH Updated Jun 2026 · 8 min read

DCF valuation is the most misused and least understood tool in Indian corporate finance. Bankers use it to justify predetermined conclusions. Founders use it to support unrealistic multiples. Here is the methodologically correct version — with India-specific adjustments for WACC, terminal value, and working capital.

The DCF Framework: Five Steps

Project Free Cash Flows (FCF) for 5–10 years
Calculate WACC (the discount rate)
Calculate Terminal Value (value beyond the projection period)
Discount all cash flows to present value
Build a sensitivity table (WACC × terminal growth rate)

Step 1: Free Cash Flow — What You're Actually Projecting

Free Cash Flow to Firm (FCFF) is the cash available to all capital providers (debt and equity) after reinvestment needs:

FCFF = EBIT × (1 – Tax Rate) + D&A – Capex – ΔWorking Capital

The most common error in Indian SME DCFs: using EBITDA as a proxy for cash flow without accounting for working capital intensity.

Item	Year 1	Year 2	Year 3	Year 4	Year 5
Revenue (₹ Cr)	50	65	82	100	118
EBITDA (18% margin)	9.0	11.7	14.8	18.0	21.2
EBIT (after D&A ₹2Cr/yr)	7.0	9.7	12.8	16.0	19.2
NOPAT (25% tax)	5.25	7.28	9.6	12.0	14.4
Add: D&A	2.0	2.0	2.0	2.0	2.0
Less: Capex	3.5	2.5	2.5	3.0	3.0
Less: ΔWorking Capital	1.8	2.3	2.9	3.5	4.2
FCFF	1.95	4.48	6.2	7.5	9.2

Step 2: WACC Calculation for Indian Businesses

WACC = (E/V × Ke) + (D/V × Kd × (1 – Tax Rate))

Component	India 2026	Source
Risk-Free Rate	6.85–7.0%	10-year G-Sec yield
Equity Risk Premium (ERP)	6.0–8.0%	Damodaran India ERP estimate
Beta (sector-adjusted)	0.8–1.4	NSE sector beta
Size Premium (SME)	2.0–4.0%	Additional risk for illiquidity
Cost of Equity (Ke)	13.5–17.5%	CAPM + size premium
Cost of Debt (Kd, post-tax)	7.5–9.0%	Bank lending rate × (1–0.25)
Typical WACC Range	12–16%	—

Step 3: Terminal Value — The Most Sensitive Input

Terminal Value typically represents 60–75% of the total enterprise value. Two methods:

Gordon Growth Model: TV = FCFF(n+1) / (WACC – g), where g = perpetuity growth rate
Exit Multiple Method: TV = EBITDA(n) × EV/EBITDA multiple

India-specific guidance on g: Use 4–5% as a maximum sustainable perpetuity growth rate (India's nominal GDP growth ≈ 10–11%; assume company converges to half of that in perpetuity). Using 7–8% g inflates value by 40–60% and is unjustifiable for most businesses.

Step 4: Sensitivity Table — Always Build This

Enterprise value varies enormously with WACC and terminal growth assumptions:

WACC \ g	3%	4%	5%	6%
12%	₹82 Cr	₹96 Cr	₹115 Cr	₹142 Cr
13%	₹71 Cr	₹81 Cr	₹95 Cr	₹114 Cr
14%	₹62 Cr	₹70 Cr	₹80 Cr	₹94 Cr
15%	₹55 Cr	₹61 Cr	₹69 Cr	₹79 Cr
16%	₹49 Cr	₹54 Cr	₹60 Cr	₹68 Cr

This range of ₹49–₹142 Cr illustrates why "DCF says X" is meaningless without disclosing assumptions. Always present a sensitivity table.

Common Mistakes in Indian SME Valuations

Promoter salary normalisation: Owner-run businesses often pay below-market promoter salaries to show higher EBITDA. Normalise to market rate before projecting
Working capital ignored: Indian SMEs with 45–90 day debtor days consume significant cash. Model working capital as % of revenue
Tax holiday periods: For new manufacturing units, MAT/tax holidays change effective tax rate — model year by year
ESOP dilution: Startup DCFs must account for ESOP pool dilution in equity value per share calculation

Frequently Asked Questions

What is DCF valuation and how does it work? ▼

DCF estimates intrinsic business value by projecting future Free Cash Flows and discounting them to present value at WACC. EV = Σ[FCFt / (1+WACC)^t] + Terminal Value / (1+WACC)^n. It is the most fundamentally sound method because it is based on actual cash generation, not multiples or accounting profits.

What WACC is appropriate for Indian businesses? ▼

Ke = Risk-free rate (6.85–7%) + Beta × ERP (6–8%) + Size premium (2–4% for SMEs) = 13.5–17.5%. Post-tax Kd ≈ 7.5–9%. Blended WACC: typically 12–16% for Indian mid-market companies in 2026. Use the upper end for early-stage or capital-intensive businesses.

What terminal growth rate should I use for India? ▼

Maximum 4–5% for most Indian businesses. India's nominal GDP growth is ~10–11%, but mature businesses grow at a fraction of the economy. Using 7–8% g is common in banker presentations but mathematically unjustifiable — it implies the business will eventually become larger than the entire economy.

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