How we estimate fair value
Every fair-value number on DocStoX is a deterministic estimate — derived from a company's own financials using a transparent, published methodology. It is not an AI opinion, not a number we invented, and not a black box. We follow the same intrinsic-value framework used by professional research houses such as Morningstar, adapted to the data available for Indian equities.
The core idea: value = book value + excess returns
A company is worth the capital already invested in it (its book value) plus the value of the profit it can earn above its cost of capital for as long as it can sustain that edge. This is the residual-income (or excess-return) model.
- If a business earns exactly its cost of capital, it's worth its book value (price-to-book ≈ 1).
- Earning more than its cost of capital justifies a premium to book.
- Earning less means it should trade at a discount.
This is deliberately not a simple earnings multiple. Earnings-multiple models systematically misprice two whole classes of business: banks, NBFCs, brokers and holding companies (whose value lives on the balance sheet, not one year's earnings), and quality compounders (whose worth comes from returns persisting for years). The residual-income model values both correctly.
The four moving parts
1. Residual income
Fair value = book value + the present value of every future year's profit earned above the cost of equity. No inflated terminal growth: once returns fade to the cost of capital, extra growth adds no value.
2. Economic moat
How durably a business out-earns its cost of capital sets how long that excess-return runway lasts — roughly None ≈ 2 years, Narrow ≈ 10 years, Wide ≈ 20 years. This is what lets a genuine compounder justify a high fair value.
3. Cost of equity
The return investors reasonably require, used to discount future value. We build it up from an Indian market base rate plus a risk premium for leverage and cyclicality — not a noisy stock-price beta.
4. Uncertainty → stars
How wide the range of plausible outcomes is sets the margin of safety. A riskier business must trade at a deeper discount before it earns a high star rating.
Banks, NBFCs, brokers & holding companies
For financial companies, cash-flow and earnings-multiple models break down — a bank's debt is raw material, not financing. So we value them on the excess-return over book value track: fair value = book value + the present value of returns above the cost of equity, which is exactly the relationship behind their price-to-book ratio (P/B above 1 only when return-on-equity beats the cost of equity). This is why a financial holding company with a large book value is no longer mis-valued as if it were a low-earnings operating business.
From fair value to a star rating
We compare the current price to the fair value, then apply a margin of safety scaled by how uncertain the estimate is. The bigger the discount to fair value, the higher the rating; a premium earns a low rating. These bands follow Morningstar's published thresholds.
| Uncertainty | ★★★★★ when price is | ★ when price is |
|---|---|---|
| Low | 20% below fair value | 25% above fair value |
| Medium | 30% below fair value | 35% above fair value |
| High | 40% below fair value | 55% above fair value |
| Very High | 50% below fair value | 75% above fair value |
| Extreme | 75% below fair value | 300% above fair value |
Around fair value (roughly ±10–15%) a stock rates ★★★ — fairly valued. A weak-quality business is also capped from earning the top ratings even when it looks cheap.
What it is — and what it isn't
It is a well-grounded estimate, computed the same way every time, that you can inspect and reason about. Every input comes from the company's reported financials; a missing input drops a method rather than inventing a number.
It is not a price target or a guarantee. It reflects our model's assumptions, not a promise about the future. We blend in sector-relative valuation multiples and analyst targets as independent cross-checks, and we flag the moat, uncertainty and confidence so you can weigh the estimate yourself.
Sources
See it in action on any stock's research view.
Explore stocksFor informational purposes only and not investment advice. Please consult a SEBI-registered advisor before investing.