Triangulating Valuation  703
one of India’s largest companies, with 2018 revenues of $60 billion, has opera-
tions in oil refining and marketing, petrochemicals, oil and gas exploration 
and production, retail, digital services, and media and entertainment. Its bal-
ance sheet also includes $11 billion book value of investments that need to be 
valued separately (relative to a market capitalization of about $105 billion).
The capital markets in which emerging-markets companies trade may have 
inefficiencies. In many cases, these companies may have limited float because 
controlling shareholders may hold large stakes. The presence of controlling 
shareholders (often founding families) may also raise concerns about gover-
nance and whether there are potential conflicts between the interests of pub-
lic shareholders and the controlling shareholders. This could lead to a lower 
share price than otherwise warranted. Some countries (particularly China and 
India) also have restrictions on investors, or the governments actively inter-
vene in the markets, causing deviations in share prices from intrinsic values. 
For example, in China, Chinese citizens are not allowed to invest in shares 
outside the country, so the share prices of mainland Chinese companies can be 
disconnected from intrinsic value and the value of similar companies outside 
China. This could be caused by an imbalance of supply and demand for shares 
that cannot be corrected by arbitrage with other equity markets. Unlike most 
markets, the Chinese traded market is also dominated by retail investors (75 
percent of holdings), roughly the reverse of the U.S. market, where institu-
tional investors own most shares. Retail investors aren’t as sophisticated and 
don’t do as much research as institutional investors. They also tend to move 
in the same direction, leading to large swings in prices. Such market inefficien-
cies can make it difficult to reconcile DCF values with market values. Finally, 
companies in emerging markets often have complex corporate structures with 
voting and nonvoting shares. This often leads to a small group of investors 
controlling the company even though they own less than 50 percent. In some 
countries with weak governance, public market investors will discount the 
value of these companies if they don’t believe the controlling shareholders 
make decisions in the interests of all shareholders.
Triangulating Valuation
We recommend triangulating the results of the scenario DCF approach with 
a comparable multiples approach and DCF using a country risk premium. 
We’ll illustrate with the example of a Brazilian retail company we’ll call 
ConsuCo.
We constructed two scenarios, a business-as-usual case (the base case) and 
a downside case reflecting performance under adverse economic conditions. 
Exhibit 35.5 shows the ROIC projections. Brazil has experienced several severe 
economic and monetary downturns, including an inflation rate that topped 
2,000 percent in 1993. Judging by its key financial indicators, such as EBITDA 

704  Emerging Markets
EXHIBIT 35.5  ConsuCo: ROIC and Financials, Base Case vs. Downside Scenario
–30
–25
–20
–15
–10
–5
0
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
ROIC (excluding goodwill)
5
10
15
20
25
Downside real
Base case real
Downside nominal
Base case nominal
Financials, %
2019
2020
2021
2022
2023
2024
Nominal indicators: Base case
Sales growth
15.3
14.5
13.6
12.6
11.7
10.8
Adjusted EBITA/sales
6.1
6.2
6.4
6.4
6.4
6.4
NOPAT/sales
4.4
4.5
4.6
4.5
4.4
4.4
Invested capital (excluding goodwill)/sales
54
53
51
51
50
49
Invested capital (including goodwill)/sales
62
59
57
56
55
54
ROIC (excluding goodwill)
8.1
8.5
9.0
9.0
8.9
9.0
Free cash flow, reais million
 (63)
 (136)
 (94)
 (91)
 (85)
 113 
Nominal indicators: Downside scenario
Sales growth
10.0
25.0
66.3
66.3
25.0
11.3
Adjusted EBITA/sales
3.1
(2.2)
(8.0)
(7.6)
(1.1)
3.3
NOPAT/sales
2.3
(1.5)
(5.8)
(5.8)
(1.1)
2.2
Invested capital (excluding goodwill)/sales
55
47
31
22
21
22
Invested capital (including goodwill)/sales
63
54
35
25
23
24
ROIC (excluding goodwill)
4.2
(3.2)
(18.6)
(25.7)
(5.0)
9.9
Free cash flow, reais million
 (149)
 (777)
 (2,533)
 (4,504)
 (2,677)
 (558)
to sales and real-terms sales growth, the impact on ConsuCo’s business per-
formance had been significant. ConsuCo’s cash operating margin had been 
negative for four years, at around –10 to –5 percent, before recovering to its 
normal levels. In the same period, sales in real terms declined by 10 to 15 
percent per year but grew sharply after the crisis. For the downside scenario 
projections, we assumed similar negative cash margins and a decline in sales, 
in real terms, for up to five years, followed by a gradual return to the long-
term margins and growth assumed under the business-as-usual scenario.