Assessing the impact of COVID-19 on the valuation of Indian companies using a financial model

Mohanty, P.; Mishra, S.

Purpose Fear grips stock markets when a pandemic like COVID-19 strikes, severely affecting stock prices. However, fundamental value drivers of companies do not change drastically during pandemics. The sensitivity of firms' cash flows to lockdowns during pandemics depends on their cost structure. This paper develops a financial model incorporating information about value drivers and lockdown sensitivity of companies to find the enterprise value. Design/methodology/approach The authors develop a financial model that estimates the effects of COVID-19 on enterprise value and helps to identify wrongly valued stocks. The authors apply the model to five Indian stocks from five different industries to study how firms belonging to various sectors get affected differently in this pandemic. Findings Companies belonging to civil aviation and retail sectors get more affected by COVID-19 compared to those in movie exhibition, automobile and hotel industries. The cost structure of the latter category of firms reduces their cash flow effect. Practical implications The model can be used by practitioners to understand any pandemic's effect on stock prices. Also, it explains how firms having different cost structures get affected by any crisis and help investors in taking appropriate buy/sell decisions. Originality/value The study has two contributions: first, the authors develop a financial model to estimate the effect of COVID-19 on the enterprise value. Second, contrary to popular perception, the authors find companies belonging to movie exhibition, hotel and automobile industries do not get that severely affected.