How does an equity research analyst execute a Sum-Of-The-Parts (SOTP) valuation for a multi-business conglomerate (such as ITC or Larsen & Toubro)?

[ A ]Multiply the company's total employee count by the price of 10 grams of physical gold.

[ B ]Apply a uniform 5.0x PE multiple to all divisions regardless of whether they are software, hospitality, or agriculture.

[ C ]Value each distinct business division independently using its own industry-specific metric (e.g., FMCG via PE, Hotels via EV/Room, Construction via EV/EBITDA), sum the standalone values, and apply an appropriate holding company conglomerate discount.[ CORRECT ]

[ D ]Liquidate all company factories and auction the scrap metal on national commodity exchanges.

Takeaway

Option C is correct: Value each distinct business division independently using its own industry-specific metric (e.g., FMCG via PE, Hotels via EV/Room, Construction via EV/EBITDA), sum the standalone values, and apply an appropriate holding company conglomerate discount.

Derivation

A diversified conglomerate operates multiple business verticals with completely different growth rates, margin structures, and capital intensities. In a Sum-Of-The-Parts (SOTP) valuation: (1) Each business segment is unbundled and valued independently using the most appropriate industry methodology (e.g., FMCG on P/E or EV/Sales, IT services on P/E, Hotels on EV/EBITDA or EV/Key, Infrastructure on DCF). (2) The independent values are aggregated, parent-level debt is subtracted, and cash is added. (3) An appropriate holding company / conglomerate discount (typically 10-25%) is often applied to reflect corporate overhead and capital allocation friction. This tests SOTP methodology. The common error is applying a blanket multiple across disparate businesses.

Why the others fail

A — Multiply the company's total employee count by the price of 10 grams of physical gold.

Multiplying employee headcounts by gold prices is an arbitrary, meaningless calculation without valuation validity.

B — Apply a uniform 5.0x PE multiple to all divisions regardless of whether they are software, hospitality, or agriculture.

Applying a single blanket multiple ignores the diverse margin and growth profiles of distinct conglomerate business units.

D — Liquidate all company factories and auction the scrap metal on national commodity exchanges.

SOTP values operating divisions as ongoing commercial going concerns, not as distressed liquidation scrap asset sales.