Fair value and margin of safety

Fair value (FV) is the per-share figure produced by the discounted-cash-flow engine using the base-case scenario. Margin of safety (MoS) is the percentage gap between fair value and the current market price. The two travel together: the FV is the model’s central estimate of intrinsic worth; the MoS is the cushion the market price offers against that estimate being wrong.

What fair value really is

FV is a model output, not a price target. It is the present value of forecast free cash flows discounted at a sector-aware WACC, with a terminal value computed using a sector-specific terminal growth rate. Inputs come from the data pipeline and the assumptions are disclosed in the methodology. Two analysts running the same DCF with different growth or margin assumptions will arrive at different fair values; that is a feature, not a bug.

How MoS is computed

MoS is simply (FV - Price) / FV, expressed as a percentage. A FV of ₹1,000 against a market price of ₹700 yields a MoS of plus thirty percent. A FV of ₹1,000 against a market price of ₹1,300 yields a MoS of minus thirty percent.

Why MoS matters

Every model carries assumption error. A wider positive MoS means the market price is comfortably below the model’s central estimate, so the answer survives a degree of input revision. A thin or negative MoS means the model and market agree, which is informative in itself but leaves no cushion. MoS is therefore best read as a tolerance band, not a profit forecast.

Reading the MoS bands

The verdict pill maps the MoS onto descriptive bands. Each band has a specific meaning:

• Deep Value — price below the bear-case FV. The market is pricing in an outcome worse than our most pessimistic scenario.
• Below Fair Value — price between bear and base. Meaningful MoS on the central estimate.
• Fair Value Region — price inside the normal dispersion of the base case. No pricing edge either way.
• Above Fair Value — price between base and bull. The market implies an outcome better than our central estimate.
• Well Above Fair Value — price above the bull-case FV. The market prices in an outcome better than our most optimistic scenario.

Example

Suppose a mid-cap auto-ancillary trades at ₹420 against a base FV of ₹560, bear FV of ₹380, and bull FV of ₹740. The MoS on the base case is plus twenty-five percent — comfortably inside the bear-to-bull spread — and the verdict pill displays Below Fair Value. The spread is wide, so the answer is sensitive to growth and margin assumptions; the bear-case floor sits below the current price, which means the market is roughly pricing in a worse-than-bear outcome on the downside.