How to Build a DCF Model for Indian SaaS Companies

To build a discounted cash flow (DCF) model for an Indian software-as-a-service (SaaS) company, you project revenue from its underlying growth drivers (new customers, net revenue retention and pricing), model the path from today’s cash burn to positive free cash flow, then discount those future cash flows back to the present at a cost of capital that reflects the risk. The reason it is hard is that a young, high-growth, low-profit business holds most of its value in the terminal value and the far-out years, so the final number is extremely sensitive to assumptions you cannot verify yet.

That sensitivity is the whole story. A DCF on a mature, cash-generating company is mostly arithmetic. A DCF on a new-age tech name is mostly judgement wearing the costume of arithmetic. This guide walks through the mechanics and, more importantly, where the mechanics quietly hand control back to your assumptions.

Start with the revenue engine, not a growth percentage

The lazy version of a SaaS DCF types “30 percent for five years, then fading” into a cell and moves on. The useful version builds revenue from the components that actually drive it, because that is where you can sanity-check yourself.

For a subscription business, revenue in any year is roughly:

• The existing base, adjusted by net revenue retention (NRR). NRR captures churn, downgrades, and expansion within the current customer set. An NRR above 100 percent means the existing base grows on its own before you win a single new logo.
• Plus new customers won that year, times their average contract value.
• Adjusted for pricing, which compounds quietly and is easy to forget.

Modelling these separately forces honesty. A single blended growth rate can hide the fact that you are implicitly assuming both very high new-customer acquisition and very high retention forever. Splitting them out shows you whether the growth is coming from a leaky bucket you keep refilling, or from a base that expands by itself.

In the Indian listed context, new-age tech and SaaS companies vary enormously here. Some sell into global enterprise customers with strong retention; others are more transactional and see far choppier renewal behaviour. The number you pick for NRR is not a detail. It often decides the entire valuation.

Model the path from burn to free cash flow

The signature feature of a high-growth SaaS company is that it spends heavily today (on sales, marketing, and engineering) to earn cash later. Your model has to represent that arc explicitly rather than assuming profitability appears on schedule.

Free cash flow (FCF) is, simply:

Operating cash flow, minus the capital and working-capital the business consumes to keep growing.

For a SaaS name the practical build is: revenue, minus cost of revenue (to get gross profit), minus operating spend (sales and marketing, research and development, general and administrative), which gives operating profit; then adjust back non-cash items and subtract the modest capital expenditure and any working-capital drag. Early years often produce negative FCF. That is expected. The question your model must answer is when and how that line crosses zero and keeps rising.

The credible way to model the crossover is through operating leverage: as revenue scales, sales-and-marketing and general-and-administrative costs should fall as a share of revenue, because you are spreading a growing top line over a semi-fixed cost base. If your model reaches positive FCF only by assuming margins snap to best-in-class levels overnight, you have written fiction. Fade the margins up gradually and defensibly.

Use the Rule of 40 as a reality check

Once you have a revenue path and a margin path, run every forecast year through the Rule of 40: growth rate plus FCF margin (or operating margin) should sit around or above 40 percent for a healthy SaaS business.

The Rule of 40 is not a valuation input. It is a consistency test. It catches the two most common modelling sins:

• Growth and margin both maxed out. If your model shows 40 percent revenue growth and 30 percent FCF margins several years out, the sum is 70. Very few companies sustain that. The market rarely lets a business keep both.
• A magic profitability jump with no growth cost. If margins leap while growth barely dips, ask what you assumed about sales spend. Usually you quietly under-funded the growth you also forecast.

Walk the Rule of 40 down your forecast. A business can legitimately trade growth for margin as it matures (say, 50 percent growth and low margins early, sliding toward 15 percent growth and 25 percent margins later). What should worry you is a forecast that stays above 40 by assuming the company defies the usual trade-off in every single year.

Estimate a discount rate that respects the risk

Future cash flows are worth less than cash today, and riskier cash flows are worth less still. The DCF captures this through the weighted average cost of capital (WACC), the blended return that debt and equity holders require.

Most young SaaS companies carry little debt, so WACC is dominated by the cost of equity. That, in turn, is driven by the risk-free rate (in India, anchored to the government bond yield), an equity risk premium, and a beta that reflects how volatile and cyclical the business is. For a small, high-growth, not-yet-profitable Indian tech company, the required return is meaningfully higher than for a stable large-cap, because the range of outcomes is wider and the cash is further away.

Do not agonise over false precision here, but do respect the direction of travel: a lower discount rate flatters the far-out cash flows (which is exactly where a growth company’s value lives), so a modest change to WACC can swing the valuation dramatically. Treat WACC as a range, not a single number, and always test it.

Compute the terminal value, then discount everything back

You cannot forecast cash flows to infinity, so you split the future in two: an explicit forecast period (often 7 to 10 years for a fast-growing business, long enough to let it approach maturity), and a terminal value capturing everything after.

Two common terminal-value methods:

• Perpetuity growth (Gordon growth): take the final-year FCF, grow it at a modest, sustainable long-run rate (never above the economy’s nominal growth), and capitalise it by (WACC minus that growth rate).
• Exit multiple: apply a sensible steady-state multiple to a terminal-year metric.

Then discount every year’s FCF, and the terminal value, back to today using your WACC, and sum them. That sum, adjusted for net cash or debt, is your equity value.

Here is a deliberately simplified, purely illustrative skeleton. The numbers are made up to show the shape, not to value anything real.

Illustrative DCF skeleton (numbers are hypothetical)

Year	Revenue (₹ cr)	FCF margin	FCF (₹ cr)	Discount factor	PV of FCF (₹ cr)
1	100	-15%	-15	0.88	-13
2	135	-5%	-7	0.78	-5
3	175	5%	9	0.68	6
4	219	12%	26	0.60	16
5	263	18%	47	0.53	25
Terminal	(after year 5)		620	0.53	329

In this toy example the five explicit years contribute about 29, while the terminal value contributes about 329, more than ninety percent of the total. That is not a quirk of the numbers. It is the defining feature of valuing a high-growth business, and it is exactly why the output deserves suspicion.

Because the answer hangs on so few assumptions, the honest way to present a growth-company DCF is a sensitivity grid, not a point estimate.

Illustrative sensitivity of equity value to WACC and terminal growth

WACC \ terminal growth	3%	4%	5%
11%	high	higher	highest
13%	mid	mid-high	high
15%	low	low-mid	mid

Even in this cartoon version, moving two dials shifts the answer across a wide band. A real grid, filled with actual figures, usually spans a range so broad that calling any single cell “the value” is a stretch.

Why the assumptions matter more than the output

A DCF for an Indian SaaS or new-age tech company is best treated as a disciplined way to write down what you believe, not as a machine that prints a price. The single number at the bottom of the model is only as good as the growth-driver forecast, the margin path, the discount rate, and the terminal assumption that produced it, and for a young high-growth business those inputs are the very things nobody can yet know.

So use the model backwards as much as forwards. Ask what growth, retention, and terminal margin the current price already implies, and judge whether those are plausible for this kind of business in this market. Change one assumption at a time and watch the output move. If a small, reasonable-looking tweak flips the conclusion, that is the model telling you the truth: your conviction should live in the assumptions, and your humility should live in the output.

This is an educational explanation of a valuation method. It is not investment advice, not a recommendation, and does not value any specific company. Altys Labs is not a SEBI-registered research analyst or investment adviser.