Is there a website where can we find beta information for the Indian market?
@SlownSteady Here is a link to a site showing beta estimates for all stocks on major Indian market indices. The default on the site is set to Nifty 50 but you can choose your preferred index from the set of available options.
http://www.topstockresearch.com/index/NIFTY_50.html
1 Like
Alternatively, you could try this topic I’d created: Data Sets for Equity Investments and Valuation in India
1 Like
Based on an operating cash flow estimate of Rs15,000 Cr, I am getting FCF valuation of Rs400,000Crs for Vedanta. It is currently quoting at Rs 120,000 Crs. Is this company way undervalued or am I missing something here? Is there any additional considerations required for Mining industry considering their cyclical nature?
Hi Akshay
Below is my calculation
Cash flow from Operations per quarter: Rs 4,600cr
Cash flow from investment per quarter: Rs 1,600cr
Interest expense for last year: Rs 6,000 cr
FCF year 0 = (4,600-1,600)*4 + (6,000 * 0.7)
= 12,000+ 4,200
= 16,200 Cr
Assuming the below:
12% growth for next 4 years.
Cost of equity (discount rate) = 10%
WACC = 10%
Terminal growth rate: 3%
Year 1 = 16,494
Year 2 = 16,794
Year 3 = 17,099
Year 4 = 17,410
Terminal value = 17,410 * ((1.03/ (0.1-0.03))
= 256,186cr
Total value in 4 years = Rs 345,186 Cr (sum of all above)
Compared to Rs 120,000 cr market cap, this is at a deep discount. Is my calculation correct?
@SlownSteady You have subtracted the entire amount of investing cash flows from the operating cash flows, which is an error. You must only subtract the amount of net capital expenditure from the operating cash flows. The net capital expenditure is only the amount spent on acquisition of fixed assets and not the entire amount of investing cash flows.
Secondly, it seems to me that you have calculated the FCFF figures for the four years, but you have not brought the cash flows and the terminal value to their present values by discounting them at the cost of capital which you have assumed at 10%.
Thirdly, since you are calculating the terminal value using the formula method, you are in effect assuming that the company will continue to exist and operate at the end of your investment period. When such is the case, assuming different growth rates during the initial years and the terminal year may make the valuation unrealistic.
It might help if you assume the same growth rate of 12% in the terminal year and recalculate your terminal value.
Hope this explanation is helpful.
1 Like
A company cannot grow at a rate more than the Economy itself (i.e. India’s GDP Growth) in the Terminal Year, that is forever. An easier anchor is the Risk Free Rate, since it already accounts from Inflation.
1 Like
Thanks for pointing things out. I did make a mistake in calculating FCF for years 1 to 4.
Terminal growth rate of 12% makes the denominator negative assuming WACC as 10%.
Yes… and precisely for that reason, it makes no sense for a company to grow beyond its Cost of Capital (Check out Sustainable Growth Rate), except maybe in the case of very young companies. As for the Terminal Growth Rate, it cannot exceed India’s GDP Growth or India’s Long Term Risk Free Rate.
1 Like
So a 3 to 4 percent is a reasonable conservative estimate for terminal growth rate?
Yes. 3% is a very conservative estimate, which is good.
1 Like
Hi Akshay,
I tried to do a calculation for Excel Industries ( this is my first attempt at calculating anything ). Request you to please check and advise. I have tried both variations of calculating the NPV basis the FCFF and also the Terminal Value at the end of 3 years ( my assumed holding period ) post which i may not continue to hold it.
Company : Excel Industries
Current Market Cap : 1039 Cr
Holding Time : 3 years
Calculation @ 10% Discount factor
Cash flow from Operations 37.12 Cash Flow Growth 5 Discounting Factors @ 10 and 11%
Interest Expenses 11.38 Discount Rate 10% 0.909 0.901
Tax rate % 25% 11% 0.826 0.812
Net Capital Expenditure 4.1 0.751 0.731
Post Tax Interest Expense 8.535
FCFF 41.55
Cash Flow
Year 0 41.55
Year1 43.63
Year 2 45.81
Year 3 48.10
NPV
Year1 39.66
Year2 37.85
Year3 36.12
Total NPV 113.63
Book Value 223.29
No of Shares Outstanding 12570692
Assuming no change in BV after 3years 280.69
Adding NPV + Value after 3 years 365.92
( Final Intrinsic Value after 3 years )
Present Market Cap 1040
Terminal Value Calculation ( assuming non liquidation at end of 3 years )
Terminal Value 1010.1
Terminal Value Calculation ( assuming non liquidation at end of 3 years )
Terminal Value 1010.1
Am also putting up the excel of the same.
Test calculation .xls (28.5 KB)
Regards,
- Please bear with me.
Thanks for the detailed posts and inputs.
This has inspired me to create a simplistic model (over simplistic maybe??) that can help me link DCF with Price to Earnings Today
My Biggest assumption is Earnings = Cash Flow. I am aware of the caveats provided in this thread of using DCF, that cash flows vary over time, that growth may not be as smooth as models expect. I am also aware of the physics envy that Charlie Munger talks about (trying to fit everything into a formula when it may not fit in the real world)
That said, I want to use this as a rough heuristic to say ‘NO’ quickly (when the price is too high) in a few minutes and move on to test other investment opportunities.
Here are a couple of calculations with growth 10% and growth = 15% for 10 years, 5% for perpetuity
| Cash Flow Current Year = Earnings Current Year | 100 | ||
|---|---|---|---|
| Growth Rate | Discount Rate | Perpetuity Growth Rate | |
| 0.1 | 0.095 | 0.05 | |
| 100 | |||
| 110 | 100.456621 | ||
| 121 | 100.915327 | ||
| 133.1 | 101.3761276 | ||
| 146.41 | 101.8390323 | ||
| 161.051 | 102.3040507 | ||
| 177.1561 | 102.7711925 | ||
| 194.87171 | 103.2404674 | ||
| 214.358881 | 103.711885 | ||
| 235.7947691 | 104.1854553 | ||
| 259.374246 | 104.6611879 | ||
| PV of Sum of 10 Year DCF | 1025.461347 | CFn(1+g) | 109.8942473 |
| Perpetuity Value | 2442.094385 | ||
| Discounted Perpetuity Value | 985.4197298 | ||
| Valuation | 2010.881077 | ||
| P/E Today | 20.10881077 | ||
| P/E with Margin of Safety | ?? |
| Cash Flow Current Year = Earnings Current Year | 100 | ||
|---|---|---|---|
| Growth Rate | Discount Rate | Perpetuity Growth Rate | |
| 0.15 | 0.095 | 0.05 | |
| 100 | |||
| 115 | 105.0228311 | ||
| 132.25 | 110.2979504 | ||
| 152.0875 | 115.8380301 | ||
| 174.900625 | 121.6563787 | ||
| 201.1357188 | 127.766973 | ||
| 231.3060766 | 134.1844922 | ||
| 266.001988 | 140.9243526 | ||
| 305.9022863 | 148.0027447 | ||
| 351.7876292 | 155.4366725 | ||
| 404.5557736 | 163.243994 | ||
| PV of Sum of 10 Year DCF | 1322.374419 | CFn(1+g) | 171.4061937 |
| Perpetuity Value | 3809.026526 | ||
| Discounted Perpetuity Value | 1536.996241 | ||
| Valuation | 2859.37066 | ||
| P/E Today | 28.5937066 | ||
| P/E with Margin of Safety | ?? |
Can seniors @The_Confused_Consult @akbarkhan @Akshay_Nayak have a look and provide feedback. Other views also invited, what all am I missing?
My steps are as below:
Assumption: Net Profit = Cash Flow over long run
For Rs 100 Earnings today, given (assumed) growth, discount rate and perpetuity growth rate
- Calculate 10 year discounted earnings - A
- Calculate perpetuity value and discount back to today - B
- Calculate C = A+B. These are the total earnings the company will ever have from now till judgement day given growth assumptions, discounted back to today. In other words this is the value of the company today.
- Take this figure and divide by earnings today (100) to arrive at a very crude P/E that the market should be willing to pay.
- Determine your own margin of safety to this
Of Course you need to carefully examine the assumptions like will the company even be around after 10 years and if so what would the perpetuity value be. And can the growth rate sustain for 10 years.
Again, I just want to use this as rough heuristic so that I can quickly determine what am I paying when I buy at a P/E of 10 v/s a P/E of 35 and am I ok with the assumptions
Thanks
There is no universal accepted method or university method to arrive at intrinsic value of a stock yet I found a simple and seems very easy to learn method one can find it at
Also the concepts of CoGS and free cash is very important Dry much important for one can refer
Regards
1 Like
How to forcast a company growth rate for next 10 years for valuation and what is the upper limit of the future growth rate