I have conducted a Discounted Cash Flow (DCF) valuation for Reliance Industries and would appreciate insights from experienced investors and analysts. The objective is to validate my methodology, assumptions, and calculations to ensure accuracy and robustness.
1. Key Assumptions
- Risk-Free Rate: 6.0%
- Beta: 1.1
- Market Risk Premium: 8.0%
- Cost of Debt: 7.0%
- Corporate Tax Rate: 25.0%
- Debt-to-Equity Ratio: 0.41
- Market Capitalization: INR 17,295 billion
- Shares Outstanding: 6.7 billion
2. Projected Free Cash Flows (INR Million)
| Year | FCF (in million) |
|---|---|
| 1 | 1,667,274 |
| 2 | 1,750,638 |
| 3 | 1,838,169 |
| 4 | 1,930,077 |
| 5 | 2,026,580 |
| 6 | 2,127,909 |
| 7 | 2,234,304 |
| 8 | 2,345,920 |
| 9 | 2,462,916 |
| 10 | 2,585,462 |
3. Discount Rate and Valuation Components
- Cost of Equity (Re): 14.8%
- After-Tax Cost of Debt (Rd): 5.25%
- Weighted Average Cost of Capital (WACC): 12.02%
- Total Present Value (PV) of FCFs: INR 11,187,996 million
4. Terminal Value (TV) Calculation
- Terminal Growth Rate: 3.0%
- Terminal Value Formula: TV=2,663,0260.0902=29,527,575 million INRTV=0.09022,663,026=29,527,575 million INR
- Present Value of Terminal Value: INR 9,119,671 million
5. Enterprise and Equity Valuation
- Enterprise Value (EV) = Total PV of FCFs + PV of Terminal Value EV=11,187,996+9,119,671=20,307,667 million INREV=11,187,996+9,119,671=20,307,667 million INR
- Debt Value: INR 7,091.95 billion
- Equity Value: 20,307,667−7,091,950=13,215,717 million INR20,307,667−7,091,950=13,215,717 million INR
6. Intrinsic Share Price Calculation
- Intrinsic Share Price: 13,215,7176,700≈INR1,972 per share6,70013,215,717≈INR1,972 per share
Sensitivity Analysis
Given the importance of WACC and terminal growth rate in DCF models, I conducted a sensitivity analysis to understand the impact of variations in these assumptions:
| Terminal Growth Rate | WACC 11% | WACC 12% | WACC 13% |
|---|---|---|---|
| 2% | INR 2,150 | INR 1,900 | INR 1,750 |
| 3% | INR 2,550 | INR 1,972 | INR 1,800 |
| 4% | INR 3,150 | INR 2,200 | INR 1,950 |
Key Observations:
- Lower WACC (11%) increases intrinsic value per share significantly (e.g., INR 2,550 at 3% terminal growth).
- Higher WACC (13%) decreases the intrinsic value (e.g., INR 1,800 at 3% terminal growth).
- Higher terminal growth rate (4%) pushes intrinsic value upward across scenarios.
Request for Peer Review
I would appreciate feedback from the ValuePickr community on the following:
- Assumptions: Are my growth rate, discount rate, and terminal value assumptions reasonable?
- Methodology: Have I applied the DCF model correctly, or are there any errors?
- Improvements: Any suggestions to refine my valuation approach?
Your insights will be invaluable in improving the accuracy of this valuation. Looking forward to a productive discussio