Numbers and Narratives: A Simple Discounted Cash Flow (DCF) Model for Equity Valuation

  1. Operating Income is only Rs. 655.01 Cr (According to the Q4/Full Year Report). You do not include Finance Costs, because it’s already accounted for in Value of Debt. Even in the Accounting sense, Finance Costs do not relate to Operating Cash Flows.

  2. Looks like you are correct. KRBL’s Rating recently got reassigned and upgraded to AA from AA- (Source). The problem is, India doesn’t have a huge Debt market, a Corporate Debt market nonetheless. Here’s a list of the Corporate Debt being traded in India. The ideal way to do this would be to find 4-5 companies in the same industry with the same Credit Rating as KRBL (AA Stable) and find out their average Yield. Since India does not have a vast Debt market, we have to settle for guess work based on the few samples we have (Ignoring the fact that we need to check Yield levels in the same industry, because there’s no other choice). So, even for AA Stable, I think 7.50% is a decent estimate.

3/4. Really weird about the Beta. From the screenshot I have attached in the post, it’s clear that I’ve taken it from TopStockResearch (I usually take it here - since they have long term Betas as well). In the screenshot, it says 0.488. Sames goes for LT Foods, it was around 0.899. Maybe the website was inaccurate? I honestly don’t know.

The most accurate way to calculate the Beta (Just to be sure yourself) would be like this:

KRBL Beta.xlsx (44.5 KB)

As you can see, the 5-Year Beta of KRBL is 0.66, Kohinoor 1.38 and LT Foods 0.96 (You can also see that NIFTY’s 5-Year CAGR is 12%, so I didn’t mess up there). Let me see if I can change the inputs and change the screenshots as well. Perhaps a good lesson in why you shouldn’t trust random sources on the internet.

Rest assured, this should not affect the outcome by much, since I wasn’t way off from the actual values. But thanks a lot for pointing this out. Oh, and the source for all this historical price data is Yahoo Finance. I have use Y! Finance extensively in the past for calculating Betas and getting historical price data, but with this one, I got a little lazy.

  1. Usually a good practice to ignore the company in question. What you’re essentially doing is calculating the risk suggested by the market for the ‘competitors’ using their Beta, remove the effect of their D/E Ratio. Once this is done, you end up with what’s called ‘Asset Beta’ or ‘Unlevered Beta’. Then you work your way backwards and ‘re-lever’ this using the D/E Ratio of the company in question (Here, KRBL). Since your end results is to obtain the Beta for KRBL, it’s best not to include anything related to KRBL in any intermediate steps. Theory on this here, if you are interested (Or just search for ‘Bottom Up Beta’ on Google).
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