How far is Minda Corporation Limited (NSE: MINDACORP) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by taking expected future cash flows and discounting them to today’s value. This will be done using the Discounted Cash Flow (DCF) model. There really isn’t much to do, although it might seem quite complex.
There are many ways that businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. Anyone interested in learning a bit more about intrinsic value should read the Simply Wall St.
See our latest review for Minda
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth, and the second stage is lower growth stage. First, we need to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of those future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) forecast
|Leverage FCF (₹, Millions)||1.27b||-197.5m||1.71b||2.48b||₹ 3.32b||₹ 4.16b||₹ 4.99b||₹ 5.79b||₹ 6.55b||₹ 7.29b|
|Source of estimated growth rate||Analyst x2||Analyst x2||Analyst x1||Is 45.04%||Is 33.55%||Is 25.5%||Est @ 19.88%||Est @ 15.93%||Est @ 13.18%||Est @ 11.25%|
|Present value (₹, millions) discounted at 15%||₹ 1.1k||– ₹ 148||₹ 1.1k||₹ 1.4k||₹ 1.6k||₹ 1.8k||₹ 1.8k||₹ 1.8k||₹ 1.8k||₹ 1.7k|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = ₹ 14b
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 6.7%. We discount terminal cash flows to their present value at a cost of equity of 15%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = 7.3b × (1 + 6.7%) ÷ (15% – 6.7%) = ₹ 90b
Present value of terminal value (PVTV)= TV / (1 + r)ten= ₹ 90b ÷ (1 + 15%)ten= 22b
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is ₹ 36b. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current stock price of 199, the company looks potentially overvalued at the time of writing. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
We draw your attention to the fact that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we consider Minda to be a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 15%, which is based on a leveraged beta of 1.382. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
While a business valuation is important, ideally it won’t be the only analysis that you look at for a business. The DCF model is not a perfect stock assessment tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price exceeds intrinsic value? For Minda, we’ve compiled three fundamental aspects that you should research further:
- Risks: For example, we discovered 4 warning signs for Minda (1 is concerning!) That you should know before investing here.
- Management: Did insiders increase their stocks to take advantage of market sentiment about MINDACORP’s future prospects? Check out our management and board analysis with information on CEO compensation and governance factors.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each NSEI share. If you want to find the calculation for other actions, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.