Estimation of the intrinsic value of Indraprastha Medical Corporation Limited (NSE: INDRAMEDCO)
Does the November share price for Indraprastha Medical Corporation Limited (NSE: INDRAMEDCO) reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by projecting its future cash flows and then discounting them to the present value. Our analysis will use the discounted cash flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they’re pretty easy to follow.
We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one of many evaluation metrics, and it is not without its flaws. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis template.
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What is the estimated value?
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. In the first step, we need to estimate the company’s cash flow over the next ten years. Since no analyst estimate of free cash flow is available, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported 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 more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
10-Year Free Cash Flow (FCF) Forecast
|Leveraged FCF (₹, million)||₹417.8 million||₹460.8 million||₹503.5 million||₹546.3 million||₹590.0 million||₹635.0 million||₹681.9 million||₹731.0m||₹782.7 million||₹837.4 million|
|Growth rate estimate Source||Is at 11.8%||Is at 10.3%||Is at 9.25%||Is at 8.51%||Is 7.99%||Is at 7.63%||Is at 7.38%||Is at 7.2%||Is at 7.08%||Is 6.99%|
|Present value (₹, million) discounted at 13%||₹370||₹361||₹349||₹335||₹320||₹305||₹290||₹275||₹261||₹247|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = ₹3.1 billion
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 6.8%. We discount terminal cash flows to present value at a cost of equity of 13%.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹837m × (1 + 6.8%) ÷ (13%–6.8%) = ₹14b
Present value of terminal value (PVTV)= TV / (1 + r)ten= ₹14b÷ ( 1 + 13%)ten= ₹4.3 billion
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is ₹7.4 billion. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹71.4, the company appears to be roughly fair value at an 11% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Indraprastha Medical as potential shareholders, 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 13%, which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
Although a business valuation is important, it is only one of many factors you need to assess for a business. It is not possible to obtain an infallible valuation with a DCF model. 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 significantly change the overall result. For Indraprastha Medical, there are three essential elements you need to explore:
- Risks: For example, we discovered 2 warning signs for Indraprastha Medical which you should be aware of before investing here.
- Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!
- Other environmentally friendly companies: Are you concerned about the environment and do you think that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to discover actions you might not have thought of!
PS. The Simply Wall St app performs an updated cash flow valuation for each NSEI stock each day. If you want to find the calculation for other stocks, search here.
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Find out if medical indraprastha is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.