# Is The Indian Hotels Company Limited (NSE:INDHOTEL) Expensive For A Reason? A Look At Its Intrinsic Value

In this article we are going to estimate the intrinsic value of The Indian Hotels Company Limited (NSE:INDHOTEL) by estimating the company’s future cash flows and discounting them to their present value. This is done using the Discounted Cash Flow (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Indian Hotels

### The method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

#### 10-year free cash flow (FCF) estimate

 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Levered FCF (₹, Millions) ₹7.75b ₹8.38b ₹9.59b ₹11.5b ₹12.4b ₹13.2b ₹14.1b ₹15.0b ₹16.0b ₹17.1b Growth Rate Estimate Source Analyst x2 Analyst x4 Analyst x4 Analyst x1 Analyst x1 Est @ 6.8% Est @ 6.7% Est @ 6.64% Est @ 6.59% Est @ 6.56% Present Value (₹, Millions) Discounted @ 14% ₹6.8k ₹6.4k ₹6.4k ₹6.7k ₹6.3k ₹5.9k ₹5.5k ₹5.1k ₹4.7k ₹4.4k

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹58b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 6.5%. We discount the terminal cash flows to today’s value at a cost of equity of 14%.

Terminal Value (TV)= FCF2029 × (1 + g) ÷ (r – g) = ₹17b× (1 + 6.5%) ÷ 14%– 6.5%) = ₹228b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹228b÷ ( 1 + 14%)10= ₹59b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹117b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₹124, the company appears slightly overvalued at the time of writing. Valuations are imprecise instruments though, rather like a telescope – move a few degrees and end up in a different galaxy. Do keep this in mind.

### Important assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at Indian Hotels 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 accounts for debt. In this calculation we’ve used 14%, which is based on a levered beta of 1.016. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

### Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price to differ from the intrinsic value? For Indian Hotels, We’ve put together three further factors you should further research:

1. Risks: To that end, you should be aware of the 1 warning sign we’ve spotted with Indian Hotels .
2. Future Earnings: How does INDHOTEL’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every IN stock every day, so if you want to find the intrinsic value of any other stock just search here.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.