Calculating The Intrinsic Value Of Ultra Wiring Connectivity System Limited (NSE:UWCSL)

Key Insights

• Ultra Wiring Connectivity System's estimated fair value is ₹109 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₹93.7 suggests Ultra Wiring Connectivity System is trading close to its fair value
• Ultra Wiring Connectivity System's peers are currently trading at a premium of 365% on average

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Ultra Wiring Connectivity System Limited (NSE:UWCSL) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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 Ultra Wiring Connectivity System

The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (₹, Millions)	₹32.2m	₹45.0m	₹58.4m	₹71.7m	₹84.7m	₹97.1m	₹109.0m	₹120.6m	₹132.1m	₹143.5m
Growth Rate Estimate Source	Est @ 53.62%	Est @ 39.57%	Est @ 29.74%	Est @ 22.85%	Est @ 18.03%	Est @ 14.66%	Est @ 12.30%	Est @ 10.65%	Est @ 9.49%	Est @ 8.68%
Present Value (₹, Millions) Discounted @ 18%	₹27.2	₹32.1	₹35.2	₹36.5	₹36.4	₹35.2	₹33.4	₹31.2	₹28.9	₹26.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹323m

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 5-year average of the 10-year government bond yield of 6.8%. We discount the terminal cash flows to today's value at a cost of equity of 18%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = ₹144m× (1 + 6.8%) ÷ (18%– 6.8%) = ₹1.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹1.3b÷ ( 1 + 18%)¹⁰= ₹244m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹567m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₹93.7, the company appears about fair value at a 14% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Ultra Wiring Connectivity System 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 18%, which is based on a levered beta of 1.278. 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:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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. For Ultra Wiring Connectivity System, we've put together three essential elements you should further research:

1. Risks: Case in point, we've spotted 2 warning signs for Ultra Wiring Connectivity System you should be aware of.
2. 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!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.