Estimating The Intrinsic Value Of GMR Power And Urban Infra Limited (NSE:GMRP&UI)

Key Insights

• The projected fair value for GMR Power And Urban Infra is ₹127 based on 2 Stage Free Cash Flow to Equity
• With ₹115 share price, GMR Power And Urban Infra appears to be trading close to its estimated fair value
• Peers of GMR Power And Urban Infra are currently trading on average at a 1,602% premium

Today we will run through one way of estimating the intrinsic value of GMR Power And Urban Infra Limited (NSE:GMRP&UI) 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. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 GMR Power And Urban Infra

What's The Estimated Valuation?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹16.3b	₹15.2b	₹17.1b	₹14.2b	₹12.9b	₹12.2b	₹12.1b	₹12.2b	₹12.5b	₹13.0b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x1	Est @ -16.80%	Est @ -9.75%	Est @ -4.81%	Est @ -1.36%	Est @ 1.06%	Est @ 2.76%	Est @ 3.94%
Present Value (₹, Millions) Discounted @ 18%	₹13.9k	₹10.9k	₹10.5k	₹7.4k	₹5.7k	₹4.6k	₹3.9k	₹3.3k	₹2.9k	₹2.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹66b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (6.7%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 18%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹13b× (1 + 6.7%) ÷ (18%– 6.7%) = ₹127b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹127b÷ ( 1 + 18%)¹⁰= ₹25b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₹91b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₹115, the company appears about fair value at a 9.0% discount to where the stock price trades currently. 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.

The Assumptions

Now 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 GMR Power And Urban Infra 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 1.608. 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.

SWOT Analysis for GMR Power And Urban Infra

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For GMR Power And Urban Infra, we've put together three essential elements you should look at:

1. Risks: We feel that you should assess the 4 warning signs for GMR Power And Urban Infra (2 make us uncomfortable!) we've flagged before making an investment in the company.
2. Future Earnings: How does GMRP&UI'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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.

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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.