A Look At The Fair Value Of INOX India Limited (NSE:INOXINDIA)

Key Insights

• INOX India's estimated fair value is ₹1,110 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₹1,028 suggests INOX India is potentially trading close to its fair value
• Peers of INOX India are currently trading on average at a 910% premium

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of INOX India Limited (NSE:INOXINDIA) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for INOX India

Is INOX India Fairly Valued?

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. 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) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹1.81b	₹2.59b	₹3.99b	₹5.59b	₹7.27b	₹8.94b	₹10.6b	₹12.1b	₹13.6b	₹15.1b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 54.35%	Est @ 40.06%	Est @ 30.05%	Est @ 23.05%	Est @ 18.15%	Est @ 14.72%	Est @ 12.31%	Est @ 10.63%
Present Value (₹, Millions) Discounted @ 14%	₹1.6k	₹2.0k	₹2.7k	₹3.4k	₹3.8k	₹4.2k	₹4.3k	₹4.4k	₹4.3k	₹4.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹35b

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 14%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹15b× (1 + 6.7%) ÷ (14%– 6.7%) = ₹235b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹235b÷ ( 1 + 14%)¹⁰= ₹66b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹101b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹1.0k, the company appears about fair value at a 7.4% 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. 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 INOX India 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 1.008. 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 INOX India

Moving On:

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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For INOX India, there are three essential aspects you should look at:

1. Risks: Every company has them, and we've spotted 1 warning sign for INOX India you should know about.
2. Future Earnings: How does INOXINDIA'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 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.