Estimating The Intrinsic Value Of Maks Energy Solutions India Limited (NSE:MAKS)
- Maks Energy Solutions India's estimated fair value is ₹21.03 based on 2 Stage Free Cash Flow to Equity
- With ₹23.45 share price, Maks Energy Solutions India appears to be trading close to its estimated fair value
- Maks Energy Solutions India's peers seem to be trading at a higher premium to fair value based onthe industry average of -815%
Does the March share price for Maks Energy Solutions India Limited (NSE:MAKS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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 Maks Energy Solutions India
What's The Estimated Valuation?
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 need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
|Levered FCF (₹, Millions)||₹36.3m||₹32.4m||₹30.6m||₹30.0m||₹30.2m||₹31.0m||₹32.2m||₹33.7m||₹35.5m||₹37.6m|
|Growth Rate Estimate Source||Est @ -18.41%||Est @ -10.84%||Est @ -5.55%||Est @ -1.84%||Est @ 0.76%||Est @ 2.57%||Est @ 3.84%||Est @ 4.73%||Est @ 5.36%||Est @ 5.79%|
|Present Value (₹, Millions) Discounted @ 24%||₹29.2||₹21.0||₹15.9||₹12.6||₹10.2||₹8.4||₹7.0||₹5.9||₹5.0||₹4.3|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹120m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (6.8%) 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 24%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹38m× (1 + 6.8%) ÷ (24%– 6.8%) = ₹230m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹230m÷ ( 1 + 24%)10= ₹26m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹146m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹23.5, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Maks Energy Solutions 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 24%, which is based on a levered beta of 1.794. 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.
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Maks Energy Solutions India, we've put together three important elements you should further research:
- Risks: We feel that you should assess the 4 warning signs for Maks Energy Solutions India (2 don't sit too well with us!) we've flagged before making an investment in the company.
- 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!
- 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.
Valuation is complex, but we're helping make it simple.
Find out whether Maks Energy Solutions India is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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.
Maks Energy Solutions India
Maks Energy Solutions India Limited engages in manufacturing, selling, installing, and testing and commissioning of diesel generator sets and earth moving equipment in India.
Slightly overvalued with imperfect balance sheet.