Estimating The Intrinsic Value Of Man Infraconstruction Limited (NSE:MANINFRA)

Key Insights

• Man Infraconstruction's estimated fair value is ₹219 based on 2 Stage Free Cash Flow to Equity
• With ₹255 share price, Man Infraconstruction appears to be trading close to its estimated fair value
• Industry average of 1,561% suggests Man Infraconstruction's peers are currently trading at a higher premium to fair value

Today we will run through one way of estimating the intrinsic value of Man Infraconstruction Limited (NSE:MANINFRA) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Man Infraconstruction

Is Man Infraconstruction 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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹5.15b	₹5.71b	₹6.26b	₹6.80b	₹7.36b	₹7.92b	₹8.51b	₹9.12b	₹9.76b	₹10.4b
Growth Rate Estimate Source	Est @ 12.57%	Est @ 10.81%	Est @ 9.58%	Est @ 8.72%	Est @ 8.12%	Est @ 7.69%	Est @ 7.40%	Est @ 7.19%	Est @ 7.05%	Est @ 6.95%
Present Value (₹, Millions) Discounted @ 14%	₹4.5k	₹4.4k	₹4.3k	₹4.1k	₹3.9k	₹3.7k	₹3.5k	₹3.3k	₹3.1k	₹2.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹37b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 6.7%. We discount the terminal cash flows to today's value at a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹10b× (1 + 6.7%) ÷ (14%– 6.7%) = ₹159b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹159b÷ ( 1 + 14%)¹⁰= ₹44b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹82b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹255, the company appears around fair value 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.

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 Man Infraconstruction 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 1.029. 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.

Looking Ahead:

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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Man Infraconstruction, we've put together three essential aspects you should assess:

1. Risks: We feel that you should assess the 1 warning sign for Man Infraconstruction we've flagged before making an investment in the company.
2. 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!
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.

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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.