Stock Analysis

A Look At The Intrinsic Value Of Setubandhan Infrastructure Limited (NSE:SETUINFRA)

NSEI:SETUINFRA
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Setubandhan Infrastructure fair value estimate is ₹0.82
  • Current share price of ₹0.85 suggests Setubandhan Infrastructure is potentially trading close to its fair value
  • When compared to theindustry average discount of -768%, Setubandhan Infrastructure's competitors seem to be trading at a greater premium to fair value

How far off is Setubandhan Infrastructure Limited (NSE:SETUINFRA) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present 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.

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 Setubandhan Infrastructure

Step By Step Through The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.

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) ₹21.4m ₹22.2m ₹23.3m ₹24.5m ₹26.0m ₹27.6m ₹29.3m ₹31.2m ₹33.3m ₹35.5m
Growth Rate Estimate Source Est @ 2.70% Est @ 3.94% Est @ 4.80% Est @ 5.40% Est @ 5.82% Est @ 6.12% Est @ 6.33% Est @ 6.47% Est @ 6.57% Est @ 6.64%
Present Value (₹, Millions) Discounted @ 26% ₹16.9 ₹13.9 ₹11.6 ₹9.7 ₹8.1 ₹6.8 ₹5.7 ₹4.8 ₹4.1 ₹3.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹85m

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. 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 26%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹35m× (1 + 6.8%) ÷ (26%– 6.8%) = ₹195m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹195m÷ ( 1 + 26%)10= ₹19m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹104m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₹0.8, 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.

dcf
NSEI:SETUINFRA Discounted Cash Flow March 30th 2023

Important 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 Setubandhan Infrastructure 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 26%, which is based on a levered beta of 2.000. 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 Setubandhan Infrastructure

Strength
  • Debt is well covered by earnings.
Weakness
  • Current share price is above our estimate of fair value.
Opportunity
  • SETUINFRA's financial characteristics indicate limited near-term opportunities for shareholders.
  • Lack of analyst coverage makes it difficult to determine SETUINFRA's earnings prospects.
Threat
  • Debt is not well covered by operating cash flow.

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for 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 Setubandhan Infrastructure, there are three further factors you should assess:

  1. Risks: Every company has them, and we've spotted 2 warning signs for Setubandhan Infrastructure you should know about.
  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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NSEI every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're helping make it simple.

Find out whether Setubandhan Infrastructure 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.

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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.