Stock Analysis

Estimating The Fair 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 ₹0.78
  • With ₹0.75 share price, Setubandhan Infrastructure appears to be trading close to its estimated fair value
  • Setubandhan Infrastructure's peers are currently trading at a premium of 229% on average

Today we will run through one way of estimating the intrinsic value of Setubandhan Infrastructure Limited (NSE:SETUINFRA) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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'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.

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) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (₹, Millions) ₹21.4m ₹22.2m ₹23.3m ₹24.5m ₹26.0m ₹27.6m ₹29.3m ₹31.2m ₹33.2m ₹35.4m
Growth Rate Estimate Source Est @ 2.70% Est @ 3.93% Est @ 4.79% Est @ 5.39% Est @ 5.82% Est @ 6.11% Est @ 6.32% Est @ 6.46% Est @ 6.56% Est @ 6.63%
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)= FCF2033 × (1 + g) ÷ (r – g) = ₹35m× (1 + 6.8%) ÷ (26%– 6.8%) = ₹194m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹194m÷ ( 1 + 26%)10= ₹19m

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 ₹104m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₹0.8, the company appears about fair value at a 3.3% 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.

dcf
NSEI:SETUINFRA Discounted Cash Flow August 4th 2023

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual 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
  • No major weaknesses identified for SETUINFRA.
Opportunity
  • Current share price is below our estimate of fair value.
  • Lack of analyst coverage makes it difficult to determine SETUINFRA's earnings prospects.
Threat
  • Debt is not well covered by operating cash flow.

Looking Ahead:

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. 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 Setubandhan Infrastructure, we've put together three fundamental items you should explore:

  1. Risks: We feel that you should assess the 4 warning signs for Setubandhan Infrastructure (3 are concerning!) we've flagged before making an investment in the company.
  2. 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!
  3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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 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.