Stock Analysis

Estimating The Fair Value Of Setubandhan Infrastructure Limited (NSE:SETUINFRA)

NSEI:SETUINFRA
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Key Insights

  • The projected fair value for Setubandhan Infrastructure is ₹1.18 based on 2 Stage Free Cash Flow to Equity
  • Current share price of ₹0.95 suggests Setubandhan Infrastructure is potentially trading close to its fair value
  • Setubandhan Infrastructure's peers are currently trading at a premium of 882% on average

Does the February share price for Setubandhan Infrastructure Limited (NSE:SETUINFRA) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

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.

View our latest analysis for Setubandhan Infrastructure

The Method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (₹, Millions) ₹21.8m ₹24.0m ₹26.2m ₹28.5m ₹30.7m ₹33.1m ₹35.5m ₹38.0m ₹40.7m ₹43.5m
Growth Rate Estimate Source Est @ 11.83% Est @ 10.30% Est @ 9.23% Est @ 8.48% Est @ 7.95% Est @ 7.59% Est @ 7.33% Est @ 7.15% Est @ 7.02% Est @ 6.94%
Present Value (₹, Millions) Discounted @ 23% ₹17.7 ₹15.8 ₹14.0 ₹12.3 ₹10.7 ₹9.4 ₹8.1 ₹7.1 ₹6.1 ₹5.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹106m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 23%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = ₹44m× (1 + 6.7%) ÷ (23%– 6.7%) = ₹279m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹279m÷ ( 1 + 23%)10= ₹34m

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 ₹141m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of ₹0.9, the company appears about fair value at a 20% 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 February 8th 2024

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 23%, 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.
  • Total liabilities exceed total assets, which raises the risk of financial distress.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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 pertinent elements you should further examine:

  1. Risks: As an example, we've found 4 warning signs for Setubandhan Infrastructure that you need to consider before investing here.
  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. 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.