Stock Analysis

Calculating The Intrinsic Value Of Shaily Engineering Plastics Limited (NSE:SHAILY)

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NSEI:SHAILY
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Shaily Engineering Plastics fair value estimate is ₹386
  • Shaily Engineering Plastics' ₹334 share price indicates it is trading at similar levels as its fair value estimate
  • Shaily Engineering Plastics' peers are currently trading at a premium of 796% on average

In this article we are going to estimate the intrinsic value of Shaily Engineering Plastics Limited (NSE:SHAILY) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 Shaily Engineering Plastics

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. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (₹, Millions) ₹186.0m ₹336.0m ₹626.8m ₹1.02b ₹1.49b ₹1.99b ₹2.51b ₹3.02b ₹3.50b ₹3.97b
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 86.55% Est @ 62.61% Est @ 45.84% Est @ 34.11% Est @ 25.90% Est @ 20.15% Est @ 16.12% Est @ 13.30%
Present Value (₹, Millions) Discounted @ 16% ₹161 ₹251 ₹405 ₹569 ₹718 ₹832 ₹906 ₹941 ₹944 ₹925

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹6.7b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 6.7%. We discount the terminal cash flows to today's value at a cost of equity of 16%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = ₹4.0b× (1 + 6.7%) ÷ (16%– 6.7%) = ₹47b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹47b÷ ( 1 + 16%)10= ₹11b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹18b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹334, the company appears about fair value at a 14% discount to where the stock price trades currently. 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.

dcf
NSEI:SHAILY Discounted Cash Flow November 29th 2023

Important 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 Shaily Engineering Plastics 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 16%, which is based on a levered beta of 1.074. 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 Shaily Engineering Plastics

Strength
  • Debt is well covered by earnings and cashflows.
Weakness
  • Earnings growth over the past year underperformed the Machinery industry.
Opportunity
  • Annual revenue is forecast to grow faster than the Indian market.
  • Current share price is below our estimate of fair value.
Threat
  • No apparent threats visible for SHAILY.

Moving On:

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. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Shaily Engineering Plastics, we've compiled three important factors you should explore:

  1. Risks: You should be aware of the 2 warning signs for Shaily Engineering Plastics (1 is concerning!) we've uncovered before considering an investment in the company.
  2. Future Earnings: How does SHAILY's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. 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!

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 Shaily Engineering Plastics 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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