Calculating The Intrinsic Value Of Texmaco Rail & Engineering Limited (NSE:TEXRAIL)

Key Insights

• Texmaco Rail & Engineering's estimated fair value is ₹117 based on 2 Stage Free Cash Flow to Equity
• With ₹135 share price, Texmaco Rail & Engineering appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -791%, Texmaco Rail & Engineering's competitors seem to be trading at a greater premium to fair value

Does the May share price for Texmaco Rail & Engineering Limited (NSE:TEXRAIL) reflect what it's really worth? Today, we will estimate the stock's intrinsic value 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.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Our free stock report includes 1 warning sign investors should be aware of before investing in Texmaco Rail & Engineering. Read for free now.

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. 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.

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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	-₹1.73b	₹1.61b	₹2.63b	₹3.51b	₹4.39b	₹5.26b	₹6.09b	₹6.89b	₹7.65b	₹8.41b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 33.22%	Est @ 25.27%	Est @ 19.70%	Est @ 15.81%	Est @ 13.08%	Est @ 11.17%	Est @ 9.84%
Present Value (₹, Millions) Discounted @ 15%	-₹1.5k	₹1.2k	₹1.8k	₹2.0k	₹2.2k	₹2.3k	₹2.4k	₹2.3k	₹2.3k	₹2.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹17b

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 15%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹8.4b× (1 + 6.7%) ÷ (15%– 6.7%) = ₹115b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹115b÷ ( 1 + 15%)¹⁰= ₹30b

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 ₹47b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₹135, 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.

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 Texmaco Rail & Engineering 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 15%, which is based on a levered beta of 1.072. 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.

View our latest analysis for Texmaco Rail & Engineering

SWOT Analysis for Texmaco Rail & Engineering

Looking Ahead:

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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. 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 Texmaco Rail & Engineering, there are three relevant items you should assess:

1. Risks: Case in point, we've spotted 1 warning sign for Texmaco Rail & Engineering you should be aware of.
2. Future Earnings: How does TEXRAIL'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. 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.

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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.