Estimating The Fair Value Of KPR Mill Limited (NSE:KPRMILL)

In this article I am going to calculate the intrinsic value of KPR Mill Limited (NSE:KPRMILL) by projecting its future cash flows and then discounting them to today’s value. I will use the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in July 2018 so be sure check out the updated calculation by following the link below.

View our latest analysis for K.P.R. Mill

The calculation

I’m 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 perpetual stable growth rate. In the first stage we need to estimate the cash flows to the business over the next five years. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

2018 2019 2020 2021 2022
Levered FCF (₹, Millions) ₹2.28k ₹2.89k ₹3.10k ₹3.32k ₹3.56k
Source Analyst x2 Analyst x2 Extrapolated @ (7.18%) Extrapolated @ (7.18%) Extrapolated @ (7.18%)
Present Value Discounted @ 13.55% ₹2.00k ₹2.24k ₹2.12k ₹2.00k ₹1.88k

Present Value of 5-year Cash Flow (PVCF)= ₹10.24b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 7.7%. We discount this to today’s value at a cost of equity of 13.5%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = ₹3.56b × (1 + 7.7%) ÷ (13.5% – 7.7%) = ₹65.88b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = ₹65.88b ÷ ( 1 + 13.5%)5 = ₹34.91b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ₹45.15b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of ₹624.75. Relative to the current share price of ₹620.2, the stock is about right, perhaps slightly undervalued at a 0.73% discount to what it is available for right now.

NSEI:KPRMILL Intrinsic Value Export July 25th 18
NSEI:KPRMILL Intrinsic Value Export July 25th 18

Important 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at K.P.R. Mill as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 13.5%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

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. For KPRMILL, there are three fundamental aspects you should look at:

  1. Financial Health: Does KPRMILL have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does KPRMILL’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: Are there other high quality stocks you could be holding instead of KPRMILL? 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 for every stock on the NSE every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.