Calculating The Intrinsic Value Of Lypsa Gems & Jewellery Limited (NSE:LYPSAGEMS)

Key Insights

• Lypsa Gems & Jewellery's estimated fair value is ₹4.96 based on 2 Stage Free Cash Flow to Equity
• Lypsa Gems & Jewellery's ₹5.15 share price indicates it is trading at similar levels as its fair value estimate
• Lypsa Gems & Jewellery's peers seem to be trading at a higher premium to fair value based onthe industry average of -2,734%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Lypsa Gems & Jewellery Limited (NSE:LYPSAGEMS) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Lypsa Gems & Jewellery

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₹, Millions)	₹19.7m	₹19.2m	₹19.2m	₹19.6m	₹20.3m	₹21.2m	₹22.3m	₹23.5m	₹24.9m	₹26.5m
Growth Rate Estimate Source	Est @ -6.84%	Est @ -2.77%	Est @ 0.08%	Est @ 2.08%	Est @ 3.47%	Est @ 4.45%	Est @ 5.13%	Est @ 5.61%	Est @ 5.95%	Est @ 6.18%
Present Value (₹, Millions) Discounted @ 18%	₹16.8	₹13.9	₹11.8	₹10.3	₹9.0	₹8.0	₹7.2	₹6.4	₹5.8	₹5.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹94m

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 6.7%. We discount the terminal cash flows to today's value at a cost of equity of 18%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₹26m× (1 + 6.7%) ÷ (18%– 6.7%) = ₹261m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹261m÷ ( 1 + 18%)¹⁰= ₹52m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹146m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₹5.2, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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 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 Lypsa Gems & Jewellery 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 18%, which is based on a levered beta of 1.300. 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 Lypsa Gems & Jewellery

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize 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 Lypsa Gems & Jewellery, we've put together three essential elements you should consider:

1. Risks: Be aware that Lypsa Gems & Jewellery is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...
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 Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.

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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.