A Look At The Fair Value Of Raymond Lifestyle Limited (NSE:RAYMONDLSL)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Raymond Lifestyle fair value estimate is ₹869
• Current share price of ₹962 suggests Raymond Lifestyle is potentially trading close to its fair value
• When compared to theindustry average discount of -3,109%, Raymond Lifestyle's competitors seem to be trading at a greater premium to fair value

In this article we are going to estimate the intrinsic value of Raymond Lifestyle Limited (NSE:RAYMONDLSL) by taking the expected future cash flows and discounting them to their present value. This will be done using 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 would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Our free stock report includes 1 warning sign investors should be aware of before investing in Raymond Lifestyle. 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. To start off with, we need to estimate the next ten years of cash flows. 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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹2.30b	₹6.55b	₹6.53b	₹6.65b	₹6.86b	₹7.16b	₹7.52b	₹7.93b	₹8.40b	₹8.92b
Growth Rate Estimate Source	Analyst x1	Analyst x2	Analyst x2	Est @ 1.78%	Est @ 3.26%	Est @ 4.30%	Est @ 5.03%	Est @ 5.53%	Est @ 5.89%	Est @ 6.14%
Present Value (₹, Millions) Discounted @ 16%	₹2.0k	₹4.9k	₹4.2k	₹3.7k	₹3.3k	₹2.9k	₹2.6k	₹2.4k	₹2.2k	₹2.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹30b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 16%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹8.9b× (1 + 6.7%) ÷ (16%– 6.7%) = ₹102b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹102b÷ ( 1 + 16%)¹⁰= ₹23b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹53b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₹962, 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.

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 Raymond Lifestyle 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 1.290. 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 Raymond Lifestyle

SWOT Analysis for Raymond Lifestyle

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. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 Raymond Lifestyle, there are three fundamental items you should assess:

1. Risks: For example, we've discovered 1 warning sign for Raymond Lifestyle that you should be aware of before investing here.
2. Future Earnings: How does RAYMONDLSL'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.