Estimating The Intrinsic Value Of Shekhawati Poly-Yarn Limited (NSE:SPYL)

Key Insights

• Shekhawati Poly-Yarn's estimated fair value is ₹2.32 based on 2 Stage Free Cash Flow to Equity
• With ₹2.05 share price, Shekhawati Poly-Yarn appears to be trading close to its estimated fair value
• The average premium for Shekhawati Poly-Yarn's competitorsis currently 7,096%

In this article we are going to estimate the intrinsic value of Shekhawati Poly-Yarn Limited (NSE:SPYL) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Shekhawati Poly-Yarn

The Model

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. 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.

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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₹, Millions)	₹115.0m	₹127.3m	₹139.5m	₹151.6m	₹163.8m	₹176.4m	₹189.4m	₹203.1m	₹217.3m	₹232.4m
Growth Rate Estimate Source	Est @ 12.46%	Est @ 10.73%	Est @ 9.53%	Est @ 8.68%	Est @ 8.09%	Est @ 7.68%	Est @ 7.39%	Est @ 7.18%	Est @ 7.04%	Est @ 6.94%
Present Value (₹, Millions) Discounted @ 22%	₹94.0	₹85.1	₹76.2	₹67.7	₹59.8	₹52.6	₹46.2	₹40.5	₹35.4	₹31.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹589m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 22%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₹232m× (1 + 6.7%) ÷ (22%– 6.7%) = ₹1.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹1.6b÷ ( 1 + 22%)¹⁰= ₹212m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹800m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of ₹2.1, the company appears about fair value at a 12% 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.

The 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. 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 Shekhawati Poly-Yarn 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 22%, which is based on a levered beta of 2.000. 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 Shekhawati Poly-Yarn

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Shekhawati Poly-Yarn, we've put together three important elements you should consider:

1. Risks: You should be aware of the 3 warning signs for Shekhawati Poly-Yarn we've uncovered before considering an investment in the company.
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 Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.