A Look At The Fair Value Of MedPlus Health Services Limited (NSE:MEDPLUS)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, MedPlus Health Services fair value estimate is ₹674
• Current share price of ₹728 suggests MedPlus Health Services is potentially trading close to its fair value
• Our fair value estimate is 21% lower than MedPlus Health Services' analyst price target of ₹849

How far off is MedPlus Health Services Limited (NSE:MEDPLUS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present 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.

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for MedPlus Health Services

The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of 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) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (₹, Millions)	-₹1.84b	-₹269.0m	₹732.5m	₹1.69b	₹3.28b	₹5.49b	₹8.20b	₹11.2b	₹14.3b	₹17.4b
Growth Rate Estimate Source	Analyst x2	Analyst x3	Analyst x2	Est @ 130.92%	Est @ 93.69%	Est @ 67.62%	Est @ 49.38%	Est @ 36.61%	Est @ 27.67%	Est @ 21.41%
Present Value (₹, Millions) Discounted @ 15%	-₹1.6k	-₹205	₹487	₹981	₹1.7k	₹2.4k	₹3.2k	₹3.8k	₹4.2k	₹4.4k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹19b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 6.8%. We discount the terminal cash flows to today's value at a cost of equity of 15%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = ₹17b× (1 + 6.8%) ÷ (15%– 6.8%) = ₹238b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹238b÷ ( 1 + 15%)¹⁰= ₹61b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹80b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₹728, 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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 MedPlus Health Services 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 0.800. 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 MedPlus Health Services

Next Steps:

Whilst important, the DCF calculation 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 MedPlus Health Services, there are three additional elements you should assess:

1. Risks: Be aware that MedPlus Health Services is showing 1 warning sign in our investment analysis , you should know about...
2. Future Earnings: How does MEDPLUS'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. 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.