Is Edelweiss Financial Services Limited (NSE:EDELWEISS) Expensive For A Reason? A Look At The Intrinsic Value

Valuing EDELWEISS, a financial stock, can be daunting since these capital market firms generally have cash flows that are impacted by regulations that are not imposed upon other industries. Asset managers, for example, must hold certain levels of capital in order to maintain a safe cash cushion. Looking at line items like book values, in addition to the return and cost of equity, may be useful for calculating EDELWEISS’s value. Today I will take you through how to value EDELWEISS in a fairly accurate and easy method.

Check out our latest analysis for Edelweiss Financial Services

Why Excess Return Model?

There are two facets to consider: regulation and type of assets. The regulatory environment in India is fairly rigorous. In addition to this, capital markets generally don’t have substantial portions of physical assets on their balance sheet. Excess Returns overcome some of these issues. Firstly, it doesn’t focus on factors such as capex and depreciation – relevant for tangible asset firms – but rather emphasize forecasting stable earnings and book values.

NSEI:EDELWEISS Intrinsic Value Export January 26th 19
NSEI:EDELWEISS Intrinsic Value Export January 26th 19

Deriving EDELWEISS’s True Value

The central belief for this model is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns above the cost of equity is known as excess returns:

Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (0.16% – 14%) x ₹96.62 = ₹1.63

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= ₹1.63 / (14% – 7.6%) = ₹24.45

Putting this all together, we get the value of EDELWEISS’s share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= ₹96.62 + ₹24.45 = ₹121.06

This results in an intrinsic value of ₹121.06. Relative to today’s price of ₹152, EDELWEISS is priced higher than its intrinsic value. Therefore, there’s no benefit to buying EDELWEISS today. Pricing is only one aspect when you’re looking at whether to buy or sell EDELWEISS. Analyzing fundamental factors are equally important when it comes to determining if EDELWEISS has a place in your holdings.

Next Steps:

For capital markets, there are three key aspects you should look at:

  1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
  2. Future earnings: What does the market think of EDELWEISS going forward? Our analyst growth expectation chart helps visualize EDELWEISS’s growth potential over the upcoming years.
  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether EDELWEISS is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on EDELWEISS here.

To help readers see past 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.