Pricing capital market stocks such as EDELWEISS is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. Asset managers, for example, must hold certain levels of capital in order to maintain a safe cash cushion. Emphasizing data points like book values, in addition to the return and cost of equity, can be useful for computing EDELWEISS’s intrinsic value. Below I will show you how to value EDELWEISS in a fairly useful and simple way.
Why Excess Return Model?
There are two facets to consider: regulation and type of assets. Strict regulatory environment in India’s finance industry reduces EDELWEISS’s financial flexibility. Furthermore, capital markets generally don’t possess substantial amounts of tangible assets on their balance sheet. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
Deriving EDELWEISS’s Intrinsic Value
The key assumption 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 in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.17% – 15%) x ₹97.76 = ₹2.45
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)
= ₹2.45 / (15% – 7.7%) = ₹35.56
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
= ₹97.76 + ₹35.56 = ₹133.32
This results in an intrinsic value of ₹133.32. Relative to the present share price of ₹164, EDELWEISS is currently trading above what it’s actually worth. Therefore, there’s no benefit to buying EDELWEISS today. Valuation is only one part of your investment analysis for whether to buy or sell EDELWEISS. There are other important factors to keep in mind when assessing whether EDELWEISS is the right investment in your portfolio.
For capital markets, there are three key aspects you should look at:
- 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.
- 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.
- 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 email@example.com.