Balrampur Chini Mills Limited (NSE:BALRAMCHIN) Shares Could Be 29% Above Their Intrinsic Value Estimate

Key Insights

• Balrampur Chini Mills' estimated fair value is ₹434 based on 2 Stage Free Cash Flow to Equity
• Balrampur Chini Mills' ₹559 share price signals that it might be 29% overvalued
• Our fair value estimate is 34% lower than Balrampur Chini Mills' analyst price target of ₹660

How far off is Balrampur Chini Mills Limited (NSE:BALRAMCHIN) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

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.

We've discovered 2 warning signs about Balrampur Chini Mills. View them for free.

The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹3.18b	-₹5.33b	₹2.98b	₹4.18b	₹5.44b	₹6.71b	₹7.93b	₹9.10b	₹10.2b	₹11.3b
Growth Rate Estimate Source	Analyst x3	Analyst x1	Analyst x3	Est @ 40.34%	Est @ 30.25%	Est @ 23.19%	Est @ 18.25%	Est @ 14.79%	Est @ 12.37%	Est @ 10.68%
Present Value (₹, Millions) Discounted @ 13%	₹2.8k	-₹4.2k	₹2.1k	₹2.6k	₹3.0k	₹3.3k	₹3.5k	₹3.5k	₹3.5k	₹3.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹24b

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 13%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹11b× (1 + 6.7%) ÷ (13%– 6.7%) = ₹208b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹208b÷ ( 1 + 13%)¹⁰= ₹64b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹88b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹559, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Balrampur Chini Mills 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 13%, 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.

See our latest analysis for Balrampur Chini Mills

SWOT Analysis for Balrampur Chini Mills

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching 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?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a premium to intrinsic value? For Balrampur Chini Mills, there are three fundamental elements you should further research:

1. Risks: Be aware that Balrampur Chini Mills is showing 2 warning signs in our investment analysis , you should know about...
2. Future Earnings: How does BALRAMCHIN'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.