Calculating The Fair Value Of Dwarikesh Sugar Industries Limited (NSE:DWARKESH)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Dwarikesh Sugar Industries fair value estimate is ₹56.67
• With ₹64.39 share price, Dwarikesh Sugar Industries appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -479%, Dwarikesh Sugar Industries' competitors seem to be trading at a greater premium to fair value

Does the October share price for Dwarikesh Sugar Industries Limited (NSE:DWARKESH) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Dwarikesh Sugar Industries

Step By Step Through The Calculation

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹1.58b	₹704.5m	₹687.4m	₹689.6m	₹705.0m	₹730.2m	₹763.1m	₹802.5m	₹847.7m	₹898.1m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ -2.42%	Est @ 0.31%	Est @ 2.23%	Est @ 3.57%	Est @ 4.51%	Est @ 5.17%	Est @ 5.63%	Est @ 5.95%
Present Value (₹, Millions) Discounted @ 12%	₹1.4k	₹560	₹487	₹436	₹398	₹367	₹342	₹321	₹302	₹286

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹4.9b

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 12%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹898m× (1 + 6.7%) ÷ (12%– 6.7%) = ₹18b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹18b÷ ( 1 + 12%)¹⁰= ₹5.6b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹11b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₹64.4, the company appears around fair value at the time of writing. 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

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Dwarikesh Sugar Industries 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 12%, 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 Dwarikesh Sugar Industries

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 Dwarikesh Sugar Industries, there are three fundamental elements you should look at:

1. Risks: Take risks, for example - Dwarikesh Sugar Industries has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
2. Future Earnings: How does DWARKESH'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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.