Hindustan Foods Limited's (NSE:HNDFDS) Intrinsic Value Is Potentially 29% Above Its Share Price

Key Insights

• The projected fair value for Hindustan Foods is ₹748 based on 2 Stage Free Cash Flow to Equity
• Hindustan Foods is estimated to be 22% undervalued based on current share price of ₹581
• The average premium for Hindustan Foods' competitorsis currently 506%

Does the July share price for Hindustan Foods Limited (NSE:HNDFDS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

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The Method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (₹, Millions)	-₹998.5m	₹2.06b	₹3.12b	₹4.31b	₹5.54b	₹6.77b	₹7.95b	₹9.08b	₹10.2b	₹11.2b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 51.54%	Est @ 38.10%	Est @ 28.69%	Est @ 22.11%	Est @ 17.50%	Est @ 14.27%	Est @ 12.01%	Est @ 10.43%
Present Value (₹, Millions) Discounted @ 13%	-₹887	₹1.6k	₹2.2k	₹2.7k	₹3.1k	₹3.3k	₹3.5k	₹3.5k	₹3.5k	₹3.4k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹26b

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)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = ₹11b× (1 + 6.7%) ÷ (13%– 6.7%) = ₹207b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹207b÷ ( 1 + 13%)¹⁰= ₹63b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹89b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹581, the company appears a touch undervalued at a 22% discount to where the stock price trades currently. 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.

Important Assumptions

We would point out that 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 Hindustan Foods 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.

View our latest analysis for Hindustan Foods

SWOT Analysis for Hindustan Foods

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Hindustan Foods, we've put together three fundamental items you should further research:

1. Risks: We feel that you should assess the 1 warning sign for Hindustan Foods we've flagged before making an investment in the company.
2. Future Earnings: How does HNDFDS'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. 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.