Estimating The Fair Value Of The Sukhjit Starch & Chemicals Limited (NSE:SUKHJITS)

Key Insights

• Sukhjit Starch & Chemicals' estimated fair value is ₹561 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₹566 suggests Sukhjit Starch & Chemicals is potentially trading close to its fair value
• Sukhjit Starch & Chemicals' peers seem to be trading at a higher premium to fair value based onthe industry average of -481%

In this article we are going to estimate the intrinsic value of The Sukhjit Starch & Chemicals Limited (NSE:SUKHJITS) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Sukhjit Starch & Chemicals

Is Sukhjit Starch & Chemicals Fairly Valued?

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. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 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)	₹453.3m	₹492.7m	₹532.6m	₹573.5m	₹615.9m	₹660.1m	₹706.6m	₹755.6m	₹807.4m	₹862.5m
Growth Rate Estimate Source	Est @ 9.55%	Est @ 8.70%	Est @ 8.10%	Est @ 7.68%	Est @ 7.38%	Est @ 7.18%	Est @ 7.04%	Est @ 6.93%	Est @ 6.86%	Est @ 6.82%
Present Value (₹, Millions) Discounted @ 12%	₹404	₹392	₹378	₹363	₹347	₹332	₹317	₹302	₹288	₹274

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹3.4b

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 12%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹862m× (1 + 6.7%) ÷ (12%– 6.7%) = ₹17b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹17b÷ ( 1 + 12%)¹⁰= ₹5.4b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹8.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹566, the company appears around fair value at the time of writing. 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

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Sukhjit Starch & Chemicals 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.

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Sukhjit Starch & Chemicals, we've put together three fundamental elements you should consider:

1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with Sukhjit Starch & Chemicals .
2. 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!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.