Krishna Institute of Medical Sciences Limited (NSE:KIMS) Shares Could Be 34% Above Their Intrinsic Value Estimate

Key Insights

• The projected fair value for Krishna Institute of Medical Sciences is ₹1,538 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₹2,059 suggests Krishna Institute of Medical Sciences is potentially 34% overvalued
• Analyst price target for KIMS is ₹2,149, which is 40% above our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Krishna Institute of Medical Sciences Limited (NSE:KIMS) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Krishna Institute of Medical Sciences

The Model

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₹, Millions)	-₹1.94b	₹1.43b	₹3.50b	₹5.47b	₹7.73b	₹10.1b	₹12.5b	₹14.8b	₹17.1b	₹19.2b
Growth Rate Estimate Source	Analyst x5	Analyst x4	Analyst x4	Est @ 56.08%	Est @ 41.27%	Est @ 30.91%	Est @ 23.66%	Est @ 18.58%	Est @ 15.02%	Est @ 12.54%
Present Value (₹, Millions) Discounted @ 13%	-₹1.7k	₹1.1k	₹2.4k	₹3.3k	₹4.1k	₹4.8k	₹5.2k	₹5.4k	₹5.5k	₹5.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹36b

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)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₹19b× (1 + 6.7%) ÷ (13%– 6.7%) = ₹308b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹308b÷ ( 1 + 13%)¹⁰= ₹87b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₹123b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of ₹2.1k, the company appears potentially overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The 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 Krishna Institute of Medical Sciences 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.

SWOT Analysis for Krishna Institute of Medical Sciences

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price exceeding the intrinsic value? For Krishna Institute of Medical Sciences, we've put together three additional aspects you should assess:

1. Risks: Be aware that Krishna Institute of Medical Sciences is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...
2. Future Earnings: How does KIMS'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. 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.