Calculating The Fair Value Of Bedmutha Industries Limited (NSE:BEDMUTHA)

Key Insights

• The projected fair value for Bedmutha Industries is ₹166 based on 2 Stage Free Cash Flow to Equity
• With ₹190 share price, Bedmutha Industries appears to be trading close to its estimated fair value
• Bedmutha Industries' peers seem to be trading at a higher premium to fair value based onthe industry average of -357%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Bedmutha Industries Limited (NSE:BEDMUTHA) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Bedmutha Industries

The Model

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. 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₹, Millions)	₹591.5m	₹621.2m	₹655.6m	₹694.3m	₹737.0m	₹783.6m	₹834.1m	₹888.6m	₹947.1m	₹1.01b
Growth Rate Estimate Source	Est @ 4.30%	Est @ 5.03%	Est @ 5.54%	Est @ 5.90%	Est @ 6.15%	Est @ 6.32%	Est @ 6.44%	Est @ 6.53%	Est @ 6.59%	Est @ 6.63%
Present Value (₹, Millions) Discounted @ 17%	₹504	₹451	₹406	₹366	₹332	₹300	₹273	₹248	₹225	₹204

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹3.3b

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 17%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₹1.0b× (1 + 6.7%) ÷ (17%– 6.7%) = ₹10b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹10b÷ ( 1 + 17%)¹⁰= ₹2.1b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹5.4b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₹190, 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.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Bedmutha 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 17%, which is based on a levered beta of 1.272. 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:

Whilst important, the DCF calculation 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. 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. For Bedmutha Industries, we've put together three important items you should explore:

1. Risks: Be aware that Bedmutha Industries is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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. 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.