Stock Analysis

Is Chambal Fertilisers and Chemicals Limited (NSE:CHAMBLFERT) Worth ₹290 Based On Its Intrinsic Value?

NSEI:CHAMBLFERT
Source: Shutterstock

Key Insights

  • The projected fair value for Chambal Fertilisers and Chemicals is ₹225 based on 2 Stage Free Cash Flow to Equity
  • Chambal Fertilisers and Chemicals' ₹290 share price signals that it might be 29% overvalued
  • The ₹350 analyst price target for CHAMBLFERT is 56% more than our estimate of fair value

Does the March share price for Chambal Fertilisers and Chemicals Limited (NSE:CHAMBLFERT) 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. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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 Chambal Fertilisers and Chemicals

Is Chambal Fertilisers and 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. 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, 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

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (₹, Millions) -₹17.8b ₹25.9b ₹21.4b ₹19.2b ₹18.2b ₹17.9b ₹18.1b ₹18.5b ₹19.3b ₹20.2b
Growth Rate Estimate Source Analyst x3 Analyst x3 Analyst x3 Est @ -10.29% Est @ -5.16% Est @ -1.57% Est @ 0.94% Est @ 2.70% Est @ 3.94% Est @ 4.80%
Present Value (₹, Millions) Discounted @ 18% -₹15.1k ₹18.5k ₹12.9k ₹9.8k ₹7.8k ₹6.5k ₹5.6k ₹4.8k ₹4.2k ₹3.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹59b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 6.8%. We discount the terminal cash flows to today's value at a cost of equity of 18%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹20b× (1 + 6.8%) ÷ (18%– 6.8%) = ₹187b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹187b÷ ( 1 + 18%)10= ₹35b

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 ₹94b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹290, the company appears slightly overvalued 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.

dcf
NSEI:CHAMBLFERT Discounted Cash Flow March 7th 2023

The 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. 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 Chambal Fertilisers and 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 18%, which is based on a levered beta of 1.184. 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 Chambal Fertilisers and Chemicals

Strength
  • Debt is well covered by earnings.
  • Dividend is in the top 25% of dividend payers in the market.
Weakness
  • Earnings declined over the past year.
Opportunity
  • Annual earnings are forecast to grow faster than the Indian market.
  • Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
  • Debt is not well covered by operating cash flow.
  • Paying a dividend but company has no free cash flows.
  • Annual revenue is expected to decline over the next 3 years.

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value lower than the current share price? For Chambal Fertilisers and Chemicals, there are three fundamental items you should further examine:

  1. Risks: Take risks, for example - Chambal Fertilisers and Chemicals has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
  2. Future Earnings: How does CHAMBLFERT'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.

New: AI Stock Screener & Alerts

Our new AI Stock Screener scans the market every day to uncover opportunities.

• Dividend Powerhouses (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies

Or build your own from over 50 metrics.

Explore Now for Free

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.