Calculating The Fair Value Of Chemplast Sanmar Limited (NSE:CHEMPLASTS)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Chemplast Sanmar fair value estimate is ₹429
• Chemplast Sanmar's ₹488 share price indicates it is trading at similar levels as its fair value estimate
• Our fair value estimate is 27% lower than Chemplast Sanmar's analyst price target of ₹585

Today we will run through one way of estimating the intrinsic value of Chemplast Sanmar Limited (NSE:CHEMPLASTS) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Chemplast Sanmar

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 begin with, we have to get estimates of 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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)	-₹7.22b	₹5.84b	₹6.76b	₹7.53b	₹8.29b	₹9.04b	₹9.80b	₹10.6b	₹11.4b	₹12.2b
Growth Rate Estimate Source	Analyst x1	Analyst x2	Analyst x1	Est @ 11.45%	Est @ 10.04%	Est @ 9.06%	Est @ 8.37%	Est @ 7.89%	Est @ 7.55%	Est @ 7.31%
Present Value (₹, Millions) Discounted @ 15%	-₹6.3k	₹4.4k	₹4.4k	₹4.3k	₹4.1k	₹3.9k	₹3.7k	₹3.5k	₹3.2k	₹3.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹28b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 15%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₹12b× (1 + 6.8%) ÷ (15%– 6.8%) = ₹159b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹159b÷ ( 1 + 15%)¹⁰= ₹40b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹68b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹488, 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.

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 Chemplast Sanmar 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 15%, which is based on a levered beta of 0.983. 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 Chemplast Sanmar

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Chemplast Sanmar, we've put together three further factors you should further research:

1. Risks: Case in point, we've spotted 1 warning sign for Chemplast Sanmar you should be aware of.
2. Future Earnings: How does CHEMPLASTS'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. 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.