Stock Analysis

Is There An Opportunity With Dalmia Bharat Limited's (NSE:DALBHARAT) 44% Undervaluation?

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NSEI:DALBHARAT
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Dalmia Bharat fair value estimate is ₹3,152
  • Dalmia Bharat is estimated to be 44% undervalued based on current share price of ₹1,750
  • Analyst price target for DALBHARAT is ₹2,137 which is 32% below our fair value estimate

Does the March share price for Dalmia Bharat Limited (NSE:DALBHARAT) reflect what it's really worth? Today, we will estimate the stock's intrinsic value 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

See our latest analysis for Dalmia Bharat

What's The Estimated Valuation?

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. 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.

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) forecast

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (₹, Millions) -₹12.2b -₹14.2b ₹2.26b ₹13.9b ₹27.0b ₹45.5b ₹68.2b ₹93.5b ₹119.6b ₹145.4b
Growth Rate Estimate Source Analyst x14 Analyst x14 Analyst x14 Analyst x1 Est @ 94.82% Est @ 68.42% Est @ 49.94% Est @ 37.00% Est @ 27.94% Est @ 21.60%
Present Value (₹, Millions) Discounted @ 15% -₹10.6k -₹10.7k ₹1.5k ₹7.9k ₹13.3k ₹19.4k ₹25.3k ₹30.1k ₹33.4k ₹35.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹145b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (6.8%) 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 15%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹145b× (1 + 6.8%) ÷ (15%– 6.8%) = ₹1.8t

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹1.8t÷ ( 1 + 15%)10= ₹446b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹591b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹1.8k, the company appears quite good value at a 44% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NSEI:DALBHARAT Discounted Cash Flow March 15th 2023

Important 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 Dalmia Bharat 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 0.866. 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 Dalmia Bharat

Strength
  • Debt is not viewed as a risk.
Weakness
  • Earnings declined over the past year.
  • Dividend is low compared to the top 25% of dividend payers in the Basic Materials market.
Opportunity
  • Annual earnings are forecast to grow faster than the Indian market.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Paying a dividend but company has no free cash flows.
  • Revenue is forecast to grow slower than 20% per year.

Moving On:

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. Why is the intrinsic value higher than the current share price? For Dalmia Bharat, there are three important elements you should consider:

  1. Risks: Be aware that Dalmia Bharat is showing 1 warning sign in our investment analysis , you should know about...
  2. Future Earnings: How does DALBHARAT'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. 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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