Calculating The Fair Value Of Emmbi Industries Limited (NSE:EMMBI)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Emmbi Industries fair value estimate is ₹111
• Emmbi Industries' ₹106 share price indicates it is trading at similar levels as its fair value estimate
• Emmbi Industries' peers are currently trading at a premium of 752% on average

Today we will run through one way of estimating the intrinsic value of Emmbi Industries Limited (NSE:EMMBI) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Our free stock report includes 4 warning signs investors should be aware of before investing in Emmbi Industries. Read for free now.

Crunching The Numbers

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. 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹136.4m	₹149.1m	₹161.7m	₹174.6m	₹187.9m	₹201.6m	₹216.1m	₹231.2m	₹247.2m	₹264.2m
Growth Rate Estimate Source	Est @ 10.36%	Est @ 9.27%	Est @ 8.50%	Est @ 7.97%	Est @ 7.59%	Est @ 7.33%	Est @ 7.15%	Est @ 7.02%	Est @ 6.93%	Est @ 6.87%
Present Value (₹, Millions) Discounted @ 14%	₹120	₹115	₹110	₹104	₹98.5	₹92.9	₹87.5	₹82.3	₹77.3	₹72.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹960m

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 14%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹264m× (1 + 6.7%) ÷ (14%– 6.7%) = ₹4.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹4.0b÷ ( 1 + 14%)¹⁰= ₹1.1b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹2.1b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹106, the company appears about fair value at a 4.6% 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.

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 Emmbi 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 14%, which is based on a levered beta of 0.974. 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.

View our latest analysis for Emmbi Industries

SWOT Analysis for Emmbi Industries

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. For Emmbi Industries, we've put together three additional elements you should consider:

1. Risks: For example, we've discovered 4 warning signs for Emmbi Industries (2 make us uncomfortable!) that you should be aware of before investing here.
2. 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!
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. 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.