Estimating The Intrinsic Value Of Jai Balaji Industries Limited (NSE:JAIBALAJI)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Jai Balaji Industries fair value estimate is ₹886
• With ₹965 share price, Jai Balaji Industries appears to be trading close to its estimated fair value
• Jai Balaji Industries' peers seem to be trading at a higher premium to fair value based onthe industry average of -218%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Jai Balaji Industries Limited (NSE:JAIBALAJI) as an investment opportunity by taking the expected future cash flows and discounting them to today's 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 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.

View our latest analysis for Jai Balaji Industries

The Model

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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₹, Millions)	₹8.27b	₹10.4b	₹12.6b	₹14.6b	₹16.5b	₹18.4b	₹20.3b	₹22.1b	₹23.9b	₹25.8b
Growth Rate Estimate Source	Est @ 34.50%	Est @ 26.16%	Est @ 20.32%	Est @ 16.23%	Est @ 13.37%	Est @ 11.36%	Est @ 9.96%	Est @ 8.98%	Est @ 8.29%	Est @ 7.81%
Present Value (₹, Millions) Discounted @ 16%	₹7.2k	₹7.8k	₹8.1k	₹8.2k	₹8.0k	₹7.7k	₹7.3k	₹6.9k	₹6.4k	₹6.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹74b

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. 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 6.7%. We discount the terminal cash flows to today's value at a cost of equity of 16%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₹26b× (1 + 6.7%) ÷ (16%– 6.7%) = ₹306b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹306b÷ ( 1 + 16%)¹⁰= ₹71b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹145b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₹965, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Jai Balaji 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 16%, which is based on a levered beta of 1.150. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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. 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 Jai Balaji Industries, there are three additional factors you should further examine:

1. Risks: For instance, we've identified 2 warning signs for Jai Balaji Industries (1 is concerning) you should be aware of.
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.