Calculating The Intrinsic Value Of Shree Rama Newsprint Limited (NSE:RAMANEWS)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Shree Rama Newsprint fair value estimate is ₹12.05
• Current share price of ₹13.80 suggests Shree Rama Newsprint is potentially trading close to its fair value
• Shree Rama Newsprint's peers seem to be trading at a higher premium to fair value based onthe industry average of -983%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Shree Rama Newsprint Limited (NSE:RAMANEWS) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Shree Rama Newsprint

What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₹, Millions)	₹281.9m	₹307.8m	₹333.8m	₹360.3m	₹387.7m	₹416.1m	₹445.9m	₹477.3m	₹510.6m	₹545.8m
Growth Rate Estimate Source	Est @ 10.21%	Est @ 9.18%	Est @ 8.45%	Est @ 7.94%	Est @ 7.59%	Est @ 7.34%	Est @ 7.17%	Est @ 7.04%	Est @ 6.96%	Est @ 6.90%
Present Value (₹, Millions) Discounted @ 23%	₹228	₹202	₹178	₹155	₹135	₹118	₹102	₹88.7	₹76.8	₹66.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹1.4b

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 6.8%. We discount the terminal cash flows to today's value at a cost of equity of 23%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₹546m× (1 + 6.8%) ÷ (23%– 6.8%) = ₹3.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹3.5b÷ ( 1 + 23%)¹⁰= ₹426m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹1.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₹13.8, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Shree Rama Newsprint 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 23%, which is based on a levered beta of 2.000. 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 Shree Rama Newsprint

Next Steps:

Although the valuation of a company is important, 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Shree Rama Newsprint, we've put together three pertinent items you should consider:

1. Risks: Every company has them, and we've spotted 3 warning signs for Shree Rama Newsprint (of which 1 is potentially serious!) you should know about.
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 Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.