A Look At The Intrinsic Value Of Jubilant Pharmova Limited (NSE:JUBLPHARMA)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Jubilant Pharmova fair value estimate is ₹1,050
• Current share price of ₹1,058 suggests Jubilant Pharmova is potentially trading close to its fair value
• Jubilant Pharmova's peers seem to be trading at a higher premium to fair value based onthe industry average of -320%

In this article we are going to estimate the intrinsic value of Jubilant Pharmova Limited (NSE:JUBLPHARMA) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Jubilant Pharmova

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 start off with, we need to estimate 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹5.26b	₹6.32b	₹8.10b	₹9.56b	₹11.0b	₹12.3b	₹13.6b	₹14.9b	₹16.1b	₹17.4b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 17.96%	Est @ 14.58%	Est @ 12.22%	Est @ 10.56%	Est @ 9.40%	Est @ 8.59%	Est @ 8.02%
Present Value (₹, Millions) Discounted @ 12%	₹4.7k	₹5.0k	₹5.7k	₹6.0k	₹6.2k	₹6.2k	₹6.1k	₹5.9k	₹5.8k	₹5.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹57b

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 6.7%. We discount the terminal cash flows to today's value at a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹17b× (1 + 6.7%) ÷ (12%– 6.7%) = ₹342b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹342b÷ ( 1 + 12%)¹⁰= ₹109b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹166b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₹1.1k, 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.

The Assumptions

Now 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 Jubilant Pharmova 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 12%, which is based on a levered beta of 0.800. 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 Jubilant Pharmova

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for 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 Jubilant Pharmova, there are three relevant items you should further examine:

1. Risks: We feel that you should assess the 2 warning signs for Jubilant Pharmova (1 is a bit unpleasant!) we've flagged before making an investment in the company.
2. Future Earnings: How does JUBLPHARMA'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. 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.