A Look At The Intrinsic Value Of Mangalam Drugs & Organics Limited (NSE:MANGALAM)

Key Insights

• The projected fair value for Mangalam Drugs & Organics is ₹144 based on 2 Stage Free Cash Flow to Equity
• With ₹118 share price, Mangalam Drugs & Organics appears to be trading close to its estimated fair value
• Mangalam Drugs & Organics' peers are currently trading at a premium of 229% on average

Does the May share price for Mangalam Drugs & Organics Limited (NSE:MANGALAM) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Mangalam Drugs & Organics

The Method

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. 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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₹, Millions)	₹135.8m	₹147.3m	₹159.0m	₹171.0m	₹183.5m	₹196.6m	₹210.4m	₹224.9m	₹240.3m	₹256.6m
Growth Rate Estimate Source	Est @ 9.26%	Est @ 8.49%	Est @ 7.95%	Est @ 7.57%	Est @ 7.31%	Est @ 7.12%	Est @ 6.99%	Est @ 6.90%	Est @ 6.84%	Est @ 6.79%
Present Value (₹, Millions) Discounted @ 13%	₹120	₹115	₹110	₹105	₹99.9	₹94.7	₹89.8	₹85.0	₹80.4	₹76.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹977m

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 13%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₹257m× (1 + 6.7%) ÷ (13%– 6.7%) = ₹4.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹4.4b÷ ( 1 + 13%)¹⁰= ₹1.3b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹2.3b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₹118, the company appears about fair value at a 18% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Mangalam Drugs & Organics 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 13%, 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.

Looking Ahead:

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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Mangalam Drugs & Organics, we've compiled three additional aspects you should further examine:

1. Risks: Case in point, we've spotted 4 warning signs for Mangalam Drugs & Organics you should be aware of, and 1 of them makes us a bit uncomfortable.
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.