A Look At The Fair Value Of Procter & Gamble Health Limited (NSE:PGHL)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Procter & Gamble Health fair value estimate is ₹3,936
• Procter & Gamble Health's ₹4,572 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -172%, Procter & Gamble Health's competitors seem to be trading at a greater premium to fair value

In this article we are going to estimate the intrinsic value of Procter & Gamble Health Limited (NSE:PGHL) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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 Procter & Gamble Health

Is Procter & Gamble Health Fairly Valued?

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. 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, 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

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (₹, Millions)	₹3.63b	₹4.39b	₹5.12b	₹5.82b	₹6.50b	₹7.16b	₹7.82b	₹8.48b	₹9.15b	₹9.85b
Growth Rate Estimate Source	Est @ 26.90%	Est @ 20.87%	Est @ 16.65%	Est @ 13.70%	Est @ 11.63%	Est @ 10.19%	Est @ 9.17%	Est @ 8.46%	Est @ 7.97%	Est @ 7.62%
Present Value (₹, Millions) Discounted @ 15%	₹3.2k	₹3.3k	₹3.4k	₹3.4k	₹3.3k	₹3.2k	₹3.0k	₹2.9k	₹2.7k	₹2.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹31b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (6.8%) 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 15%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = ₹9.9b× (1 + 6.8%) ÷ (15%– 6.8%) = ₹135b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹135b÷ ( 1 + 15%)¹⁰= ₹35b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹65b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹4.6k, 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

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Procter & Gamble Health 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 15%, 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.

Moving On:

Although the valuation of a company is important, it 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. 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. 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 Procter & Gamble Health, we've compiled three additional items you should further research:

1. Risks: For example, we've discovered 1 warning sign for Procter & Gamble Health that you should be aware of before investing here.
2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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.