Are Brainbees Solutions Limited (NSE:FIRSTCRY) Investors Paying Above The Intrinsic Value?

Key Insights

• Brainbees Solutions' estimated fair value is ₹344 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₹418 suggests Brainbees Solutions is potentially 22% overvalued
• Our fair value estimate is 49% lower than Brainbees Solutions' analyst price target of ₹669

In this article we are going to estimate the intrinsic value of Brainbees Solutions Limited (NSE:FIRSTCRY) by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. 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 Brainbees Solutions

Is Brainbees Solutions Fairly Valued?

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. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	-₹5.09b	-₹1.92b	₹2.17b	₹5.89b	₹9.51b	₹13.8b	₹18.4b	₹23.1b	₹27.6b	₹32.0b
Growth Rate Estimate Source	Analyst x5	Analyst x5	Analyst x4	Analyst x1	Est @ 61.30%	Est @ 44.92%	Est @ 33.46%	Est @ 25.43%	Est @ 19.82%	Est @ 15.89%
Present Value (₹, Millions) Discounted @ 14%	-₹4.5k	-₹1.5k	₹1.5k	₹3.5k	₹5.0k	₹6.4k	₹7.5k	₹8.2k	₹8.7k	₹8.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹44b

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. 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 14%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹32b× (1 + 6.7%) ÷ (14%– 6.7%) = ₹487b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹487b÷ ( 1 + 14%)¹⁰= ₹135b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹178b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₹418, the company appears slightly overvalued at the time of writing. 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

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 Brainbees Solutions 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 14%, which is based on a levered beta of 1.031. 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 Brainbees Solutions

Looking Ahead:

Although the valuation of a company is important, 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?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value lower than the current share price? For Brainbees Solutions, we've put together three additional items you should further examine:

1. Risks: Every company has them, and we've spotted 1 warning sign for Brainbees Solutions you should know about.
2. Future Earnings: How does FIRSTCRY'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NSEI every day. If you want to find the calculation for other stocks 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.