Estimating The Fair Value Of Manoj Vaibhav Gems 'N' Jewellers Limited (NSE:MVGJL)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Manoj Vaibhav Gems 'N' Jewellers fair value estimate is ₹203
• Manoj Vaibhav Gems 'N' Jewellers' ₹231 share price indicates it is trading at similar levels as its fair value estimate
• Industry average of 652% suggests Manoj Vaibhav Gems 'N' Jewellers' peers are currently trading at a higher premium to fair value

Today we will run through one way of estimating the intrinsic value of Manoj Vaibhav Gems 'N' Jewellers Limited (NSE:MVGJL) by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Manoj Vaibhav Gems 'N' Jewellers

Is Manoj Vaibhav Gems 'N' Jewellers 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. To begin with, we have to get estimates of 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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹682.8m	₹777.4m	₹868.3m	₹956.9m	₹1.04b	₹1.13b	₹1.22b	₹1.31b	₹1.41b	₹1.51b
Growth Rate Estimate Source	Est @ 16.90%	Est @ 13.84%	Est @ 11.70%	Est @ 10.20%	Est @ 9.15%	Est @ 8.42%	Est @ 7.90%	Est @ 7.54%	Est @ 7.29%	Est @ 7.11%
Present Value (₹, Millions) Discounted @ 15%	₹594	₹589	₹573	₹549	₹522	₹492	₹462	₹433	₹404	₹377

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹5.0b

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 15%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹1.5b× (1 + 6.7%) ÷ (15%– 6.7%) = ₹20b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹20b÷ ( 1 + 15%)¹⁰= ₹4.9b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₹9.9b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹231, 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 Manoj Vaibhav Gems 'N' Jewellers 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 1.204. 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 Manoj Vaibhav Gems 'N' Jewellers

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Manoj Vaibhav Gems 'N' Jewellers, we've compiled three fundamental elements you should consider:

1. Risks: For example, we've discovered 2 warning signs for Manoj Vaibhav Gems 'N' Jewellers (1 makes us a bit uncomfortable!) 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 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.