Stock Analysis
Estimating The Intrinsic Value Of CyberTech Systems and Software Limited (NSE:CYBERTECH)
Key Insights
- CyberTech Systems and Software's estimated fair value is ₹175 based on 2 Stage Free Cash Flow to Equity
- Current share price of ₹172 suggests CyberTech Systems and Software is potentially trading close to its fair value
- CyberTech Systems and Software's peers are currently trading at a premium of 321% on average
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of CyberTech Systems and Software Limited (NSE:CYBERTECH) as an investment opportunity 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. It may sound complicated, but actually it is quite simple!
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 CyberTech Systems and Software
The Calculation
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. 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (₹, Millions) | ₹383.5m | ₹413.2m | ₹443.9m | ₹475.9m | ₹509.5m | ₹544.9m | ₹582.3m | ₹622.1m | ₹664.3m | ₹709.2m |
Growth Rate Estimate Source | Est @ 8.19% | Est @ 7.74% | Est @ 7.43% | Est @ 7.21% | Est @ 7.06% | Est @ 6.95% | Est @ 6.87% | Est @ 6.82% | Est @ 6.79% | Est @ 6.76% |
Present Value (₹, Millions) Discounted @ 14% | ₹337 | ₹318 | ₹300 | ₹283 | ₹266 | ₹249 | ₹234 | ₹219 | ₹206 | ₹193 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹2.6b
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 14%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = ₹709m× (1 + 6.7%) ÷ (14%– 6.7%) = ₹10b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹10b÷ ( 1 + 14%)10= ₹2.9b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹5.5b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₹172, the company appears about fair value at a 2.2% 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.
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 CyberTech Systems and Software 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 1.060. 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 CyberTech Systems and Software
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- Shareholders have been diluted in the past year.
- Current share price is below our estimate of fair value.
- Lack of analyst coverage makes it difficult to determine CYBERTECH's earnings prospects.
- No apparent threats visible for CYBERTECH.
Moving On:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 CyberTech Systems and Software, we've compiled three further factors you should further examine:
- Risks: For example, we've discovered 3 warning signs for CyberTech Systems and Software that you should be aware of before investing here.
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for CYBERTECH's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About NSEI:CYBERTECH
CyberTech Systems and Software
Provides geospatial, networking, and enterprise information technology solutions in India and the United States.