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Is Indus Towers Limited (NSE:INDUSTOWER) Trading At A 43% Discount?
Today we will run through one way of estimating the intrinsic value of Indus Towers Limited (NSE:INDUSTOWER) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Check out the opportunities and risks within the IN Telecom industry.
Is Indus Towers 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. 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (₹, Millions) | ₹50.0b | ₹68.0b | ₹70.9b | ₹74.3b | ₹78.3b | ₹82.8b | ₹87.9b | ₹93.4b | ₹99.5b | ₹106.0b |
Growth Rate Estimate Source | Analyst x13 | Analyst x15 | Analyst x12 | Est @ 4.76% | Est @ 5.37% | Est @ 5.79% | Est @ 6.09% | Est @ 6.3% | Est @ 6.45% | Est @ 6.55% |
Present Value (₹, Millions) Discounted @ 13% | ₹44.3k | ₹53.3k | ₹49.2k | ₹45.6k | ₹42.5k | ₹39.8k | ₹37.4k | ₹35.2k | ₹33.1k | ₹31.2k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹412b
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 6.8%. We discount the terminal cash flows to today's value at a cost of equity of 13%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹106b× (1 + 6.8%) ÷ (13%– 6.8%) = ₹1.8t
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹1.8t÷ ( 1 + 13%)10= ₹538b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹950b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹202, the company appears quite good value at a 43% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Indus Towers 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.
SWOT Analysis for Indus Towers
- 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.
- Earnings declined over the past year.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow slower than the Indian market.
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Indus Towers, we've put together three relevant items you should explore:
- Risks: For example, we've discovered 1 warning sign for Indus Towers that you should be aware of before investing here.
- Future Earnings: How does INDUSTOWER'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.
- 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!
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.
About NSEI:INDUSTOWER
Indus Towers
A telecom infrastructure company, engages in the operation and maintenance of wireless communication towers and related infrastructures for various telecom service providers in India.
Outstanding track record and undervalued.