Stock Analysis

Calculating The Fair Value Of Blue Dart Express Limited (NSE:BLUEDART)

NSEI:BLUEDART
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Key Insights

  • The projected fair value for Blue Dart Express is ₹7,169 based on 2 Stage Free Cash Flow to Equity
  • With ₹8,283 share price, Blue Dart Express appears to be trading close to its estimated fair value
  • Analyst price target for BLUEDART is ₹8,252, which is 15% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Blue Dart Express Limited (NSE:BLUEDART) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Blue Dart Express

The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate 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.

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

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF (₹, Millions) ₹5.74b ₹7.11b ₹7.63b ₹10.9b ₹12.7b ₹14.4b ₹16.0b ₹17.6b ₹19.2b ₹20.8b
Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x3 Analyst x1 Est @ 16.29% Est @ 13.41% Est @ 11.40% Est @ 9.99% Est @ 9.00% Est @ 8.31%
Present Value (₹, Millions) Discounted @ 13% ₹5.1k ₹5.6k ₹5.3k ₹6.7k ₹6.9k ₹7.0k ₹6.9k ₹6.7k ₹6.5k ₹6.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹63b

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. 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 13%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = ₹21b× (1 + 6.7%) ÷ (13%– 6.7%) = ₹359b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹359b÷ ( 1 + 13%)10= ₹107b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹170b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹8.3k, 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.

dcf
NSEI:BLUEDART Discounted Cash Flow August 28th 2024

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 Blue Dart Express 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 0.909. 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 Blue Dart Express

Strength
  • Debt is well covered by earnings and cashflows.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Earnings declined over the past year.
  • Dividend is low compared to the top 25% of dividend payers in the Logistics market.
  • Expensive based on P/E ratio and estimated fair value.
Opportunity
  • Annual earnings are forecast to grow faster than the Indian market.
Threat
  • Annual revenue is forecast to grow slower than the Indian market.

Next Steps:

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. The DCF model is not a perfect stock valuation tool. 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Blue Dart Express, we've compiled three further aspects you should consider:

  1. Risks: We feel that you should assess the 2 warning signs for Blue Dart Express we've flagged before making an investment in the company.
  2. Future Earnings: How does BLUEDART'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. 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.

Valuation is complex, but we're here to simplify it.

Discover if Blue Dart Express might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.