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- Gas Utilities
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- NSEI:GUJGASLTD
Estimating The Intrinsic Value Of Gujarat Gas Limited (NSE:GUJGASLTD)
Key Insights
- The projected fair value for Gujarat Gas is ₹542 based on 2 Stage Free Cash Flow to Equity
- With ₹605 share price, Gujarat Gas appears to be trading close to its estimated fair value
- The ₹578 analyst price target for GUJGASLTD is 6.6% more than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Gujarat Gas Limited (NSE:GUJGASLTD) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for Gujarat Gas
Step By Step Through The Calculation
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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (₹, Millions) | ₹8.98b | ₹12.1b | ₹16.6b | ₹20.3b | ₹23.9b | ₹27.3b | ₹30.6b | ₹33.9b | ₹37.0b | ₹40.2b |
Growth Rate Estimate Source | Analyst x6 | Analyst x9 | Analyst x3 | Est @ 22.38% | Est @ 17.68% | Est @ 14.38% | Est @ 12.08% | Est @ 10.46% | Est @ 9.34% | Est @ 8.54% |
Present Value (₹, Millions) Discounted @ 12% | ₹8.0k | ₹9.6k | ₹11.8k | ₹12.8k | ₹13.5k | ₹13.8k | ₹13.7k | ₹13.5k | ₹13.2k | ₹12.8k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹123b
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 12%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = ₹40b× (1 + 6.7%) ÷ (12%– 6.7%) = ₹788b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹788b÷ ( 1 + 12%)10= ₹251b
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 ₹373b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹605, the company appears around fair value 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
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Gujarat Gas 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 12%, 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 Gujarat Gas
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Gas Utilities market.
- Expensive based on P/E ratio and estimated fair value.
- Annual revenue is forecast to grow faster than the Indian market.
- Annual earnings are forecast to grow slower than the Indian market.
Looking Ahead:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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?" 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 Gujarat Gas, there are three essential elements you should explore:
- Risks: You should be aware of the 1 warning sign for Gujarat Gas we've uncovered before considering an investment in the company.
- Future Earnings: How does GUJGASLTD'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. 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.
About NSEI:GUJGASLTD
Excellent balance sheet second-rate dividend payer.