nse: natcopharm – NATCO Pharma Limited Shares Could Be 44% Below Their Intrinsic Value Estimate. Today, we’re going to look at a way to estimate the intrinsic value of NATCO Pharma Limited (NSE:NATCOPHARM) by projecting its future cash flows and then disregarding them to today’s value. For this, we will use the discounted cash flow (DCF) model. It might sound complicated, but it’s actually quite simple.
We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, DCF is one measurement metric among many, and it is not without its flaws. If you still have doubts about this type of review, check out the Simply Wall St review template.
We use what is recognized as a 2-stage model, that is, we have two different period growth rates for the company’s cash flows. Generally, the first stage is the highest developmental stage and the second stage is the lowest developmental stage. The first step is to estimate the cash flows for the business over the next ten years. Wherever possible, we use analyst estimates, but when they are not available, we extrapolate free cash flow (FCF) from past estimates or reported amounts. Our hypothesis is that companies with decreasing free cash flow will decrease their rate of contraction and that companies with increasing free cash flow will decrease their growth rate during this period. We do this to reflect that growth slows down more slowly in early years than in later years.
A DCF is all around the idea that a dollar in the future is less valued than a dollar today, and so the sum of these upcoming cash flows is then discounted to today’s value:
|Levered FCF (₹, Millions)||Growth Rate Estimate Source||Present Value (₹, Millions) Discounted @ 15%|
|₹13.4b||Est @ 29.58%||₹7.8k|
|₹16.4b||Est @ 22.75%||₹8.3k|
|₹19.4b||Est @ 17.97%||₹8.6k|
|₹22.2b||Est @ 14.62%||₹8.6k|
|₹25.0b||Est @ 12.28%||₹8.4k|
|₹27.6b||Est @ 10.64%||₹8.1k|
|₹30.2b||Est @ 9.49%||₹7.7k|
(“Est” = FCF growth rate valued by Simply Wall St)
10 year Present Value of Cash Flow (PVCF) = ₹75b
After calculating the present value of the future cash flows over the initial 10-year historical, we need to calculate the mortal value, which accounts for all future cash flows outside the first period. The Gordon development formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 6.8%. We discount terminal cash flows to present value at 15% cost of equity.
Deadly Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹30b× (1 + 6.8%) ÷ (15%– 6.8%) = ₹415b
Current Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹415b÷ (1 + 15%)10= ₹106b
The total value is the sum of the cash flows for the next ten years and the discounted terminal value, resulting in a total book value of ₹182b. We divide this by the total number of shares unresolved to get the intrinsic value per share. The company is very undervalued at a 44% discount to the current share price against the current share price of ₹557. Assumptions in any calculation have a large impact on valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
The above calculation depends on two assumptions. First is the discount degree and the other is liquidity. You don’t necessarily agree with these inputs, I suggest you repeat the calculations yourself and play around with them. DCF does not consider the likely cycle of an industry or a company’s future capital needs, so it does not provide a complete picture of a company’s potential performance.
As we consider Natco Pharma as a potential shareholder, the cost of equity rather than the cost of capital is used as the discount rate. In this calculation, we use 15% based on a leveraged beta of 0.800. Beta is a amount of a stock’s volatility relative to the overall market. We derive our beta from the average industry 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 NATCO Pharma
- Earnings growth over the previous year exceeded the industry.
- Debt is not observed as a risk.
- Dividends are enclosed by earnings and cash flows.
Dividend is low likened to the top 25% of dividend payers in the Pharmaceuticals market.
- Annual earnings are prediction to grow faster than the Indian market.
- Good price based on P/E ratio and projected fair value.
Revenue is prediction to grow slower than 20% per year.
While a company’s valuation is important, it may not be the only analysis you look at for a company. DCF copies are not the be-all and end-all of investment valuation. Rather, “What assumptions must be true for this stock to be under/overvalued?” should be viewed as a guide to If a firm produces at a different degree, or if its cost of capital or risk-free rate changes dramatically, the outcome will be very different. Can we figure out why the company is interchange at a discount to intrinsic value? For NATCO Pharma, there are three additional rudiments you should further examine:
Be conscious that NATCO Pharma is showing 1 cautioning sign in our investment analysis , you should know about.
Have insiders been ramping up their stocks to take advantage of the market’s sentimentality for NATCOPHARM’s future outlook? Checked out our management and board analysis with visions on CEO compensation and governance factors.
Other High Quality Alternatives:
Do you like a good all-rounder? Explore our communicating list of high quality stocks to get an idea of what else is out there you may be missing!
This article by Club Hi Tech is general in nature. We provide commentary founded on historical data and analyst predictions only using an unbiased methodology and our articles are not envisioned to be financial advice. It does not constitute a reference to buy or sell any stock, and does not take account of your objectives, or your financial state. We aim to bring you long-term absorbed analysis driven by important data. Note that our analysis may not issue in the latest price-sensitive company announcements or qualitative material. Club Hi Tech has no position in any stocks mentioned.
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