A look at the fair value of Cinevista Limited (NSE: CINEVISTA)
Does the August share price for Cinevista Limited (NSE: CINEVISTA) reflect what it’s really worth? Today, we’re going to estimate the intrinsic value of the stock by projecting its future cash flows, then discounting them to today’s value. Our analysis will use the discounted cash flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!
There are many ways businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. If you would like to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
See our latest analysis for Cinevista
The model
We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. In the first step, we need to estimate the cash flow of the business over the next ten years. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
Generally, we assume that a dollar today is worth more 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) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (₹, Millions) | ₹ 51.7m | 61.2 m | 70.4m | 79.2 m | ₹ 87.8m | 96.3 m | ₹ 104.7m | 113.3m | 122.2m | ₹ 131.4 m |
Source of estimated growth rate | East @ 23.48% | Est @ 18.49% | Est @ 14.99% | Est @ 12.55% | Est @ 10.84% | Est @ 9.64% | East @ 8.8% | East @ 8.21% | East @ 7.8% | East @ 7.51% |
Present value (₹, Millions) discounted @ 16% | 44.6 | ₹ 45.6 | ₹ 45.3 | ₹ 44.0 | ₹ 42.1 | 39.9 | ₹ 37.4 | ₹ 35.0 | ₹ 32.5 | ₹ 30.2 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = ₹ 396m
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 used the 5-year average of the 10-year government bond yield (6.8%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 16%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = ₹ 131m × (1 + 6.8%) ÷ (16% – 6.8%) = ₹ 1.6b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= ₹ 1.6b ÷ (1 + 16%)^{ten}= ₹ 359m
The total value, or net worth, is then the sum of the present value of the future cash flows, which in this case is 755 million euros. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current stock price of 11.7, the company appears to be roughly at fair value with a 9.1% discount from where the stock price is currently trading. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
Important assumptions
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view Cinevista 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 takes debt into account. In this calculation, we used 16%, which is based on a leveraged beta of 1.313. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
To move on :
While important, calculating DCF shouldn’t be the only metric you look at when looking for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Cinevista, there are three important aspects that you should research further:
- Risks: We think you should evaluate the 4 warning signs for Cinevista (3 should not be ignored!) We reported before making an investment in the business.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
- Other picks from top analysts: Interested in seeing what analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think might have a compelling outlook for the future!
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 Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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