Wanganui

Main Menu

  • Creative Destruction
  • Tax Haven
  • Terminal Value
  • First Theorem Of Welfare Economics
  • Debt

Wanganui

Header Banner

Wanganui

  • Creative Destruction
  • Tax Haven
  • Terminal Value
  • First Theorem Of Welfare Economics
  • Debt
Terminal Value
Home›Terminal Value›A look at the fair value of NMDC Limited (NSE: NMDC)

A look at the fair value of NMDC Limited (NSE: NMDC)

By Judy Grier
April 16, 2022
0
0

How far is NMDC Limited (NSE:NMDC) from its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by taking the company’s expected future cash flows and discounting them to the present value. We will use the Discounted Cash Flow (DCF) model for this purpose. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.

Remember though that there are many ways to estimate the value of a business and a DCF is just one method. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.

Check out our latest analysis for NMDC

Is the NMDC correctly valued?

We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. To start, we need to estimate the cash flows for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. 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 more in early years than in later 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:

Estimated free cash flow (FCF) over 10 years

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leveraged FCF (₹, million) ₹37.1 billion ₹55.7 billion ₹37.5 billion ₹38.8b ₹40.5 billion ₹42.5 billion ₹44.9b ₹47.6 billion ₹50.5 billion ₹53.7 billion
Growth rate estimate Source Analyst x1 Analyst x2 Analyst x1 Is at 3.43% Is at 4.42% Is at 5.11% Is at 5.6% Is at 5.94% Is at 6.18% Is at 6.34%
Present value (₹, million) discounted at 14% ₹32,600 ₹43,100 ₹25,500 ₹23,200 ₹21,300 ₹19,700 ₹18,300 ₹17,000 ₹15,900 ₹14,900

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) =₹231b

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 stage. The Gordon Growth 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 6.7%. We discount terminal cash flows to present value at a cost of equity of 14%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = ₹54b × (1 + 6.7%) ÷ (14%–6.7%) = ₹823b

Present value of terminal value (PVTV)= TV / (1 + r)ten= ₹823b÷ ( 1 + 14%)ten=₹228b

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is ₹459 billion. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of ₹168, the company appears around fair value at the time of writing. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.

NSEI: NMDC Discounted Cash Flow April 16, 2022

Important assumptions

The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. If you disagree with these results, try the math yourself and play around 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 complete picture of a company’s potential performance. Since we consider NMDC 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 14%, which is based on a leveraged beta of 1.085. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Next steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of many factors you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For the NMDC, we have compiled three fundamental elements that you should assess:

  1. Risks: Be aware that NMDC displays 2 warning signs in our investment analysis and 1 of them is potentially serious…
  2. Future earnings: How does NMDC’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
  3. Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!

PS. The Simply Wall St app performs an updated cash flow valuation for each NSEI stock each day. If you want to find the calculation for other stocks, search here.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Related posts:

  1. Installment loan for the unemployed
  2. How to assess the need for a payday loan?
  3. Do traders undervalue TV At the moment Community Restricted (NSE: TVTODAY) by 41%?
  4. Marilyn Hartman, “ Serial Stowaway, ” Arrested at Chicago O’Hare Worldwide Airport

Recent Posts

  • XPeng Stock: Anchored in Valuation, Not Speculation (NYSE: XPEV)
  • Balenciaga’s trashed sneakers divide opinion and tap into fashion history
  • US States Struggle to Replace Tax Revenue from Fossil Fuels | News, Sports, Jobs
  • MarketInk: Newsradio KOGO Wins Regional Edward R. Murrow Award
  • Scarlet Witch Fills Out The Original MCU Hulk Arc

Archives

  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • July 2019
  • June 2019
  • April 2019
  • February 2019
  • January 2019
  • September 2018
  • December 2017
  • October 2017
  • March 2017
  • February 2017
  • December 2016
  • August 2016
  • May 2016
  • April 2016
  • October 2015
  • May 2015
  • April 2015
  • November 2014
  • September 2013
  • August 2010

Categories

  • Creative Destruction
  • Debt
  • First Theorem Of Welfare Economics
  • Tax Haven
  • Terminal Value
  • Terms and Conditions
  • Privacy Policy