A Look at the Intrinsic Value of Apollo Hospitals Enterprise Limited (NSE: APOLLOHOSP)
In this article, we will estimate the intrinsic value of Apollo Hospitals Enterprise Limited (NSE:APOLLOHOSP) by projecting its future cash flows and then discounting them to present value. On this occasion, we will use the Discounted Cash Flow (DCF) model. There really isn’t much to do, although it may seem quite complex.
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis template.
Check out our latest analysis for Apollo Hospitals Enterprise
Is the Apollo Hospitals company at its fair value?
We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates 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
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF (₹, million) | ₹8.31 billion | ₹13.2 billion | ₹18.0b | ₹25.3 billion | ₹31.4 billion | ₹37.2b | ₹42.8 billion | ₹48.2b | ₹53.4b | ₹58.6b |
Growth rate estimate Source | Analyst x10 | Analyst x10 | Analyst x6 | Analyst x1 | Is at 23.76% | Is at 18.66% | Is at 15.08% | Is at 12.58% | Is at 10.83% | Is at 9.61% |
Present value (₹, million) discounted at 12% | ₹7,400 | ₹10,500 | ₹12,800 | ₹16,100 | ₹17,800 | ₹18,900 | ₹19,400 | ₹19,500 | ₹19,300 | ₹18,900 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) =₹161b
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 6.8%. We discount terminal cash flows to present value at a cost of equity of 12%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = ₹59b × (1 + 6.8%) ÷ (12%–6.8%) = ₹1.2t
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= ₹1.2t÷ ( 1 + 12%)^{ten}=₹389b
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is ₹549b. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of ₹4.5k, the company appears around fair value at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
Important assumptions
We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own 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 Apollo Hospitals Enterprise 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 factors in debt. In this calculation, we used 12%, which is based on a leveraged beta of 0.811. 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 crafting your investment thesis, and ideally it won’t be the only piece of analysis you look at 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. If a company grows at a different pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. For Apollo Hospitals Enterprise, we have compiled three relevant factors that you should consider further:
- Financial health: Does APOLLOHOSP have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.
- Future earnings: How does APOLLOHOSP’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.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
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.
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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.
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