Camlin Fine Sciences Limited (NSE:CAMLINFINE) shares could be 32% below their intrinsic value estimate
Does Camlin Fine Sciences Limited (NSE:CAMLINFINE) share price in January reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
See our latest analysis for Camlin Fine Sciences
What is the estimated valuation?
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. In the first step, we need to estimate the company’s cash flow over 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.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10-Year Free Cash Flow (FCF) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (₹, million) | ₹101.0m | ₹1.28 billion | ₹1.78 billion | ₹2.18b | ₹2.57 billion | ₹2.95 billion | ₹3.31 billion | ₹3.66 billion | ₹4.00b | ₹4.35b |
Growth rate estimate Source | Analyst x1 | Analyst x2 | Analyst x1 | Is at 22.72% | Is at 17.93% | Is at 14.57% | Is at 12.22% | Is at 10.58% | Is at 9.43% | Is at 8.62% |
Present value (₹, million) discounted at 13% | ₹89.1 | ₹999 | ₹1.2k | ₹1,300 | ₹1.4k | ₹1.4k | ₹1.4k | ₹1,300 | ₹1,300 | ₹1.2k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = ₹12b
The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used which 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 (6.7%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 13%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = ₹4.3b × (1 + 6.7%) ÷ (13%–6.7%) = ₹70b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= ₹70b÷ ( 1 + 13%)^{ten}= ₹20b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹32 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of ₹168, the company appears to be pretty good value with a 32% discount to where the share price is currently trading. 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.
The hypotheses
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual 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 view Camlin Fine Sciences 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 13%, which is based on a leveraged beta of 1.065. 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.
Look forward:
Although the valuation of a business is important, it will ideally not be the only piece of analysis you will look at for a business. It is not possible to obtain an infallible valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. Why is the stock price below intrinsic value? For Camlin Fine Sciences, we have put together three relevant factors that you should explore:
- Risks: For example, we found 2 warning signs for Camlin Fine Sciences that you must consider before investing here.
- Future earnings: How does CAMLINFINE’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.
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.