How far off is Balkrishna Industries Limited (NSEI:BALKRISIND) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in April 2018 so be sure check the latest calculation for Balkrishna Industries here.

Crunching the numbers

I will be using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. Firstly, I took the analyst consensus forecast of BALKRISIND’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 13.4%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of ₹37.14B. Keen to understand how I arrived at this number? Take a look at our detailed analysis here.

Above is a visual representation of how BALKRISIND’s earnings are expected to move going forward, which should give you some color on BALKRISIND’s outlook. Then, I calculate the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is ₹108.78B.

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is ₹145.92B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of ₹754.83, which, compared to the current share price of ₹1068.65, we find that Balkrishna Industries is rather overvalued at the time of writing.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For BALKRISIND, there are three fundamental factors you should further examine: