Gujarat State Petronet Limited (NSE:GSPL) Is Trading At A 28.46% Discount

Simply Wall St.

Mon, Oct 1, 2018, 1:13 AM

How far off is Gujarat State Petronet Limited (NSE:GSPL) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by estimating the company’s future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not October 2018 then I highly recommend you check out the latest calculation for Gujarat State Petronet by following the link below.

Check out our latest analysis for Gujarat State Petronet

The model

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

	2019	2020	2021	2022	2023
Levered FCF (₹, Millions)	₹5.58k	₹7.25k	₹8.78k	₹9.60k	₹11.14k
Source	Analyst x5	Analyst x9	Analyst x3	Analyst x1	Est @ 16%, capped from 44.14%
Present Value Discounted @ 13.55%	₹4.91k	₹5.62k	₹6.00k	₹5.78k	₹5.90k

Present Value of 5-year Cash Flow (PVCF)= ₹28.21b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 7.7%. We discount this to today’s value at a cost of equity of 13.5%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = ₹11.14b × (1 + 7.7%) ÷ (13.5% – 7.7%) = ₹206.27b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = ₹206.27b ÷ ( 1 + 13.5%)⁵ = ₹109.29b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ₹137.50b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of ₹243.84. Compared to the current share price of ₹174.45, the stock is about right, perhaps slightly undervalued at a 28.5% discount to what it is available for right now.

NSEI:GSPL Intrinsic Value Export October 1st 18

The assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Gujarat State Petronet as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 13.5%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

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 GSPL, there are three relevant aspects you should further examine:

Financial Health: Does GSPL have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does GSPL’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of GSPL? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every IN stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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