In this article I am going to calculate the intrinsic value of Graphite India Limited (NSEI:GRAPHITE) 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. If you are reading this after May 2018 then I highly recommend you check out the latest calculation for Graphite India here.

Crunching the numbers

We are going to use a two-stage DCF 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. To start off, I took the analyst consensus forecast of GRAPHITE’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 14.91%. 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 ₹30.49B. Want to know how I calculated this value? Check out our detailed analysis here.

Above is a visual representation of how GRAPHITE’s earnings are expected to move in the future, which should give you some color on GRAPHITE’s outlook. Then, I calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes ₹63.73B.

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ₹94.22B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of ₹482.43, which, compared to the current share price of ₹711.85, we find that Graphite India is quite expensive 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 GRAPHITE, there are three fundamental aspects you should further research:

1. Financial Health: Does GRAPHITE 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.

2. Future Earnings: How does GRAPHITE’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.

3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of GRAPHITE? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!