An Intrinsic Calculation For IFGL Refractories Limited (NSE:IFGLEXPOR) Shows It’s 21.49% Undervalued

Simply Wall St.

Sat, Sep 29, 2018, 8:08 PM

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of IFGL Refractories Limited (NSE:IFGLEXPOR) as an investment opportunity by taking the foreast future cash flows of the company and discounting them back to today’s value. I will use 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. Please also note that this article was written in September 2018 so be sure check out the updated calculation by following the link below.

Check out our latest analysis for IFGL Refractories

The method

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 the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF (₹, Millions)	₹825.00	₹560.00	₹660.80	₹773.14	₹896.84
Source	Analyst x1	Analyst x2	Est @ 18%, capped from 44.04%	Est @ 17%, capped from 44.04%	Est @ 16%, capped from 44.04%
Present Value Discounted @ 13.55%	₹726.58	₹434.35	₹451.39	₹465.12	₹475.18

Present Value of 5-year Cash Flow (PVCF)= ₹2.55b

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) = ₹896.8m × (1 + 7.7%) ÷ (13.5% – 7.7%) = ₹16.61b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = ₹16.61b ÷ ( 1 + 13.5%)⁵ = ₹8.80b

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 ₹11.35b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of ₹315.05. Compared to the current share price of ₹247.35, the stock is about right, perhaps slightly undervalued at a 21.5% discount to what it is available for right now.

NSEI:IFGLEXPOR Intrinsic Value Export September 30th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 IFGL Refractories 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:

Although the valuation of a company is important, 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 IFGLEXPOR, there are three essential factors you should look at:

Financial Health: Does IFGLEXPOR 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 IFGLEXPOR’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 IFGLEXPOR? 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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