I am going to run you through how I calculated the intrinsic value of The Ramco Cements Limited (NSEI:RAMCOCEM) using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in March 2018 so be sure check the latest calculation for Ramco Cements here.

Is RAMCOCEM fairly valued?

I use what is known as the 2-stage 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 begin, I pulled together the analyst consensus forecast of RAMCOCEM’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 13.4%. This resulted in a present value of 5-year cash flow of ₹24.99B. Want to know how I arrived at this number? Check out our detailed analysis here.

Above is a visual representation of how RAMCOCEM’s top and bottom lines are expected to move going forward, which should give you an idea of RAMCOCEM’s outlook. Then, I calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable 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. Discounting the terminal value back five years gives us a present value of ₹99.13B.

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ₹124.12B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of ₹526.88, which, compared to the current share price of ₹734.4, we see that Ramco Cements is quite expensive and not available at a discount at this time.

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 RAMCOCEM, there are three essential aspects you should further examine:

1. Financial Health: Does RAMCOCEM 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 RAMCOCEM’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 RAMCOCEM? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!