Investors Are Undervaluing Bajaj Electricals Limited (NSE:BAJAJELEC) By 25.28%

Ben Rossbaum

Thu, Jan 31, 2019, 6:15 PM

I am going to run you through how I calculated the intrinsic value of Bajaj Electricals Limited (NSE:BAJAJELEC) by taking the expected future cash flows and discounting them to their present value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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 February 2019 then I highly recommend you check out the latest calculation for Bajaj Electricals by following the link below.

Check out our latest analysis for Bajaj Electricals

The method

I’m 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. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

	2019	2020	2021	2022	2023
Levered FCF (₹, Millions)	₹-4.24k	₹2.43k	₹5.41k	₹5.73k	₹6.06k
Source	Analyst x4	Analyst x3	Analyst x1	Est @ 5.8%	Est @ 5.8%
Present Value Discounted @ 13.77%	₹-3.72k	₹1.87k	₹3.67k	₹3.42k	₹3.18k

Present Value of 5-year Cash Flow (PVCF)= ₹8.4b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (7.6%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 13.8%.

Terminal Value (TV) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = ₹6.1b × (1 + 7.6%) ÷ (13.8% – 7.6%) = ₹105b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = ₹105b ÷ ( 1 + 13.8%)⁵ = ₹55b

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 ₹63b. The last step is to then 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) then we use the equivalent number. This results in an intrinsic value of ₹613.22. Compared to the current share price of ₹458.2, the stock is about right, perhaps slightly undervalued at a 25% discount to what it is available for right now.

NSEI:BAJAJELEC Intrinsic Value Export February 1st 19

Important 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 Bajaj Electricals 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 13.8%, which is based on a levered beta of 0.835. 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 BAJAJELEC, there are three important factors you should further examine:

Financial Health: Does BAJAJELEC 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 BAJAJELEC’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 BAJAJELEC? 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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