A Look At The Intrinsic Value Of Entertainment Network (India) Limited (NSE:ENIL)

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Collin Greene

Wed, Dec 26, 2018, 6:39 PM

How far off is Entertainment Network (India) Limited (NSE:ENIL) 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 taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in December 2018 so be sure check out the updated calculation by following the link below.

See our latest analysis for Entertainment Network (India)

Step by step through the calculation

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)	₹1.48k	₹1.33k	₹1.43k	₹1.79k	₹2.04k
Source	Analyst x2	Analyst x6	Analyst x3	Analyst x1	Analyst x1
Present Value Discounted @ 13.55%	₹1.30k	₹1.03k	₹974.10	₹1.08k	₹1.08k

Present Value of 5-year Cash Flow (PVCF)= ₹5.5b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. 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) = ₹2.0b × (1 + 7.7%) ÷ (13.5% – 7.7%) = ₹38b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = ₹38b ÷ ( 1 + 13.5%)⁵ = ₹20b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ₹25b. 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 ₹531.18. Relative to the current share price of ₹610.35, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

NSEI:ENIL Intrinsic Value Export December 27th 18

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Entertainment Network (India) 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:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For ENIL, I’ve put together three important factors you should further examine:

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

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NSE every 6 hours. If you want to find the calculation for other stocks 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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