Does the November share price for Mahindra CIE Automotive Limited (NSE:MAHINDCIE) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be 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. Please also note that this article was written in November 2018 so be sure check out the updated calculation by following the link below.
Check out our latest analysis for Mahindra CIE Automotive
The model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. 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. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (₹, Millions) | ₹5.85k | ₹3.56k | ₹4.20k | ₹4.91k | ₹5.70k |
| Source | Analyst x2 | Analyst x1 | Est @ 17.92% | Est @ 17%, capped from 17.92% | Est @ 16%, capped from 17.92% |
| Present Value Discounted @ 13.55% | ₹5.15k | ₹2.76k | ₹2.87k | ₹2.95k | ₹3.02k |
Present Value of 5-year Cash Flow (PVCF)= ₹17b
The second stage is also known as Terminal Value, this is the business’s cash flow after 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 (7.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 13.5%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = ₹5.7b × (1 + 7.7%) ÷ (13.5% – 7.7%) = ₹106b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = ₹106b ÷ ( 1 + 13.5%)5 = ₹56b
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 ₹73b. 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 ₹193.55. Relative to the current share price of ₹255.65, the stock is quite expensive at the time of writing.