Is Maruti Suzuki India Limited (NSE:MARUTI) Worth ₹7,999 Based On Intrinsic Value?

Simply Wall St.

Wed, Sep 26, 2018, 6:47 PM

How far off is Maruti Suzuki India Limited (NSE:MARUTI) 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 expected future cash flows and discounting them to their present 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 September 2018 so be sure check out the updated calculation by following the link below.

See our latest analysis for Maruti Suzuki India

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. In the first stage we need to estimate the cash flows to the business over the next five years. 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 estimate

	2019	2020	2021	2022	2023
Levered FCF (₹, Millions)	₹61.98k	₹101.91k	₹114.22k	₹129.11k	₹145.93k
Source	Analyst x7	Analyst x14	Analyst x7	Est @ 13.03%	Est @ 13.03%
Present Value Discounted @ 13.55%	₹54.59k	₹79.04k	₹78.02k	₹77.67k	₹77.32k

Present Value of 5-year Cash Flow (PVCF)= ₹366.64b

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. 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) = ₹145.93b × (1 + 7.7%) ÷ (13.5% – 7.7%) = ₹2.70t

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = ₹2.70t ÷ ( 1 + 13.5%)⁵ = ₹1.43t

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ₹1.80t. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of ₹5954.87. Relative to the current share price of ₹7999.45, the stock is quite expensive and not available at a discount at this time.

NSEI:MARUTI Intrinsic Value Export September 27th 18

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Maruti Suzuki 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. What is the reason for the share price to differ from the intrinsic value? For MARUTI, I’ve compiled three important factors you should look at:

Financial Health: Does MARUTI 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 MARUTI’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 MARUTI? 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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