Is There An Opportunity With Sunteck Realty Limited’s (NSE:SUNTECK) 49.06% Undervaluation?

Will Harmon

Updated Fri, Aug 17, 2018, 9:00 PM

How far off is Sunteck Realty Limited (NSE:SUNTECK) 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 use 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 August 2018 so be sure check out the updated calculation by following the link below.

Check out our latest analysis for Sunteck Realty

The method

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of 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 the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

	2018	2019	2020	2021	2022
Levered FCF (₹, Millions)	₹360.00	₹5.06k	₹1.65k	₹10.01k	₹11.61k
Source	Analyst x5	Analyst x3	Analyst x3	Analyst x1	Est @ 16%, capped from 16.06%
Present Value Discounted @ 13.73%	₹316.53	₹3.91k	₹1.12k	₹5.98k	₹6.10k

Present Value of 5-year Cash Flow (PVCF)= ₹17.43b

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 13.7%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = ₹11.61b × (1 + 7.7%) ÷ (13.7% – 7.7%) = ₹208.28b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = ₹208.28b ÷ ( 1 + 13.7%)⁵ = ₹109.45b

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 ₹126.88b. 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 ₹907.39. Compared to the current share price of ₹462.2, the stock is quite undervalued at a 49.06% discount to what it is available for right now.

NSEI:SUNTECK Intrinsic Value Export August 18th 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 Sunteck Realty 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 13.7%, which is based on a levered beta of 0.826. 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 SUNTECK, I’ve put together three essential factors you should further examine:

Financial Health: Does SUNTECK 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 SUNTECK’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 SUNTECK? 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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