In This Article:
Does the share price for UPL Limited (NSEI:UPL) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. 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 after March 2018 then I highly recommend you check out the latest calculation for UPL here.
What’s the value?
We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Firstly, I pulled together the analyst consensus estimates of UPL’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 13.4%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of ₹66.85B. Keen to know how I arrived at this number? Check out our detailed analysis here.
In the visual above, we see how how UPL’s top and bottom lines are expected to move in the future, which should give you some color on UPL’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes ₹221.96B.
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 ₹288.81B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of ₹567.05, which, compared to the current share price of ₹730.25, we find that UPL is fair value, maybe slightly overvalued at the time of writing.
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 UPL, there are three pertinent factors you should further examine:
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Financial Health: Does UPL 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.
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Future Earnings: How does UPL’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.
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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of UPL? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!