A Look At The Fair Value Of Oracle Financial Services Software Limited (NSE:OFSS)

Kayla Ward

Sun, Jan 13, 2019, 8:58 PM

In this article I am going to calculate the intrinsic value of Oracle Financial Services Software Limited (NSE:OFSS) by estimating the company’s 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 January 2019 so be sure check out the updated calculation by following the link below.

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The method

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. 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)	₹12.78k	₹16.21k	₹18.87k	₹19.85k	₹20.89k
Source	Analyst x1	Analyst x2	Analyst x2	Est @ 5.2%	Est @ 5.2%
Present Value Discounted @ 13.55%	₹11.26k	₹12.58k	₹12.89k	₹11.94k	₹11.07k

Present Value of 5-year Cash Flow (PVCF)= ₹60b

The second stage is also known as Terminal Value, this is the business’s cash flow after 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) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = ₹21b × (1 + 7.7%) ÷ (13.5% – 7.7%) = ₹387b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = ₹387b ÷ ( 1 + 13.5%)⁵ = ₹205b

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 ₹265b. 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 ₹3080.47. Relative to the current share price of ₹3635.6, the stock is fair value, maybe slightly overvalued at the time of writing.

NSEI:OFSS Intrinsic Value Export January 14th 19

Important assumptions

I’d like to point out that 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 Oracle Financial Services Software 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 OFSS, I’ve compiled three fundamental factors you should further examine:

Financial Health: Does OFSS 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 OFSS’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 OFSS? 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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