A Look At The Intrinsic Value Of Sharda Cropchem Limited (NSE:SHARDACROP)

Joel Foster

Sun, Jan 13, 2019, 8:48 PM

Does the January share price for Sharda Cropchem Limited (NSE:SHARDACROP) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Sharda Cropchem by following the link below.

See our latest analysis for Sharda Cropchem

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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. 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)	₹1.48k	₹1.55k	₹1.81k	₹2.12k	₹2.46k
Source	Analyst x3	Analyst x3	Est @ 17.05%	Est @ 17%, capped from 17.05%	Est @ 16%, capped from 17.05%
Present Value Discounted @ 13.55%	₹1.30k	₹1.20k	₹1.24k	₹1.27k	₹1.30k

Present Value of 5-year Cash Flow (PVCF)= ₹6.3b

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) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = ₹2.5b × (1 + 7.7%) ÷ (13.5% – 7.7%) = ₹46b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = ₹46b ÷ ( 1 + 13.5%)⁵ = ₹24b

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 ₹30b. 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 ₹333.37. Relative to the current share price of ₹299.9, the stock is about right, perhaps slightly undervalued at a 10% discount to what it is available for right now.

NSEI:SHARDACROP Intrinsic Value Export January 14th 19

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Sharda Cropchem 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For SHARDACROP, there are three fundamental aspects you should look at:

Financial Health: Does SHARDACROP 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 SHARDACROP’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 SHARDACROP? 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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