SRTRANSFIN operates in the consumer finance sector, which has characteristics that make it unique to other industries. Understanding these differences is crucial when it comes to putting a value on the financial stock. For instance, these lenders must hold a certain level of cash reserves on the books as a safety precaution. Examining factors such as book values, with the return and cost of equity, can be useful for gauging SRTRANSFIN’s true value. Below I will show you how to value SRTRANSFIN in a reasonably accurate and uncomplicated method. See our latest analysis for Shriram Transport Finance
What Is The Excess Return Model?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. Financial firms operating in India face strict financial regulation. In addition to this, consumer financials usually do not possess substantial portions of physical assets on their books. This means the Excess Returns model is best suited for calculating the intrinsic value of SRTRANSFIN rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.
Deriving SRTRANSFIN’s Intrinsic Value
The central assumption for Excess Returns is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (16.06% – 13.40%) * ₹499.46 = ₹17.1
We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= ₹17.1 / (13.40% – 7.00%) = ₹267.11
Putting this all together, we get the value of SRTRANSFIN’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= ₹499.46 + ₹267.11 = ₹909.08
Compared to the current share price of ₹1416.8, SRTRANSFIN is , at this time, overvalued. This means there’s no upside in buying SRTRANSFIN at its current price. Valuation is only one side of the coin when you’re looking to invest, or sell, SRTRANSFIN. There are other important factors to keep in mind when assessing whether SRTRANSFIN is the right investment in your portfolio.
Next Steps:
For consumer financials, there are three key aspects you should look at: