Intrinsic Value Analysis Using Discounted Cash Flow Method (DCF) - YouTube

Whenever I want to do a fundamental analysis of any company

To decide whether I want to buy the company or not

We will end up on this kind of page where we have a lot of information

Around its financials, recent news, or the overview of the company

Post the analysis of all these things only we get to decide whether we want to invest or not

Apart from all this, there is another concept that we are going to discuss today

That is this thing where it says the intrinsic value

Where it says the current price is more than the Intrinsyc value

In all the websites that you go for this kind of analysis

Mostly will tell you whether it is trading at a greater price or lesser than the intrinsic value

But as an investor is this information enough for me

to know whether any price is lesser or greater than the Intrinsyc value

Maybe not

Because I also want to know that

At what premium or what discount the stock is available in the market

So that I can decide for how long I have to be invested in the stock

If it is almost at its Intrinsyc value I might invest but if it is already trading very high I might not

To know this value there are a lot of methods available

If you look up for Intrinsyc value analysis methods on the Internet

So honestly even I had my intensive research on the subject

I was confused a lot about it first of all there is no clear-cut information available

Where it is it looks to be very complicated maybe unnecessarily forward I'm not sure about it

But I feel this subject is relatively easy which has been unnecessarily complicated

So today in this video will learn how to do intrinsic value analysis for any given stock

When I say Intrinsyc value analysis I'm talking about discounted cash flow method

I understand that this term DISCOUNTED CASH FLOW method might look quite complicated as of now

For now, let's just understand it as

There can be many methods to calculate Intrinsyc value for any stock

One of the heavily used methods out of those is discounted cash flow method

However, there can be other methods to analyze other types of stocks and companies that people use

This preference changes person-to-person at times

Some people might prefer discounted cash flow method some might prefer any other method

For this video we are going to use discounted cash flow method for Intrinsyc value analysis

Now let's not go into the formal definition of this thing

If you do that things tend to get complicated

We are not going to deal with intercrosses of formulas and all those things as of now

Let's just try to understand what discounted cash flow method aims to accomplish

lets not focus on the term discouted as of now and try to understand cash flow first

IfWhen I see cash flow I want to know what is the amount of cash that a business can generate for me

Let's say if I build a house and rent it out now the cash it would generte is as follows

Rent per month multiplied by 12 is the income from rent for the year

Let's say I do it for 10 years so this amount would be multiplied by 10

Post that will set a minimum value at which we think we can sell the same property after 10 years

This value will be added to the previous one because

The cash the property would give me is rent amont plus the sale value

Post this there are things that I have to subtract from this total value that will be my expenses on the property

These include maintenance charge electricity bills and may be the brokerage amount as well at times

After subtracting all these values the number that we get is the actual cash that this property is going to give me in 10 years

Just the way we have talked about House similarly we will try to estimate what the company can give us in the span of 10 years

We say that is the value of the property

Now once I know the value of certain property I can compare that with the investment needed on it

And then will decide whether the investment is actually good or not for us

For now just ignore all the points on the screen

Will get to know all these things later in the video

Let's try to estimate how much DMart is going to earn for us in next 10 years

Now obviously no one knows what DMart is exactly going to open next year

Nor I do need that Mr Radhakrishnan Damani will who is the promoter of the company

But the earnings for this year will be clearly written in the balance sheet of the company

This is a mandate from Sebi to do so in the annual statements

You can directly use annual statement for this or you can use any third-party websites to take this data

You can use tickertape or ticker by finology

I personally feel ticker by finlogy is more convenient to use

So we want to know the cash flows of the company

In the cash flow section there are these three kind of cash flows available

First operating cash flow second is the investing cash flow and the third one is financing cash flow

First of all let's try to understand what are these three kind of cash flows

Operating cash flow is the cash that a company earns with its core operations and other operations

When I say "earn" it can mean two things first what is the profit mentioned in the profit and loss statements

We are not going to talk about that over here because that can be manipulated at times by companies

Not that always those values are manipulated but at times this can happen for multiple reasons

Since we cannot rely much on the profit loss statement let's focus on cash flow statements

Maybe we'll discuss it in a separate video sometimes that why we don't rely on profit and loss statements

For now let's just say we are concerned about only one thing how much cash has come into the company

And that would be the operating cash flow for us

Now here we see the operating cash flow is constantly increasing and in 2021 it is almost 3400 crores

Now from this amount we still have two things to do

First of all will reduce our finance expenses from this

Finances includes expenses like the dividends that the company is providing to its shareholders

Secondly you might have interest towards the debt taken or any other expenses which company is not going to get back in any form

All the frictional losses for the company are called financing cash flows

So now if we subtract financing cash flow from the operating cash flow that becomes the net cash for us

Another component is investing cash flows this is the cash company uses for things like company expansion

Or to buy other smaller businesses where company things is a potential for future returns

For now say a net cash flow is operating cash flow minus financing cash flow

Because we are hoping any investments will be returns in future and will come back to the company

And that should be the approach for an investor to see the positive aspect of a company

That means from the perspective of the stock the net cash flow for this year would be

3459 - 582 = 2877 (mistyped in the sheet, follows for subsiquent calculations)

That means future cash flow for the first year is 1385

Now when we talk about future cash flows for year two

For this I will estimate somethings

I will try to predict at what rate this company can grow

Rate of growth for the company will determine my cash flows for the next year

This prediction is one of the most difficult tasks of this kind of analysis

For this you need to understand the company thoroughly that includes its fundamental analysis

What is the income for the company? what are the other qualitative aspects for the income?

Keeping in keeping in mind all the future prospects for the company we conclude a number

But for now that is out of the scope of this video

For the sake of simplicity let's assume that number to be 10

If I assume the increment would be for 10% then with a very simple mathematical calculation

When I do 110% of 1385 that is add 10% of 1385 the same we get 1524

What is at three also expecting a growth of 10% we get the number is 1676

Method of calculation still remains the same multiply the previous years value by 1.1

For year four with a growth of 10% the number comes to be 1844

I do the same thing for year five as well

Now when we come to year 6

This is a common phenomena that has been observed when a company grows big its growth starts to saturate

That means with the passage of time rate of growth of the company starts to dampen

Not that company is not growing but the rate of growth starts declining

So from the year six and onwards let's assume the growth rate to be 5%

Assuming 5% for sixth yer value here becomes 2129

Formula remains the same we multiply with 1.5 this time because we want to add 5% to the previous value

For year seven it is 2236

Using the same method for it the number is 2248

Career nine the number is 2465

What is the 10th the number comes to be 2588

Now as we discussed we add the earnings for 10 years and then we assume we sell the company

Now for a business like this if we go by very basic logic you would want to sell the business at least 10 times to its yearly earnings

Since last years and years to 588 let's multiply it by 10

So this is the amount we keep for its selling price

So the company is going to earn summation of all these numbers for the next 10 years

Adding up all these values we get 46103 crores

That means after 10 years I will be having 46103 crores from the company

All good till this point?

But does this mean that current value of the company is 46103 crores?

No this is the valuation of the company after 10 years

Let's understand it as today I say I give you one lakh rupees or after 10 years I will give you ten lakh rupees

Now where is the profit the things that you can buy from this some today might be reduced to half after 10 years

That means for the current time frame it would be equal into 50,000

Right? makes sense?

So what we do is we discount this value for the current inflation rate

This was the reason this method has the word discounted in its name

First we calculated the cash flows then what discount is cash flow with the inflation rate

i am me an aggressive inflation rate of 6%

Which is difficult to sustain but let's assume it to be

This inflation rate is provided by the official sources of the government and are using the same for estimation

For now we are taking that as 6%

If you want to calculate present value for any future number there is a very simple formula

Well let's say the amount is $150

Inflation rate is 6% for the duration of 10 years

Using the formula on the screen we get 0.015

Sorry that should have been 5% instead and not 6%

So this becomes 92.09%

So using this kind of formula we calculate the present value of a number

So if we use the same formula for every year 1385 becomes 1307 for the first year

1524 will end up to 1356 at the end of two years

Today if you have Rs.1676 then after three years you will be left with1407b

Post three years the money left would be 1407

1844 becomes 1460 and 2028 it becomes 1515

And similarly will project the values of all the numbers into the current time

Once I have all the values adding all of them I get 29226

That means the net present value of the company is 29226

Now this much I know what ever the company is going to earn in future if I discount that to cuurent date this value is 29226

That means I really total market capitalisation of this company today should have been 29226

Now if we directly see what is the market capitalisation of the company today

As you can see it is showing 3,45,000 that is obviously way more than what we have calculated

But we are not done yet we want to calculate the price per share

Before that we need to do two more things over here

When you analyse a company one of the things that you check is how much cash the company is holding

Another you check how much debt is there on the company

Now how does this matter? whatever the cash company is holding that will also be added to the company's net value right?

So whatever value we have got if we add available cash to it

So the number we get is 30658

This is the number of crores that should be the value of the company today

Also if the company would have been in debt for now it is zero though

We would have to subtract the debt amount from this number to get the net present value

Now this is the total value of my company

But I want to know is price per share

So let's use very basic 7th grade mathematics

When we see the total capital and if I show you how current price is actually calculated

Doing the calculations as on screen

Amount we get is 5329 that is exactly equal to the today's price

But the market capitalisation that we calculated is not same right?

The market capitalisation that we have calculated is 30658

If we divide this by number of outstanding shares today

Then the value per share I would get is 473

Now I know this today the value of the share should have been 473

And I am getting the same share for Rs.5000

It is possible that the price what is the valuation might increase in future with the new cash flow number is coming into the picture

Another possibility is the 10% growth rate that we had assumed is wrong

If the company grows with 20% or 30% then all the numbers would change accordingly

Maybe the inflation rate is lesser than 6% in future

So all these things we have to see what would be the inflation rate and what would be the growth rate

If I know these two things precisely I can very easily calculate actuall price of one share for any company

Now let's see what all things we have used for this

There is no rocket science in it current price we already know that we used to compare at the end

Operating cash flow finance in cash flow and number of outstanding shares I get easily to calculate the price at the end

I need available cash for the company to add to the net present value

I need current debt on the company to subtracted from the enterprise value

I just need to know inflation rate and the current growth rate

Once I have these two things I can say I am done with my analysis

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