U.S. Markets close in 2 hrs 51 mins

Calculating The Fair Value Of Sobha Limited (NSE:SOBHA)

Donald Bartholomew

In this article I am going to calculate the intrinsic value of Sobha Limited (NSE:SOBHA) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! 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 and its not August 2018 then I highly recommend you check out the latest calculation for Sobha by following the link below.

View our latest analysis for Sobha

Is SOBHA fairly valued?

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

2018 2019 2020 2021 2022
Levered FCF (₹, Millions) ₹3.52k ₹6.69k ₹4.50k ₹5.35k ₹3.56k
Source Analyst x3 Analyst x6 Analyst x6 Analyst x3 Analyst x1
Present Value Discounted @ 15.45% ₹3.05k ₹5.02k ₹2.93k ₹3.01k ₹1.74k

Present Value of 5-year Cash Flow (PVCF)= ₹15.75b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (7.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 15.5%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = ₹3.56b × (1 + 7.7%) ÷ (15.5% – 7.7%) = ₹49.73b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = ₹49.73b ÷ ( 1 + 15.5%)5 = ₹24.24b

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 ₹39.99b. 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 ₹421.57. Relative to the current share price of ₹465.2, the stock is fair value, maybe slightly overvalued at the time of writing.

NSEI:SOBHA Intrinsic Value Export August 28th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Sobha 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 15.5%, which is based on a levered beta of 1.062. 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 SOBHA, I’ve put together three fundamental factors you should look at:

  1. Financial Health: Does SOBHA 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.
  2. Future Earnings: How does SOBHA’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.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of SOBHA? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every IN stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.