I am going to run you through how I calculated the intrinsic value of NIIT Technologies Limited (NSEI:NIITTECH) using the discounted cash flow (DCF) method. 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 after December 2017 then I highly recommend you check out the latest calculation for NIIT Technologies here.
What’s the value?
I use what is known as the 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I use the analyst consensus forecast of NIITTECH’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 13.4%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of ₹11,157.0M. Keen to understand how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how NIITTECH’s earnings are expected to move in the future, which should give you an idea of NIITTECH’s outlook. Then, I calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of ₹33,509.4M.
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 ₹44,666.4M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of ₹727.08, which, compared to the current share price of ₹631.1, we see that NIIT Technologies is about right, perhaps slightly undervalued at a 13.20% discount to what it is available for right now.
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.
For NIITTECH, there are three relevant aspects you should look at:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NSEI every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass 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.