Does the share price for Bharat Heavy Electricals Limited (NSEI:BHEL) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after April 2018 then I highly recommend you check out the latest calculation for Bharat Heavy Electricals here.
Is BHEL fairly valued?
I will be using the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Firstly, I use the analyst consensus estimates of BHEL’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 14.66%. This resulted in a present value of 5-year cash flow of ₹77.02B. Keen to understand how I arrived at this number? Take a look at our detailed analysis here.
The graph above shows how BHEL’s top and bottom lines are expected to move going forward, which should give you an idea of BHEL’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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 ₹281.86B.
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 ₹358.88B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of ₹97.75, which, compared to the current share price of ₹87.85, we find that Bharat Heavy Electricals is about right, perhaps slightly undervalued at a 10.13% discount to what it is available for right now.
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For BHEL, there are three essential factors you should look at:
- Financial Health: Does BHEL 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 BHEL’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 BHEL? 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 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.