I am a newbie and have been trying to understand how DCF works. I tried doing a DCF calculation for RACL geartech considering the following params:
- Initial fcf = 70 crore
- discount rate = 15%
- growth rate(1 to 5 years) is 15%
- growth rate(6 to 10 years) is 10%
- terminal growth rate is 5%
- Current market cap is 1082 crore
- current share price is 1003 rs
- net debt is 200 crore
Q. What do I take as FCF? I have been taking Operating profit as of now.
Here is my calculation with the assumption of taking FCF as Operating Profit
- Calculate the projected free cash flows (FCF) for the next 10 years:
* Year 1 FCF: ₹70 crore (given)
* Year 2 FCF: Year 1 FCF * (1 + growth rate) = ₹70 crore * (1 + 0.15) = ₹80.5 crore
* Year 3 FCF: Year 2 FCF * (1 + growth rate) = ₹80.5 crore * (1 + 0.15) = ₹92.58 crore
* Year 4 FCF: Year 3 FCF * (1 + growth rate) = ₹92.58 crore * (1 + 0.15) = ₹106.47 crore
* Year 5 FCF: Year 4 FCF * (1 + growth rate) = ₹106.47 crore * (1 + 0.15) = ₹122.44 crore
* Year 6 FCF: Year 5 FCF * (1 + growth rate) = ₹122.44 crore * (1 + 0.10) = ₹134.68 crore
* Year 7 FCF: Year 6 FCF * (1 + growth rate) = ₹134.68 crore * (1 + 0.10) = ₹148.15 crore
* Year 8 FCF: Year 7 FCF * (1 + growth rate) = ₹148.15 crore * (1 + 0.10) = ₹162.97 crore
* Year 9 FCF: Year 8 FCF * (1 + growth rate) = ₹162.97 crore * (1 + 0.10) = ₹179.26 crore
* Year 10 FCF: Year 9 FCF * (1 + growth rate) = ₹179.26 crore * (1 + 0.10) = ₹197.19 crore
- Determine the terminal value (TV) using the Gordon Growth Model:
* TV = Year 10 FCF * (1 + terminal growth rate) / (discount rate - terminal growth rate)
* TV = ₹197.19 crore * (1 + 0.05) / (0.15 - 0.05) = ₹2,191 crore
- Calculate the present value (PV) of each projected cash flow:
* PV = FCF / (1 + discount rate) ^ n, where n is the number of years in the future
* PV Year 1 = ₹70 crore / (1 + 0.15) ^ 1 = ₹60.87 crore
* PV Year 2 = ₹80.5 crore / (1 + 0.15) ^ 2 = ₹58.51 crore
* PV Year 3 = ₹92.58 crore / (1 + 0.15) ^ 3 = ₹53.22 crore
* PV Year 4 = ₹106.47 crore / (1 + 0.15) ^ 4 = ₹48.55 crore
* PV Year 5 = ₹122.44 crore / (1 + 0.15) ^ 5 = ₹44.19 crore
* PV Year 6 = ₹134.68 crore / (1 + 0.15) ^ 6 = ₹35.78 crore
* PV Year 7 = ₹148.15 crore / (1 + 0.15) ^ 7 = ₹31.08 crore
* PV Year 8 = ₹162.97 crore / (1 + 0.15) ^ 8 = ₹26.91 crore
* PV Year 9 = ₹179.26 crore / (1 + 0.15) ^ 9 = ₹23.27 crore
* PV Year 10 = (Year 10 FCF + TV) / (1 + discount rate) ^ 10 = (₹197.19 crore + ₹2,191 crore) / (1 + 0.15) ^ 10 = ₹1,157.31 crore
- Calculate the sum of the present values of all projected cash flows:
* Sum of PV = PV Year 1 + PV Year 2 + PV Year 3 + PV Year 4 + PV Year 5 + PV Year 6 + PV Year 7 + PV Year 8 + PV Year 9 + PV Year 10
* Sum of PV = ₹60.87 crore + ₹58.51 crore + ₹53.22 crore + ₹48.55 crore + ₹44.19 crore + ₹35.78 crore + ₹31.08 crore + ₹26.91 crore + ₹23.27 crore + ₹1,157.31 crore = ₹1,600.59 crore
- Calculate the intrinsic value of the company:
* Intrinsic Value = Sum of PV / Shares Outstanding
* Shares Outstanding = Market Cap / Share Price = ₹1,082 crore / ₹1,003 = 1.08 crore
* Intrinsic Value = (₹1,600.59 crore) / 1.08 crore = ₹1,600.59 crore / 1.08 crore = ₹1482.03
This gives the intrinsic value for RACL as 1482.03
However I have a feeling that I’m going wrong somewhere, can someone help please?
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