Are Godrej Agrovet Limited (NSE:GODREJAGRO) Investors Paying Above The Intrinsic Value?

Key Insights

• The projected fair value for Godrej Agrovet is ₹585 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₹774 suggests Godrej Agrovet is potentially 32% overvalued
• Our fair value estimate is 29% lower than Godrej Agrovet's analyst price target of ₹825

Today we will run through one way of estimating the intrinsic value of Godrej Agrovet Limited (NSE:GODREJAGRO) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Godrej Agrovet

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₹, Millions)	₹1.74b	₹3.15b	₹4.61b	₹5.83b	₹7.01b	₹8.16b	₹9.25b	₹10.3b	₹11.3b	₹12.4b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x2	Est @ 26.29%	Est @ 20.41%	Est @ 16.30%	Est @ 13.42%	Est @ 11.40%	Est @ 9.99%	Est @ 9.00%
Present Value (₹, Millions) Discounted @ 12%	₹1.6k	₹2.5k	₹3.3k	₹3.7k	₹4.0k	₹4.1k	₹4.1k	₹4.1k	₹4.0k	₹3.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹35b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (6.7%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹12b× (1 + 6.7%) ÷ (12%– 6.7%) = ₹242b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹242b÷ ( 1 + 12%)¹⁰= ₹77b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹112b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹774, the company appears potentially overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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 these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Godrej Agrovet as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 12%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Godrej Agrovet

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price exceeding the intrinsic value? For Godrej Agrovet, there are three fundamental elements you should assess:

1. Risks: Be aware that Godrej Agrovet is showing 2 warning signs in our investment analysis , you should know about...
2. Future Earnings: How does GODREJAGRO'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Indian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.