A look at the fair value of Salasar Exteriors and Contour Limited (NSE:SECL)

Key findings

• Using 2-step free cash flow to equity, the fair value of Salasar Exteriors And Contour is ₹19.85
• Salasar Exteriors And Contour’s share price of ₹20.95 suggests that the stock price is at a similar level to the estimated fair value.
• Salasar Exteriors and Contour’s peers appear to trade at a higher premium to fair value, based on the industry average of -540%.

How far is Salasar Exteriors And Contour Limited (NSE:SECL) from its intrinsic value? Using the latest financial data, we will check if the stock is fairly valued by taking the company’s forecasted future cash flows and discounting them to today’s value. This is done using the Discounted Cash Flow (DCF) model. It doesn’t actually take too much to do this, even though it may seem quite complex.

We would like to point out that there are many ways to value a company and that each method, such as the DCF, has advantages and disadvantages in certain scenarios. For those who like to engage in stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for Salasar Exteriors And Contour

Is Salasar Exteriors and Contour priced appropriately?

We will use a two-stage DCF model which, as the name suggests, considers two phases of growth. The first stage is generally a higher growth phase that stabilizes toward the terminal value captured in the second “steady growth” stage. First, we need to estimate the next ten years of cash flows. Since we don’t have analyst estimates of free cash flow available, we extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage and that companies with growing free cash flow will slow their growth rate over this period. We do this to account for the fact that growth tends to slow more in the early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today. Therefore, the sum of these future cash flows is discounted to today’s value:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = ₹898 million

The second period is also called the terminal value. This is the company’s cash flow after the first period. For various reasons, a very conservative growth rate is used, which cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year Treasury 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 15%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₹340 million × (1 + 6.7%) ÷ (15% – 6.7%) = ₹4.5 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= ₹4.5 billion ÷ (1 + 15%)¹⁰= ₹1.1 billion

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is ₹2.0 billion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹21.0, the company seems to be around fair value at the time of writing. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

The assumptions

The key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs, and therefore does not provide a complete picture of a company’s potential performance. Since we are viewing Salasar Exteriors And Contour 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 takes debt into account. In this calculation, we used 15%, which is based on a leveraged beta of 1.027. Beta is a measure of a stock’s volatility relative to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Next Steps:

While a company’s valuation is important, it shouldn’t be the only metric you consider when researching a company. The DCF model isn’t a perfect stock valuation tool. It should be viewed more as a guide to “what assumptions need to hold for this stock to be under/overvalued.” If a company is growing at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome could look very different. For Salasar Exteriors And Contour, we’ve put together three more points for you to evaluate:

1. Risks: For example, we found 5 Warning Signs for Salasar Exteriors And Contour (1 we don’t like so much) that you should be aware of.
2. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea of ​​what else you might be missing out on!
3. More top analyst tips: Want to know what the analysts think? Take a look at our interactive list of analyst recommended stocks and find out which stocks they think could have attractive future prospects!

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

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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