Calculation of the fair value of Shemaroo Entertainment Limited (NSE: SHEMAROO)

Today we will discuss one way to estimate the intrinsic value of Shemaroo Entertainment Limited (NSE:SHEMAROO) by taking the expected future cash flows and discounting them to their present value. We will use the discounted cash flow (DCF) model this time. There really isn’t much to do, even though it can look quite complex.

However, remember that there are many ways to estimate the value of a company, and a DCF is only one method. For those who are keen learners of stock analysis, the Simply Wall St analysis model here may be something of interest to you.

review the opportunities and risks within the IN Entertainment industry.

Is Shemaroo Entertainment fairly valued?

We use what is known as a 2-stage model, which simply means that we have two different periods of growth rates for the company’s cash flows. Generally, the first stage is one of higher growth and the second stage is a phase of lower growth. To begin with, we need to obtain estimates of the next ten years of cash flows. Since we do not have analyst estimates on free cash flow, we have extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with decreasing free cash flow will see their rate of contraction slow, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow more in early years than in later years.

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

10-Year Free Cash Flow (FCF) Forecast

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Leveraged FCF (₹, million) 441.4 crores 478.3 crore ₹516.0 million 555.0 crore 595.7 crore 638.3 crore 683.3 crores 731.0 crore 781.6 crore 835.3 crores
Growth rate estimation source @ 9.02% @ 8.35% @ 7.88% @ 7.55% est @ 7.33% @ 7.16% @ 7.05% @ 6.97% Est @ 6.92% Est @ 6.88%
Present value (₹, million) discounted @ 15% $384 $362 $339 $317 $296 $276 $257 $239 $222 $206

(“Est” = FHR growth rate estimated by Simply Wall St)
10-year Present Value of Cash Flow (PVCF) = ₹2.9b

After calculating the present value of the future cash flows in the initial 10-year period, we must calculate the terminal value, which represents all future cash flows beyond the first stage. For various 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 (6.8%) to estimate future growth. As with the 10-year “growth” period, we discount future cash flows to present value, using a 15% cost of capital.

Terminal value (TV)= FHR2032 × (1 + g) ÷ (r – g) = ₹835m × (1 + 6.8%) ÷ (15%– 6.8%) = ₹11b

Present Value of Terminal Value (PVTV)= television / (1 + r)10= ₹11b ÷ (1 + 15%)10= ₹2.7b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹5.6 trillion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Relative to the current share price of ₹183, the company is listed at fair value at a discount of 11% compared to the current share price. However, ratings are imprecise instruments, like a telescope: move a few degrees and you end up in a different galaxy. Please keep this in mind.

NSEI:SHEMAROO Discounted Cash Flow Oct 15, 2022

important assumptions

Now the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is building your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not consider the potential cyclicality of an industry or a company’s future capital requirements, so it does not provide a complete picture of a company’s potential performance. Since we are considering Shemaroo Entertainment as potential shareholders, the cost of capital is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which represents debt. In this calculation we have used 15%, which is based on a leveraged beta of 1.161. Beta is a measure of the volatility of a stock, compared to the market as a whole. We derive our beta from the industry average beta of global peers, with a cap imposed between 0.8 and 2.0, which is a reasonable range for a stable business.

Next steps:

Valuation is just 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. The DCF model is not a perfect stock valuation tool. Instead, the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, if the terminal value growth rate is adjusted slightly, it can drastically alter the overall result. For Shemaroo Entertainment, we’ve compiled three other items you should explore:

  1. risks: For example, we have discovered 4 warning signs for Shemaroo Entertainment (3 are a bit nasty!) that you should be aware of before investing here.
  2. Other Solid Businesses: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong business fundamentals to see if there are any other companies you may not have considered?
  3. Other Top Analyst Picks: Interested in seeing what analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think could have an attractive future outlook!

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

This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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