Investing can be a complex game, and a key to success is recognising when a stock is undervalued. In the world of finance, Vedanta Limited is making waves as it appears to be potentially undervalued by a staggering 41%. In this article, we’ll separate the experiences and estimations that propose Vedanta might be exchanging underneath its actual worth.
Key Insights of the Analysis of Vedanta Limited
The projected fair value for Vedanta is ₹382, according to a meticulous analysis utilising the Two-Stage Free Cash Flow to Equity method. However, the current share price of ₹224.40 (after closing on 26 sep 2023 ) suggests that Vedanta might be undervalued by as much as 41%. This massive contrast between the projected fair worth and the ongoing business sector cost is surely interesting for financial backers.
Vedanta Limited Discounted Cash Flow (DCF) Model
To gauge whether Vedanta is undervalued or not, we’ll utilize the Discounted Cash Flow (DCF) model. In this approach, projected future cash flows for the business are estimated before being discounted to their present value.
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (₹, Millions) | ₹132.4b | ₹207.5b | ₹218.6b | ₹230.5b | ₹243.8b | ₹258.7b | ₹275.0b | ₹292.7b | ₹311.8b | ₹332.4b |
| Growth Rate Estimate Source | Analyst x3 | Analyst x4 | Analyst x1 | Est @ 5.40% | Est @ 5.81% | Est @ 6.09% | Est @ 6.29% | Est @ 6.43% | Est @ 6.53% | Est @ 6.60% |
| Present Value (₹, Millions) Discounted @ 20% | ₹110.8k | ₹145.2k | ₹128.0k | ₹112.9k | ₹99.9k | ₹88.7k | ₹78.8k | ₹70.2k | ₹62.6k | ₹55.8k |
“Est” stands for Simply Wall St.’s projected FCF growth rate.
The 10-year cash flow’s present value (PVCF) is $953 billion.
The Two-Stage DCF Model
The DCF model we’re using here is a two-stage one, which takes into account two growth stages. The first stage represents a higher growth period that eventually levels off as the company matures.
In this initial phase, we gather estimates for the next ten years of cash flows. Whenever possible, we rely on analyst estimates, but when those aren’t available, we extrapolate from previous free cash flow (FCF) figures.
For companies with declining FCF, we assume a slower rate of shrinkage, while for those with growing FCF, we expect a deceleration in growth over time. This approach recognizes that growth typically slows more in the early years than in later ones.
Calculating the Present Value
A crucial principle in DCF analysis is that a dollar in the future is worth less than a dollar today. Consequently, we need to discount the sum of these future cash flows to arrive at their present value.
Our calculations reveal a 10-year free cash flow forecast, with a present value (discounted at 20%) totaling ₹953 billion.
Determining the Terminal Value
After assessing the present value of future cash flows for the initial 10-year period, we need to calculate the Terminal Value, which considers all cash flows beyond this period.
We use the Gordon Growth formula, assuming a future annual growth rate equal to the 5-year average of the 10-year government bond yield, which is 6.8%.
Discounting these terminal cash flows to today’s value at a cost of equity of 20%, we arrive at a Terminal Value of ₹2.8 trillion.
Assembling Everything
The total equity value is the sum of the present value of future cash flows, which, in this case, amounts to ₹1.4 trillion. When compared to the current share price of ₹225, it’s evident that Vedanta is trading at a substantial 41% discount to its intrinsic value.
However, it’s important to remember that valuations are not absolute truths; they are more like tools that provide perspective. Depending on the presumptions used, they can change. Small adjustments to these assumptions can lead to significantly different valuation outcomes.
Important Assumptions
The value we’ve calculated for the company relies a lot on two important guesses: one about how much future money is worth compared to today’s money (discount rate), and the other about how much money the company will make in the future (cash flow estimates).
If you don’t quite agree with our numbers, you can have a go at the calculations yourself and change these guesses to see how it affects the result.
Likewise, it’s great to remember that our computation doesn’t consider a few things. For example, it doesn’t consider how the company’s performance might change with economic ups and downs or how much money it might need for future growth.
Thus, while it gives us an important understanding, it doesn’t lay out the entire image of how the organization could do from here on out.
SWOT Analysis for Vedanta Limited
Strengths: Vedanta has a strong ability to cover its debt with earnings and cash flows. It additionally positions in the top 25% of profit payers on the lookout, offering alluring profit opportunities.
Weaknesses: Earnings have seen a decline over the past year, which is a concerning trend.
Opportunities: The company is poised for annual earnings growth that is expected to outpace the Indian market. Its current P/E ratio and estimated fair value suggest good value.
Threats: On the flip side, dividends are not adequately covered by earnings and cash flows. Annual revenue is also projected to grow at a slower pace compared to the Indian market.
Looking Ahead
When you’re looking at a company’s value, the DCF model is a helpful tool, but it’s not the only one you should rely on. There are numerous things that can influence how a stock is valued, and the suspicions you make are pivotal. Understanding why a stock is trading either below or above its real value is key.
For Vedanta, investors should be aware of potential risks. There are three warning signs and one concern that deserve more investigation. It’s likewise smart to contrast Vedanta’s development rate and other comparative organizations and the general market to get a superior picture.
In the end, even though our analysis suggests Vedanta might be undervalued by 41%, it’s important to look at the bigger picture. While you’re going with speculation choices, it’s fundamental to completely assess an organization’s essentials and the potential dangers implied.
Keep in mind, contributing is definitely not a one-size-fits-all methodology. To settle on savvy decisions in the monetary world, you want to do all necessary investigation and think about all the accessible data.
Disclaimer: The information in this “Stock Profile” blog post is for informational purposes only. It is not financial advice. Always consult a qualified expert before making investment decisions.
