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A Look At The Intrinsic Value Of MIRC Electronics Limited (NSE:MIRCELECTR)


Key Insights

  • MIRC Electronics’ estimated fair value is ₹17.8 based on 2 Stage Free Cash Flow to Equity
  • Current share price of ₹15.4 suggests MIRC Electronics is trading close to its fair value
  • MIRC Electronics’ peers are currently trading at a premium of 424% on average

Today we will run through one way of estimating the intrinsic value of MIRC Electronics Limited (NSE:MIRCELECTR) by projecting its future cash flows and then discounting them to today’s value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for MIRC Electronics

The Calculation

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 start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company’s last 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:

10-year free cash flow (FCF) forecast

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (₹, Millions) ₹230.0m ₹312.6m ₹397.5m ₹481.1m ₹561.8m ₹639.2m ₹713.8m ₹786.7m ₹859.0m ₹931.7m
Growth Rate Estimate Source Est @ 48.35% Est @ 35.88% Est @ 27.15% Est @ 21.04% Est @ 16.77% Est @ 13.77% Est @ 11.68% Est @ 10.21% Est @ 9.19% Est @ 8.47%
Present Value (₹, Millions) Discounted @ 17% ₹196 ₹226 ₹245 ₹253 ₹251 ₹243 ₹231 ₹217 ₹202 ₹186

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹2.2b

The second stage is also known as Terminal Value, this is the business’s cash flow after 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 (6.8%) 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 17%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹932m× (1 + 6.8%) ÷ (17%– 6.8%) = ₹9.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹9.3b÷ ( 1 + 17%)10= ₹1.9b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₹4.1b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₹15.4, the company appears about fair value at a 14% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

NSEI:MIRCELECTR Discounted Cash Flow January 26th 2023

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 MIRC Electronics 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 17%, which is based on a levered beta of 1.177. 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 MIRC Electronics

Strength

  • Debt is well covered by cash flow.

Weakness

  • Interest payments on debt are not well covered.

Opportunity

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

  • Current share price is below our estimate of fair value.

  • Lack of analyst coverage makes it difficult to determine MIRCELECTR’s earnings prospects.
Threat

  • No apparent threats visible for MIRCELECTR.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It’s not possible to obtain a foolproof valuation with a DCF model. Preferably you’d apply different cases and assumptions and see how they would impact the company’s valuation. For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. For MIRC Electronics, we’ve put together three pertinent aspects you should consider:

  1. Risks: Every company has them, and we’ve spotted 3 warning signs for MIRC Electronics (of which 1 can’t be ignored!) you should know about.
  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 is out there you may be missing!
  3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NSEI every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we’re helping make it simple.

Find out whether MIRC Electronics is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.



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