Valuation

The stock price basically tells you how the stock is being traded in the market based on an agreed
price by the buyer and the seller. At a particular time when the number of buyer for the stock is
more than the stock price will boom and in other hand if the number of seller is more than the price
will fall. But talking about its Value it tells you the real worth of the stock, it will comprise of the
present value of all the expected future cash flows of the company.

INPUTS
Particular Calculation/Score Result
Risk free rate 5-Year Average of IN Long-Term Gov. Bond Rate 7.2%
Equity Risk Premium S&P Global 9.5%
Auto Components Simply Wall St/ S&P Global 1.4
unlevered beta
Re-levered Beta = 0.33 + [(0.66 * Unlevered beta) * (1 + (1 - tax 1.305
rate) (Debt/Market Equity))]
= 0.33 + [(0.66 * 1.4) * (1 + (1 - 35.0%) (6.12%))]
Levered Beta Levered Beta limited to 0.8 to 2.0 1.305
(practical range for a stable firm)
Discount Rate/ Cost of = Cost of Equity = Risk Free Rate + (Levered Beta 19.57%
Equity * Equity Risk Premium)
= 7.19% + (1.305 * 9.49%)

The calculations below outline how an intrinsic value for MRF is arrived at by discounting
future cash flows to their present value using the 2 stage method. We use analyst's estimates
of cash flows going forward 10 years for the 1st stage; the 2nd stage assumes the company
grows at a stable rate into perpetuity (Terminal value).

Future Cash Flows

Years Levered FCF (INR, Source Present Value
Millions) Discounted (@
19.57%)
2021 5839 Est. @-50.43% 4,883.15
2022 17947 Est. @207.36% 10,453.87
2023 15235 Est. @1.93% 8,911.01
2024 15750.97 Est. @ 3.39% 7,704.65
2025 16464.13 Est. @ 4.53% 6,735.13
2026 17341.08 Est. @ 4.53% 5,932.6
2027 18361.69 Est. @ 5.89% 5,253.43
2028 19514.22 Est. @ 6.28% 4,669.2
2029 20792.56 Est. @ 6.55% 4,160.65
2030 22194.51 Est. @ 6.74% 3,714.15
Present value of next 10 years cash flows ₹62,417
Source: BSE: 500290 DCF 1st Stage: Next 10 years cash flow forecast
Share price v/s Fair price
Terminal Value FCF2030 × (1 + g) ÷ (Discount ₹192,097.35
Rate – g)
= ₹22,194.507 x (1 + 7.19%) ÷
(19.57% - 7.19% )
Present Value of Terminal = Terminal Value ÷ (1 + r)10 ₹32,146.65
Value ₹192,097 ÷ (1 + 19.57%)10
Total Equity Value = Present value of next 10 years ₹94,563.65
cash flows + Terminal Value
= ₹62,417 + ₹32,147
Equity Value per Share = Total value / Shares ₹22296.74
(INR) Outstanding
= ₹94,564 / 4
Value per share (INR) = Total value / Shares ₹22296.74
Outstanding
= ₹94,564 / 4
Current discount Discount to share price of -160.7%
₹58134.25
= (₹22296.74 - ₹58134.25) /
₹22296.74

After calculating the value of the share on the basis of discounting its future cash flows, it is simple
that the share of MRF is highly overvalued. The market price does not justify the future cash flows of
the company. We can see the fair value is ₹22296.74 while its market price is ₹58134.25 which is
very high as being compared. It is about 160.7% overvalued.