Cipla Shares Valuation and Intrinsic Value

Cipla Shares Valuation : About the Company

Cipla is one of the largest pharmaceutical company in India. It has 46 states of the art manufacturing facilities across 5 countries and has 1500+ products. It employs 1300+ scientists and has seen double-digit growth in R&D investments in recent years. The major revenue share is about 38% from India, 21% from North America and 20% from Africa. It also has a presence in the European and other emerging markets in Asia. From here, we go ahead with Cipla Shares Valuation and Intrinsic Value of its shares.

Methodology Used:

Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future. The following step by step procedure is followed.

1. Determining the Revenue Growth Rates
2. Forecasting the Financial Statements
3. Deriving the FCFF and FCFE
4. Calculating the Terminal Value
5. Calculating the Discount Rate
6. Discounting the Cashflows
7. Arriving at the Intrinsic Value of the Shares
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Step 1: Determining the Revenue Growth Rates

We arrive at the below table by using the past and expected future performance of both the company and the economy. This along with adjustments to changes in the management expectations, extraordinary events and other macro factors give the revenue growth rates for Cipla Shares Valuation.

Step 2: Forecasting the Financial Statements

The financial statements are forecasted for a period of 5 years using the annual report data of the company. The assumptions used for forecasting are tabulated below. The Excel model is completely editable and can be adjusted for specific changes which may happen over a period of time.

Step 3: Deriving the FCFF and FCFE

Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution after accounting for depreciation expenses, taxes, working capital, and investments. FCFF is a measurement of a company’s profitability after all expenses and reinvestments. It is given as follows.

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Free cash flow to equity (FCFE) is a measure of how much cash is available to the equity shareholders of a company after all expenses, reinvestment, and debt are paid. FCFE is a measure of equity capital usage.

Step 4: Calculating the Terminal Value

Terminal value (TV) is the value of a business or project beyond the forecast period when future cash flows can be estimated. It assumes that a business will grow at a set growth rate forever after the forecast period. Terminal value often comprises a large percentage of the total assessed value.

Step 5: Calculating the Discount Rate

DCF analysis helps assess the viability of a project or investment by calculating the present value of expected future cash flows using a discount rate. Here we use the Weighted average cost of capital (WACC) to discount the cash flow. The below table from the excel model shows the calculation of WACC for Cipla Shares Valuation.

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Step 6: Discounting the Cashflows

The WACC and the Cost of Equity for the company calculated in the above step are then used to discount the FCFF, FCFE and Terminal Value calculated in Step 3 and 4. In our case, we’ll only consider the FCFF based Intrinsic price of the shares as it represents the cash flow to all the suppliers of capital and not only to the equity shareholders. Thus we arrive at Present value of future FCFF for Cipla Shares Valuation. (Units are INR Millions)

Step 7: Arriving at the Intrinsic Value of the Shares

Dividing the PV of the FCFF and Terminal Value (the Value of the entire firm) by the number of outstanding shares we get the per share intrinsic value. We can compare this price with the current market price of the stock to get the Discount or Premium to its intrinsic price.

Cipla Shares Valuation and Intrinsic Share Price = INR 536.47

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References: Investopedia
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