Bharat Forge DCF Valuation Excel Model and Intrinsic Value of Shares

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Bharat Forge DCF Valuation : About the Company

The company operates in the Industrial and manufacturing sector where market dominance comes from Scale, distribution reach, innovation capabilities and Clientele. Bharat Forge is the world’s largest forging company and has more than 50+ years of market presence. On the manufacturing front, the company has 10+ large manufacturing facilities across the world including the US, Germany, Sweden, France and India. The company is also vertically integrated and has end-to-end capabilities in forging.

The business model of the company is such that it has global leadership in Powertrain and Chassis components forging. The segmental revenue breakup is 43% is from commercial vehicles, 17% is from Passenger Vehicles and 40% is from the Industrial components. The geographical distribution is also such that 41% is from India, 42% from the US, 15% is from Europe and the rest of the world contributes 2% to the total revenue. This overall shows a good business model which is still heavily dependent on the Auto industry which is cyclic in nature. From here, we go ahead with Bharat Forge DCF Valuation and Intrinsic Value of its shares.

Read more here: Bharat Forge Shares Fundamental Analysis 

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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You can also get the formula based DCF Excel Model from below:

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 Bharat Forge DCF Valuation.

Financial Year Revenue Growth Rate
Year 1 -20%
Year 2 -26%
Year 3 29%
Year 4 18%
Year 5 13%
Revenue Growth Rates: Bharat Forge DCF 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.

Financial Statements Forecast : Bharat Forge DCF Valuation
Financial Statements Forecast : Bharat Forge DCF Valuation

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.

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.

F/S Items (INR Millions) Mar-20 Mar-21 Mar-22 Mar-23 Mar-24
Free Cash Flow to Firm 11009 8293 11441 13955 16545
Free Cash Flow to Equity -3205 -19518 24954 22293 21222
FCFF and FCFE values: Bharat Forge DCF Valuation

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.

Terminal Value Calculation Units INR Millions
Free Cash Flow to Firm 16544.54
Growth Rate 5.00%
Cost of Capital 11.22%
Terminal Value 279190.76
Terminal Value: Bharat Forge DCF Valuation

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 Bharat Forge DCF Valuation.

WACC Calculation for Bharat Forge DCF Valuation.
WACC Calculation for Bharat Forge DCF Valuation.

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 Bharat Forge DCF Valuation. (Units are INR Millions)

PV of FCFF and FCFE  for Bharat Forge DCF Valuation.
PV of FCFF and FCFE for Bharat Forge DCF Valuation.

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.

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Bharat Forge DCF Valuation Units
PV in INR Million 151539
No of Shares Outstanding (In Million) 466
Intrinsic Value 325.19
Current Market Price of Share 803
Current Discount/Premium 147%
Intrinsic Value of the Shares: Bharat Forge DCF Valuation

Bharat Forge DCF Valuation and Intrinsic Share Price = INR 325.19

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References: Investopedia
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You can read more about the company on its website!
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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)

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