BHEL DCF Valuation Excel Model and Intrinsic Value of Shares

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BHEL DCF Valuation : About the Company

The company is promoted by the government of India which controls over 63% stake. Therefore, BHEL has a high percentage of revenue coming from government projects. The company currently has 16 manufacturing units, 2 repair centres, 8 service centres along with the infrastructure to deal with 150+ project sites across the world. BHEL has a project footprint in 83+ countries in the world and is currently executing 6 GW projects in 12 countries.

The company has 4 major business segments called Power, Transmission, Transportation, and Renewable energy. The power segment involves the execution of power projects from concept to commissioning. It includes emission control equipment, Gas turbines, hydropower generators, and nuclear SG & TG sets up to 700 MWe. The Transmission segment includes a wide range of transmission systems and products including EHV & UHV (Extra and Ultra-high Voltage). The transportation segment includes traction propulsion equipment like railway electrification, Locos, EMUs, and Metro coaches. The Renewable energy segment has EPC solutions for ground-mounted and rooftop solar power plants. From here, we go ahead with BHEL DCF Valuation and Intrinsic Value of its shares.

Read more here: BHEL DCF 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 BHEL DCF Valuation.

Financial Year Revenue Growth Rate
Year 1 -30%
Year 2 -3%
Year 3 26%
Year 4 15%
Year 5 12%
Revenue Growth Rates: BHEL 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 : BHEL DCF Valuation
Financial Statements Forecast : BHEL 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 -6758 8517 33095 20096 27419
Free Cash Flow to Equity -120356 -1125 109176 67605 77613
FCFF and FCFE values: BHEL 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 27419.07
Growth Rate 5.00%
Cost of Capital 17.71%
Terminal Value 226525.47
Terminal Value: BHEL 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 BHEL DCF Valuation.

WACC Calculation for BHEL DCF Valuation.
WACC Calculation for BHEL 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 BHEL DCF Valuation. (Units are INR Millions)

PV of FCFF and FCFE  for BHEL DCF Valuation.
PV of FCFF and FCFE for BHEL 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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BHEL DCF Valuation Units
PV in INR Million 104374
No of Shares Outstanding (In Million) 3629
Intrinsic Value 28.76
Current Market Price of Share 56
Current Discount/Premium 95%
Intrinsic Value of the Shares: BHEL DCF Valuation

BHEL DCF Valuation and Intrinsic Share Price = INR 28.76

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References: Investopedia
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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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