Calculating The Fair Value Of Blue Dart Express Limited (NSE:BLUEDART)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Blue Dart Express fair value estimate is ₹5,404
• With ₹5,676 share price, Blue Dart Express appears to be trading close to its estimated fair value
• Analyst price target for BLUEDART is ₹6,852, which is 27% above our fair value estimate

Does the January share price for Blue Dart Express Limited (NSE:BLUEDART) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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The Model

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 begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (₹, Millions)	₹5.67b	₹6.75b	₹7.88b	₹10.0b	₹11.5b	₹13.0b	₹14.4b	₹15.8b	₹17.2b	₹18.6b
Growth Rate Estimate Source	Analyst x4	Analyst x4	Analyst x3	Analyst x1	Est @ 15.14%	Est @ 12.63%	Est @ 10.88%	Est @ 9.65%	Est @ 8.79%	Est @ 8.19%
Present Value (₹, Millions) Discounted @ 14%	₹5.0k	₹5.2k	₹5.3k	₹5.9k	₹6.0k	₹5.9k	₹5.7k	₹5.5k	₹5.3k	₹5.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹55b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 14%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = ₹19b× (1 + 6.8%) ÷ (14%– 6.8%) = ₹274b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹274b÷ ( 1 + 14%)¹⁰= ₹73b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹128b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹5.7k, the company appears around fair value at the time of writing. 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Blue Dart Express 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 14%, which is based on a levered beta of 0.974. 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.

Check out our latest analysis for Blue Dart Express

SWOT Analysis for Blue Dart Express

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Blue Dart Express, we've put together three further aspects you should further research:

1. Risks: Case in point, we've spotted 1 warning sign for Blue Dart Express you should be aware of.
2. Future Earnings: How does BLUEDART's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. 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!

PS. Simply Wall St updates its DCF calculation for every Indian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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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.