An Intrinsic Calculation For Indus Towers Limited (NSE:INDUSTOWER) Suggests It's 26% Undervalued

Key Insights

• Indus Towers' estimated fair value is ₹580 based on 2 Stage Free Cash Flow to Equity
• Indus Towers' ₹429 share price signals that it might be 26% undervalued
• Our fair value estimate is 35% higher than Indus Towers' analyst price target of ₹429

In this article we are going to estimate the intrinsic value of Indus Towers Limited (NSE:INDUSTOWER) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

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Is Indus Towers Fairly Valued?

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (₹, Millions)	₹63.0b	₹87.9b	₹96.2b	₹101.4b	₹122.4b	₹134.1b	₹145.7b	₹157.5b	₹169.7b	₹182.3b
Growth Rate Estimate Source	Analyst x8	Analyst x9	Analyst x9	Analyst x3	Analyst x1	Est @ 9.50%	Est @ 8.69%	Est @ 8.12%	Est @ 7.72%	Est @ 7.44%
Present Value (₹, Millions) Discounted @ 13%	₹55.7k	₹68.8k	₹66.6k	₹62.1k	₹66.3k	₹64.3k	₹61.8k	₹59.1k	₹56.3k	₹53.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹614b

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 13%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = ₹182b× (1 + 6.8%) ÷ (13%– 6.8%) = ₹3.1t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹3.1t÷ ( 1 + 13%)¹⁰= ₹914b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹1.5t. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₹429, the company appears a touch undervalued at a 26% discount to where the stock price trades currently. 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. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Indus Towers 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 13%, which is based on a levered beta of 0.838. 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 Indus Towers

SWOT Analysis for Indus Towers

Next Steps:

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. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Indus Towers, we've put together three fundamental factors you should consider:

1. Risks: For example, we've discovered 1 warning sign for Indus Towers that you should be aware of before investing here.
2. Future Earnings: How does INDUSTOWER'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NSEI every day. If you want to find the calculation for other stocks 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.