Calculating The Intrinsic Value Of The Sandur Manganese & Iron Ores Limited (NSE:SANDUMA)

Key Insights

• The projected fair value for Sandur Manganese & Iron Ores is ₹280 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₹227 suggests Sandur Manganese & Iron Ores is potentially trading close to its fair value
• The average premium for Sandur Manganese & Iron Ores' competitorsis currently 398%

Does the December share price for The Sandur Manganese & Iron Ores Limited (NSE:SANDUMA) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Sandur Manganese & Iron Ores Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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) forecast

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (₹, Millions)	₹8.07b	₹9.81b	₹11.5b	₹13.1b	₹14.7b	₹16.2b	₹17.7b	₹19.2b	₹20.7b	₹22.3b
Growth Rate Estimate Source	Est @ 27.96%	Est @ 21.61%	Est @ 17.16%	Est @ 14.05%	Est @ 11.87%	Est @ 10.35%	Est @ 9.28%	Est @ 8.53%	Est @ 8.01%	Est @ 7.64%
Present Value (₹, Millions) Discounted @ 15%	₹7.0k	₹7.4k	₹7.5k	₹7.4k	₹7.2k	₹6.9k	₹6.6k	₹6.2k	₹5.8k	₹5.4k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹67b

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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 6.8%. We discount the terminal cash flows to today's value at a cost of equity of 15%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = ₹22b× (1 + 6.8%) ÷ (15%– 6.8%) = ₹283b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹283b÷ ( 1 + 15%)¹⁰= ₹69b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₹136b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₹227, the company appears about fair value at a 19% 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.

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual 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 Sandur Manganese & Iron Ores 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 15%, which is based on a levered beta of 1.130. 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 Sandur Manganese & Iron Ores

SWOT Analysis for Sandur Manganese & Iron Ores

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Sandur Manganese & Iron Ores, we've compiled three essential factors you should assess:

1. Risks: Case in point, we've spotted 3 warning signs for Sandur Manganese & Iron Ores you should be aware of, and 1 of them doesn't sit too well with us.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.