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    Valuation - Script

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    Bhaveek Ostwal
    The valuation of the company was arrived at using discounted cash flow analysis and trading comparables. For DCF, free cash flows for the next 5 years were forecasted based on management guidance, assuming revenues double in 3-4 years and margins gradually decrease from 39-40% to a 5-year average of 36-37%. A two-stage growth model was used to calculate DCF for the high growth period of 5 years, after which a terminal growth rate of 4% was assumed. By assigning a 75% weight to the DCF and 25% to trading comparables, a target price of INR 1154 was arrived at, providing 18% upside to the current price.

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    Valuation - Script

    Uploaded by

    Bhaveek Ostwal
    63 views2 pages
    The valuation of the company was arrived at using discounted cash flow analysis and trading comparables. For DCF, free cash flows for the next 5 years were forecasted based on management guidance, assuming revenues double in 3-4 years and margins gradually decrease from 39-40% to a 5-year average of 36-37%. A two-stage growth model was used to calculate DCF for the high growth period of 5 years, after which a terminal growth rate of 4% was assumed. By assigning a 75% weight to the DCF and 25% to trading comparables, a target price of INR 1154 was arrived at, providing 18% upside to the current price.

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    The valuation of the company was arrived at using discounted cash flow analysis and trading comparables. For DCF, free cash flows for the next 5 years were forecasted based on management guidance, assuming revenues double in 3-4 years and margins gradually decrease from 39-40% to a 5-year average of 36-37%. A two-stage growth model was used to calculate DCF for the high growth period of 5 years, after which a terminal growth rate of 4% was assumed. By assigning a 75% weight to the DCF and 25% to trading comparables, a target price of INR 1154 was arrived at, providing 18% upside to the current price.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    63 views2 pages

    Valuation - Script

    Uploaded by

    Bhaveek Ostwal
    The valuation of the company was arrived at using discounted cash flow analysis and trading comparables. For DCF, free cash flows for the next 5 years were forecasted based on management guidance, assuming revenues double in 3-4 years and margins gradually decrease from 39-40% to a 5-year average of 36-37%. A two-stage growth model was used to calculate DCF for the high growth period of 5 years, after which a terminal growth rate of 4% was assumed. By assigning a 75% weight to the DCF and 25% to trading comparables, a target price of INR 1154 was arrived at, providing 18% upside to the current price.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

     Valuation for the company is arrived at basis Discounted cash flows as well as trading

    comparables.

     For DCF, Free Cash Flows for the next 5 years have been forecasted based on management’s
    guidance

     For revenues, management’s estimate of volumes and prices for existing as well as new
    products is considered where management has guided for doubling the revenues in the next
    3-4 years

     Operating margins have been taken on the conservative side i.e. current margins of 39-40%
    have been assumed to gradually lower to 5 year average margin of 36-37%

     Capex assumptions have been taken basis management’s expectations of capacity utilisation
    in the coming years

     As discussed previously, the speciality chemicals industry is poised to grow at a higher rate
    of 10-15% in the next few years, and hence a two stage growth model is used to calculate
    DCF for the high growth period of 5 years, post which a terminal growth rate of 4% is
    assumed basis the blended GDP growth rate.

     All the cash flows have been discounted at the WACC of 10.5%

     Finally, by assigning a 75% weightage to the DCF price, and 25% weightage to trading
    comparables (i.e. EV/EBIDTA & P/E), we arrive at a target price of INR 1154 giving a potential
    upside of 18% to the current price of 974.3

     As can be seen on the football field chart at the left, at the current price of 974, the company
    lies on lower rung of the valuation both on the basis of DCF as well as trading multiples

     The target price through the DCF implies an EV/EBITDA multiple of 20.0 vis-à-vis the current
    multiple of 16.8 and a P/E multiple of 27.8 vis-à-vis the current multiple of 23.1, hence a
    potential upside on both fronts

     A sensitivity analysis of the target price has also been presented in the appendix considering
    different 2 stage growth rates, terminal growth rates and WACC.

     Coming to the risks for the company, crude price risk is the most significant risk since >90%
    of the raw material of the company derives its prices from crude oil. The company has
    hedged against such risk by formula pricing i.e. benchmarking its prices to the crude oil
    prices in most of its long-term contracts. However, for revenues arising outside of these
    contracts, margins could be affected if the company is unable to pass on the increase in price
    of raw materials.

     The next significant risk the company faces is price competition risk. However, the company
    has global oligopoly in most of the products it produces and since most of the revenues
    comes from long-term contracts, the likelihood of this risk reduces.
     The company is also exposed to concentration risk in terms of concentration of its products
    as well concentration of revenues. However, the company has over the period of time
    reduced this risk by diversifying into multiple products and clients across geographies and
    industries.

     The company is also exposed to currency risk since exports constitute 3 quarters of the
    revenue. However, the contracts entered with customers have the provision to share the
    forex risk beyond a certain limit.

     Finally, the company has an ROCE is higher than its peers primarily on account of
    significantly higher operating margins which are almost twice the average margins of its peer
    group.

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