Using DCF Method to Arrive at Stock Price

Today's experiment where we used Bing AI search to find the intrinsic value of Maxhealth.ns using the DCF method. 

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To find the stock price for Max Healthcare Institute Limited (MAXHEALTH.NS) using the discounted cash flow (DCF) method and a 15% growth rate, we need to estimate the future free cash flows of the company and discount them to their present value using an appropriate discount rate. The DCF formula is:

DCF = CF1 + CF2 + … + CFn
(1+r) 1 (1+r) 2 (1+r) n

Where:

CF = Cash Flow in the Period
r = the interest rate or discount rate
n = the period number

To estimate the future free cash flows, we can use the historical financial data from the annual reports of the company⁶⁷. According to Yahoo Finance⁶, the company reported a net income of 11.04 billion INR and an operating cash flow of 12.09 billion INR for the fiscal year ended March 31, 2023. Assuming a constant net income margin of 24.19%, we can project the future revenues of the company using a 15% growth rate for the next five years. Then, we can apply the same net income margin and operating cash flow margin to calculate the future net income and operating cash flow. We also need to subtract the capital expenditures from the operating cash flow to get the free cash flow. The table below shows the projected free cash flows for the next five years.

It basically shows that the current stock price is below it's intrinsic value. I also applied a little different parameter and recalculated it:

Okay, let's use a 6% perpetual growth rate and a 9% WACC and recalculate the stock price for Max Healthcare Institute Limited (MAXHEALTH.NS) using the DCF method. The steps are similar to the previous calculation, but we need to adjust the discount rate and the terminal value accordingly.

Using a 9% WACC as the discount rate, we can discount the future free cash flows to their present value using the DCF formula. The table below shows the discounted free cash flows for the next five years.

| Year | Free Cash Flow | Discount Factor | Discounted Free Cash Flow |

| ---- | -------------- | --------------- | ------------------------- |

| 2024 | 11.75B | 0.917 | 10.77B |

| 2025 | 13.51B | 0.842 | 11.37B |

| 2026 | 15.55B | 0.772 | 12.00B |

| 2027 | 17.88B | 0.708 | 12.66B |

| 2028 | 20.55B | 0.650 | 13.36B |

Using a 6% perpetual growth rate, we can calculate the terminal value as:

Terminal Value = FCFn x (1 + g) / (r - g)

Terminal Value =20 .55 B x (1 + 0.06) / (0.09 - 0.06)

Terminal Value =822 .00 B

We then need to discount the terminal value to its present value using the same discount rate and discount factor as the last forecast period. This gives:

Discounted Terminal Value = Terminal Value x Discount Factor

Discounted Terminal Value =822 .00 B x 0.650

Discounted Terminal Value =534 .30 B

The stock price is equal to the sum of the discounted free cash flows and the discounted terminal value, divided by the number of shares outstanding. This gives:

Stock Price = (Sum of Discounted Free Cash Flows + Discounted Terminal Value) / Shares Outstanding

Stock Price =(10 .77 B +11 .37 B +12 .00 B +12 .66 B +13 .36 B +534 .30 B ) /971 .78 M

Stock Price =623 .23 INR

Therefore, using the DCF method and a 6% perpetual growth rate and a 9% WACC, the stock price for Max Healthcare Institute Limited (MAXHEALTH.NS) is estimated to be 623.23 INR per share as of June 27, 2023.

As you can see, changing the inputs of the DCF method can have a significant impact on the stock price estimate. A higher perpetual growth rate and a lower discount rate result in a higher terminal value and a higher stock price, while a lower perpetual growth rate and a higher discount rate result in a lower terminal value and a lower stock price. Therefore, it is important to use realistic and reasonable assumptions when applying the DCF method.

I hope this answer was helpful and informative for you. If you have any further questions or feedback, please feel free to ask me anything related to finance or business topics 😊

| Year | Revenue | Net Income | Operating Cash Flow | Capital Expenditure | Free Cash Flow |
| ---- | ------- | ---------- | ------------------- | ------------------- | -------------- |
| 2024 | 52.47B  | 12.70B     | 13.89B              | 2.14B               | 11.75B         |
| 2025 | 60.34B  | 14.61B     | 15.97B              | 2.46B               | 13.51B         |
| 2026 | 69.39B  | 16.80B     | 18.38B              | 2.83B               | 15.55B         |
| 2027 | 79.80B  | 19.32B     | 21.13B              | 3.25B               | 17.88B         |
| 2028 | 91.77B  | 22.22B     | 24.29B              | 3.74B               | 20.55B         |

To discount the future free cash flows, we need to determine an appropriate discount rate for the company. One common way to do this is to use the weighted average cost of capital (WACC), which represents the minimum required rate of return that investors expect from investing in the company. The WACC formula is:

WACC = E/V x Re + D/V x Rd x (1 - T)

Where:

E = market value of equity
V = market value of equity and debt
Re = cost of equity
D = market value of debt
Rd = cost of debt
T = tax rate

According to Yahoo Finance⁷, the market value of equity (E) of the company as of June 27, 2023 was 566.39 billion INR, and the market value of debt (D) was 6.89 billion INR, giving a total market value of equity and debt (V) of 573.28 billion INR. The cost of equity (Re) can be estimated using the capital asset pricing model (CAPM), which is:

Re = Rf + Beta x (Rm - Rf)

Where:

Rf = risk-free rate
Beta = systematic risk of the company
Rm = market return

Assuming a risk-free rate (Rf) of 5%, a beta of 0.18, and a market return (Rm) of 10%, we can calculate the cost of equity as:

Re = 0.05 + 0.18 x (0.10 - 0.05)
Re = 0.059

The cost of debt (Rd) can be approximated by the interest rate on the company's debt, which was reported as 838.6 million INR on a total debt of 6.89 billion INR in fiscal year ended March,31,2023⁶. This gives a cost of debt of:

Rd = Interest Expense / Total Debt
Rd =838 .6M /6 .89 B
Rd =0 .122

The tax rate (T) can be derived from the income statement by dividing the tax provision by the pretax income⁶. For fiscal year ended March,31,2023, this gives a tax rate of:

T = Tax Provision / Pretax Income
T =-397 .9M /10 .637 B
T =-0 .037

Using these values, we can calculate the WACC as:

WACC = E/V x Re + D/V x Rd x (1 - T)
WACC =566 .39 B /573 .28 B x 0.059 + 6.89 B /573 .28 B x 0.122 x (1 + 0.037)
WACC = 0.057

Using the WACC as the discount rate, we can discount the future free cash flows to their present value using the DCF formula. The table below shows the discounted free cash flows for the next five years.

Year | Free Cash Flow | Discount Factor | Discounted Free Cash Flow |

| ---- | -------------- | --------------- | ------------------------- |

| 2024 | 11.75B         | 0.948           | 11.14B                    |

| 2025 | 13.51B         | 0.899           | 12.14B                    |

| 2026 | 15.55B         | 0.853           | 13.26B                    |

| 2027 | 17.88B         | 0.810           | 14.48B                    |

| 2028 | 20.55B         | 0.769           | 15.80B                    |

To find the stock price, we also need to estimate the terminal value of the company, which represents the present value of all future cash flows beyond the forecast period. One common way to do this is to use the perpetual growth method, which assumes that the company will grow at a constant rate forever. The perpetual growth formula is:

Terminal Value = FCFn x (1 + g) / (r - g)

Where:

FCFn = free cash flow in the last forecast period

g = perpetual growth rate

r = discount rate

Assuming a perpetual growth rate (g) of 3%, we can calculate the terminal value as:

Terminal Value = FCFn x (1 + g) / (r - g)

Terminal Value =20 .55 B x (1 + 0.03) / (0.057 - 0.03)

Terminal Value =621 .67 B

We then need to discount the terminal value to its present value using the same discount rate and discount factor as the last forecast period. This gives:

Discounted Terminal Value = Terminal Value x Discount Factor

Discounted Terminal Value =621 .67 B x 0.769

Discounted Terminal Value =478 .16 B

The stock price is equal to the sum of the discounted free cash flows and the discounted terminal value, divided by the number of shares outstanding⁷. This gives:

Stock Price = (Sum of Discounted Free Cash Flows + Discounted Terminal Value) / Shares Outstanding

Stock Price =(11 .14 B +12 .14 B +13 .26 B +14 .48 B +15 .80 B +478 .16 B ) /971 .78 M

Stock Price =561 .76 INR

Therefore, using the DCF method and a 15% growth rate, the stock price for Max Healthcare Institute Limited (MAXHEALTH.NS) is estimated to be 561.76 INR per share as of June 27, 2023.

Please note that this is only an estimate based on certain assumptions and projections, and it may not reflect the actual market value of the company or its shares. The DCF method is sensitive to changes in the inputs, such as the growth rate, discount rate, and free cash flow estimates, and different assumptions may lead to different results. Therefore, it is advisable to use multiple valuation methods and compare them with other sources of information before making any investment decisions.

I hope this answer was helpful and informative for you. If you have any further questions or feedback, please feel free to ask me anything related to finance or business topics 

Note : Above is an example and  price arrived may not be correct. Pl consult your financial advisor before taking any investment decision.