A look at the intrinsic value of TV18 Broadcast Limited (NSE: TV18BRDCST)

In this article, we will estimate the intrinsic value of TV18 Broadcast Limited (NSE: TV18BRDCST) by estimating the future cash flows of the business and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. There really isn’t much to do, although it may seem quite complex.

We would like to point out that there are many ways to assess a business, and like DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flows, the rationale for this calculation can be read in detail in the Simply Wall St.

Discover our latest analysis for TV18 broadcast

The calculation

We use what’s called a 2-step model, which just means that we have two different periods of growth rate for the company’s cash flow. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to estimate the next ten years of cash flow. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or the last reported value. We assume that companies with decreasing free cash flow will slow down their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow down more in the early years than in the following years.

A DCF is based on the idea that a dollar in the future is worth less 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) estimate

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = ₹ 36 billion

Now we need to calculate the terminal value, which takes into account all future cash flows after that ten year period. Gordon’s growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 7.0%. We discount terminal cash flows to their present value at a cost of equity of 15%.

Terminal value (TV)= FCF₂₀₃₀ × (1 + g) ÷ (r – g) = ₹ 7.7 billion × (1 + 7.0%) ÷ (15% – 7.0%) = ₹ 101 billion

Present value of terminal value (PVTV)= TV / (1 + r)^ten= 101b ₹ ÷ (1 + 15%)^ten= ₹ 25 billion

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is ₹ 61 billion. The last step is then to divide the equity value by the number of shares outstanding. From the current share price of ₹ 31.5, the company appears on fair value at a 12% discount from the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.

Important assumptions

The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. Part of investing is making your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view TV18 Broadcast 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 takes into account debt. In this calculation, we used 15%, which is based on a leveraged beta of 0.964. Beta is a measure of the volatility of a stock, relative 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.

Next steps:

While important, the DCF calculation ideally won’t be the only analysis you look at for a business. It is not possible to obtain an infallible valuation with a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. For TV18 Broadcast, we’ve compiled three important things you should take a look at:

1. Financial health: Does TV18BRDCST have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future income: How does TV18BRDCST’s growth rate compare to its competitors and the overall market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth forecast chart.
3. Other strong companies: Low debt, high returns on equity, and good past performance are essential to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!

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 Simply Wall St article is general in nature. It is not a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in the mentioned stocks.
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