A look at the intrinsic value of Brand Concepts Limited (NSE: BCONCEPTS)

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In this article, we’ll estimate the intrinsic value of Brand Concepts Limited (NSE: BCONCEPTS) by taking expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Don’t be put off by the lingo, the math is actually pretty straightforward.

There are many ways businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. If you still have burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest review for branding concepts

The calculation

We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. In the first step, we need to estimate the cash flow of the business over the next ten years. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.

Generally, we assume that a dollar today is worth more 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

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF (₹, Millions) ₹ 44.6m ₹ 46.0 m 47.9 m 50.2 m ₹ 52.9m ₹ 56.0m ₹ 59.5m ₹ 63.2m 67.3 m 71.7m
Source of growth rate estimate Is 1.4% Is @ 3% Est @ 4.12% Est @ 4.91% Est @ 5.46% Est @ 5.84% Est @ 6.11% Is 6.3% Est @ 6.43% Est @ 6.52%
Current value (₹, Millions) discounted at 16% 38.5 ₹ 34.1 ₹ 30.6 27.7 ₹ 25.2 23.0 21.0 19.2 ₹ 17.6 ₹ 16.2

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = ₹ 253m

The second stage is also known as terminal value, this is the cash flow of the business after the first stage. The Gordon 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 6.7%. We discount terminal cash flows to their present value at a cost of equity of 16%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = ₹ 72m × (1 + 6.7%) ÷ (16% – 6.7%) = ₹ 822m

Present value of terminal value (PVTV)= TV / (1 + r)ten= ₹ 822m ÷ (1 + 16%)ten= 186m

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is 439 million euros. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of 43.7, the company appears to be around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.

NSEI: BCONCEPTS Discounted Cash Flow November 8, 2021

The hypotheses

Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. Part of investing is coming up with 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 full picture of a company’s potential performance. Since we view Brand Concepts 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 debt into account. In this calculation, we used 16%, which is based on a leveraged beta of 1.493. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

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 business. It is not possible to achieve a rock-solid valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. For branding concepts, we’ve compiled three more things you should explore:

  1. Risks: We think you should evaluate the 3 warning signs for brand concepts (2 are potentially serious!) We reported before investing in the business.
  2. Other strong companies: 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 trading fundamentals to see if there are other companies you may not have considered!
  3. Other picks from top analysts: Interested in seeing what analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think might have a compelling outlook for the future!

PS. The Simply Wall St app performs a daily discounted cash flow assessment for each NSEI share. If you want to find the calculation for other actions, just search here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in the mentioned stocks.

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.


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