Valuation of Ambuja Cement

In financial parlance, Valuation means how much a company is worth of. Talking about equity investments, one should have an understanding of valuation. Valuation means the intrinsic worth of the company.  There are various methods through which one can measure the intrinsic worth of a company.

They are mentioned below:

Net Asset Value (NAV)

NAV or Book value is one of the most commonly used methods of valuation. As the name suggests, it is the net value of all the assets of the company. If you divide it by the number of outstanding shares, you get the NAV per share.

One way to calculate NAV is to divide the net worth of the company by the total number of outstanding shares. Say, a company’s share capital is Rs. 100 crores (10 crores shares of Rs. 10 each) and its reserves and surplus is another Rs. 100 crores. Net worth of the company would be Rs. 200 crores (equity and reserves) and NAV would be Rs. 20 per share (Rs. 200 crores divided by 10 crores outstanding shares).

NAV can also be calculated by adding all the assets and subtracting all the outside liabilities from them. This will again boil down to net worth only. One can use any of the two methods to find out NAV.

One can compare the NAV with the going market price while taking investment decisions.

Discounted Cash Flows Method (DCF)

DCF is the most widely used technique to value a company. It takes into consideration the cash flows arising to the company and also the time value of money. That’s why, it  is so popular. What actually happens in this is, the cash flows are calculated for a particular period of time (the time period is fixed taking into consideration various factors). These cash flows are discounted to the present at the cost of capital of the company. These discounted cash flows are then divided by the total number of outstanding shares to get the intrinsic worth per share.

For our project we have taken Ambuja Cement for doing valuation. The details are given as follows.

The reinvestment rate for The company as calculated by determining the working capital is found out to be 8.91% and its ROC is calculated to be 20.96% hence its expected growth rate is 1.87%, whereas the industry growth rate is around 12.42% for cement industry. Hence, if we compare ambuja cement growth rate with the industry average, we can say that the company is in low growth phase.

The cement industry in India is experiencing a boom on account of overall growth of the Indian economy. The demand for cement, being a derived demand, depends mainly on the industrial activities, real estate business, construction activities and investment in the infrastructure sector. India is experiencing growth in all these areas and hence the cement market is moving ahead in spite of the world-wide economic recession.

AMBUJA CEMENT has a market share of 10%.

Firm is earning significant return on capital as compared to the cost of capital

Also it has a competitive advantage because of significant economies of scale. It has a management team focussed on growth and efficiency. Thus its safe to assume that 10 * YEARS, it will be difficult for competitors to overcome the economies of scale.

SUMMARY OF INPUTS LOW GROWTH STABLE GROWTH LENGTH 10 yrs Forever after 10 yrs BETA 0.86 COST OF EQUITY 25.53% AFTER TAX COST OF DEBT 72.03% DEBT RATIO 0.61% COST OF CAPITAL 25.81% 12.20% RETURN ON CAPITAL 20.96% REINVESTMENT RATE 8.91% EXPECTED GROWTH RATE 1.87% 11.00% TAX RATE(marginal tax rate considered) 32.45%

From the report of Indian cement industry we came to know that it has CAGR of 12%. Also analysing the past data and upcoming projects we predict that it will grow in future. According to current budget Rs. 3000 crore are allocated for road projects. Also as country is doing development in infrastructure, cement consumption will increase in upcoming time. But market share of AMBUJA CEMENT is 10% which is one of the top three companies in this sector having ACC as its competitor with market share of 13.96%. We placed our company in low growth segment because growth rate of big companies is low. This is because of small players who are providing cement at cheaper rate; hence their market share is increasing. Also people now days are importing cement from Nepal.

According to our analysis company should increase its reinvestment rate, to maintain its position in the market. That is why for the first 10 years we have kept expected growth rate to be low and placed it in slow growth segment but for the upcoming years company is moving to stable growth rate with growth rate of 11% (CAGR= 12%).

Cost of capital for our company is 25.81% which needs to be reduced. According to the data of ACC cement (immediate competitor) the company is maintaining cost of capital to be 12.20%. Hence we are making an assumption that if our company maintains the cost of capital 12.20% growth will increase.

Also we observe that company is reducing the debt year by year. 

The terminal value of the future cash flows is calculated to be Rs. 185216.3378 discounted at present value of Rs. 18643.50954. This means the value of the firm is Rs. 18529.79918. The reinvestment rate is less than 100% for AMBUJA CEMENT. It is 8.91%. So for every Rs. 100 earned by the company, it reinvests Rs. 8.91, hence there is no cash outflow by the firm. Thus the net value of the firm is positive.

(*all the figures are in crores)

Share price as per our calculation = Rs. 163.2871491

Share price as per market = Rs 189. 95

As it is greater than Rs. 163.2871491 hence the share is overpriced, hence it is an overvalued company. But not that much overvalued as growth rate is very low (1.89%). In near future it is expected to come down to be Rs. 163.2871491.

Stock value using dividend growth model

Return rate= 15%

Growth rate = 5.5%

Value of stock using dividend growth rate model = 44.42105263   

If growth rate = 12%

Value of stock = 149.3333333          

As we have taken return rate to be 15% our stock value using dividend growth model is coming out to be 44.42 if growth rate is 5.5% and 149.33 if growth rate is 12%.      

Value of stock using Divided Growth Model = 44.42

Value of stock as per balance sheet (book value) = 52.38