Valuing companies is a combination of art and science The DND Flyway (Delhi Noida Direct Flyway) is an eight-laned 9.2 km  access controlled tolled expressway which connects Delhi to Noida, an industrial suburb area. It was built and is maintained by The Noida Toll Bridge Company Ltd which we will try to value in this post

We discussed few valuation methodologies for a fast grower like CERA in previous post in today’s post we will try to value a slow grower /annuity kind of business

We will use below methods

Company Type	Valuation model	Basis	Driven by	Assumptions
Slow Growers	Average PE Value Method	The company is valued at its average PE for last 5 years	Earnings	Implicit assumptions that company would trade at average PE
	Economic Value Method	Current EPS is converted to perpetuity with model discount factor	Earnings	Share is treated as perpetual bond
Liquidating business/ Cyclical / No growth business	Graham Number	Theoretically, the maximum price that a defensive investor should pay for the given stock	Earnings	To be used in bear phase for cyclical business
Fast growth Companies	Graham Intrinsic Value	The formula as described by Graham in the 1962 edition of Security Analysis	Earnings	The formula’s inherent assumption
Fast grower	Historical Earnings growth	Value of stock   when existing EPS growth rate is extended	Earnings	PE assumptions
Fast grower	Sustainable Earnings Growth	Value of stock when existing ROE growth rate is extended	Earnings	PE assumptions
All Companies	DCF	Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them with a discount rate to arrive at a present value, which is used to evaluate the potential for investment.	Cash Flow	Growth , discount assumptions & projections
All Companies	Reverse DCF	Gives view on market implied growth	Cash flow	Market price is true reflector of growth expectations

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Let’s start

Average PE Value Method

To calculate the average P/E ratio you need to go through the process and obtain data for the earnings per share for the last 5 years. I prefer to get 5 years as we know earnings per share can be altered by one time sales of plants or equipment and using one year average may not give satisfactory results

Then find the stock high and low prices for those corresponding years by using Yahoo Finance / NSE website

For Noida the numbers are below

Average PE for a single year is average of High and Low PE

Now calculate average earnings for last five years and Average of Average PE 🙂

Pause and evaluate those two numbers , in value stocking it is about getting things right in future even though we are deriving future from historical data

Ask yourself can this company command a PE of 12 going forward ? a company whose earnings are growing at roughly inflation rate, I would be skeptic and would lower the average PE number  to 8.5 ( No real growth company)

Now as far as earnings are considered they are increasing at inflation rate so there no point in taking average historical figure put yourself in shoes of a conservative investor and I am one so I would take last year’s earnings as my base increase per share earnings by 7% to get revised figures

This is the value of share based on revised figures

Economic Value Method

If firm doesn’t grow its earnings faster than inflation that we can use this method, Current EPS is converted to perpetuity with model discount rate, the big questions is what is the discount rate to apply ? For a no real growth company, I would keep discount as 12% [My assumption]

Value of Share = [Current EPS / Discount rate (as decimal)]

Get the trailing EPS value from Financial websites, For Noida I got this from Yahoo finance – INR 3.74

Apply discount rate = 12% (0.12)

Graham Number

Investopedia explains

A figure that measures a stock’s fundamental value by taking into account the company’s earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued, and thus worth investing in

The formula for calculating Graham number is below

Value of share = Graham Number, For NOIDA

Graham Number is  INR 38

Discounted cash flow method

Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them with a discount rate to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one

This is DCF formula

What is free cash flow for NOIDA ?, below table gives a view in INR million

Using above lets calculate per share DCF value using average FCF value

Few key calls outs

FCF growth rate is based on last 4 year’s FCF CAGR

Terminal growth rate is Zero as toll way will become free for commuters

Like last post we get a range of fair values for Noida

Method	Value per share (INR)
Average PE Value Method	27
Economic Value Method	31
Graham Number	38
DCF	36

Hope both the posts helped you to get insights in valuing companies, always try and value companies using multiple methods and get a band of fair values

Our third and last post on valuation series would on reverse DCF

Till then happy investing