Calculating the Intrinsic Value of Adani Ports and Limited Special Economic Zone (NSE:ADANIPORTS) | Whuff News

Today we will do a brief run through of the valuation methods used to estimate the attractiveness of Adani Ports and Special Economic Zone Limited (NSE:ADANIPORTS) as an investment opportunity by taking the company’s future cash flow forecast and discounting it back to today’s value. The Discounted Cash Flow (DCF) model is the tool we will use to do this. Before you think you won’t be able to understand it, just read it! It’s actually a lot more complex than you might imagine.

We generally believe that a company’s value is the present value of all the cash it will generate in the future. However, DCF is only one valuation metric among many, and it is not without its flaws. If you want to know more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St. analysis model.

Check out our latest analysis for Adani Ports and Special Economic Zones


We use a 2-stage growth model, which means we take into account two stages of company growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we need to estimate the cash flow of the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to be slower in the early years than in the later years.

DCF is about the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:

Estimated free cash flow (FCF) 10 years

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Leveraged FCF (₹, Million) ₹52.4b ₹91.0b ₹97.3b ₹103.4b ₹110.1b ₹117.3b ₹125.0b ₹133.3b ₹142.2b ₹151.8b
Sources of Growth Rate Estimates Analyzer x6 Analyzer x6 Analyzer x2 Estimated @ 6.32% Estimated @ 6.45% Estimated @ 6.54% Estimated @ 6.6% Estimated @ 6.65% Estimated @ 6.68% Estimated @ 6.7%
Present Value (₹, Million) Discount @ 12% ₹46.7k ₹72.3k ₹68.9k ₹65.3k ₹62.0k ₹58.8k ₹55.9k ₹53.2k ₹50.6k ₹48.1k

(“Estimated” = FCF growth rate estimated by Simply Wall St)
10-year Present Value of Cash Flows (PVCF) = ₹582b

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 10-year government bond yield of 6.8%. We discount the terminal cash flows to today’s value at a cost of equity of 12%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹152b× (1 + 6.8%) ÷ (12%– 6.8%) = ₹3.0t

Present Value Terminal Value (PVTV)= TV / (1 + r)10= ₹3.0t÷ ( 1 + 12%)10= ₹945b

The total value is the sum of the cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₹1.5t. In the last step we divide the equity value by the number of outstanding shares. Compared to the current share price of ₹827, the company appears to be around fair value at the time of writing. But remember, this is only an approximate assessment, and like any complex formula – garbage in, garbage out.

NSEI:ADANIPORTS Discounted Cash Flow September 29, 2022


We will show that the most important input to the discounted cash flow is the discount rate and of course the actual cash flow. Part of investing will result in your own assessment of the company’s future performance, so try your own calculations and check your own assumptions. DCF also does not consider possible industry cycles, or a company’s future capital needs, so it does not provide a full picture of a company’s potential performance. As we look at Adani Ports and the Special Economic Zone 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 includes debt. In this calculation, we have used 12%, which is based on a beta lever of 0.846. Beta is a measure of a stock’s volatility, relative to the market as a whole. We derive our beta from the industry average beta of comparable companies globally, with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable business.

Looking Ahead:

Although important, the DCF calculation is only one of the many factors you need to evaluate a company. The DCF model is not the be-all and end-all of investment valuation. Instead, the best use for the DCF model is to test certain assumptions and theories to see if they will lead to the company being undervalued or overvalued. For example, changes in a company’s cost of equity or the risk-free rate can significantly impact valuations. For Adani Ports and Special Economic Zones, there are three more things you need to look out for:

  1. Risk: Take risks, for example – Adani Port and Special Economic Zone have 3 warning signs we think you should be aware.
  2. Future Income: How does ADANIPORTS’ growth rate compare to its peers and the wider market? Dig deeper into analyst consensus numbers for the coming years by interacting with our free analyst growth forecast chart.
  3. Other High Quality Alternatives: Do you like all-rounders? Explore our interactive list of high-quality stocks to get an idea of ​​what else you might have missed!

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.

Valuation is complicated, but we help make it simple.

Find out if Adani Port and Special Economic Zone potential over or under value by reviewing our comprehensive analysis, which includes fair value estimation, risk and warning, dividends, insider trading and financial health.

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This article by Simply Wall St is general in nature. We provide reviews based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares, and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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