Fundamental Analysis And Intrinsic Value of Taparia Tools Ltd.
Dated: 30 Mar 23
Company: Taparia Tools Ltd.
CMP: Rs. 10.50
Introduction
In this article we will try to analyze Taparia Tools Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.
Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.
Leverage Ratios
Observations:
- All the above ratio show that the company has no debt.
Operating Ratios
Observations:
- Company is maintaining a good fixed asstes turnover ratio, indicating that all plant, machinery and buildings are put to optimum use.
- The receivables turnover ratio has shown some decline over the period in consideration. The company has to keep a closer watch over the receivables so that its cash flow is not hurt.
Profitability Ratios
Observations:
- Company has achieved remarkable improvement in PAT and EBITDA margins. All other profitability ratios also have shown marked improvement during the period.
Intrinsic Value
Assumptions:
- The increase in cash flow is assumed to be Rs.15.18 Lacs for the first five years and then Rs 7.59 Lacs from sixth to tenth year. The growth rate is projected based on the past Free Cash Flows (refer to figure below). In the past free cash flow has increased at the rate of Rs. 30.37 Lacs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Terminal growth rate is assumed to be 0%.
- Discount rate is assumed to be 12%.
- Free Cash Flow is extrapolated with the base value as Rs 1000 Lacs which is a value below the average of free cash flows during the period viz 1756.95 Lacs.
- Increase in Revenue is assumed to be Rs. 2158.08 Lacs per year for the first five years and then Rs 1079.04 Lacs per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 4316.17 Lacs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Free cash flow will be 4% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.04. Here we assume that the same average will hold good for future.
Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free cash flows and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.
Free Cash Flow Growth Model
Intrinsic Value: Rs. 296.11
Stock Entry price with 25% margin of safety: Rs. 222.08
Revenue Growth Model
Intrinsic Value: Rs. 719.22
Stock Entry price with 25% margin of safety: Rs. 539.42
The average of the above two stock entry prices works out to be Rs. 380.75. When the stock starts trading below this price it becomes attractive for long term investment.
Author
Jibu Dharmapalan
Fundamental Analyst
Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.
References:
https://www.tapariatools.com/quarterly_results.html
More about the Company:
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