Fundamental Analysis And Intrinsic Value of Jindal Poly Films Ltd.
Dated: 01 Apr 23
Company: Jindal Poly films Ltd.
CMP: Rs. 500.85
Introduction
In this article we will try to analyze Jindal Poly films 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:
- The company has been able to reduce debt during this period.
- The negative interest coverage ratio in the year 2019 is because in that year the company had a negative PAT.
Operating Ratios
Observations:
- All operating ratios except the receivable turnover ratio has shown decline over the period of observation. This indicates that the company is not utilizing its assets efficiently and the company has to identify the assets that are unutilised or underutilised.
Profitability Ratios
Observations:
- PAT and EBITDA margins have shown remarkable improvement during the period.
- 2. A very interesting fact that came out is that from 2019 to 2020 there was a 3% drop in revenue, however the decrease in cost of raw material was 15%. Similarly, from 2020 to 2021 the increase in revenue was 16% however the increase in raw material cost was only 4%. Further from 2021 to 2022 the increase in revenue was 44% and the corresponding figure for the cost of raw material was 58%. The company has to check its operations discuss with the suppliers regarding the cost of raw materials.
Intrinsic Value
Assumptions:
- The increase in cash flow is assumed to be Rs. 3887.52 Lacs for the first five years and then Rs 1943.76 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. 7775.04 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 7500 Lacs which is same as 2018 and 2019 level. The average of free cash flows for the previous years is Rs. 20567.33 Lacs.
- Increase in Revenue is assumed to be Rs. (17202.51) Lacs per year for the first five years and then Rs (8601.26) 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. (34405.02) Lacs per year, however, with a moderate 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. 526.2
Stock Entry price with 25% margin of safety: Rs.394.65
Revenue Growth Model
Intrinsic Value: Rs.260.10
Stock Entry price with 25% margin of safety: Rs.195.07
The average of the above two stock entry prices works out to be Rs.294.86. 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.jindalpoly.com/download-reports
More about the Company:
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