Heritage Foods:

Discounted
Cash Flow
Valuation.
Current Price: INR 1400
 Questions

1. Discuss the concept and framework of equity valuation in the context of Heritage Foods.

2. Discuss the modalities of DCF valuation methodology and its main assumptions for valuation of Heritage Foods.
Is the DCF valuation method an appropriate way to value Heritage Foods?

3. Estimate the computation of FCFF required for performing DCF valuation of Heritage Foods.

4. Determine the fair fundamental valuation of Heritage Foods (on a per share basis) using the multistage DCF
methodology. Clearly state all your assumptions and calculations including an estimation of WACC (for required
returns).

5. Based on your analysis, as Rakesh Singh, determine the undervaluation or overvaluation of Heritage Foods
relative to its currently traded market price? As Rakesh Singh, what is your recommendation for investment
decision making in shares of Heritage Foods
 Discuss the concept and framework of equity valuation in the context of Heritage
Foods. 
CFt
V0  
t 1 (1  r )
t

• Valuation of a consumer company like Heritage Foods involves determining

• the payoffs expected to be received by shareholders in the future and
• finding out its present value (in time value terms) using an appropriate risk-adjusted rate.

• Financial analysts generally follow the three step top down approach Be able to elaborate on
• macro analysis of the economy this using lecture material
• industry analysis (in which the company operates)
• target company analysis

• After that the appropriate valuation methodology or technique is decided to arrive at the target price for
the stock and basis that the investment decision is made.
 Discuss the modalities of DCF valuation methodology and its main assumptions
for valuation of Heritage Foods. Is the DCF valuation method an appropriate way
to value Heritage Foods?


CFt
V0  
t 1 (1  r )
t

• This approach, also known as the fundamental approach to equity valuation, compares the intrinsic value of
the company with its traded market price to arrive at the investment decision.
• This case FCFF - unlike dividend discount models which tend to capture only a fraction of total cash flows
available for distribution to shareholders, free cash flows under the DCF approach take into consideration the
entire cash flows available.
• Given that Heritage Foods is a growth company and reinvests a significant portion of its profits back into the business, the DCF approach
is the most suitable methodology to value the same

Be able to elaborate on
this using lecture material
 Estimate the computation of FCFF required for performing DCF valuation of
Heritage Foods.

• This question is asking you to specify the theory and to talk through the calculations
• How to calculate FCFF --- depending on info available: NI/EBITDA/EBIT
• How to forecast FCFF
• How to forecast for the explicit forecast period and for the terminal period
• How to calculate WACC

𝑛
𝐹𝑖𝑟𝑚 𝑉𝑎𝑙𝑢𝑒= ∑ 𝐹𝐶𝐹 𝐹 0 ¿ ¿ ¿
𝑡=1 Be able to elaborate on
this using lecture material
Determine the intrinsic fundamental valuation of Berger Paints (on a per share basis) using the
multi-stage DDM. Clearly state all your assumptions and calculations including an estimation of
cost of equity (for required returns).

• Two periods:
• forecast period (from 2018–2027);
• terminal period (beyond 2027).

6
Income Statement

Assumptions 2018-2027
Revenues Increase of 10%
Other income Same as 2017
Cost of materials consumed As % of revenues similar to 2017
Power and fuel No info so set to zero
Employee expenses As % of revenues similar to 2017
Other expenses As % of revenues similar to 2017
Depreciation As % of revenues similar to 2017
Tax rate 30%
Cost of debt 8.5%
Dividend payout 15%

Assume
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Finance cost 15 18 21 25 30 34 39 45 51 57

This finance cost is 8.5%(long term borrowing + short term borrowing)

 Income statement
Heritage Foods (in crores) FY17 2018E
Income
Revenue from operations (net) 2,643 2907.3
Other income 6 6
Cost of materials consumed 2,063 2269.3
Gross Profit 586 644
Power and fuel 28 0
Employee benefits expense 164.72 181.192
Other expenses 246.16 270.776
EBITDA 175.12 192.032
Depreciation and amortization expense 37.8 41.58
EBIT 98 150.452

Finance costs 11.22 15

Profit before tax 98 135.452
Tax 31 40.6356
Profit after tax 67 94.8164

Weighted average number of equity shares outstanding (in crores) 2.3199 2.3199
Earnings per share (EPS) 28.9 40.8709
Dividend per share 4 6.130635
Assumptions 2018-2027
Revenues Increase of 10% --- take from Income statement
Shareholders Funds Share capital + Reserve & Surplus
Share capital Same as 2017
Reserves and surplus for year 2018 reserves and surplus for the year 2017 + PAT for year 2018 −
dividends paid in the year 2018
Long term borrowing Based on holding constant debt/equity ratio
Ratio = (short term debt + long term debt)/(short term debt and
long term debt + shareholders equity)
CAPEX Previous year plus 3.5% of revenue
Working capital As % of revenues similar to 2017
Cash and bank balances Balancing figure

• Following are the same as 2017: Deferred tax liabilities (net); Other long-term liabilities; Long-term provisions;
Current liabilities; Short-term borrowings; Trade payables; Other current liabilities; Short-term provisions; Intangible
assets; Capital work-in-progress; Non-current investments; Long-term loans and advances; Other non-current assets;
Current assets; Current investments
 Heritage Foods (in crores) FY17 2018E
Revenue - from IS 2,643 2907.3

Equity and liabilities

Shareholders funds 303 383.784
Share capital 23.19 23.19
Reserves and surplus 280 360.594

Non-current liabilities
Long-term borrowings 69.45 105.528
Deferred tax liabilities (net) 19.08 19.08
Other long-term liabilities 11.48 11.48
Long-term provisions 4.89 4.89
Current liabilities
Short-term borrowings 65.87 65.87
Trade payables 50.75 55.825
Other current liabilities 107.16 107.16
Short-term provisions 5.98 5.98
Total 638 759.597
 FY17 2018E
Assets
Fixed assets
Property, plant, and equipment 281 382.756
Intangible assets 0 0
Capital work-in-progress 8 8
Non-current investments 149 149
Long-term loans and advances 17 17
Other non-current assets 1 1
Current assets
Current investments 0.02 0.02
Inventories 116 127.6
Trade receivables 11 12.1
Cash and bank balances 46 53.1216
Short-term loans and advances 8 8
Other current assets 1 1
Total 638 759.597
Calculate WACC

• re = 7% + (0.5 × 4%) = 9%
• rd = 8.5% × (1 − tax rate) = 8.5% × (1 − 0.3) = 5.95%.
• We = 69.13%
• Wd = 30.87%

• WACC =
 Calculate FCFF

• For each year and for the terminal value calculate

• FCFF = EBIT (1-tax rate) + Dep – FCInv – WCInv
Assumptions 2018-2027
2018E
gL 5%
Net debt 89 NOPAT 105.3164

Dep 41.58

Non cash WCINV 7.625

CAPEX INV 101.7555

FCFF 37.5159
 Based on your analysis, as Rakesh Singh, determine the undervaluation or
overvaluation of Heritage Foods relative to its currently traded market price? As
Rakesh Singh, what is your recommendation for investment decision making in
shares of Heritage Foods

Undervalued Fairly Valued Overvalued