DCF Model of Bharti Airtel: Assumptions

DCF Model of Bharti Airtel
We are going to use a two-stage DCF model, which, as the name states, takes into account two
stages of growth. The first stage is generally a higher growth period which levels off heading
towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we
need to estimate the cash flows to the business over the next five years. Where possible we use
analyst estimates, but when these aren’t available we extrapolate the 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 shrinkage, and that companies with growing free cash flow will see
their growth rate slow, over this period. We do this to reflect that growth tends to slow more in
the early years than it does in later years.
Assumptions;
In this calculation we’ve used 13%, which is based on a levered beta of 0.800. Beta is a measure
of a stock’s volatility, compared to the market as a whole. We get our beta from the industry
average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0,
which is a reasonable range for a stable business.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we
discount the value of these future cash flows to their estimated value in today’s dollars:
Projected Discounted Discounted cash flows
Years Free cash flows (In billions) @13% (In billions)
2021 $ (336.90) 0.885 $ (298.16)
2022 $ 162.20 0.783 $ 127.00
2023 $ 196.30 0.693 $ 136.04
2024 $ 223.00 0.613 $ 136.70
2025 $ 245.60 0.543 $ 133.36
Total cash inflows $ 234.94
We now need to calculate the Terminal Value, which accounts for all the future cash flows after
this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future
annual growth rate equal to the 5-year government bond rate of 6.5%. We discount the terminal
cash flows to today’s value at a cost of equity of 13%.
Terminal Value (TV)= FCF2025 × (1 + g) ÷ (r – g) = ₹245.6b× (1 + 6.5%) ÷ 13%– 6.5%) =
₹4.024trillion
Present Value of Terminal Value (PVTV)= TV / (1 + r)5= ₹4.024t÷ ( 1 + 13%)5= ₹2.1trillion
The total value is the sum of cash flows for the next five years plus the discounted terminal
value, which results in the Total Equity Value, which in this case is ₹2.7trillion. The last step is
to then divide the equity value by the number of shares outstanding. Relative to the current share
price of ₹455, the company appears about fair value at a 13% discount to where the stock price
trades currently.
DCF Model of Reliance Jio

I’m using the 2-stage growth model, which simply means we take in account two stages of
company’s growth. In the initial period the company may have a higher growth rate and the
second stage is usually assumed to have perpetual stable growth rate. To start off with we need to
estimate the next five years of cash flows. For this I used the consensus of the analysts covering
the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present
value estimate.
Projected Free cash Flows (in Discounted Discounted Cash flows (In
Years Billions) @13% Billions)
2021 -845.34 0.885 -748.124
2022 2,497.66 0.783 1955.669
2023 3,538.04 0.693 2451.860
2024 4,025.00 0.613 2467.325
2025 6,075.00 0.543 3298.725
Total cash inflows 9425.454
Assumption;
Reliance Industries 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 accounts for
debt. In this calculation we’ve used 19%, which is based on a levered beta of 1.270. Beta is a
measure of a stock’s volatility, compared to the market as a whole. We get our beta from the
industry average beta of globally comparable companies, with an imposed limit between 0.8 and
2.0, which is a reasonable range for a stable business.
After calculating the present value of future cash flows in the initial 5-year period we need to
calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage.
For a number of reasons a very conservative growth rate is used that cannot exceed that of the
GDP. In this case I have used the 10-year government bond rate (7%). In the same way as with
the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 13%.
Terminal Value (TV) = FCF2025 × (1 + g) ÷ (r – g) = ₹6,075 × (1 + 7%) ÷ (13% – 7%) = ₹10.1
Trillion
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = ₹101,566 / ( 1 + 13%)5 = ₹5.4
Trillion
The total value is the sum of cash flows for the next five years and the discounted terminal value,
which results in the Total Equity Value, which in this case is ₹6,345,725. The last step is to then
divide the equity value by the number of shares outstanding. If the stock is an depositary receipt
(represents a specified number of shares in a foreign corporation) then we use the equivalent
number. This result in an intrinsic value of ₹1,103.76, which, compared to the current share
price of ₹924.5, we see that Reliance Industries is about right, perhaps slightly undervalued at a
16.24% discount to what it is available for right now.
DCF Model of Vodafone Idea

We are going to use a two-stage DCF model, which, as the name states, takes into account two
stages of growth. The first stage is generally a higher growth period which levels off heading
towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we
need to estimate the cash flows to the business over the next five years. Where possible we use
analyst estimates, but when these aren’t available we extrapolate the 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 shrinkage, and that companies with growing free cash flow will see
their growth rate slow, over this period. We do this to reflect that growth tends to slow more in
the early years than it does in later years. Generally we assume that a rupee today is more
valuable than a rupee in the future, so we need to discount the sum of these future cash flows to
arrive at a present value estimate:
Free cash Flows Discounted Discounted cash

Projected Years (In Billions) @13% flows (In Billions)
2021 $ 5.53 0.885 $ 4.89
2022 $ 3.31 0.783 $ 2.59
2023 $ 2.45 0.693 $ 1.70
2024 $ 2.06 0.613 $ 1.26
2025 $ 1.87 0.543 $ 1.02
Total cash Inflows $ 11.46
Assumption;
Given that we are looking at Vodafone idea 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 accounts for debt. In this calculation we’ve used 13%, which is based on a levered beta of
2.0. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta
from the industry average beta of globally comparable companies, with an imposed limit
between 0.8 and 2.0, which is a reasonable range for a stable business.
The second stage is also known as Terminal Value, this is the business’s cash flow after the first
stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of
a country’s GDP growth. In this case we have used the 5-year average of the 10-year government
bond yield (7.2%) to estimate future growth. In the same way as with the 5-year ‘growth’ period,
we discount future cash flows to today’s value, using a cost of equity of 26%.
Terminal Value (TV)= FCF2025 × (1 + g) ÷ (r – g) = ₹1.87b× (1 + 7.2%) ÷ (13%– 7.2%) =
₹34.5b
Present Value of Terminal Value (PVTV)= TV / (1 + r)5= ₹11b÷ ( 1 + 13%)5= ₹18.75b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value,
which results in the Total Equity Value, which in this case is ₹12b. The last step is to then divide
the equity value by the number of shares outstanding. Relative to the current share price of
₹37.1, the company appears about fair value at a 13% discount to where the stock price trades
currently. The assumptions in any calculation have a big impact on the valuation, so it is better to
view this as a rough estimate, not precise down to the last cent.

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DCF Model of Bharti Airtel

DCF Model of Reliance Jio

DCF Model of Vodafone Idea

Free cash Flows Discounted Discounted cash

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