DCF Unlevered Valuation of Polycab India Ltd. – May 2025

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📘 DCF Valuation of Polycab India Ltd. – May 2025

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🎯 Objective

The goal of this analysis is to estimate the intrinsic value of Polycab India Ltd. using the Discounted Cash Flow (DCF) method, specifically focusing on Free Cash Flow to the Firm (FCFF). This method aligns with the CFA curriculum’s principles on valuation.

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🏗️ DCF Valuation Framework

Formula for Enterprise Value (EV):

$$EV=\sum _{t=1}^n\frac{FCF{F}_t}{(1+r{)}^t}+\frac{TV}{(1+r{)}^{\mathrm{n}}}$$

Where:

• $FCFF_t$ = Free Cash Flow to the Firm in year t

• $r$ = Discount rate (WACC)

• $TV$= Terminal Value

Formula for Equity Value:

$$Equity \ Value = EV - Net \ Debt$$

Intrinsic Value per Share:

$$Intrinsic \ Value = \frac{Equity \ Value}{Shares \ Outstanding}$$

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📘 What is FCFF?

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📝 Step 1: Gather Key Financial Data

Metric Value Source Free Cash Flow (FY24) ₹2,203 Cr Alpha Spread Revenue (FY24) ₹18,260 Cr Annual Report FY24 EBITDA Margin (FY24) 12.5% Annual Report FY24 Net Cash (Mar 2025) ₹2,460 Cr Business Standard Shares Outstanding 15.04 Cr Economic Times Tax Rate 25% Assumed based on historical effective tax rate Current Market Price ₹5,947 Screener

📈 Step 2: Assumptions and Forecast Parameters

Assumption	Value	Rationale
Forecast Period	5 Years	Standard horizon for a DCF analysis
FCFF Growth Rate (Years 1-5)	15% CAGR	Reflects historical growth and industry outlook
Terminal Growth Rate (g)	5%	Above inflation, below GDP growth rates
Discount Rate (WACC)	12%	Derived from cost of capital calculations

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📊 Step 3: Forecast Future Free Cash Flows (FCFF)

Year	FCFF (₹ Cr)
FY26	2,533
FY27	2,912
FY28	3,348
FY29	3,851
FY30	4,429

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📉 Step 4: Discount FCFF to Present Value

Year	FCFF (₹ Cr)	Discount Factor (12%)	PV of FCFF (₹ Cr)
FY26	2,533	0.8929	2,259
FY27	2,912	0.7972	2,322
FY28	3,348	0.7118	2,385
FY29	3,851	0.6355	2,447
FY30	4,429	0.5674	2,514
Total			11,927

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🔁 Step 5: Compute Terminal Value (TV)

Using the Gordon Growth Model, the terminal value is calculated as:

$$TV=\frac{FCF{F}_{n+1}}{WACC-\mathrm{g<span\; class="vlist-s"></span>}}$$

Where:

• $FCFF_{n+1}$ = FCFF in the last forecasted year (FY30)

• $g$ = Terminal growth rate (5%)

Terminal Value Calculation:

$$TV = \frac{4,429 \times (1 + 0.05)}{0.12 - 0.05} = ₹63,803 \text{ Cr}$$

Discounted to present value:

$$PV(TV) = \frac{63,803}{(1 + 0.12)^5} = ₹36,224 \text{ Cr}$$

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🧾 Step 6: Enterprise Value (EV) and Equity Value

Enterprise Value (EV):

$$EV = 11,927 + 36,224 = ₹48,151 \text{ Cr}$$

Equity Value:

$$EquityValue=EV-NetCash=48,151-2,460=\text{₹}45,691\text{ Cr}$$

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💰 Step 7: Intrinsic Value per Share

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📉 Step 8: Market Price Comparison

• Current Market Price (May 14, 2025): ₹5,947

• DCF Value per Share: ₹3,039

• Overvaluation: ~95%

Conclusion:

Based on this updated DCF analysis, Polycab India Ltd.'s stock appears overvalued by approximately 95% compared to its intrinsic value per share of ₹3,039. Investors should carefully evaluate their position based on this overvaluation and consider additional analyses.

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⚠️ Limitations and Considerations

Area	Risk / Subjectivity
Growth Rate	Based on assumed 15% CAGR, subject to market conditions
WACC Estimate	Simplified to 12%; actual WACC may vary depending on market factors
Terminal Growth	Sensitive to small changes in the terminal growth rate
FCFF Cyclicality	Polycab operates in a sector influenced by infrastructure cycles

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🔗 References

• Polycab India Annual Report FY24

• Alpha Spread - Free Cash Flow

• Business Standard

• Economic Times

• Screener

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Disclaimer: The above is a sample calculation provided for illustrative purposes only. It does not constitute investment advice or a recommendation. Please consult with your investment advisor or a qualified financial professional before making any investment decisions.