Calculating The Fair Value Of Swiggy Limited (NSE:SWIGGY)
Key Insights
- The projected fair value for Swiggy is ₹346 based on 2 Stage Free Cash Flow to Equity
- Current share price of ₹387 suggests Swiggy is potentially trading close to its fair value
- Analyst price target for SWIGGY is ₹495, which is 43% above our fair value estimate
Does the January share price for Swiggy Limited (NSE:SWIGGY) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Is Swiggy Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. 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 dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
| 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | |
| Levered FCF (₹, Millions) | -₹24.6b | -₹12.1b | ₹8.50b | ₹31.0b | ₹53.0b | ₹80.3b | ₹111.0b | ₹143.0b | ₹174.7b | ₹205.3b |
| Growth Rate Estimate Source | Analyst x11 | Analyst x13 | Analyst x11 | Analyst x1 | Est @ 70.85% | Est @ 51.63% | Est @ 38.18% | Est @ 28.76% | Est @ 22.17% | Est @ 17.56% |
| Present Value (₹, Millions) Discounted @ 15% | -₹21.4k | -₹9.2k | ₹5.6k | ₹17.7k | ₹26.3k | ₹34.7k | ₹41.6k | ₹46.6k | ₹49.5k | ₹50.6k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹242b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 6.8%. We discount the terminal cash flows to today's value at a cost of equity of 15%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = ₹205b× (1 + 6.8%) ÷ (15%– 6.8%) = ₹2.7t
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹2.7t÷ ( 1 + 15%)10= ₹655b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹897b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₹387, the company appears around fair value at the time of writing. 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.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Swiggy 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 15%, which is based on a levered beta of 1.106. 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.
Check out our latest analysis for Swiggy
SWOT Analysis for Swiggy
- Debt is well covered by earnings.
- Shareholders have been diluted in the past year.
- Forecast to reduce losses next year.
- Good value based on P/S ratio compared to estimated Fair P/S ratio.
- Debt is not well covered by operating cash flow.
- Has less than 3 years of cash runway based on current free cash flow.
Next Steps:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Swiggy, we've put together three pertinent items you should further examine:
- Risks: Case in point, we've spotted 1 warning sign for Swiggy you should be aware of.
- Future Earnings: How does SWIGGY's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NSEI every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.