{"id":9603,"date":"2022-07-28T15:00:16","date_gmt":"2022-07-28T09:30:16","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=9603"},"modified":"2022-07-28T15:00:17","modified_gmt":"2022-07-28T09:30:17","slug":"market-talks-we-need-to-listen-a-detailed-valuation-report-on-hero-motocorp","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/market-talks-we-need-to-listen-a-detailed-valuation-report-on-hero-motocorp\/","title":{"rendered":"Market Talks We Need To Listen: A Detailed Valuation Report on Hero MotoCorp"},"content":{"rendered":"\n

This article is authored by Pratik Arya who spearheads Finbridge and Finplus programs. He is an avid reader and has a keen interest in ensuring education is as practical as it can be. Pratik has a formidable experience of financial services blended with a rare perspective of an education entrepreneur.<\/em><\/p>\n\n\n\n

Markets talk in the language of expectations and not Hindi\/English etc. At any point of time in the market cap<\/a> of a company, there is an inherent expectation embedded about future cash flows and discount rates. <\/p>\n\n\n\n

For discount rates, also called the opportunity cost of capital, it\u2019s reasonable to take a common number i.e., the average of past after-tax 10-yr NIFTY<\/a> rolling returns. This is 12%. See the below image for calculations:<\/p>\n\n\n\n

The discount rate is not static. It changes as businesses mature or there are changes in institutional holdings (FII\/DII\/Weightage in index<\/a>) or capital structure or rolling betas. (We will discuss this in a separate blog).<\/p>\n\n\n\n

Now, some important connections between the financials of a company: <\/p>\n\n\n\n

  1. Operating Profits = Revenue \u2013 all expenses excluding interest and taxes<\/li>
  2. Expected Net Operating Profits After taxes (NOPAT) [EBIT*(1-tax rate)] = Current NOPAT * (1+NOPAT growth)<\/li>
  3. NOPAT growth = ROCE<\/a> (Return on capital employed) * Reinvestment rate<\/li>
  4. Reinvestment Rate = NOPAT growth \/ ROCE<\/li>
  5. Expected Reinvestments = Expected NOPAT * Reinvestment Rate <\/li>
  6. Future Free Cash flows (FCFF) = Expected NOPAT \u2013 Expected Reinvestments (WC + Capex) <\/li>
  7. ROCE = NOPAT \/ Capital Employed<\/li>
  8. Capital Employed = Shareholders<\/a> Equity<\/a> (share capital<\/a> + reserves)<\/em> + Debt<\/li>
  9. Debt = Long term borrowings + short term borrowing + current portion of long-term borrowing + leases <\/li><\/ol>\n\n\n\n

    Through the above equations, we can see that NOPAT Growth and ROCE are two inputs that drive FCFF.  Also, remember that the current market cap is the present value of future cash flows. In other words, at any point of time when you see the market cap of a company, it is speaking something about:<\/p>\n\n\n\n

    1. Expected NOPAT growth <\/li>
    2. Expected ROCEs<\/li>
    3. For how long Growth above GDP can continue <\/li>
    4. For how long ROCEs of business can be maintained above discount rates<\/li><\/ol>\n\n\n\n
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      Table of Contents<\/p>\n<\/span><\/div>\n