Learn discounted cash flow (DCF) modeling — Hinglish notes

2.6.2 · Stock-Market › Valuation Methods

What Is DCF Modeling?

Yeh kaam kyun karta hai? Kyunki ek stock ek business mein ownership hai, aur ek business tabhi valuable hota hai jab woh cash generate kare jise tum eventually extract kar sako (dividends, buybacks, ya sale proceeds ke roop mein). Baaki sab—earnings, revenue, hype—sirf tabhi matter karta hai jab woh cash produce kare.

The DCF Formula: Built From First Principles

Step 1: Why Do We Discount?

Time value of money: ₹1 aaj ≠ ₹1 kal.

Agar tumhare paas aaj ₹1 hai aur tum use rate $r$ par invest kar sakte ho, toh ek saal mein tumhare paas hoga: $Future Value = 1 \times (1 + r)$

Flip karo: agar koi tumse promise kare ₹1 agale saal, toh woh aaj kitna worth hai? $Present Value = \frac{1}{( 1 + r )}$

$n$ saal mein: $P V = \frac{Cash Flow _{n}}{( 1 + r ) ^{n}}$

Yeh step kyun? Hum saare cash flows ko ek single point in time (aaj) par normalize kar rahe hain taaki hum unhe compare aur add kar sakein. Tum ₹100 aaj + ₹100 in 2030 ko add nahin kar sakte—woh time ke terms mein alag "currencies" hain.

Step 2: The Full DCF Equation

Maan lo ek company year $t$ mein free cash flow $F C F_{t}$ generate karti hai. Enterprise Value (poore business ki value) hai:

Terminal value kyun? Hum cash flows forever forecast nahin kar sakte. Year $n$ ke baad, hum assume karte hain ki company ek stable rate $g$ par forever grow karti hai: $T V = \frac{F C F _{n + 1}}{W A C C - g} = \frac{F C F _{n} \times ( 1 + g )}{W A C C - g}$

Yeh Gordon Growth Model hai—ek perpetuity formula. Agar koi cheez agale saal $C$ pay karti hai aur $g %$ per year grow karti hai, toh aaj uski value $\frac{C}{r - g}$ hai (ek infinite geometric series sum karne se derive kiya gaya).

Yeh formula kyun? $\sum_{t = 1}^{\infty} \frac{C ( 1 + g ) ^{t - 1}}{( 1 + r ) ^{t}} = \frac{C}{r - g} (when r > g)$

Step 3: From Enterprise Value to Equity Value

Enterprise Value mein saare capital providers (debt + equity) ko owed value shamil hoti hai. Sirf equity (stock) ki value paane ke liye:

Kyun?

Cash already equity holders ka hai (woh balance sheet par hai).
Debt pehle chukana hota hai (debtholders ki priority hai).
Preferred stock aur minority interests doosre claims hain jo common equity se upar rank karte hain.

Phir: $Intrinsic Value per Share = \frac{Equity Value}{Shares Outstanding}$

Figure — Learn discounted cash flow (DCF) modeling

How to Build a DCF Model: Step-by-Step

Step 1: Project Free Cash Flows

Free Cash Flow = woh cash jo business operations aur capital expenditures ke liye pay karne ke baad generate karta hai.

$F C F = E B I T \times (1 - Tax Rate) + D&A - Capex - Δ N W C$

Ya equivalently: $F C F = Operating Cash Flow - Capex$

Yeh kyun matter karta hai? FCF woh hai jo investors (dono debt aur equity) ke liye bachta hai. Tum yeh 5-10 saal ke liye project karte ho based on:

Historical growth rates
Industry trends
Management guidance
Apne khud ke assumptions (conservative better hai)

Step 2: Calculate WACC

$W A C C$ debt aur equity se blended cost of capital hai:

Debt par $(1 - T)$ kyun? Interest tax-deductible hota hai, toh debt tax savings ke baad "sasta" hota hai.

Step 3: Discount Each FCF

Har year $t$ ke liye: $P V_{t} = \frac{F C F _{t}}{( 1 + W A C C ) ^{t}}$

Step 4: Calculate Terminal Value

Ek perpetual growth rate $g$ choose karo (usually 2-3%, roughly GDP growth—companies economy se zyada fast forever grow nahin kar sakti): $T V = \frac{F C F _{n} ( 1 + g )}{W A C C - g}$

Phir use discount karo: $P V (TV) = \frac{T V}{( 1 + W A C C ) ^{n}}$

Step 5: Sum It All Up

$E V = \sum_{t = 1}^{n} P V_{t} + P V (TV)$

Phir Equity Value paane ke liye cash aur debt adjust karo, shares outstanding se divide karo.

Worked Example: DCF for "TechCo"

Given:

Year 1-5 projected FCF: ₹100 Cr, ₹110 Cr, ₹121 Cr, ₹133 Cr, ₹146 Cr
WACC = 10%
Terminal growth rate $g = 3%$
Cash = ₹50 Cr, Debt = ₹200 Cr
Shares outstanding = 10 Cr

Step 1: Discount each FCF

Year	FCF (₹ Cr)	Discount Factor $(1.10)^{t}$	PV (₹ Cr)
1	100	1.10	90.91
2	110	1.21	90.91
3	121	1.331	90.91
4	133	1.464	90.85
5	146	1.611	90.63

Yeh calculations kyun? Har PV = $\frac{F C F _{t}}{( 1.10 ) ^{t}}$ . For example, year 1: $\frac{100}{1.10} = 90.91$ .

Sum of PV of explicit FCFs = ₹454.21 Cr

Step 2: Terminal Value

$T V = \frac{146 \times 1.03}{0.10 - 0.03} = \frac{150.38}{0.07} = 2, 148.29 Cr$

Kyun? Year 6 FCF = $146 \times 1.03 = 150.38$ . Perpetuity formula.

$P V (TV) = \frac{2 , 148.29}{( 1.10 ) ^{5}} = \frac{2 , 148.29}{1.611} = 1, 333.54 Cr$

Step 3: Enterprise Value

$E V = 454.21 + 1, 333.54 = 1, 787.75 Cr$

Step 4: Equity Value

$Equity Value = 1, 787.75 + 50 - 200 = 1, 637.75 Cr$

Cash add aur debt subtract kyun? Cash already hamara hai; debt chukana padega.

Step 5: Intrinsic Value per Share

$Intrinsic Value = \frac{1 , 637.75}{10} = ₹163.78 per share$

Interpretation: Agar TechCo ₹120 par trade kare, toh woh undervalued hai (buy karo). Agar ₹200 par, toh overvalued (sell karo).

Common Mistakes & How to Fix Them

The Sensitivity of DCF: Why Small Changes = Big Swings

DCF highly sensitive hai:

WACC: 1% change valuation ko 15-20% swing kar sakta hai.
Terminal growth rate: 2% aur 4% ka difference terminal value ko double kar sakta hai.
FCF projections: Garbage in, garbage out.

Example: TechCo ke liye, agar hum WACC = 12% use karein 10% ki jagah:

$P V (TV) = \frac{2 , 148.29}{( 1.12 ) ^{5}} = 1, 219.13 Cr$

Naya intrinsic value ≈ ₹147 per share (₹163.78 se neeche). 2% WACC change se 10% lower valuation.

Lesson: Hamesha sensitivity analysis run karo. Ek table banao jo alag-alag WACC aur terminal growth assumptions mein intrinsic value dikhaye.

When to Use DCF (and When Not To)

DCF use karo jab:

Company ke predictable, positive cash flows hain (mature tech, consumer staples, industrials)
Tum reasonably 5-10 saal forecast kar sako
Capital structure stable ho

DCF mat use karo:

Startups ke liye (koi cash flows nahin, high uncertainty)
Financial companies ke liye (banks, insurers—P/B ya dividend discount use karo)
Cyclical companies peak/trough par (projections distort ho jaati hain)
High-growth with unclear path to profitability (bahut speculative)

Un ke liye, relative valuation (P/E, P/S multiples) ya stage-adjusted models use karo.

Connections

Weighted Average Cost of Capital (WACC): Woh discount rate jo DCF ko kaam karwata hai
Free Cash Flow (FCF): DCF engine ka "fuel"
Terminal Value Calculation: Perpetuity ko handle karna
Gordon Growth Model: Terminal value ke peeche ka math
Comparable Company Analysis: Alternative valuation method (relative vs. intrinsic)
Time Value of Money: Foundational principle
Beta and Cost of Equity: WACC ke liye $r_{e}$ estimate karna
Sensitivity Analysis: Yeh test karna ki assumptions valuation ko kaise impact karti hain

Recall Ek 12-saal ke bachche ko explain karo

Imagine tumhare paas ek lemonade stand hai. Main use tumse kharidna chahta hun. Mujhe kitna pay karna chahiye?

Well, mujhe based on pay karna chahiye ki stand future mein mere liye kitna paisa (cash, sirf paper par "profit" nahin) banayega. Maan lo woh agale saal ₹100, uske baad ₹110 banata hai, aur aise hi aage.

Lekin yeh baat hai: Agale saal ka ₹100 aaj ke ₹100 jaisa achha nahin hai, kyunki agar mere paas aaj ₹100 hota, toh main use bank mein rakh sakta tha aur woh agale saal ₹110 ban jaata (10% interest par). Toh woh future ₹100 mere liye aaj sirf ₹91 worth hai.

DCF yeh har saal ke liye karta hai: woh poochta hai "saare future lemonade stand cash aaj ke paison mein kitne worth hain?" Sab add karo, aur wahi fair price hai. Agar tum zyada maang rahe ho, toh main overpay kar raha hun. Agar kam, toh yeh achha deal hai!

#flashcards/stock-market

DCF modeling ke teen main steps kya hain? :: 1. Future free cash flows project karo, 2. Unhe WACC use karke present value mein discount karo, 3. Unhe sum karo aur cash/debt adjust karke equity value nikalo.

DCF formula for enterprise value kya hai?

E V = \sum_{t = 1}^{n} \frac{F C F _{t}}{( 1 + W A C C ) ^{t}} + \frac{T V}{( 1 + W A C C ) ^{n}}

jahan TV terminal value hai.

Hum future cash flows ko discount kyun karte hain?

Time value of money ki wajah se—₹1 aaj ₹1 kal se zyada worth hai kyunki tum use invest karke returns kama sakte ho.

DCF mein terminal value ka formula kya hai?

T V = \frac{F C F _{n} ( 1 + g )}{W A C C - g}

jahan

g

perpetual growth rate hai.

Enterprise value ko equity value mein kaise convert karte hain?

Equity Value = EV + Cash - Debt - Preferred Stock - Minority Interest.

Free Cash Flow (FCF) kya hai?

Operating expenses aur capital expenditures ke baad saare investors ke liye available cash:

F C F = O p er a t in g C a s h F l o w - C a p e x

WACC kya hai?

Weighted Average Cost of Capital—debt aur equity investors ke liye blended required return:

W A C C = \frac{E}{E + D} r_{e} + \frac{D}{E + D} r_{d} (1 - T)

Terminal growth rate usually 2-3% kyun hoti hai?

Companies indefinitely economy se zyada fast grow nahin kar sakti; 2-3% mature economies mein long-term GDP growth approximate karta hai.

10% terminal growth rate use karne mein kya problem hai?

Iska matlab hai company eventually poori economy se badi ho jaayegi, jo impossible hai.

DCF mein net income ki jagah FCF kyun use karte hain?

Net income mein non-cash items shamil hain aur capex ignore hota hai; FCF investors ke liye actual cash available hai.

Agar WACC badhta hai, toh intrinsic value ka kya hota hai?

Woh decrease hoti hai (higher discount rate → lower present values).

₹100 jo 3 saal baad milega, 10% discount rate par uski present value kya hai?

\frac{100}{( 1.10 ) ^{3}} = \frac{100}{1.331} = ₹75.13

Equity value calculate karte waqt debt subtract kyun karte hain?

Kyunki debtholders ki priority hoti hai—equity holders ko woh milta hai jo debt pay off hone ke baad bachta hai.

Equity value calculate karte waqt cash add kyun karte hain?

Kyunki balance sheet par cash already equity holders ka hota hai.

Agar kisi stock ki intrinsic value (DCF) uski market price se zyada ho, toh iska kya matlab hai?

Stock undervalued hai—ek potential buy opportunity.