In this post, let's analyse the basic parameters of IndusInd Bank. As we know already, estimating a financial company is the most difficult part as there may be many hidden factors involved. But at the best, we check a few parameters that will check the health of the organization.
To make the valuation more defensive, we consider following conditions.
1. Calculate the income after tax averaged out for the past 4 years. The higher the number of years, the better.
| Earnings calculation | |
| Income from operations | 20,921 |
| - Expenses | 17,905 |
| Income before tax | 3,015 |
| - Tax | 1,025 |
| Income after tax | 1,990 |
| + Depreciation and Amortization | |
| + 25% of Selling expense | 0 |
| - Maintanence Capital expenditure | |
| Distributable cash flow | 1,990 |
2. Regarding the free cash flow calculation, we use only the financial assets in hand for the Bank namely, Cash and cash equivalents, Investments and other bank balance.
3. To calculate the risk the bank poses to non performing assets, we consider following deductions from the cash available in hand.
a. 5% of total Borrowings
b. 5% of total Debt securities
c. 10% of the total advances given by the company
d. 10% of the Deposits in hand with the bank
| Excess Cash Calculation | ||
| + Fixed financial assets | ||
| Investments | ||
| Other financial assets | ||
| + Current financial assets | ||
| Other financial assets | ||
| Cash and cash eq | 11,350 | |
| Other Bank balance | 9,438 | |
| Investments | 60,517 | |
| - Total debt | ||
| Borrowings | 4,681 | |
| NPA | 31,112 | |
| Policy Holder’s funds | 0 | |
| Deposits reduction | 21,671 | |
| Total | 23,840 |
So, when we calculate the capital needed at 7% cost of capital to earn the averaged out profit after tax + the free cash flow available in hand, we can arrive at an enterprise value for the bank. When we divide this value by the total number of shares in hand, we get intrinsic value of IndusInd Bank.
| Investment needed @ | Capital needed | + excess cash | Per share value |
| 7.50% | 26,534 | 50,375 | 730.07 |
To
check the intrinsic value and complete fundamental analysis, please
see the video below
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