Stock Market · Fundamental Analysis

DCF

DCF (Discounted Cash Flow) is the most rigorous method of valuing a business. It calculates the present value of all future cash flows a company is expected to generate. The result is the intrinsic value.

The logic

₹100 today is worth more than ₹100 next year because today's ₹100 can earn interest. DCF uses this logic in reverse: future cash flows are 'discounted' back to their present value.

> A business is worth the sum of all the cash it will generate over its lifetime, discounted to today's rupees.

The formula

Intrinsic Value = Σ [FCF_t ÷ (1 + r)^t] + Terminal Value

Where: FCF = Free Cash Flow in year t, r = discount rate (cost of capital), Terminal Value = value of cash flows beyond the forecast period

Inputs you need

1. Forecast free cash flows for 5–10 years

2. Discount rate (WACC. Weighted Average Cost of Capital, typically 10–14% for Indian companies)

3. Terminal growth rate (what rate FCF grows forever, typically 3–6%)

The problem: garbage in, garbage out

DCF is extremely sensitive to inputs. Changing the discount rate from 10% to 12% can change intrinsic value by 30%. Changing the terminal growth rate by 1% moves intrinsic value significantly.

10-14%Typical WACC for Indian companies

3-6%Typical terminal growth rate

Practical use

Use DCF to establish a range of values (conservative, base, optimistic assumptions). If the stock trades well below even the conservative estimate, it may be undervalued. If it's above the optimistic estimate. Likely priced for perfection.

For retail investors, the intrinsic-value calculators built into fundamentals screeners approximate DCF without the manual complexity.

Takeaway. DCF discounts future free cash flows back to a value today. It is powerful and brutally sensitive to its inputs. Small changes in growth or discount rate swing the answer enormously, which is why a range of scenarios carries information that a single confident number destroys.