Determine the intrinsic fundamental valuation of berger

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Reference no: EM133492829

Question: Determine the intrinsic fundamental valuation of Berger Paints (on a per share basis) using the multi-stage DDM. Clearly state all your assumptions and calculations including an estimation of cost of equity (for required returns).

For years 1-5 the estimate revenue for the company is about 20%. If you decide to use another number, that's fine as long as it's near 20% (18-19% etc.), the years 6 to infinity the growth rate is estimated at 6%.

To perform the dividend discount valuation, Rohit needed to explicitly forecast the dividends of Berger Paints using the various financial data available in the annual report for the financial year 2015-2016 (see Tables 1 and 2). Rohit was confident that revenues of Berger Paints would grow in the high teens (close to 20%) given the management's positive outlook, improving demand environment, and strong financial position of the company. As per the "India Paint Industry Outlook 2020" report, given rapid urbanization, increasing disposable incomes, and growing infrastructure, it is anticipated that the Indian paint market will grow with a CAGR of around 14% during 2015-2016 to 2019-2020 (Business Wire, 2015).

Some of the other assumptions made by Rohit were as follows:

• Cost of materials consumed (as % of revenue) assumed to be in line with the current year (2015-2016) levels in the foreseeable future.

• Employee and other expenses (as % of revenue) was assumed to be in line with the current year levels (2015-2016).

• Depreciation (as % of revenue) assumed to be in line with the current year (2015-2016).

• Finance costs were assumed to be the same as in the current year (2015-2016).

• Dividend payout ratio was assumed to be at 60%, higher than the current year levels on account of the strong financial position of the company.

• Tax rate to be assumed as 30%.

The final consideration for Rohit was determination of cost of equity to be used as a discounting factor. To compute the same, Rohit estimated the one-year beta for Berger Paints to be 0.7 and the average equity risk premium for India as 4%. For risk free rate data, Rohit referred to the central bank (Reserve Bank of India) website wherein government treasury securities prices and yields were traded. As per the Reserve Bank of India website, India's 10-year treasury yield as on 30 July, 2016 was 7.2% (RBI, 2016). With all this financial information in hand, Rohit set out to assess the fundamental value of Berger Paints using the dividend discount valuation methodology wondering whether the price he was about to calculate would be higher or lower than the market price as accordingly he needed to recommend the stock for his clients

Reference no: EM133492829

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