DCF (Discounted Cash Flow) is one of the most important valuation methods in finance used to estimate the intrinsic value of an asset (like a stock, company, or project).

🔹 What is DCF?

DCF is based on a simple idea:

The value of a business today = the present value of all its future cash flows

Because money in the future is worth less than money today (due to inflation, risk, and opportunity cost), we discount future cash flows back to today.

🔹 Basic Formula

[
DCF = \sum \frac{CF_t}{(1 + r)^t}
]

Where:

• CFₜ = Cash flow in year t
• r = Discount rate (usually cost of capital)
• t = Time period

🔹 How DCF Works (Step-by-Step)

1. Estimate future cash flows (usually 5–10 years)
2. Choose a discount rate (WACC or required return)
3. Calculate present value of each future cash flow
4. Add terminal value (value beyond forecast period)
5. Sum everything → gives intrinsic value

🔹 Why DCF is Important

1. 🧠 Intrinsic Valuation (Not Market Price)

DCF tells you what a stock should be worth, independent of market hype.

👉 Example:
If a stock trades at ₹500 but DCF value is ₹800 → undervalued

2. 📊 Focuses on Fundamentals

It is based on:

• Revenue growth
• Profit margins
• Cash generation

So it ignores short-term noise and focuses on real business strength.

3. 🎯 Helps in Long-Term Investing

Perfect for investors like you (20–30 year horizon), because:

• It values future earnings power
• Works best for stable, growing companies

4. ⚖️ Decision Making Tool

DCF helps answer:

• Is this stock worth buying?
• What is the margin of safety?
• What is a good entry price?

🔹 Key Inputs That Matter

• Growth rate → biggest driver
• Discount rate (WACC) → reflects risk
• Terminal value assumptions → often 50–70% of total value

⚠️ Small changes in these can significantly change valuation.

🔹 Limitations of DCF

• ❌ Highly sensitive to assumptions
• ❌ Hard to apply for:
  • Loss-making companies
  • Cyclical businesses
• ❌ Requires financial understanding

🔹 Simple Intuition

Think of DCF like this:

“If this company gives me cash every year in the future, how much is that stream of cash worth today?”

🔹 When You Should Use DCF

✅ Long-term investing
✅ Stable companies (like FMCG, Pharma, Insurance, Utilities)
❌ Not ideal for speculative or highly volatile stocks

Great—let’s do both in a practical, investor-friendly way 👇

🔷 Real DCF Example (Laurus Labs – Simplified)

(Numbers are illustrative but close to realistic assumptions so you understand the process clearly.)

📊 Step 1: Base Data (Approx)

• Current Free Cash Flow (FCF): ₹1,000 Cr
• Growth (next 5 years): 12%
• Discount rate (WACC): 11%
• Terminal growth: 4%

📊 Step 2: Project Future Cash Flows

📊 Step 3: Discount to Present Value

Formula:
[
PV = \frac{FCF}{(1 + r)^t}
]

👉 Total PV (5 yrs) ≈ ₹5,131 Cr

📊 Step 4: Terminal Value

[
TV = \frac{FCF_5 \times (1 + g)}{(r – g)}
]

[
= \frac{1763 × 1.04}{0.11 – 0.04} ≈ ₹26,200 Cr
]

Discounted to present:
[
PV(TV) ≈ ₹15,500 Cr
]

📊 Step 5: Total Intrinsic Value

• PV of cash flows = ₹5,131 Cr
• PV of terminal value = ₹15,500 Cr

👉 Total Value = ₹20,600 Cr

📊 Step 6: Per Share Value

• Shares outstanding ≈ 54 Cr

[
Intrinsic Value ≈ ₹381/share
]

🎯 Interpretation

• If current price = ₹350 → fairly valued
• If ₹280 → good buying range
• If ₹450 → overvalued

Simple DCF Template (You Can Use)

You can copy this into Excel 👇

📊 Input Section

📊 Projection Table

📊 Terminal Value

[
TV = \frac{FCF_5 × (1 + g)}{r – g}
]

Discount it:
[
PV(TV) = \frac{TV}{(1+r)^5}
]

📊 Final Calculation

[
Intrinsic Value = \text{Sum of PVs} + PV(TV)
]

[
Per Share Value = \frac{Intrinsic Value}{Shares}
]

🔥 Pro Tips (Very Important)

1. Always Use Margin of Safety

• Buy at 20–30% below DCF value

2. Be Conservative

• Lower growth assumption
• Slightly higher discount rate

3. Focus on Quality Inputs

DCF is only as good as:

• Growth estimate
• Cash flow quality
• Business stability