Case 054DCF and intrinsic valueHard
DCF modelling assessment: take Trivanza Industrial Gases from revenue, margins, capex and working capital to a value per share, showing every step from enterprise value to equity.
1The situation
Trivanza Industrial Gases supplies oxygen, nitrogen and argon to steel mills and hospitals. Revenue this year is Rs 3,000 crore and you forecast 12% growth for each of the next five years. EBIT margin is 18% and tax is 25%.
Depreciation is 6% of revenue and capex is 10% of revenue, because new on-site plants are being built for customers. Working capital needs 10% of each year's increase in revenue. WACC is 11%, terminal growth after year 5 is 5%, net debt is Rs 1,200 crore and there are 50 crore shares.
2Your task
Build the free cash flows, the terminal value and the bridge to equity, and give a value per share with the two inputs that matter most.
Quick check
Roughly what share of Trivanza's enterprise value will come from the terminal value?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About Rs 94.5 a share. Five years of free cash flow are worth Rs 1,299 crore today and the terminal value Rs 4,628 crore, an enterprise value of Rs 5,927 crore. Less Rs 1,200 crore of net debt leaves equity of Rs 4,727 crore over 50 crore shares. The terminal value is 78% of the answer, so WACC and terminal growth decide it.
Step 1What is free cash flow here, line by line?
Think of a taxi owner. His profit after tax is not what he can take home: he adds back depreciation because no cash left for it, then subtracts the new car he had to buy and the cash tied up in fares customers owe him. Free cash flow to the firm is after-tax operating profit, plus depreciation, less capex, less the increase in working capital. It is taken before interest because the debt holders are paid out of it, and they are subtracted later as net debt.
| Rs crore | Y1 | Y2 | Y3 | Y4 | Y5 |
|---|---|---|---|---|---|
| Revenue | 3,360.0 | 3,763.2 | 4,214.8 | 4,720.6 | 5,287.0 |
| EBIT at 18% | 604.8 | 677.4 | 758.7 | 849.7 | 951.7 |
| NOPAT, after 25% tax | 453.6 | 508.0 | 569.0 | 637.3 | 713.7 |
| Add depreciation, 6% | 201.6 | 225.8 | 252.9 | 283.2 | 317.2 |
| Less capex, 10% | (336.0) | (376.3) | (421.5) | (472.1) | (528.7) |
| Less working capital build | (36.0) | (40.3) | (45.2) | (50.6) | (56.6) |
| Free cash flow | 283.2 | 317.2 | 355.2 | 397.9 | 445.6 |
| Discount factor at 11% | 0.901 | 0.812 | 0.731 | 0.659 | 0.593 |
| Present value | 255.1 | 257.4 | 259.8 | 262.1 | 264.5 |
Step 2How do you get from the last forecast year to a terminal value?
Grow year 5's cash flow by one year at 5% and divide by WACC less growth: 445.6 x 1.05 / (0.11 - 0.05) gives Rs 7,798.4 crore. That figure is a value at the end of year 5, so it is discounted five years, not six, to Rs 4,627.9 crore. The Gordon growth formulaValue of a cash flow growing at a constant rate forever: next year’s cash flow divided by the discount rate less the growth rate. gives a value one period before the first cash flow it uses, which is why year 6's cash flow produces a year 5 value.
| FCF_5 | year 5 free cash flow, Rs 445.6 crore |
| g | terminal growth, 5% |
| WACC | the blended cost of debt and equity, 11% |
Step 3Why must the bridge from enterprise value to equity be shown?
The cash flows belong to lenders and shareholders together, so discounting them gives the value of the whole business. Only after subtracting net debt do you have what the shareholders own, and only then do you divide by shares. Dividing Rs 5,927 crore by 50 crore shares gives Rs 118.5, a quarter too high, and it is the most common error in modelling tests.
One refinement earns credit. The terminal cash flow keeps capex at 10% of revenue, which was sized for 12% growth. At 5% growth the business needs less reinvestment: if new capital earns 15%, it reinvests 5/15 of profit, a third, and year 6 cash flow is Rs 500 crore instead of Rs 468. That lifts value to about Rs 100.8. Mention it; do not change the base case silently.
Where candidates lose it
The loss that fails most modelling tests is dividing enterprise value by the share count and skipping net debt. It is quick to make under time pressure and it overstates this answer by Rs 24 a share.
The second is discounting the terminal value by six years because it was built from year 6's cash flow. The formula already places it at the end of year 5.
What the interviewer asks next
- How would you add a mid-year discounting convention, and in which direction does it move the value?
- Trivanza has Rs 300 crore of lease liabilities. Where do they go?
- Cross-check the terminal value with an exit EBITDA multiple. What multiple is implied?
- What ROIC do the forecast years imply, and is it consistent with 18% margins?
Asked at Jefferies, Equity Research, New York, 2026 (Wall Street Oasis): then technical assessment (DCF modeling), then final interview in-person
Company names and figures are illustrative.