Profit E-Magazine Issue 239

CON TENTS

09

09 Why are fashion retailers all suddenly selling perfume?

14

14 The Return

of the

King

22 In times of high inflation, everything goes in the grocery store business

26

26 Secure your financial future - Retail Investing Abdul Rehman

28 A beginner’s guide to Discounted Cash Flow (DCF) method for stock valuation

Publishing Editor: Babar Nizami - Joint Editor: Yousaf Nizami

Senior Editors: Abdullah Niazi I Sabina Qazi

Assistant Editor: Momina Ashraf

Editor Multimedia: Umar Aziz - Video Editors: Talha Farooqi I Fawad Shakeel

Reporters: Taimoor Hassan l Shahab Omer l Ghulam Abbass l Ahmad Ahmadani l Muhammad Raafay Khan

Shehzad Paracha l Aziz Buneri | Daniyal Ahmad | Asad Kamran l Shahnawaz Ali l Noor Bakht l Nisma Riaz

Regional Heads of Marketing: Mudassir Alam (Khi) | Zufiqar Butt (Lhe) | Malik Israr (Isb)

Business, Economic & Financial news by 'Pakistan Today'

Contact: profit@pakistantoday.com.pk

By Nisma Riaz

Chances are that if you walked into a shopping mall and decided to visit some of the most popular fashion retail stores, you would at some point be ambushed by an enthusiastic salesperson wielding the tester of a new perfume. Over the past few years, brands such as Khaadi, Sapphire, Beachtree, Sana Safinaz, and ETHNIC are only some of the large fashion retailers that have launched their own line of perfumes. So where has this sudden diversification come from, and how successful has it been? Profit interviewed a number of professionals within the industry and even more consumers to get to the bottom of this influx of new locally branded perfumes. To understand the phenomenon entirely, we must go back to the very beginning. And without any real doubt the pioneer that made this work was Junaid Jamshed’s brand J.

JJ’s swan song

In the early 2000s, Pakistan’s fashion retail landscape was changing fast. And one of the brands quickly establishing itself was J., which had recently been launched by former pop-sensation Junaid Jamshed. Mr Jamshed had opened his own line of clothing after quitting show

business for religious reasons.

And this then became perhaps one of those rare moments where religious tradition and custom ended up informing a very smart business decision. You see at this point in time, there was a very limited market for perfume in Pakistan, and there were essentially three kinds of scents available on the market.

The first kind were imported perfumes worn by the urban intelligentsia of cities like Lahore and Karachi. The second kind were those created by local perfume makers. While many of these perfume makers could craft very ‘western’ scents as well, they operated on a hyper-local scale with very little branding and no marketing. Lahore’s Lohari gate and Shah Almi Gate, for example, continue to have famed perfume markets. However, the perfumes created here were made on demand and not sold outside of Lahore or under any brand names.

Other than these two options the vast majority of the population relied on wearing ‘attar’ as scents. Attar was and very much still continues to be associated with Islamic tradition because this was also the kind of scent used in Arabia at the time of the birth of Islam, and the techniques to extract it were later improved in different Islamic civilizations. The association between attar and religion was so strong, in fact, that religious figureheads such as Maulana Ilyas Attari (also known as Maulana Ilyas Qadri) of the Dawat e Islami set up businesses selling the fragrance in small vials which were then bought by devoted followers.

And this is where the idea came to Junaid Jamshed. At this point in time, fashion retailers had not yet ventured into a lot of side products such as perfumes. However, the story goes that a friend of Junaid Jamshed’s that he knew through his preaching complained that local attars were not that great as gifts, and it would be a good idea to introduce locally branded perfumes to the market that were packaged as high-end but more reasonably priced than their imported counterparts.

And that is exactly what J. did. They became the pioneer in this trend by starting to sell fragrances similar to attar from select outlets as early as 2005. However, it was not until 2009 that the category received significant attention. According to an inside source from J., “Until 2009, we were still in the experimental stage. But we recognized the potential and even then, the response from customers was quite encouraging.”

Over the past seven to eight years, the fragrance market has seen remarkable growth, with J. achieving significant success in 2013 after partnering with celebrities such as Adnan Siddiqui, Wasim Akram, Shahid Afridi, and Sania Mirza. But as J.’s success became apparent, it was also clear that other fashion retailers were not going to sit by and watch. They were ready to jump into the fray.

First whiff of competition

It wasn’t immediate, but it was bound to happen. Bonanza Satrangi followed J. in 2017, with Khaadi entering the market in 2021, Sana Safinaz in 2022, Zelbury in Q2 2022, and ETHNIC towards the end of 2022. The demand for fragrances in Pakistan remains concentrated

among a small base of middle- and high-income urban consumers. However, according to Euromonitor, the industry is expected to see a steady year-on-year (YoY) growth rate of 9.6% from 2007 to 2026. The industry is also projected to grow from its 2021 size of Rs 1.2 billion to almost Rs 2.5 billion by 2026.

According to one industry source, some of these brands tried to cut into J.’s market by focusing on affordability instead of on packaging and longevity. Others tried to compete more directly with J. by producing high-end products that are better quality, both in terms of the formula itself and packaging, allowing them to justify higher prices. J. has over 100 outlets selling its perfumes and a range of over 100 fragrances to choose from. They also offer unique designer bottles, including ones shaped like a racket and a ball.

Of course, the journey hasn’t quite been so simple. And even J. took a lot of trial and error in getting where it is — which is undeniably the position of market leader. You see, very few brands in Pakistan have the technology and resources necessary to produce perfumes locally. “While we can make more volatile and lighter fragrances for body sprays and mists, we don’t have the proper factories or raw materials to create perfumes locally,” they explained.

In addition to these limitations, there are also certain restrictions that prevent manufacturers from producing high-quality perfumes in Pakistan. For example, a certain percentage of alcohol is required to make perfume, and there is no alternative ingredient that can be used to replace it. Moreover, storing large quantities of alcohol in Pakistan is not permitted, even at warehouses. This makes it difficult for local manufacturers to produce high volumes of quality perfumes. “The most popular areas to source fragrances are China and the UAE,” said the source. “Most retailers that sell fragrances in

Pakistan source their stock from China or other places, and then package and label the products locally.”

The source went on to explain that there are different types of wearable fragrances: Eau de Parfum (EDP) and Eau de Cologne (EDC). EDP contains a lower percentage of essential fragrance compounds, typically around 15 to 20 percent, but it’s a high-grade perfume that lasts a long time. EDC, on the other hand, contains a higher grade of fragrance with stronger notes, but a lower percentage of fragrance compounds (up to 8 percent). “It’s very difficult to produce EDCs locally,” the source added. “Most local production is focused on EDPs.”

Profit also spoke with the deputy general manager of the fragrance division at J., who explained that their production model is mixed. Some scents are produced locally, while others are imported. “However, even for the perfumes we produce locally, the raw materials are sourced from abroad,” they noted.

Same concept, different attitudes

The source at J. emphasised that packaging is an essential aspect of their product because many of the perfumes they sell are purchased as gifts. “No one wants to give a visibly cheap-looking present,” they explained. J. has been in the market longer and has more experience, using perfume houses’ technology that meets international standards.

Bonanza also has a broad range of fragrances, but it cannot match J.’s designer bottles and carefully crafted formula. However, it would be unfair to compare other brands’ quality with J. and Bonanza, as these two have established themselves earlier and are in a league of their own, while others are just starting.

But why have so many of these local perfumes popped up over the past few years? One explanation is that people simply can’t afford the imported kind anymore. The current economic situation in Pakistan, including inflation and economic unrest, has had a significant impact on people’s lifestyles. As imported products become increasingly unaffordable, many people have turned to local alternatives. Although the prices of most imported perfumes have remained relatively stable, the difference in exchange rates between the Pakistani rupee and the US dollar has caused a considerable price difference for Pakistani buyers.

According to Euromonitor, the fragrance market in Pakistan is dominated by mass-market fragrances, with premium fragrances having a Retail Value RSP of Rs 172.1 million in 2021, while mass-market fragrances had a Retail Value RSP of Rs 1.037.3 billion. The data from Euromonitor also indicates that premium fragrances not only had a lower compounded annualised growth rate (CAGR) from 2016-2021 but are also projected to fare similarly from 2021-2026. This provides opportunities for local brands that are offering competitive prices in comparison to their imported counterparts.

To understand the price differences between imported and local perfumes, Profit compared the cheapest and most expensive perfumes from some local brands with popular international brands. The results showed that imported perfumes are significantly more expensive than local ones, which explains the increasing popularity of local perfumes by clothing brands.

However, the shift towards local brands and products has been happening for some time now, and it’s not just due to the current economic climate. There has been a significant mindset shift among consumers who are now more willing to try and experiment with local

products and are often pleasantly surprised by the quality.

So what has caused this change in consumer behaviour? According to an industry insider who has been in the business for over a decade, “It’s a matter of perception versus experience. The general perception across the country has been that imported products are of better quality. However, after trying local fragrances and experiencing their quality, this perception changes. People are now able to compare the quality of local perfumes to that of branded ones, and although there may be some differences, they still find good value for money in local alternatives, which is the main reason that has driven this mindset shift.”

Another factor contributing to the popularity of local perfumes is the increased exposure to global trends through social media and travel. People are now more aware of current trends and often see influencers on social media endorsing perfumes by local fashion brands, which motivates them to try them out.

Moreover, the progressive middle class in Pakistan, who are conscious of their lifestyle but cannot afford to spend a lot, are also more inclined towards local fragrances. These fragrances do not smell cheap and offer a great value proposition. Additionally, perfumes are intangible, and unlike carrying an outdated bag or clothes, there is no judgement or assumption made about the buyer’s spending habits or lifestyle.

In conclusion, the shift towards local fragrances in Pakistan is driven by a combination of factors, including affordability, quality, exposure to global trends, and changing mindsets. This trend is likely to continue in the coming years, providing an excellent opportunity for local brands to thrive and gain market share.

What are the consumers thinking?

Profit conducted a comprehensive survey to ascertain what motivates people to purchase fragrances from local fashion retailers. The results indicated three key

reasons that were highlighted by almost every respondent.

The first and foremost reason was obviously the scent - the primary factor driving the purchase of perfumes! As one respondent shared, “I purchased Bonanza Musk because the scent was absolutely delightful! Although it’s not the most long-lasting fragrance, considering its price, I didn’t expect much in that aspect anyway. It’s not my go-to perfume yet, but I will most probably buy it again when I finish this bottle.”

Another significant factor highlighted by respondents was volatility, which was directly proportional to the frequency of repurchasing. Our source at J. echoed this sentiment, stating that “customers are highly conscious of how long a scent lasts! Good fragrances can uplift your mood, and people are well aware of that. If you smell nice, you feel good and make a positive impression on others, making long-lasting perfumes an attractive option for establishing a loyal customer base.”

Lastly, price was an important factor. Another respondent revealed that although no local perfume had replaced their imported ones, they preferred using local fragrances for daily wear. “Branded perfumes are long-lasting but also quite expensive. However, the ones available at Khaadi or Sapphire are perfect for daily use, despite needing to be reapplied. So, the perfume I choose to wear depends on where I am going and for how long I need it to last.

That being said, I have become very loyal to my Pour Femme by J. and people recognise me with that scent now!”

For some, discovering the world of local scents was an unexpected surprise. Quite a few respondents, mostly men who don’t frequent shopping malls as much as women, shared that they stumbled upon a whole new world of local scents after receiving a J. or a Cambridge perfume as a gift.

Gifting perfumes is an age-old tradition, and local retailers have made it more accessible and affordable for gift givers. One respondent explained, “Initially, I would only get a J. perfume for my father, but now I get it for my husband too. I particularly like J. for their men’s range. Both their Janan fragrances are fantastic.”

The same respondent continued, “Bloom by Bonanza used to be my favourite everyday perfume, but it’s been discontinued. It was a great scent for the price, and as a university student, I had limited pocket money, so it was affordable for me. I have only bought Maria B perfumes as gifts because the packaging is attractive and the scent is pleasant. However, since last year, I have been using Sana Safinaz. After starting work, I used to buy Paco Rabanne, but due to the dollar prices, I switched to Sana Safinaz and don’t plan on buying imported perfumes again.”

Others, who were more loyal to their imported fragrances, opined that “These are nice backups, but there’s no match for Valentino (duh). However, if the dollar continues to rise, I will stick to these.” and “I don’t have a favourite yet, and my go-to fragrance is still Paris Hilton, because c’mon, nothing smells like it. However, I think these local perfumes do smell quite nice and offer a good-quality affordable option.”

While Pakistan’s local fragrance market may not yet have the cachet of Victoria’s Secret or Paris Hilton perfumes, there’s an understated allure to the scents crafted here that make them a delightful option for daily wear or gift-giving. And in these uncertain times, clothing brands with an established reputation and a fiercely loyal customer base have thrived, rising above the fray and leaving their competitors in the dust. n

By Abdullah Niazi

Standing in the middle of his lush green mango orchards, Syed Ali Shah Darbelo can afford to smile. Weather advisories in his native home of Naushahro Feroze had been indicating soaring mercury levels in the month of March which would have been detrimental for his 50 acre mango farm. But even though he had been preparing for the worst, regular rain and an unseasonably cool month have left his trees blooming with all the signs of spring and a large harvest in the months to go.

But even as Darbelo and others like him take in the distinct scent of a mango orchard launching into full bloom, the happiness of these farmers is underlined with a sense of unease. Only last year the situation had been drastically different. The summer of 2022 was the hottest both Punjab and Sindh had seen in more than half a century. Average temperatures in mid-March (a vital time for mango trees) were soaring between 37-42 degrees, compared to the usual 34 degree temperature that this month sees in Punjab’s mango belt. This made the mangoes more susceptible to disease, premature ripening, and being of a lower quality. Overall, yields fell in both Punjab and Sindh although final data has still not been monitored by provincial crop monitoring departments.

This year, average temperatures in the same region in mid to late March have fluctuated from 27-32 degrees. Increased rain showers in the month have also helped the mango crops bloom faster and better. “After the first rains and storms of the season, spring has sprung on all the plants. And a good amount of rain during this time can make or break our entire harvest,” explains Darbelo.

Unable to contain a hint of excitement from his voice, Darbelo says that not only do rains in March result in better quality fruit, it can also have a direct effect on yield. “Before

The problem with Pakistani mangoes

Global production of mangoes is over 48 million tonnes showing an increased production with an average growth of 4.4% per annum as compared to 25 million tonnes. In Pakistan, total area under mango cultivation is around 169 thousand ha with the production of 1.7 million tonnes being the second major fruit crop of the country. Pakistan is 6 th largest mango producer in the world. The total global export is about 1.7 million tonnes with an estimated value of US$2.1 billion. USA is the leading importer with 28% share in the global market followed by EU countries with 22% share. Pakistan’s export to these high-end markets is insignificant.

Pakistan’s mango industry is mainly located in two provinces-Punjab and Sindh, each covering 63% and 37% of the total mango area in the country. Based on the district-level data on mango area and its varieties grown in each province, two mango clusters are identified for the detail analysis in this study: i) Punjab Chaunsa Cluster mainly grows Chaunsa mango variety, consists of Multan, Rahim Yar Khan, Bahawalpur, Muzaffargarh and Khanewal with Multan as its centre point; and ii) Sindh Sindhri Cluster mainly growing Sindhri variety, comprises of Hyderabad, Tando Allahyar, Mirpur Khas, Naushehro Feroze and Sanghar with MirpurKhas as its centre point. The characterization of these clusters with the help of stakeholders helped to highlight the main production, marketing, trade, and processing features and identify the potential and constraints in each.

Mango growing faces several constraints at the institutional level which include weak mango research and extensions system, poor access to finance, lack of information about the market, lack of supply of modern inputs, poor coordination among stakeholders; production level constraints which include old, bushy-type and tall mango plants with low yield potential, lack of supply of high-yielding and true to type planting material, weak farmers’ capacity to understand modern management practices; poor post-harvest handling and marketing which include poor post-harvest management practices like storing, packaging, transportation, etc. poor domestic marketing infrastructure, non-compliance of international quality standards, limited diversity in international market; and value chain and processing level constraint which include weak value chain infrastructure like lack of collection centres, cold storage, hot water treatment plants, etc. and limited processing facilities. These constraints reduce per ha yield, increase post-harvest losses, reduce export production ratio, and deteriorate quality of the produce for the national and international markets.

the rains came, we were worried about an infestation of midges attacking the inflorescence of mango flowers. But ever since the rains the pests have gone away entirely. Pesticides are expensive this year and so is labour and elec-

tricity, and if the rains hadn’t come we could have very well seen half our mangoes perish to the pests. Along with this, the pollination process of the remaining flowers will start and will tend towards giving healthy fruit.”

Yet there are still many difficulties for these farmers. Normally, a year like this where the conditions are favourable would mean a bumper crop and the chance to make a big profit. However, high prices of fuel, energy, and labour due to rising inflation has meant increased costs of farm inputs. As a result, the price of these mangoes is expected to be very high this year which may also cause delays for exporters. On top of this, many of the farmers in Sindh have been affected by last year’s mega floods. So what will the long-term implications of this chilly March be?

Last year’s events

There is a fair bit of confusion regarding what exactly happened last year. In short, Pakistan’s mango production process was already alive on a whim and a prayer, when political and economic instability resulted in an unreliable water and electricity supply, expensive labour, and on top of that there was also a record breaking heatwave. But how did news of the mango’s woes travel?

For starters, people in big cities like Lahore, Karachi, and Islamabad noticed that mangoes were late to the markets. Usually, the greener, smaller, variety of mangoes hit the markets around mid to late April and by the second week of May the premium varieties of mangoes start making appearances. From this point up until the end of July is peak mango season, with the fruit still being in circulation until sometime in September before finally tapering off for the next harvest.

This was the first sign in the cities that mango production had possibly decreased. On the 16th of May 2022, a report was published in The Express Tribune which quoted the Director of the Mango Research Institute (MRI), Abdul Ghaffar Garewal, in Multan saying that due to the unprecedented heat wave this year mango production would fall by nearly 60%. The news spread fast on social media. Within a day of this, screenshots of a Punjab government report surfaced on Twitter which claimed that mango production in

Punjab had actually increased by 8.9%.

In the public eye, it immediately seemed that the report of mango production falling by 60% was fake news – a feeling further propagated because the statistic was being shared by a number of shady looking ‘news’ sites that flash infographics for cheap clicks. However, even the statistics being provided by the Punjab government are not an accurate measure. For starters, it is not an actual measurement of the amount of mangoes harvested this year – it is an estimation based on acreage and how much yield is expected per hectare. The second issue is that it does not include numbers for

Sindh – which is downstream of the Indus where water scarcity is a much larger issue. And perhaps most importantly, it does not factor in the mangoes that were dropped before they were ripe.

On the 18th of May, the noise from the mango industry grew louder and louder. After the initial assessment of a 60% fall made by the Mango Research Institute, the All Pakistan Fruit and Vegetable Exporters Association (PFVA) announced that due to climatic effects and high temperature, mango production had been severely affected during this mango season, and was facing a dip of

Each season, sudden weather changes mar the output of the growers, making it increasingly an unviable business. Even if you discount all kinds of seasonal variability, nothing explains changes on this scale year after year

Sheikh Insiram Ali, the president of Mango Growers’ Association of India

50%. The average production of mango in Pakistan is 1.8 million tons and with 50% reduction, it is likely to be limited to 0.9 million tonnes. Because of this, the PFVA announced that they were cutting their export target by 25,000 tonnes to 125,000 tonnes for the current season, which is expected to fetch around $106 million.

Now, this too cannot be taken as an accurate indicator, since exporters also cut their target because of crises like shortage of electricity and diesel, an increase in cost of packaging processing and high freight charges to meet the export target. However, the association maintained that mango production had halved this year which is why they are having to slash targets.

Once again – we must reiterate that the figures of mango production going down by 50% or 60% are not accurate, surveyed, and final data. They are impressions and estimations given by different stakeholders, all of whom blamed the heatwave.

Despite the next year being in full swing, a final tally could not be put on the total harvest. In fact this year the provincial agriculture departments are yet to provide their projections. While the Crop Reporting System in Punjab is good at publishing data, things are made more difficult because there is no set up for such a system in Sindh which also contributes significantly to mango production and no data is publicly available since 2018.

What is happening this year?

Things are looking up. But the problem is, this might just be a one time thing. While mangoes may have a good 2023, rapid rising temperatures in the global south including Pakistan means that the farming of products such as mangoes is

impossible as it used to be.

For starters, much like other crops in Pakistan, mango production has long not achieved its potential. According to a report on Mango Clusters by the Planning Commission back in February 2020, reported that during the 2000s, the mango production in Pakistan has been increasing at a reasonable rate of 4.1% per annum, comparable to the rate at international level. But all of the increase has been coming from the expansion in its area, while per ha yield has been declining during the period, and the deceleration has accelerated during 2011-16.

“The decrease in per ha yield along with the poor value chain infrastructure development resulted in a gradual decline in its competitive position in the world market. That is why Pakistan could not benefit from the high growth in the international mango market, both in terms of quantity and value of export,” reads the report. These were already existing issues in Pakistan’s mango industry infrastructure.

On top of this political instability and

an economic crisis meant that fuel prices have been high and electricity largely unavailable. Mango trees require constant watering, and in the absence of working tubewells and cheap fuel to power generators the crisis deepened. This year, it so happens that natural conditions are favourable. However, last year, the final nail in the coffin were the scorching temperatures that arrived early and continued to rise – and had a visceral impact on the fruit.

Why it may not always be so

The climate factor is no joke. According to the International Food Policy Research Institution (IFPRI), agriculture is extremely vulnerable to climate change. Higher temperatures eventually reduce yields of desirable crops while encouraging weed and pest proliferation. Changes in precipitation patterns increase the likelihood of short-run crop failures and longrun production declines. This is a major part of what has happened to Pakistan’s mangoes this year.

Mango crops being affected by climate change is not a new phenomenon, and it has been observed and recorded in India as well –the world’s largest producer and exporter of mangoes. Back in April, India Times reported that local weather change has already affected the flowering sample and yield of mangoes. “Normally, mango flowering begins between December and March. However higher-than-normal temperatures this 12 months when the bushes had been on the flowering stage have broken crops. Unseasonal rains additionally introduced germs, flies, and microorganisms,” reads the report.

According to the report, Uttar Pradesh’s “mango belt” often accounts for practically 4-5 million tonnes of mangoes per 12 months, however this 12 months there might solely be

1.5 million tonnes. The yield has fallen sharply on account of the delay in flowering caused by the change in local climate. Mango growers in Malihabad cited poor flowering, illnesses, and erratic water supply as just a few causes for the anticipated low produce and stated the crop can also be more likely to be delayed by around 20 days – very similar to what has happened in Sindh and Punjab in 2022.

In a different set of circumstances, reporting for The Third Pole Sopan Joshi in 2016 described how erratic rainfall and unexpected humidity, a fallout of increasingly unpredictable weather due to climate change, is hurting the cultivation and harvest of India’s favourite fruit. The research report describes how “these are the effects of climate change that scientists have projected all along: Greater variability of temperature and rainfall, disruption of familiar weather patterns, and greater unpredictability.”

“Each season, sudden weather changes mar the output of the growers, making it increasingly an unviable business. Even if you discount all kinds of seasonal variability, nothing explains changes on this scale year after year,” says Sheikh Insiram Ali, the president of Mango Growers’ Association of India. “So many growers now want to get out of mangoes because of increasing risk and uncertainty. It is difficult to recover investments, forget about making profits.”

What should farmers be doing — the export equation

Praying. And as far as this year is concerned, it seems that the prayers of mango farmers have been answered. “Orchards in these areas were completely destroyed last year because of the drought. Then the floods came in and due to lack of drainage, water stood in the gardens for several months due to which the roots of the plants became hollow. We also have a five-decade-old orchard that we are reviewing because its root system has been completely destroyed,” laments Wadero Shuja Memon of Khairpur district of Sindh.

“Fertility of fertile lands has been affected and following the ravages of floods this year, Mango Smart Tree System is being initiated in Punjab including Sindh. However, the process of planting new trees in these gardens is going on, but due to the floods, the market

will face a decrease in mangoes coming from Sindh. But by next year, the situation will not only be normal but also better than before.”

“The weather suddenly warmed up in March last year and the heat intensified in April. Although the best temperature was available for flowering mangoes in February, and after flowering, when it was time for pollination, the night weather was still very ideal. We had temperatures ranging from 11 degrees Celsius to 20 degrees Celsius at night, which was perfect for any variety of mango. On the other hand, the temperature continued to rise during the day and reached 42 degrees Celsius,” says Chauhdry Siffique Ahmed. “As a result, the pollination process was disrupted and fruit drop began to increase in the areas where the pollination process was completed and fruit setting was started. If the daytime temperature ranged from 26 degrees Celsius to a maximum of 35 degrees Celsius, the pollination process would have been better.”

Those are the conditions that these farmers have gotten this year. However, this may not be how matters remain forever. As a fruit, mangoes need to be export oriented. The decrease in per ha yield along with the poor value chain infrastructure development resulted in a gradual decline in its competitive position in the world market. That is why Pakistan could not benefit from the high growth in the international mango market, both in terms of quantity and value of export. The country is facing a declining export-production ratio while major mango growing countries are bringing a higher proportion of their mango produce to the international market. Moreover, despite some recent improvements in the mango value chain, the country still earns the lowest per unit price of mango among the leading mango exporting countries of the world.

The global production in 2016 was 50.6 million tonnes, with a total cropped area of 5.7 ha translating into yield of 8.9 tonnes/ha. During 2016, Pakistan contributed about 3% of the global area under mango cultivation, and

produced 3.3% of the world’s total mango production. The per ha yield of mango in Pakistan is about 12% higher than the world average. The mango export from the country contributed about 5% of the world export and only 3.2% in the value of mango exported internationally. This is because Pakistan earns only two thirds of the world average export price. Farm gate price of mango in Pakistan is far below (68.8%) the international farm gate price providing Pakistan the competitive edge in competing with the international competitors even by investing in production, exportable quality and value chain infrastructure. The major mango producing countries of the world are India, China, Thailand (Table 6). While Pakistan’s production of 1.7 million tonnes (3.1% share), ranked 6th in global production with cropped area 169 thousand ha translating into average yield of 10.0 tonnes/ ha. Although Pakistan’s yield is higher than the global yield of 8.92 tonne/ha, it is still lower than many countries such as Brazil, Indonesia, Egypt, and Mexico with very high yields through better farm management, adaption of GAP/SPS protocols, mechanisation, high density plantation and appropriate infrastructure.

Conclusion

The good news is that there is a very good chance that there will be some respite for Pakistan’s mangoes this year. Unlike 2022, the fruit will not be short on the market and it will also not suffer in terms of quality given the good conditions it has found naturally. The problem is that these are short-term wins.

There is no guarantee that March will be the same next year. In fact, it may be even hotter. And if Pakistan is to turn its precious mangoes into an export oriented industry, all of the suggestions presented above need to be given very serious thought. Besides, the climate threat is going nowhere. Already fears have been raised that the pre-monsoon rains would delay wheat crop for 15 days, damage quality & cause late sowing of kharif compromising its yield. So while a cooler March may have helped mangoes, it might not be so great for other crops. That is why it is necessary for all of the stakeholders to sit together and devise a policy framework for inter-provincial coordination on agricultural matters. n

By Momina Ashraf

In the middle of a long que to get to the cashier at D-Watson right at the beginning of Ramzan, the hushed conversations between strangers waiting their turn was heavy with discontentment.

“Three bananas, a handful of grapes, some green chillies and lemons for Rs 500,” muttered one mother-of-four, disapprovingly addressing no one in particular.

The murmurings spread fast through the lines. Inflation has hit everyone hard. And while the poorest segments of society have been hit the hardest, shoppers at up-scale grocery stores have not been spared either. Everyone is reeling from record food inflation which touched 45.1% by the end of February 2023, and hit an all-time high of 46.7% as measured by the Pakistan Bureau of Statistics.

But in the same line at D-Watson, perhaps one of the most interesting comments made in passing was by another woman in the line: “Superstore walon ki to aj kal mouj hogi (the superstore businesses must be striving these days).”

This poses an essential question. Since the demand for food is inelastic, meaning it never goes down since it is a basic necessity, does that mean businesses selling these items thrive in times of great inflation? That might be the answer one immediately arrives at but the reality is more complicated. And it goes to the heart of how the grocery store business works.

Normally, up-scale and upper middle class superstores and grocery stores enjoy a peak season in the month of Ramzan. People

In times of high inflation, everything goes in the grocery store business

Is the era of leisure buying over? Or do big retailers still have the capacity to clap back?

are consuming more despite prices rising which results in greater profits. And while the regular Ramzan price hikes are in place, the economy is not playing favourites. With inflation and import restrictions as well as rising costs of doing business such as more expensive electricity and rent hikes, things are far from easy.

Banking on non-food items

One starts a business to make profit out of it, not to bear losses. This is evident in increased prices of food items as inflation soars globally.

“Retailers are not there to bear the brunt and provide subsidy,” says Omer Farooq, founder of retail consultancy, Extreemretail. Normally, price hikes are passed onto consumers. But it’s not that simple.

Grocery stores are built on the idea of high volumes and low margins. This means that the food we buy from the grocery store is actually making little profit for the store. The margins are low so the customer is attracted to buy more. A lot of these costs are gone to overheads, staff payrolls and distribution. “Some costs are beyond us. We can’t pass on those to consumers like food price hikes,” confirms Farooq.

A grocery store’s unique selling point is the diversity of products it offers under one roof. That’s why they are built on a specific area of land. Convenience stores are built on at least 1,000-2,000 square feet, supermarkets on 5,000 square feet and hypermarkets on 25,000

square feet. With such expansion comes expense. “The industry is seeing exorbitant costs in electricity and utility bills. If the place is rented, then there’s an added cost too. Since last year, these costs have broken the backs of grocery stores across the country and some have even shut down,” said Farooq.

Because margins on food prices are kept low, grocery stores rely on non-food items to cushion their profits. The non-food items, such as cosmetics, skin and hair care, crockery and fabric have higher margins. “It makes about 30-35% for the margins, the highest any item does,” indicated Farooq. That’s why convenience stores and small retail stores are more vulnerable to food inflation as they don’t have a diversified portfolio to curb the costs. But unfortunately, in the current times of inflation and import ban, non-food items are the first ones to get hit.

“Food item sales have seen no major decline because it’s essential. But the non-food items demand has decreased significantly. Generally speaking, I would say there is a 40% dip in sales in terms of quantity, most of which is owed to the non-food items. The sections in the stores are closing down and there’s no hope of regaining the demand like before any time soon,” explained Munsub Abrar, founder of Naheed super store in Karachi.

Grocery store visits, which in a country like Pakistan is one of the limited means of leisure for whole families, are reduced to just essential, and even panic buying. The idea behind big retail stores was to display things in front of the customer so they end up buying things which they don’t necessarily need. It’s

about creating demand on the spot. But that’s not working anymore. Prices are downward sticky, which suggests that once they increase, it’s difficult for them to fall even when the market readjusts itself. Because inflation is irreversible, and wages only adjust in real terms with productivity, it results in the erosion of purchasing power.

There’s a historic 31.5% inflation in Pakistan, as recorded by the state bank, dangerously close to the inflation of post-1971 war years. The figure indicates that not only the ones below the poverty line are suffering, but calls for an adverse lifestyle change for even the middle and upper-class, the primary target audience of a grocery store.

“I avoid going to grocery stores now and just send a list to my husband. Looking at so many items with such high prices gives me a lot of stress. Even though I have stopped shopping for non-essential items like crockery, frozen food items and hair care products, the total bill is still higher than what it was before,” said an Islamabad-based housewife, who wishes to stay anonymous. Similarly, even those earning good pay have changed their buying habits.

A general manager of one of the top retail stores in Lahore said even he and his own family have stopped splurging on grocery items. “We don’t shop from a single store like before now. We buy flour, wheat, sugar from one store and oil and pulses from another to keep the bill as low as possible,” he said.

Crushing under import ban

Grocery stores, which stand out from local kiryana stores are their product diversity and availability of high-quality imported items. But since the problem of non-issuance of Letter of Credit (LC) began in October of 2022, even the big stores began trembling.

Non-issuance of LCs became a game changer not only for the retail industry but for other industries in the food business too. In a conversation with a supply strategist from Metro Cash & Carry (who wishes to stay anonymous), Profit learned that the store was unable to procure the brand’s imported frozen fries which created a flurry. “There was demand for the product but not supply. The items were stopped at the ports but we weren’t able to procure it,” he explained. “But we couldn’t lose the customers so Metro resorted to local frozen food companies, like Opa and Menu, to manufacture fries under Metro’s brand. The same happened with KFC and McDonald’s too. They faced a shortage until Opa handled their fries business. So the whole issue really benefited the local industry at that time,” he continued.

However store owners did not always

come by alternatives so easily. Pakistan is the second largest importer of pulses in Asia and its lack of supply became a detrimental factor for Metro Cash & Carry and others. Initially, the store benefitted from the import ban because it had a safety stock of pulses when there was a shortage in the market. “We sold them for higher prices and in the month the profits splurged. But it was a momentarily high. Eventually, our stock also ran out and we had to procure more before the peak season in Ramadan,” explained the source from Metro. That’s why the overall sales revenue of Metro did not see a major slump, the profit earned initially due to pulses was readjusted later when pulses and other items ran out.

Other than just procuring items, retailers struggle with efficient planning and an unstable atmosphere makes planning extremely difficult. “We had to procure pulses in a market where prices were constantly going up because imports were banned and demand was high. We bought our targeted supply for Ramadan in five to six phases, and each time paid a price higher than the previous. The market trend (as shown in the graph) showed the potential for gaining profit. But it didn’t. As you can see after February the prices began decreasing because LCs were opened and there was no more a supply shortage. The prices settled, but we as a business are now selling the stock in prices less than what we bought for.”

indexed price for pulses

Due to this Metro Cash & Carry is bearing the brunt of almost Rs 5 million. “But we had to do what we could. It’s extremely difficult to plan and strategize in such an unstable political and economic environment had we not stocked up pulses, we would have borne the brunt of more than Rs 5 million and also potentially lost customers,” he elaborated.

The stores take risks for essentials like

pulses, wheat and rice. There are some items which they have resigned from. “We haven’t been able to achieve the forecasted supply of canned food and fruits. There are no local alternatives for it,” said the supply strategist from Metro. Similarly, Naheed superstore is facing similar problems. “Baby food, canned food, coffee and cereals are becoming a task to procure,” said Abrar.

“For some products like cereals and coffee, we have invented a new alternative of grading the products of focal companies. Basically, it’s a change in the manufacture of the local product just a bit. Both the quality and price of the graded product are mid-tier. It’s lesser than the imported items but a little better than the locally sourced ones. We have to do this because we don’t see when we will be able to import back in full swing like before,” he paused, “currency difference is too much for us to go back to our old ways.”

The cost of doing business is high. A lot of the money, which would previously account for margins is reinvested back to buy the same food item but for a higher price. “The cost of tea has increased three times in just a month. And every time we have had to procure oil in the last six months, the price is higher than before. We are reinvesting everything and there is no growth,” said Farooq. More than price hikes, grocery stores also have to mend broken trust with the suppliers. “No one is ready to give us supplies on credit. We have to make on-spot payment,” mentioned Abrar. Providing ease to the customer is becoming more difficult with every passing day because suppliers and the grocery store are testing new ways to merely get the boat floating.

Just like any other business in Pakistan, the profits of grocery stores are also trembling. Not because food prices are rising, but because buying habits are changing. There’s no room for splurging when bringing bread to the table is increasingly becoming a concern even for grocery store goers. For a consumption-driven economy, this might be some food for thought. n

Abdul Rehman

your research. Read company & research reports to better understand the business dynamics rather than focusing on what the stock price will be in the next 30-60 days.

2. Price is what you pay, value is what you get

How to secure your financial future is one of the most important questions on everyone’s mind. Many of us save some portion of our income today so it can take care of our expenses in the future. Whether it is buying a home, establishing a university fund for our children or saving for Hajj, having some investing skills can really help you prosper in this journey.

Some of us are afraid of taking control of our investments and leaving it to the professionals in the banking/insurance industry. For the brave ones out there who are passionate about investing and want to learn the tricks of the trade, I will share my top 5 skills that you should master in order to become a successful retail investor and secure your financial future.

Investing is very simple. It is possible for you to take out some time in your daily routine and grow your savings in an efficient manner. Broadly speaking, there are 2 types of retail investors - Part-time Active & Passive investors. This article will focus on the Part-time Active investors, who enjoy doing their own research, want to pick their own stocks and feel jubilant when their companies perform well.

Here are 5 things that will make you a better retail investor:

1. It is all about patience and discipline, you do not need a finance degree/qualification to do well Stocks are nothing but a small partnership in a business. If the business does well, stock prices will follow. There is no rocket science. People focus on all sorts of things, money supply, foreign liquidity, current account deficit etc. whereas they should be focusing on the business performance. Getting sufficient orders from its customers, making a good profit on its sales, and healthy growth plans for the next 5 years are all positive indicators. This should be the focus of

The writer has a bachelor degree in Economics from University of Warwick, UK and is a full time investor in Pakistan Stock Exchange. He tweets at @ abdulrehman0292

Stock markets are irrational and will seldom price a company correctly. Use this to your advantage. You will ask what is the value of a company? It is the sum of all the future profits the company will make and can payout to its shareholders. It’s nothing more, nothing less. You can use formulas like Price-Earnings multiple, dividend yield to estimate a fair price for a business. Buy when price is much below intrinsic value and sell when price is much above the company’s intrinsic value.

3. You only need 3-4 great investments to secure your financial future

Here are a few examples of companies which have provided 30150x returns on your savings in the last 20 years. By investing in a portfolio of such companies, your savings would have increased by more than 30 times in 20 years.

Fauji Fertilizer 22 times

Nestle 48 times

Meezan Bank 62 times

Atlas Honda 75 times

National Foods 94 times

Mari Petroleum 155 times

No one would have been able to pick all of them but having 2-3 of them in your portfolio would have been life changing. Invest your time in understanding the business and its earning capability rather than market fluctuations, this will increase your chances of spotting a future superstar.

4. Use your competitive advantage

In investing, knowledge is your competitive advantage. Invest in industries you have know-how about. You will be able to spot trends and developments much earlier than other market participants. Rather than investing in a completely new sector, just because someone recommended it, invest in the industry you already work in. You will be able to avoid any bankruptcy/ future downturn because you already know how the business is performing in the real world. Hence, I always say “invest in what you fully understand.”

5. You only have to be right once

The best thing about the stock market is that the market may disagree with you 95% of the time and still you can make a good profit. For example, to explain through a personal example, I invested in a company (Nishat Power) in 2020, the stock did not reach its true value for 23 months but it appreciated 50% in the 24th month and I was able to make a good return.

Use stock market prices to your advantage, don’t let it dictate to you what is the underlying value of a business. The concept of “Mr.Market” is a great way of understanding the psyche of the stock market.

Mr.Market will happily offer to buy/sell your stock(s) at a particular price each day. He/she will not get disheartened if you decline his/her offer, he will always come back the next day with a new offer. Mr.Market is emotionally unstable and will offer very low prices when he is upset and offer multiple times the true value of the business when he is happy and things are looking rosy. By understanding this behaviour, and controlling your emotions, you can grow your savings handsomely.

A beginner’s guide to

Discounted Cash Flow (DCF) method for stock valuation

Stock market analysts use this method to find the intrinsic value of a stock

By Muhammad Raafay Khan

As the Pakistani stock market continues to capture headlines with its ups and downs (mostly downs), investors, who prefer to understand their investments instead of doing mere speculation, are always on the lookout for reliable methods to evaluate stocks.

One such method is the Discounted Cash Flow (DCF) valuation method, which has gained popularity in recent years due to its ability to provide a detailed analysis of a company’s financial health and future prospects.

The DCF valuation method is based on the principle that the value of an asset, such as a stock, is equal to the present value of its expected future cash flows. While the DCF method has its advantages, including its ability to provide a detailed analysis of a company’s financial health, it also has its limitations. Critics argue that the method is highly sensitive to small changes in assumptions and can be difficult to use for companies with unstable or unpredictable cash flows.

In this article, we will delve deeper into the DCF valuation method, its advantages and limitations, and explore how investors can use it to make informed decisions about stock investments.

Advantages of DCF

The Discounted Cash Flow (DCF) valuation method is a popular and widely used technique to evaluate the intrinsic value of a company’s stock.

Here are some of the advantages of using the DCF method:

1. Focus on Future Cash Flows: The DCF method focuses on estimating future cash flows of the company, which is a crucial factor in determining the true value of the company. By taking into account the expected future cash flows, this method provides a comprehensive view of a company’s financial health and

prospects.

2. Incorporates Time Value of Money: The DCF method takes into account the time value of money, which means that it considers the idea that money today is worth more than the same amount of money in the future. By discounting future cash flows back to their present value, the DCF method provides a more accurate and realistic valuation of a company’s stock.

3. Flexibility: The DCF method is flexible and can be applied to a variety of companies across different industries. It can also be used to evaluate the value of assets, projects, and even entire businesses.

4. Can Account for Changing Circumstances: The DCF method can be adjusted to account for changing circumstances and new information that may become available in the future. This means that investors can revise their valuation estimates as new data becomes available, allowing them to make more informed decisions about their investments.

5. Considers Unique Company Factors: The DCF method takes into account the unique characteristics of a company, such as its growth prospects, market position, and competitive advantages. This means that the valuation produced by the DCF method is tailored to the specific company being evaluated. Overall, the DCF method is a popular and reliable way to evaluate the intrinsic value of a company’s stock. Its focus on future cash flows, incorporation of the time value of money, flexibility, ability to account for changing circumstances, and consideration of unique company factors make it a preferred method for many investors and analysts.

Disadvantages

While the Discounted Cash Flow (DCF) valuation method has several advantages, it is important to note that there are also some disadvantages and limitations to using this technique:

1. Requires Accurate Projections: The DCF method is based on future cash flow projections, which can be challenging to make accurately. Inaccurate projections can lead to incorrect valuations, which can ultimately impact investment decisions.

2. Sensitivity to Discount Rate: The DCF method relies heavily on the discount rate used to calculate the present value of future cash flows. Small changes in the discount rate can significantly affect the valuation estimate.

3. Ignores Market Sentiment: The DCF method focuses solely on fundamental factors and cash flows, ignoring market sentiment and investor behavior. Market sentiment can significantly impact a stock’s price, even if the fundamentals suggest a different value.

4. Time-Consuming: The DCF method can be time-consuming to implement, as it requires extensive analysis and calculation of future cash flows, discount rates, and other inputs.

5. Difficulty in Accounting for External Factors: External factors, such as changes in interest rates, political instability, and changes in industry trends, can significantly impact a company’s future cash flows. Accounting for these factors in the DCF method can be challenging, making the valuation estimate less accurate.

6. Not Suitable for All Companies: The DCF method is most suitable for companies with stable and predictable cash flows. It may not be appropriate for companies that experience significant fluctuations in cash flows or operate in rapidly changing industries.

While the DCF method is a widely used and reliable valuation technique, it is important to understand its limitations and potential drawbacks. It is not a one-size-fits-all approach and should be used in combination with other valuation methods and analysis to make informed investment decisions.

The DCF method guide

The Discounted Cash Flow (DCF) valuation method is a powerful tool that can help investors evaluate the intrinsic value of a stock or a company. Intrinsic value of a stock means assessing what a stock is really worth. When you see those different stock prices on the market, not all of them are fair or actual market values. You see, a stock price can either be undervalued or overvalued, meaning underpriced or overpriced.

In the words of the legendary value investor Warren Buffet, “Intrinsic value of a company is the number that if you were able to predict and were all-knowing about the future and all the cash that a business would give between now and judgment day, discounted to the present day, that is the intrinsic value.”

The DCF method involves estimating the future cash flows that a company will generate and then discounting it back to its present value to arrive at a fair value for the stock.

Before we start with the valuation of a stock, the first precondition is to select a company where cash flows can be easily predicted and the cash flow is generally stable.

While it would be helpful to use an example of a real company from the PSX, we have avoided doing so so that the readers don’t use this article as a recommendation to invest their money. All investors should do their own research before investing in the stock market.

Here is a step-by-step guide on how to carry out the DCF valuation method:

Step 1: Estimate Future Cash Flows

The first step in conducting the DCF valuation method is to estimate the future cash flows that a company is expected to generate. This involves looking at the company’s historical financial statements, analyst reports, and industry trends to forecast the company’s future revenue, expenses, and capital expenditures.

Put simply, look at the free cash flows (FCF) of the company for the past five years, average their growth rate, change the growth rate after considering the industry and analyst reports, and then use that growth rate to project the FCF for the next 5-10 years of the company.

So now you have the projected future cash flows for the next 5-10 years. This projected period could be several years or even decades, depending on the nature of the investment.

One common approach is to use a fiveyear projection period and then estimate the terminal value (we’ll get to this later) of the company beyond the five-year period. It’s essential to be as realistic and accurate as possible when estimating future cash flows, as this will have a significant impact on the final valuation.

Step 2: Determine the Discount Rate

Once the future cash flows of a business have been estimated, the next step is to determine the appropriate discount rate.

The discount rate is important because it is used for Step 3, which is calculating the present value of the future cash flows. Since the value of money falls over time because of inflation, meaning the same amount is worth less in the future than what it is worth today, the future cash flows need to be discounted to the present time.

Discounting the cash flows back to their present value is done using an appropriate discount rate. The discount rate should reflect the time value of money, the risk associated with the investment, and the opportunity cost of capital.

A simple way to get the discount rate is to look at the interest rate in the future. A higher interest rate would mean that the value of the same cash today will be less in the future. But analysts usually use something called the Weighted Average Cost of Capital (WACC) for the discount rate, which is a technical term which we won’t go into right now.

Step 3: Calculate the Present Value of Cash Flows

Once the future cash flows (Step 1) and discount rate (Step 2) have been determined, the next step is to calculate the present value of each future cash flow for each projected year in the future.

The present value of the future cash flow uses the following formula:

PV = CF / (1+r)^n

Where:

PV = Present Value of Cash Flow

CF = Expected Cash Flow

r = Discount Rate

n = Number of Periods

Note that each projected year’s cash flow will have to be separately discounted one by one.

For example, if a company is expected to generate cash flows of Rs 10 million in year 1, and the discount rate is 10%, the present value of the cash flow in year 1 would be Rs 9.09 million (10 million divided by 1.10 raised to the power of 1).

If in year 2, the company is projected to produce a cash flow of Rs 12 million, then using the same discount rate of 10%, the present value of the cash flow in year 2 would be Rs 9.92 million (12 million divided by 1.10 raised to the power of 2).

This process is repeated for each year’s cash flow, until we have the present value of all future cash flows for all the years we are projecting (5, 10, 15, etc).

Step 4: Calculate the terminal value

However, remember at the start when we used Warren Buffet’s definition of intrinsic value as the value of ALL the cash that the business will generate until judgment day? That means that we also have to project a future cash flow for the years beyond the 5-10 years that we have already projected for and then find a present value for that as well.

This future cash flow of the company is called the Terminal Value. It is the value of all the cash that the business will generate as long as it exists.

Let’s say we projected the cash flows of our company up until year 5 or 5 years into the future. To calculate the terminal value, we will use the year 5 projected cash flow and use a more modest cash flow growth rate than the average historical growth rate we used for the first 5 years. And since this is the growth rate in perpetuity/forever, let’s

use the growth rate of the economy which we will assume to be 3%.

The resulting value will be divided by the difference between our discount rate (which we used to get at the present values in step 3) and the perpetual growth rate of 3%. The answer will be the projected terminal value of the company’s cash flow.

The formula is as such:

Terminal Value = (Cash flow year 5 * ( 1 + 3%) ) / (Discount rate - 3%)

But one last thing needs to be done here. This terminal value needs to be discounted to the present as well. The formula will be the same as the one used in step 3 and ‘n’ will be 5 since we are calculating the terminal value from year 5.

When you do this correctly, the present value of the terminal value will probably be 100-500 times more than the year 5 projected cash flow’s present value. This is because the terminal value is the sum of all future cash flows beyond year 5 of our hypothetical company.

Now that we have all the present values up until year 5 and even the present value of the terminal value of the company, all we have to do is sum of all these present values. This will give us the present value of all future cash flows of the company.

Step 5: Compare estimated intrinsic value to market price

If you were able to follow everything up until now, first congratulations are in order. But there is one last final step missing.

The last value we got was the sum of all future cash flows of the company. This total sum needs to be divided by the total outstanding shares of the company to get at the intrinsic value of the company’s stock. When you do this calculation, you will find a number that is the actual intrinsic price of the stock.

But just to be careful, it is best to keep a margin of safety with this intrinsic value and reduce it by 30-60%, depending on how much margin you want to give yourself. This is done because the intrinsic value is just a

projected calculation which is not necessarily right. It’s better to reduce the intrinsic value for a decent margin of safety and then use the resulting value for comparison.

The final step in the DCF valuation process is to compare this estimated intrinsic value to the company’s current market price. If the estimated intrinsic value is higher than the market price, the stock may be undervalued and could represent a good investment opportunity. If the estimated intrinsic value is lower than the market price, the stock may be overvalued and investors may want to consider selling or avoiding the stock.

That’s it. You have just learned a highly technical method of stock valuation. Let’s summarize what we learned today.

1. Step 1: Estimate the future cash flows of the company for how long you want to project using the historical growth rates of the free cash flow. Use the final future year’s cash flow to get the terminal value of cash flow.

2. Find an appropriate discount rate and discount all the projected cash flows to the present value.

3. Sum all the present values of the future cash flows.

4. Divide the sum of the present values by the outstanding shares of the company and you will have the intrinsic value of the stock.

5. Compare the intrinsic value of the stock to its current market price and decide whether the stock is a good investment opportunity or not.

In conclusion, the DCF valuation method is a reliable and effective way to estimate the intrinsic value of a company’s stock. By following these steps, investors can gain a better understanding of a company’s financial health and make informed decisions about whether to invest in its stock. However, it’s important to keep in mind that the DCF valuation method is not without its limitations, and investors should consider using other valuation methods as well to arrive at a well-rounded investment decision. n

In the words of the legendary value investor Warren Buffet, “Intrinsic value of a company is the number that if you were able to predict and were all-knowing about the future and all the cash that a business would give between now and judgment day, discounted to the present day, that is the intrinsic value”