Jaipuria Institute of Management,

Vineet Khand, Gomti Nagar

Lucknow – 226010

Academic Year 2022-23

Batch 2022-24
Trimester III
Programme PGDM
(PGDM / PGDM-FS / PGDM-RM)

Name of Course Advance Corporate Finance

Section B
Name of Faculty Prof. Dheeraj Misra

Nature of Submission Softcopy

(Assignment / Project Report)
Topic of Assignment / Project Valuation of Shares of Blue Star
Limited

Deadline for Submission 04/05/2023

Group/ Learning Team Number -
Maximum Marks Allotted

Contribution of Group/LT members in the Assignment/Project

Name & Enrollment Contribution Signature

Number of Student

Rishab Bansal Individual Assignment

JL22PG155

Date of receiving at PMC: Signature of PMC Staff:

Penalty [Marks to be deducted (if any)]:
 CONTENTS

INTRODUCTION...............................................................................................................................3
OBJECTIVES OF THE PROJECT...................................................................................................4
THEORETICAL FRAMEWORK4
DATA REQUIRED FOR THE VALUATION OF SHARES OF BLUE STAR.............................7
METHODOLOGY ADOPTED FOR THE VALUATION OF BLUE STAR SHARES................8
EMPIRICAL RESULTS AND ANALYSIS......................................................................................9
CONCLUSION..................................................................................................................................16
REFERENCES........................................................................................................................................16
 INTRODUCTION

Blue Star is India's preeminent HVAC&R company, with over 778 million USD in annual
revenue, 31 offices, 5 modern manufacturing facilities, and 2 additional state-of-the-art
facilities currently under construction, 2621 employees, and 3950 channel partners. Room air
conditioners, packaged air conditioners, chillers, cold rooms, and refrigeration products and
systems are all accessible through the Company's 7500 retail locations, which are supported
by 1172 service employees who travel to over 900 communities. Blue Star's ability to provide
customers with a comprehensive solution due to its vertically integrated business strategy as a
manufacturer, contractor, and after-sales service provider distinguishes it from its
competitors. In fact, Blue Star products can be found in every other Indian business structure.

The company meets the heating, cooling, and ventilation needs of a wide range of
commercial, industrial, and processing applications, as well as the comfort needs of
residential consumers. Blue Star has expanded into the domestic water purifier industry with
an elegant and innovative product line that includes India's first RO+UV Hot & Cold-water
purifier. In order to provide comprehensive solutions, in addition to executing specialised
industrial projects, the company has experience in associated contracting activities such as
electrical, plumbing, fire-fighting, and industrial projects.

Blue Star Engineering & Electronics Ltd., a wholly-owned subsidiary of the Company, sells
and maintains imported professional electronics and industrial products and systems.

Every product is manufactured in Dadra, Himachal Pradesh, Wada, and Ahmedabad, all of
which are equipped with cutting-edge machinery to ensure the utmost quality and
dependability. The company has a manufacturing area of approximately one million square
metres, with energy efficiency and environmentally benign and sustainable products serving
as the primary focus of product development and R&D.

OBJECTIVES OF THE PROJECT

The main objective of this project is to estimate the valuation of the shares of the chosen
company, i.e., Blue Star. The stock exchange that has been considered for the valuation
purpose in this project is Bombay Stock Exchange. Index of BSE 500 has been taken for the
calculation and the reference purpose.

The project majorly aims at analysing whether the company’s market price of shares is being
reflected in its fundamental value or not. Also, the future earning capacity of the company is
being looked upon here along with its growth prospect.

THEORETICAL FRAMEWORK

WHY IS VALUATION OF SHARES NEEDED?

Why do we take decisions? We take decisions to achieve the respective objectives which in
case of Corporate Finance is to accept the project and the project will only be accepted when
the NPV is greater than zero. Basically, the company needs to create a value for its
shareholders which only possible when the actual is more than expected.

Now the question comes, how do we measure the expectations of the shareholders.
Expectations of the shareholders depend on 3 things: Risk free rate (Rf), Market Risk
Premium (MRP) and the Beta of the company. The expected return is the Ke or cost of
capital of the company whereas the actual return is the ROE or return on equity. Therefore,
whenever the ROE > Ke, the value for the shareholders will be created by the company.

Normally, two types of decisions need to be made: Investing decision and financial decision.
Tools that are being used to make this decision are the tool of Risk and Return and the tool of
Present Value.

Whenever any financial asset is valued, the concept of present value of future cash flow of
that asset is applied for the valuation purpose. Same is the concept with the valuation of
shares.
WHAT IS SHARE VALUATION?

Any investor who wants to benefit from the market needs to master the skill of share
valuation. Share valuation is nothing but a way of determining the intrinsic value or it can be
said, the theoretical value of the shares. The importance of share valuation lies in the fact that
the intrinsic value of the shares differs from what is known as the current market price.

METHODS OF SHARE VALUATION

2 models are used to estimate the fundamental value of the shares of any company which are
as follows:

DIVIDEND DISCOUNT MODEL is one of the basic methods of absolute share valuation.
This valuation method is the quantitative method of valuing the shares.

This method assumes that the dividend of the company represents the cash flow from the
company to its shareholders. This is the remaining cash flow after meeting all the
requirements of the company that is paid to its shareholders in the form of dividend.

This method states the intrinsic value of the company’s share price is equal to the present
value of the company’s future dividends or it can be said that the current market price of the
share is the present value of the future flows of the dividends.

This method is also known as Gordon Growth Model.

Basic formula for the dividend discount model: Po = D1 / Ke – g where,

 D1 = Dividend of the next year.

 Ke = Cost of Equity.
 g = Growth rate in the EPS.
 P0 = Value of the share.

Now dividend discount model can further be subdivided into the following 2 categories:
  One stage model – This model is used only when the company is in its maturity
stage. The basic condition for the application of this model is that the Cost of Capital
must be less than the Growth Rate of the company.
 Two stage model can be used for two stages of growth. The initial stage of growth
where the growth rate is not stable and the subsequent growth stage where the growth
rate is stable, and expectations are that it would remain stable for a longer period. The
assumption of this model is that growth rate for n period, dividend grows at super
normal rate (g) and after that it grows at the stable normal growth rate of gn

FREE CASH FLOW TO EQUITY (FCFE)

FCFE is also the quantitative method of valuing the share price of the company. This method
gained popularity as an alternative to the Dividend Discount Method. This model comes into
the application when the firm is following the residual policy of dividend. It can be applied in
any situation whether the company is in its growth stage or not and whether the company is
paying or not paying dividend to its shareholders.

The basic formula for the FCFE method is Po = FCFE1 / Ke - g

Variables used in this model are as follows:

 Dividend of the next year (D1)

 Cost of Equity (Ke)
 Growth Rate in the EPS

This method of FCFE depends on the following:

 Profit after Tax

 Debt Ratio
 Capital Expenditure
 Working Capital
 Depreciation

FCFE= PAT(NI) – (1-g) (CE- Depreciation) – (1-g) ΔWC

 FCFE measures the amount of cash that is available to the company’s equity shareholders
after company has met all its expenses, reinvestments and made the payment of its debt.
Basically, FCFE method measures the equity capital usage.
FCFE calculates the amount that available to the equity shareholders but that does not mean
that it necessarily would equate the amount paid to the shareholders.
If the FCFE comes out to be lesser than the dividend paid and the buy back cost, that means
that the company is funding with either existing capital, debt or has issued new securities.

Whereas, if the dividend paid by the company is less than the FCFE amount, that would mean
that the company is using the excess to either increase the level of its cash amount or has
invested in the marketable securities.

Lastly, if the FCFE amount is equal to the amount of dividend paid to the shareholders by the
company that would mean that the company is paying the entire amount it has earned to it
shareholders.

DATA REQUIRED FOR THE VALUATION OF SHARES OF

BLUE STAR
Particulars FY 22 FY 21 FY - 20 FY - 19 FY - 18 FY – 17
EPS 13.26 6.85 12.55 12.66 13.8 11.73

DPS 10 4 10 10 10 7.5
FCFE / share -11.52 336.24 481.65 163.1 -29.01 -56.61
Market Price / Share 1051.15 937.45 460.65 678.2 754 692.8
PE Ratio 79.27 136.85 36.71 53.61 54.76 59.11

Risk free Rate 5.48%

Market Risk Premium 9.49
Beta 0.6864 (BSE 500) (01/04/2017 – 31/03/2022)
METHODOLOGY ADOPTED FOR THE VALUATION OF BLUE STAR
SHARES
2 methods have been used to calculate the value of the shares of Blue Star Limited which are
as follows:

1. Dividend Discount Method which is used when the company is paying regular and
stable dividends. There are further sub-division in this method depending on the
fulfilment of the basic condition:
One Stage Model which is applied when the cost of equity comes out to be greater
than the g i.e., the growth rate in earnings per share. As in case of Blue Star Ltd, the
Ke > g, therefore, one stage model cannot be applied in this project.
Two Stage Model is used when the cost of equity or Ke comes out to be less than the
g i.e., the growth rate in the earnings per share of the company. Since the Ke < g, in
case of Blue Star Ltd, therefore, the entire calculation for valuation has been done
using the two-stage model. An assumption has been made that the extraordinary
growth will prevail for the next 5 years and that, after that the growth rate g will fall
to 6%. Further, 3 different scenarios have been made using the average, maximum
and the minimum growth rate in the EPS in the past 5 years.
2. Free Cash Flow to Equity Method – Another method that is used as an alternative to
the dividend discount method is FCFE method. This is mostly used for valuation
when the company is not paying dividend to its shareholders or when the dividend in
unstable. This method measures the equity capital usage by the company.
3. Implied Growth – Lastly, the rate of implied growth rate has also been calculated on
the basis of assumption that the current market price of the Blue Star Ltd shares are
representing the intrinsic market value of its shares.
 EMPIRICAL RESULTS AND ANALYSIS

Valuation of shares of Blue Star Ltd has been done through the available historical data of
Blue Star. The data of past 5 years has been taken into the consideration so that the implied
growth and the intrinsic value of the share can be forecasted. After that, the data of earnings
per share and dividend per share has been collected so that the market value of the Blue Star
shares can be estimated.

Year EPS DPS G(EPS)

Mar 2022 13.26 10 0.935766423

Mar 2021 6.85 4 -0.454183267

Mar 2020 12.55 10 -0.008688784

Mar 2019 12.66 10 -0.082608696

Mar 2018 13.8 10 0.176470588

Mar 2017 11.73 7.5  

    8.583333333 0.024823563

Average DPS = Average of DPS of the previous 6 years = 8.583

Growth in Earnings Per Share

G(EPS) = (EPS of current year – EPS of previous year) / EPS of previous year
Instance; to calculate the g of EPS of the FY22,

g (EPS) = (EPS of 2022 – EPS of 2021) / EPS of 2021

= (13.26 – 6.85) / 6.85

= 0.9357

The calculation for rest of the years has been done in the same way.
 DIVIDEND DISCOUNT MODEL

As Ke >g, the one-stage model will be used here for share valuation.

The market price of the share is estimated as per the 3 scenarios depending on the growth rate
of EPS in the past 5 years.

SCENARIO 1: Average Growth Rate

Case 1: D0 = Average DPS

Assumptions:
 D0 has been taken as the current dividend for the FY March 2022.
 Growth in the dividend paid by the company is constant over the years.

Year EPS DPS G(EPS)

Mar 2022 13.26 10 0.935766423
Mar 2021 6.85 4 -0.454183267
Mar 2020 12.55 10 -0.008688784
Mar 2019 12.66 10 -0.082608696
Mar 2018 13.8 10 0.176470588
Mar 2017 11.73 7.5  
    8.583333333 0.024823563

Under one-stage model, the company is expected to grow at the rate of “g”.

One Stage Model      

Current Dividend: Current Dividend:
March 2022     Average
D1 10.24823563   8.796402252
P0 107.744833   92.48098169

The actual market price, Rs. 1091.75 is greater than the intrinsic value of the share, Rs.
107.74. This tells the story that the share price of the company is overvalued. The market is
assuming growth rate high in the coming future which can be due to the ongoing pandemic
situations.
Case 2: D0 = DPS of March 2022

One Stage Model      

Current Dividend: Current Dividend:
March 2022     Average
D1 10.24823563   8.796402252
P0 107.744833   92.48098169

The actual market price, Rs. 1091.75 is greater than the intrinsic value of the share, Rs. 92.48.
This tells the story that the share price of the company is overvalued. The market is assuming
growth rate high in the coming future which can be due to the ongoing pandemic situations.

SCENARIO 2: Maximum Growth Rate

Two Stage Model

Current Dividend: March 2022
Time Period Dividend PV(D)
1 D1 19.35766423 17.28456462
2 D2 37.47191646 29.8756174
3 D3 72.5368777 51.63870393
4 D4 140.4144523 89.25525148
5 D5 271.8095821 154.2738161
Terminal value 2728.261448
Intrinsic value 3070.589402

G = 93.57%

Intrinsic value of the Blue Star share = Rs. 3070.58

Actual market price of the Blue Star share = Rs. 1091.75

Intrinsic value of the Blue Star share > Actual market price of the Blue Star share

Thereby, showing that the maximum growth rate gave more accurate market price of the
share.
Two Stage Model Based on: Average Dividend

Current Dividend: Average

Time Period Dividend PV(D)
1 D1 16.61532847 14.83591796
2 D2 32.16339496 25.64323826
3 D3 62.26082002 44.32322087
4 D4 120.5224049 76.61075752
5 D5 233.3032247 132.4183589
  Terminal Value   2341.757743
  Intrinsic Value (P0)   2635.589236
       
    Implied Growth 0.222073244

In this case dividend is calculated based on the average dividend from March 2017 to March
2022.

In this model we can observe that even though we have taken a maximum growth rate of
93.5% but the market price of shares come out to be Rs. 2635.58 which is higher than the
market price of shares on March 20 22 which is Rs. 1091.75. If we assume are model to be
true then we can draw following interpretations:

 Market is assuming a lower growth rate then our model

 The shares of Blue Star ltd are undervalued

SCENARIO 3: Minimum Growth Rate

Two Stage Model

Current Dividend: March 2022
Time Period Dividend PV(D)
1 D1 11.76470588 10.50477044
2 D2 13.84083045 11.0350202
3 D3 16.28332994 11.5920354
4 D4 19.15685875 12.17716708
5 D5 22.53748089 12.79183447
  Terminal value   226.2177064
  Instrinsic value   284.318534
       
    Implied Growth 0.101563718

g = 17.64%
Intrinsic value of the Blue Star share = Rs. 284.31

Actual market price of the Blue Star share = Rs. 1091.75

Intrinsic value of the Blue Star share <Actual market price of the Blue Star share

Thereby, showing that the share of Blue Star is overvalued and market has assumed a high
growth rate in the future.

Implied growth rate = 10.15% which also indicates future growth prospects of the company.

Two Stage Model Based on: Average Dividend

Current Dividend: Average

Time Period Dividend PV(D)
1 D1 10.09803922 9.016594627
2 D2 11.88004614 9.47172567
3 D3 13.97652487 9.949830382
4 D4 16.44297043 10.45206841
5 D5 19.34467109 10.97965792
  Terminal Value   194.170198
  Intrinsic Value (P0)   244.040075
       
    Implied Growth 0.104908548

In this case dividend is calculated based on the average dividend from March 2017 to March
2022.

In this model we can observe that even though we have taken a maximum growth rate of
93.5% but the market price of shares come out to be Rs. 244.04 which is less than the market
price of shares on March 20 22 which is Rs. 1091.75. If we assume are model to be true then
we can draw following interpretations:

 Market is assuming a higher growth rate then our model.

 The shares of Blue Star ltd are overvalued.
 FREE CASH FLOW TO EQUITY MODEL

Number of
Outstanding Equity Total FCFE (Per
PAT Shares FCFE Share) G(FCFE)
2,689.39 202.8197587 -11.52 -0.0567992 -1.0504
2,044.65 298.4890511 336.24 1.12647348 -0.568
2,318.17 184.714741 481.65 2.607534176 1.38473
1,888.41 149.1635071 163.1 1.093430982 -5.0109
1,468.52 106.4144928 -29.01 -0.272613243 -0.5997
974.94 83.11508951 -56.61 -0.68110376  
      0.636153739 -0.3915

SCENARIO 1: Average Growth Rate

Case 1:- FCFE0 = Average FCFE

Current FCFE: Average

Time
Period Dividend PV(FCFE)
1 FCFE1 0.387068538 0.345616
2 FCFE2 0.235512336 0.187769
3 FCFE3 0.143297775 0.102013
4 FCFE4 0.08718971 0.055423
5 FCFE5 0.053050688 0.030111
  Terminal Value   0.532491
Intrinsic Value
  (P0)   1.253422
       
Implied
    Growth 0.119907

As per the FCFE model the intrinsic value of the share is 1.25 which is less than the actual
market value of the share that is ₹1091.75. Because of negative average growth in FCFE we
are getting very low intrinsic value which is 1.25. This shows that the share is overvalued.
Further the implied growth is 11.99% which is more than the average growth rate of -39%.
Because of negative growth rate of FCFE this model may not hold true for comparison.
Case 2: FCFE0 = FCFE of March 2022

Current FCFE: March 2022

Time
Period Dividend PV(FCFE)
1 FCFE1 -0.034559544 -0.030858
2 FCFE2 -0.021027798 -0.016765
3 FCFE3 -0.01279439 -0.009108
4 FCFE4 -0.007784763 -0.004948
5 FCFE5 -0.004736648 -0.002688
Terminal Value -0.047544
Intrinsic Value
(P0) -0.111912

Implied
Growth 0.1199422

As per the FCFE model the intrinsic value of the share is -0.111 which is less than the actual
market value of the share that is ₹1091.75. This shows that the share is overvalued. Further
the implied growth is 11% which is more than the average growth rate of -39%.

As the implied growth is 11% it indicates that there are expectations of future growth in the
company and thereby the share price may also increase over the years. So as per the FCFE
model, the share of Blue Star is a good buy option.
 CONCLUSION

The shares of Blue Star are undervalued.

The market has assumed a high growth rate in the future for the company.

Blue Star has high and good prospects in the future.

The company, Blue Star, can create a value for its shareholders currently and it will be same
even in the coming future years for the shareholders.

REFERENCES
https://awsone.capitaline.com/index.html#/Company/General/CompanyInfo

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