Professional Documents
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FSA – Section 3
PGDM 2017-19
Ishan Bhargava – 17F813
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Vijay Jhawar – 17F849
Table of Contents
ECONOMIC ANALYSIS
India has emerged as the fastest growing major economy in the world as per the Central
Statistics Organization (CSO) and International Monetary Fund (IMF) and it is expected to be
one of the top three economic powers of the world over the next 10-15 years, backed by its
strong democracy and partnerships.
The Economic Survey 2017-18 forecasts a growth rate of 7 to 7.5 per cent for FY19, as
compared to the expected growth rate of 6.75 per cent in FY18.
GDP growth expected to be between 6.5 and 6.75 per cent in 2017-18. Real GDP growth
expected at 6.5 per cent in 2017-18.
Corporate earnings in India are expected to grow by over 20 per cent in FY 2017-18
supported by normalization of profits, especially in sectors like automobiles and banks,
according to Bloomberg consensus.
India's consumer confidence index stood at 136 in the fourth quarter of 2016, topping the global list
of countries on the same parameter, as a result of strong consumer sentiment, according to market
research agency, Nielsen.
Trends observed in Indian economy that would aid the development of the consumer durables
industry:
CPI
IIP
Interest Rates
GDP
Numerous foreign companies are setting up their facilities in India on account of various government
initiatives like Make in India and Digital India. Mr. Narendra Modi, Prime Minister of India, has
launched the Make in India initiative with an aim to boost the manufacturing sector of Indian
economy, to increase the purchasing power of an average Indian consumer, which would further
boost demand, and hence spur development, in addition to benefiting investors. The Government of
India, under the Make in India initiative, is trying to give boost to the contribution made by the
manufacturing sector and aims to take it up to 25 per cent of the GDP from the current 17 per cent.
Besides, the Government has also come up with Digital India initiative, which focuses on three core
components: creation of digital infrastructure, delivering services digitally and to increase the digital
literacy.
INTRODUCTION
India is one of the largest growing electronics market in the world. Indian electronics market is
expected to grow at 41 per cent CAGR between 2017-20 to reach US$ 400 billion. Consumer
electronics exports from India reached US$ 270.08 million during April-December 2017. India has the
world’s third largest television industry. India’s television industry, is expected to grow at a CAGR of
14.7 per cent over FY 16-21. By 2018, the television industry in India is expected to grow to US$
11.78 billion from US$ 9.23 billion in 2016., registering a growth of 12.97 per cent.
Sales of consumer durables increased 13 per cent in Q4 FY17, 20 per cent in Q1 FY18 and 16 per cent
in Q2 FY18. Consumer durables market expected to grow at CAGR of 13 per cent from FY05 to FY20.
Around two third of the total revenue is generated from urban population and rest is generated
from rural population. Godrej group, Mirc Electronics, Blue Star and Videocon Industries are few of
the major domestic players operating in India consumer durable market.
Growth drivers:
Per capita income is expected to expand at a CAGR of 8.6 per cent for the period 2015-19.
Due to factors like rising rural incomes, increasing urbanisation, a growing middle class and
changing lifestyles, the demand for consumer durables is increasing.
Significant increase in discretionary income and easy financing schemes have led to
shortened product replacement cycles and evolving life styles where consumer durables, like
ACs and LCD TVs, are perceived as utility items rather than luxury possessions
There is a growth in demand from rural and semi-rural areas. Also, online channels also act
as a catalyst to growth.
Non-metro markets namely Vishakhapatnam, Bhopal, Vadodara, Chandigarh etc. have
grown rapidly in regard to consumption, becoming the main target markets, posing a huge
potential transforming themselves into new business centers as compared to metro cities.
ADVANTAGE INDIA
Consumer Electronics
Consumer
Durables
ACs & Regrigerators
Consumer appliances
Threat of substitutes:
Medium
- - Technological
advancements
- - Buyers have huge
propensity to substitute
Bargaining Power of
suppliers: High
Threat of New Entrants:
Low
- - Product
Competitive Rivalry differentiation is
- Highly capital Continuous Innovation very low
intensive
Homogenity in product
- Major players have - - By charging the
developed brand equity Low switching costs
input, firms
- Brand loyalty is cannot drastically
moderate
differentiate on
prices
Bargaining power of
buyers: High
- - Internet usage
for information
- - Switching cost is
very less
Company Analysis: BLUE STAR
INTRODUCTION
Blue star is an air conditioning and commercial refrigeration company with annual turnover of 2800
crores was founded by Mohan T. Advani in 1943 Blue Star is India's largest central air conditioning
company over 1,600 dealers and around 2,800 employees and 7 modern manufacturing facilities. It
primarily focusses on corporate and commercial markets which includes institutional, industrial and
government organizations.
BUSINESS SEGMENTS
In accordance with the nature of products and markets addressed, business drivers, and competitive
positioning, the lines of business of Blue Star can be segmented as follows:
Corporate governance is the system of rules, practices and processes by which a company is directed
and controlled. Corporate governance basically involves ethical conduct, integrity and accountability
across all business transactions, and aims at maximizing value for all stakeholders sustainably.
1) Compliance to the Corporate governance practices as enshrined in the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015
2) 50% of the board has independent directors and board meeting attendance is 93.67%
3) 10% of board of directors consist of women.
4) Audit committee consists of 3 independent directors out of 4
5) There is no CEO duality in the board
6) No dual class unequal voting rights for common shares
7) It has a CSR/Sustainability committee
We have taken both income statement and balance sheet figures as reported in the company’s
latest annual report as the Bloomberg data was not matching.
There has been a slight change in which way the company had report its financial statements
from past years. In 2016, there has been too many acquisitions and let out of many joint
ventures and subsidiaries which has clearly affected the strategy of the company and its future
outlook. Therefore, financial statements before 2016 has all this joint ventures and
subsidiaries which no longer form a part of Blue Star Ltd. are and thus will surely have negative
effect on future forecasted financial statements.
For this reason, we have taken financials reports of 2016 and 2017 with immense importance
and forecasted the future statements. 70% weightage is given to 2017 and 30% to 2016 as the
2017 figures are more relevant but 2016 are also important for consistency.
INCOME STATEMENT
2016 and 2017 yearend consolidated figures have been used as reported in the annual report after
cross checking with Bloomberg. The 2015 balance sheet figures were restated in the latest annual
report but not those of the income statement. Even Bloomberg had no similar consistent reporting
for 2015 figures.
Revenue growth rate assumed to be 15% every year based on EIC analysis and consensus of
analysts in analyst reports.
Most items were converted to a percentage of revenues and then a weighted average of the %
figures of 2016 and 2017 was calculated. This average % figure was applied to the forecasted years
as per their grown sales values. 70% weightage is given to 2017 and 30% to 2016 as the 2017
figures are more relevant but 2016 are also important for consistency.
For depreciation and amortization, breakdown of the total figure was found in the notes. These
individual figures were converted into % of PPE and intangible assets respectively. Again, a
weighted average of the % figures was calculated and applied to the estimated balance sheet
figures of the same.
Exceptional items, discontinued operations and JV accounting was assumed to be zero.
Current tax percentage is very close to 30% and this was flatly applied to the estimated PBT.
Dividend payout and tax rate on dividends was assumed to be zero since company in 2017 had
reinvested the total profit again so we had continued the same trend and the amount was
transferred to balance sheet under “other equity” (retained earnings).
Finance costs were assumed to be on the basis of opening non-current liabilities and therefore
were forecasting using a percentage of the same.
BALANCE SHEET
Tangible Assets: After deducting its respective depreciation, Tangible assets was grown by 15%, in
line with revenues as it shows a constant increasing trend in the past. It can be assumed that the
company continues to grow these assets with revenues.
Capital WIP: As per its definition, it is a capital asset not yet completed. Therefore, we have
assumed it to keep same as the figure of 2017
Goodwill, investments, other financial assets, tax assets, other non-current assets, assets held for
sale, other financial liabilities, borrowings, tax liabilities and equity was assumed to remain the
same.
Trade payables has been derived by taking weighted average of 2016 and 2017 trade payables
turnover ratio, 70% weightage is given to 2017 and 30% to 2016 as the 2017 figures are more
relevant but 2016 are also important for consistency.
Inventory has also been derived by taking weighted average of 2016 and 2017 Inventory turnover
ratio, 70% weightage is given to 2017 and 30% to 2016 as the 2017 figures are more relevant but
2016 are also important for consistency.
Receivables has also been derived by taking weighted average of 2016 and 2017 Account
receivable turnover ratio, 70% weightage is given to 2017 and 30% to 2016 as the 2017 figures are
more relevant but 2016 are also important for consistency.
Interpretation of Significant Ratios, DuPont, Altman Z Score and KZ Index
1) The Altman Z-score is the output of a credit-strength test that gauges a publicly traded
manufacturing company's likelihood of bankruptcy. A score of 1.8 and below means that
the company is highly distressed and has a high probability of becoming bankrupt.
Altman Z scores are higher than 1.8 which shows that it is not heading for bankruptcy and
since the score has crossed 3 in the year 2017 we can safely say that it has moderate credit
risk. Blue Star went below 1.8 only in the year 2012, that too not significantly.
We found out the actual Altman Z Score of Blue Star from Bloomberg too and found it to be in the
same range:
From the above table we can see the company has reducing ROE. Comparing the individual
components we can see there is reducing operating efficiency whereas both asset use and
financial leverage is increasing. The impact of reducing operational efficiency is more than
the combined effect of increasing asset efficiency and financial leverage. If the company can
focus on increasing operating efficiency it can increase its ROE.
Du Pont analysis we can see that interest burden is healthy and tax burden also consistent.
Its operating margin is less and leverage ratio is higher than required which might be a cause
of concern.
4) Ratio Analysis
Efficiency Ratios
Receivable turnover ratio – This indicates the number of times the average
account receivable is collected in a year. Since this ratio indicates the ability of a
company to collect funds from debtors in a timely manner, higher the ratio, the
better. This ratio also varies across industries. For Blue Star the receivable
turnover ratio has increased with year compared from 2015 to 2017 from 3.95 to
4.59. It means that in Blue Star, the efficiency and extending credit has gone up
with time.
Inventory turnover ratio - Indicates how many times a company's inventory is
sold and replaced in a year’s time. The lesser the better. For Blue Star, the
inventory turnover ratio went down from 1.89 in 2015 to 1.82 in 2016 and then
went up to 1.84 in 2017 which means it takes them more number of days to
replace over a period of time.
Asset turnover - The asset turnover ratio is an efficiency ratio that measures a
company's ability to generate sales from its assets by comparing net sales with
average total assets. In other words, this ratio shows how efficiently a company
can use its assets to generate sales. For Blue Star, the asset turnover ratio has
increased which means they are able to efficiently use their assets to generate
their sales.
Liquidity Ratios
Solvency Ratio
Debt to equity ratio – A high debt-equity ratio indicates that most assets are
funded by debt. While zero debt companies are best, investors should be careful
if this ratio is above 2. For Blue Star, the debt to equity has raised from 1.73 to
1.82 which means their assets are financed mostly by debts. However, we see
that the estimation for 2018 shows that the ratio will fall to 1.59.
Debt to asset ratio - The debt to total assets ratio is an indicator of financial
leverage. It tells the percentage of total assets that were financed
by creditors, liabilities, debt. For Blue Star debt to asset ratio has remained
constant at 0.01, over the period which means it has more of its assets financed
by debt.
Interest coverage ratio - It is used to determine how easily a company can pay its
interest expenses using its outstanding debt. The lower the ratio, the more the
company is burdened by debt expense. When a company's interest coverage
ratio is only 1.5 or lower, its ability to meet interest expenses may be
questionable. This can be thought of as a margin of safety for the company’s
creditors, should the company run into financial difficulty down the road. Blue
Star has more interest coverage ratio which means they have increasing margin
of safety every year to meet its interest obligation.
Profitability Ratio
Net profit - The net profit percentage is the ratio of after-tax profits to net
sales. It reveals the remaining profit after all costs of production,
administration, and financing have been deducted from sales, and income
taxes recognized. As such, it is one of the best measures of the overall results
of a firm, especially when combined with an evaluation of how well it is using
its working capital. Net profit is not an indicator of cash flows, since net
profit incorporates a number of non-cash expenses, such as accrued
expenses, amortization, and depreciation. Blue Star has increasing profit
margin.
Return on equity – This ratio provides investors with insight how efficiently a
company is utilizing its equity that shareholders have funded. For Blue Star, ROE
has reduced over the period which is not a positive sign for the investors.
Return on asset - Measures the efficiency with which the management is utilizing
assets. Since this ratio varies across industries, one needs to compare it against
the company’s previous values or ratio of a similar company. This ratio has
increased over time.