Blue Star Ltd Valuation and Intrinsic Value

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Blue Star Ltd: Company Overview

Blue Star is India’s leading air conditioning and commercial refrigeration company. Its integrated business model of a manufacturer, contractor, and after-sales service provider enables it to offer an end-to-end solution to its customers, which has proved to be a significant differentiator in the market place.

The company mostly competes with other major players like Voltas operated by Tata Group and Lloyd operated by Havells in India.

From here, we go ahead with Blue Star Ltd Valuation and calculate the Intrinsic Value of its shares.

Read more here: Blue Star Shares Fundamental Analysis 

Methodology Used

Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows.

DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.

The following step by step procedure is followed.

  1. Determining the Revenue Growth Rates
  2. Forecasting the Financial Statements
  3. Deriving the FCFF and FCFE
  4. Calculating the Terminal Value
  5. Calculating the Discount Rate
  6. Discounting the Cashflows
  7. Arriving at the Intrinsic Value of the Shares
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Step 1: Determining the Revenue Growth Rates

We arrive at the below table by using the past and expected future performance of both the company and the economy.

This along with adjustments to changes in the management expectations, extraordinary events and other macro factors give the revenue growth rates for Blue Star Valuation.

Financial Year Revenue Growth Rate
Year 1 2%
Year 2 -16%
Year 3 27%
Year 4 13%
Year 5 13%
Revenue Growth Rates: Blue Star Ltd

Step 2: Forecasting the Financial Statements

The financial statements are forecasted for a period of 5 years using the annual report data of the company.

The assumptions used for forecasting are tabulated below.

The Excel model is completely editable and can be adjusted for specific changes that may happen over a period of time.

Financial Statements Forecast: Blue Star Ltd
Financial Statements Forecast: Blue Star Ltd

Step 3: Deriving the FCFF and FCFE

Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution after accounting for depreciation expenses, taxes, working capital, and investments.

Read: How to Read the Cash Flow Statement of a Company

FCFF is a measurement of a company’s profitability after all expenses and reinvestments. It is given as follows.

Free cash flow to equity (FCFE) is a measure of how much cash is available to the equity shareholders of a company after all expenses, reinvestment, and debt are paid. FCFE is a measure of equity capital usage.

F/S Items (INR Millions) Mar-20 Mar-21 Mar-22 Mar-23 Mar-24
Free Cash Flow to Firm 3707 2481 3877 4047 4566
Free Cash Flow to Equity 4649 1979 4609 4500 5082
FCFF and FCFE values: Blue Star Ltd

Step 4: Calculating the Terminal Value

Terminal value (TV) is the value of a business or project beyond the forecast period when future cash flows can be estimated.

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It assumes that a business will grow at a set growth rate forever after the forecast period. Terminal value often comprises a large percentage of the total assessed value.

Terminal Value Calculation Units INR Millions
Free Cash Flow to Firm 4565.82
Growth Rate 5.50%
Cost of Capital 14.45%
Terminal Value 53802.25
Terminal Value: Blue Star Ltd

Step 5: Calculating the Discount Rate

DCF analysis helps assess the viability of a project or investment by calculating the present value of expected future cash flows using a discount rate.

Here we use the Weighted average cost of capital (WACC) to discount the cash flow.

The below table from the excel model shows the calculation of WACC for Blue Star Valuation.

WACC Calculation for Blue Star Valuation.

Step 6: Discounting the Cashflows

The WACC and the Cost of Equity for the company calculated in the above step are then used to discount the FCFF, FCFE, and Terminal Value calculated in Steps 3 and 4.

In our case, we’ll only consider the FCFF based Intrinsic price of the shares as it represents the cash flow to all the suppliers of capital and not only to the equity shareholders.

Thus we arrive at the Present value of future FCFF for Blue Star Valuation. (Units are INR Millions)

PV of FCFF and FCFE  for Blue Star Valuation.
PV of FCFF and FCFE for Blue Star Valuation.

Step 7: Arriving at the Intrinsic Value of the Shares

Dividing the PV of the FCFF and Terminal Value (the value of the entire firm) by the number of outstanding shares we get the per-share intrinsic value.

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We can compare this price with the current market price of the stock to get the Discount or Premium to its intrinsic price.

Blue Star Valuation Units
PV in INR Million 39797
No of Shares Outstanding (In Million) 96
Intrinsic Value 414.55
Current Market Price of Share 658.00
Current Discount/Premium 59%
Intrinsic Value of the Shares: Blue Star Valuation

Thus, the intrinsic value of Blue Star Ltd turns out to be Rs.414.55

Comparison: Voltas Ltd. vs Blue Star Ltd

You can download the Excel Model from Here!

References: Investopedia
Our Stock ratings List
You can read more about the company on its website!
Investor Presentation.

(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)

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