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FSA – Section 3
PGDM 2017-19
Ishan Bhargava – 17F813
Swati Choraria – 17F845
Vijay Jhawar – 17F849
Table of Contents

BLUE STAR ............................................................................................... Error! Bookmark not defined.

A. Introduction ................................................................................................................................ 3
Economic Analysis ............................................................................ Error! Bookmark not defined.
Industrial Analysis ............................................................................ Error! Bookmark not defined.
Company Analysis ............................................................................ Error! Bookmark not defined.
B. Way Ahead ................................................................................... Error! Bookmark not defined.
C. Analysis of Corporate Governance .............................................. Error! Bookmark not defined.
D. Forecasted Financial Statements ................................................. Error! Bookmark not defined.
E. Key Assumptions for forecasts .................................................................................................. 10
F. Calculation and interpretation of Altman Z scores and KZ Index, Ratio Analysis ..................... 10
G. Synthetic Credit rating for the company...................................... Error! Bookmark not defined.
A. Introduction


 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


 Interest Rates


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

Industry Analysis: CONSUMER DURABLES


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.

Growing Demand Opportunities Increasing Policy Support

•Increase in demand •Huge untapped rural Investments •100% FDI allowed in
growth with rise in market. Currently •Sector has attracted electronics hardware
disposable income penetration level is significant manufacturing sector
•Easy access to credit only 2% for investments over the under automatic
with increased refrigerators and years route
demand growth 0.5% for washing •US $1 billion worth •National Electronic
•rise in working age machines of investments in policy to boost
population to production and R&D investment in this
stimulate demand in next few years sector
•Increasing •Modified special
electrification of incentive package
rural areas and wide scheme has been
usability of online introduced for
sales growth of consumer
durable industry

TV, Audio & Video Systems

CD, DVD Players & PCs

Consumer Electronics

Laptops and Digital Cameras

Electronic accessories &


ACs & Regrigerators

Washing Machines & Sewing


Consumer appliances

Electric Fans & Cleaning


Microwave Ovens & others


Threat of substitutes:

- - Technological
- - Buyers have huge
propensity to substitute

Bargaining Power of
suppliers: High
Threat of New Entrants:
- - Product
Competitive Rivalry differentiation is
- Highly capital Continuous Innovation very low
Homogenity in product
- Major players have - - By charging the
developed brand equity Low switching costs
input, firms
- Brand loyalty is cannot drastically
differentiate on

Bargaining power of
buyers: High

- - Internet usage
for information
- - Switching cost is
very less
Company Analysis: BLUE STAR


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.


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:


This business segment covers the design, manufacturing, installation, commissioning and
maintenance of central air conditioning plants, packaged/ducted systems and variable
refrigerant flow (VRF) systems, as well as contracting services in electrification, plumbing and
fire-fighting. After-sales services such as revamp, retrofit and upgrades also form part of this
Blue Star offers a wide variety of stylish, contemporary and energy-efficient room air
conditioners for both residential as well as commercial applications. It also manufactures and
markets a comprehensive range of commercial refrigeration products and cold chain
equipment. These formed part of Cooling Products Segment, which has been renamed as
Unitary Products Segment due to the proposed extension of the product range to include
water purifiers and air purifiers.
For over six decades, Blue Star has been the exclusive distributor in India for many
internationally renowned manufacturers of professional electronic equipment and services,
as well as industrial products and systems. This business is managed by the Company’s wholly
owned subsidiary, Blue Star Engineering & Electronics.
The segment wise revenue and results break-up is given as follows:

B. Analysis of Corporate Governance

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

C. Forecasted Financial Statements

Please refer the excel sheets for Blue Star

D. Key Assumptions for forecasts

 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.


 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.

 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
 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:

2) The KZ-Index (Kaplan-Zingales Index) is a relative measurement of reliance on external

financing. Companies with a higher KZ-Index scores are more likely to experience
difficulties when financial conditions tighten since they may have difficulty financing their
ongoing operations.
The scores have been on the lower side since 2011 and hence will survive when financial
conditions tighten.
3) Du Pont analysis

This is a measure of performance of company. It shows company’s ability to increase its

ROE. This shows the breakup of ROE into 3 factors using which the company can increase its
return for investors. According to DuPont analysis, ROE is affected by three things:
operating efficiency- which is measured by profit margin; asset use efficiency- which is
measured by total asset turnover; and financial leverage- which is measured by the equity

2015 2016 2017

Du Pont Value 0.096590823 0.020491074 0.069364049
Operating efficiency (Net 0.154101 0.024972 0.071771895
profit margin)
Asset use efficiency 0.413132 0.446604 0.558785638
Financial leverage 1.517195 1.837328 1.72955663
ROE 0.096591 0.020491 0.069364049

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

 Current Ratio - Determines a company’s ability to pay back short-term liabilities.

A high ratio means the company is not utilizing enough current liabilities. This
shows how efficiently a company is able to meet its current liabilities with its
current assets. Over the period 2015-2017 Blue Star’s current ratio has been
increasing which means it is not utilizing its liabilities to pay-off its current assets.
 Quick Ratio – This indicates the company’s ability to pay off current liabilities at
short notice. Inventories are not considered as they take time to liquidate. Ratio
above 0.5 times is considered good. Blue Star’s quick ratio is currently above 0.5,
which can be cause of concern for the company.

 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
 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.