Title - Different Valuation Models on Jet Airways and Spicejet

INTRODUCTION

Valuation is the analytical process of determining the present value of an asset or business. There are
many techniques used to make an assessment. A value to a company examines the management of the
company, the composition of its capital structure, the prospect of future profits and the market value
of its assets, among other measures.

The two main categories of valuation methods

Absolute valuation models plan to find the intrinsic or true value of an investment based solely on
fundamentals. Examining the fundamentals just means that you only focus on things like dividends,
cash flow, and growth rate of a single business. Valuation models that fall into this category include
the Dividend Discounted Model, the Cash Flow Discounted Model, the Residual Income Model, and
the Asset Based Model.

Relative valuation models work by comparing the business in question to other similar businesses.
These methods involve calculating multiples and ratios, such as price to earnings multiple, and
comparing them to multiples of similar firms. The relative valuation model may be a lot easier and
quicker to calculate than the absolute valuation model, which is why many investors and analysts
begin their analysis with this model.

PROBLEM STATEMENT

Jet Airways faced difficulties due to lack of poor management. Experts attribute a lot to
Goyal's management style. They say their decision to have a single self-directed management
team managing all of Jet's operations was a critical mistake. Analysts say it should have had
one team handling the full-service carrier and another handling the budget flyer. Agarwal,
who believes that the company's decisions lack transparency? Goyal was also accused of
making bad investments and failing to resolve the company's deteriorating financial situation
while taking on large loans.

Spicejet Case: Delhi Police have filed an FIR against Spicejet Chairman and CEO Ajay Singh and
seven other airline directors in a cheating case. The FIR was searched at the Grand Kailash Police
Station following court instructions. A private consultant based in South Delhi, Puneet Dewan,
alleged that the company used his services but failed to pay his fees. The FIR came forward after
Dewan approached a Delhi court. Legal proceedings will be initiated after a thorough investigation. A
Spicejet spokesperson, however, denied the allegations as "false, fraudulent, baseless and concocted".
"The complainant has defrauded the company and is now filing frivolous complaints to extract

B003832499 – Mohammed Mudassir Page 1

money. He has deliberately concealed facts before the court. The company/directors will take strict
action against him under the law," the spokesperson said.

SCOPE OF THE STUDY

The scope of this study is to understand the use of different valuation models and various
environmental analyses of Jet airways and Spicejet.

1. Valuation is a quantitative process for determining the fair value of an asset or business.

2. A business can be valued on its own in absolute terms or in relative terms against other businesses
or similar assets.

3. There are several methods and techniques for arriving at a valuation, each of which can produce a
special value.

4. Valuations can be quickly affected by corporate earnings or economic events that force analysts to
restructure their valuation models.

5. Ratio Analysis is used to evaluate issues in an entity such as liquidity, efficiency, profitability.

6. SWOT Analysis primary objective is to help the organisation to identify the strengths, weaknesses,
opportunities, and threats which help in the decision making of the business.

RESEARCH OBJECTIVES and QUESTIONS

1. To analyse the importance of valuations models in investment decision.

2. To analyse different and best suited valuation models for an Airline Industry.

3. To analyse valuation module technique to be used for investment decision making for Jet
Airways and Spicejet.

DATA COLLECTION

Secondary data - Websites, Annual reports, Articles, Projects, Consultancy reports.

DATA ANALYSIS TECHNIQUES

Quantitative analysis through various valuation models, Ratio Analysis, SWOT Analysis.

B003832499 – Mohammed Mudassir Page 2

LITERATURE REVIEW

1. The author of this research is Niklas Karlsson & Elise Lind who successfully completed this
research in the year of 2008. The title of this research was ‘Correct valuation of investments is a
complex issue that is of great interest for companies and investors’. The purpose of the study was to
describe the procedure followed when prioritizing projects within the research department in Lund,
and to develop a model for strategic and financial valuation of research projects. The methodology
was presented in a impressive manner and it was To achieve the descriptive part of the purpose; to
describe the procedure Gambro uses when prioritizing research projects, an inductive approach was
used. Empiric was collected at the company and conclusions were made up of this information. To
fulfil the explorative purpose; to develop a model for strategic and financial valuation of research
projects, a deductive approach was used at first. Existing theory was studied to gauge its suitability in
reference to the purpose. When developing the model, an abductive approach was used, as theory was
varied with empiric in an iterative process. The deductive hypothesis, that the model reflects the worth
of Gambro’s research portfolio, was then tested by evaluating real research projects within model.
The research department at Gambro is currently not following any systematic process while
prioritizing projects. The resources have been distributed among projects according to discussions
among the scientists working at the research department. The company has recently gone through
structural changes and, due to this, no clearly communicated business- and technology strategy has
been available. This has negatively affected the research work. Gambro has now developed a business
and technology strategy, which hopefully can be used as a support for the research department while
making decisions about resource and project prioritizations. The explorative study resulted in a model
for strategic and financial valuation of research projects. The model is meant to be used as a
systematically process and basis of discussion when making project prioritizations.

2. Chaney Paul K., Lewis Craig M. (1995) in research paper "Earnings management and firm
valuation under Asymmetric information" they developed a valuation model which estimates
income of the high-value firm and assume income-increasing accounting treatments relative to other
firms. They concluded that, firm value is based on the capacity to generate economic earnings; firms
have high value when investors expect high economic earnings

3. Torrez Jimmy (2006) in the research article "Corporate Valuation", they discussed corporate
valuation methods like discounted cash flow models, Capital Asset Pricing Model (CAPM),
Arbitrage Pricing Models (APM), sales accelerator, cash flow models of investment, economic base
performance measures such as Economic Rent and Excess Market Value. Finally they argued
that, more modem methods are required to notice the changes in company's financial
positions, they extended the conclusion by commenting that manager's financial experience is
essential for companies to compete in a world with a constant change. Damodaran (2006) in his

B003832499 – Mohammed Mudassir Page 3

book "Damodaran on Valuation-Security analysis for Investment and Corporate Finance", he
classified business valuation in to three parts, first two parts provide compacted version of
both discounted cash flow and relative valuation models which are most popularly used models
in business valuation. In third part, he focused on loose ends in valuation like liquidity, control,
synergy, transparency, and distress which effect on value of business. According to his
opinion, there are too many valuation models available for business valuation purpose,
choosing the right model is as critical to arrive at a sensible value as knowing how to use
the model. He gave a guidelines could be used to choose the right business valuation model.
Damodaran (2009) in his book "Investment Valuation" he writes on risk less rate and risk
premiums that to be considered in valuation, he also provided guidelines about how to
understand basic financial statement of the firm. He explained about how to estimate a growth
rate of firm to calculate future value of a firm. He guided further to the investors and
businessman about how to value a firm with negative earnings, valuation of private companies,
young companies, valuating future and forward contracts. Howard Qi (2010) in research article
"Valuation Methodologies and Emerging Markets ", he states that, weighted average cost of capital
(WACC), adjusted present value (APV), cash flow to equity (CFTE) and capital cash flow (CCF) are
widely used business valuation methods in industry, however there is still on-going debate with
regard to their equivalency and the convenience of their applications.

B003832499 – Mohammed Mudassir Page 4