Investments

FIN -651 BHAVAN-MARSHALL INSTITUTE OF MANAGEMENT , BANGALORE

BMIM

STOCK VALUATION
Company Stock Valuation, Investments Module by Dr. Mukesh Chaudhary
TEAM: ANAND,ANUSHA,SUJITHA 7/1/2011

Investments

FIN -651

BMIM

Introduction:
Our report tries to give a brief view about the evaluation of the stock price of the three companies in three different sectors. The three companies and their sectors are JSW STEELmining, mining and metal, BHEL (Bharat Electronics limited- Capital goods), HUL (Hindustan Unilever limited)-FMCG. The information given by our report will help the investors in their investments in the stocks. The main goal of the project is to help the investor make an informed choice to invest in.

Overview of the sectors:

Mining and metal: India boasts significant mineral resources, producing 86 minerals. Coal constitutes over 80 percent of all mining activities with a turnover projected to be $30 billion by 2012. The Indian government-owned mines contribute over 80 percent of the total value of mineral production. Nevertheless, there is a strong trend in favor of private-sector led mining. The mining sector has shown healthy growth over the past few years. The growth rate will likely continue, given the projected shortfall in coal supply and the current emphasis to increase coal production. Estimated investment of $21 billion in opencast mining and $5 billion in underground mining will be required to attain the target production level by 2025. Although Indian firms manufacture mining equipment, U.S. firms will be competitive for providing highend, higher size equipment and advanced technologies. Most of the global technology leaders are present in India as joint venture companies, or have set up their own manufacturing facilities or marketing companies. FMCGs: The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. Availability of key raw materials, cheaper labor costs and presence across the entire value chain gives India a competitive advantage. The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc in India is low indicating the untapped market potential. Growth is also likely to come from consumer 'upgrading' in the matured product categories. With 200 million people expected to shift to processed and packaged food by 2010, India needs around US$ 28 billion of investment in the food-processing industry.

Investments

FIN -651

BMIM

Capital goods: The development of a strong and vibrant engineering and capital goods sector has been at the core of the industrial strategy in India since the planning process was initiated in 1951.The performance of the capital goods sector reveals that its fortunes are inextricably linked with that of the overall Indian industry. High degree of the correlation between the performances of the two sectors is further accentuated by high elasticity of capital goods industry to changes in industry growth. The apparent consumption of the capital goods constitutes a constant share of the total gross domestic investment in the country. The investments in the capital goods sector. Have declined with the decline in the relative profitability of the capital goods sector with respect to the other sectors. RATIOS: HUL RATIOS: Current ratio Debt equity ratio Equity turn over ratio Asset turnover ratio Dividend payback ratio 0.84% 0.20% 29.24times 5.35times 0.64%

Current ratio: This ratio indicates as of 0.84 current assets of HUL available for each rupee of current liability. Higher the ratio, greater the margin of safety for short term creditors & viseversa. Debt equity Ratio: Hindustan Unilever LTD has $0.20 cents of Debt and only $1.00 in Equity to meet this obligation. Equity turnover Ratio: HUL debt equity ratio is pretty good because almost 30 times debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. Asset turnover Ratio: The ability of a company to use its assets to generate sales is 5.35 times. Its ratio considers all assets including fixed assets, like plant and equipment, as well as inventory and accounts receivable. Dividend Payback Ratio: HUL is paying 0.64% dividends to its share holders and the rest amount is invested to company activities and growth.

Investments

FIN -651

BMIM

BHEL RATIOS ANALYSIS: Current ratio Debt equity ratio Asset turn over ratio Dividend payback ratio Equity turn over ratio 1.37% 0.01% 5.15times 0.26% 38.35times

Current Ratio: This ratio indicates as of 1.37 current assets of BHEL available for each rupee of current liability. Higher the ratio greater the margin of safety for the short term creditors and lower the ratio lower the margin of safety for the long term creditors. Debt Equity Ratio: BHEL has $0.01 cents of Debt and $1.00 in equity to meet this obligation. Asset Turn Over Ratio: The ability of BHEL to use its assets to generate sales is 5.15 times. Its ratio considers all assets including fixed assets, like plant and equipment, as well as inventory and accounts receivable. Dividend Payback Ratio: BHEL is paying 0.26% dividends to its share holders and the rest amount is invested to company activities and growth. Equity turn over ratio: BHEL debt equity ratio is pretty good because almost 30 times debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are.

Investments

FIN -651

BMIM

JSW STEEL RATIO ANALYSIS:

Current ratio Debt equity ratio Equity turnover ratio Asset turnover ratio Dividend payback ratio

0.55% 1.26% 45.32times 36.60times 0.58%

Current ratio: This ratio indicates as of 0.55 current assets of JSW available for each rupee of current liability. Higher the ratio , greater the margin of safety for short term creditors and viceversa. Debt equity Ratio: Debt equity ratio of JSW has $1.20 cents of Debt and $1.00 in Equity to meet this obligation. Equity turnover Ratio: JSW debt equity ratio is pretty good because almost 45.32 times debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. Asset turnover Ratio: The ability of a company to use its assets to generate sales is 38.60 times. JSW is performing pretty well. Dividend Payback Ratio: JSW is paying 0.58% dividends to its share holders and the rest amount is invested to company activities and growth.

Investments

FIN -651

BMIM

EVALUATION OF VALUE OF THE STOCK: JSW STEEL: By dividend discount model method To calculate the price of the share, 

Here, k is calculated based on the CAPM model to calculate the returns of that particular stock

Where, Rf = Risk free rate = 8% (Based on 10 years government bond) Rm = Market Return = 18.6% (Based on 10 years Market Index Values) = 1.45 (Based on the Regression between the stock return and the market return values) Expected return: k = Rs= 0.08+ 1.45(0.186-0.08) = 0.2337=23.33% Average growth: The current price of the stock (from the website): 1118.2 Div 2006 8 2007 12.5 2008 14 2009 1 2010 9.5

P5= DIV (1+g)/ (k-g) 1118.2= 9.5(1+g)/(0.2333-g) g = 22.33% Dividend discount model: Value of the stock = div/ (k-g) value = 9.5/ (0.2333-0.2233) Value=950 CONCLUSION: According to the calculations the value of the stock is overpriced in the market because the value of the stock from the calculations we got is 950 which is lower than the current market price 1118.2. So for the investor it will be better if he sells the share of the company.

Investments

FIN -651

BMIM

HUL(Hindustan Unilever Ltd) : By dividend discount model method To calculate the price of the share, 

Here, k is calculated based on the CAPM model to calculate the returns of that particular stock

Where, Rf = Risk free rate = 8% (Based on 10 years government bond) Rm = Market Return = 18.6% (Based on 10 years Market Index Values) = 0.5072 (Based on the Regression between the stock return and the market return values) Expected return: k = Rs= 0.08+ 0.50(0.186-0.08) = 0.133 k=13.33% Average growth: The current price of the stock (from the website): 320.02 Div 2006 5 2007 6 2008 9 2009 7.5 2010 6.5

P5= DIV (1+g)/ (k-g) 320.02= 6.5(1+g)/(0.133-g) g = 11.04% Dividend discount model: Value of the stock = div/ (k-g) Price = 6.5/ (0.1333-0.1104) = 283.842 CONCLUSION: According to the calculations the value of the stock is overpriced in the market because the value of the stock from the calculations we got is 283.842 which is lower than the current market price 320.02. So for the investor it will be better if he sells the share of the company.

Investments

FIN -651

BMIM

BHEL (Bharat Electricals Ltd) : By dividend discount model method To calculate the price of the share, 

Here, k is calculated based on the CAPM model to calculate the returns of that particular stock

Where, Rf = Risk free rate = 8% (Based on 10 years government bond) Rm = Market Return = 18.6% (Based on 10 years Market Index Values) = 1.095 (Based on the Regression between the stock return and the market return values) Expected return: k = Rs= 0.08+ 1.095(0.186-0.08) = 19.60% k=19.60% Average growth: The current price of the stock (from the website): 2306.1 Div 2006 14.5 2007 24.5 2008 15.25 2009 17 2010 23.3

P5= DIV (1+g)/ (k-g) 2306.1= 23.3(1+g)/(0.1960-g) g = 18.40% Dividend discount model: Value of the stock = div/ (k-g) Price = 23.3/ (0.1960-0.1840) Price = Rs. 1941.66 CONCLUSION: According to the calculations the value of the stock is overpriced in the market because the value of the stock from the calculations we got is 1941.66 which is lower than the current market price 2306.1. So for the investor it will be better if he sells the share of the company

Investments

FIN -651

BMIM

ECONOMIC FACTORS: JSW steels: Stock price Jindal steels & power limited was reduced almost by 60% following the sharp decline in steel demand and the subsequent fall in steel prices. JSPL, through its subsidiary Jindal Power Limited (JPL), is aggressively expanding into the power business. The company has entered into MOUs with the governments of Chhattisgarh and Jharkhand for setting up of two power plants of 2520MW and 2640 MW capacity, respectively. Thus the power business will not only drive growth for JSPL in the near future but also provide a cushion from the cyclicity of their steel business. Due to downturn in the global economy and slowdown in credit growth, infrastructure development activities and consumer spending have been adversely affected. The construction and automobile sectors, which are major consumers of steel, have witnessed a significant decline , thus leading to a slowdown in the demand for steel.

BHEL: The economic boom in India particularly in the last one decade has played a significant role in the success of the company. Lot of Industrialization has been brought about, which has always been a catalyst for BHELs growth. BHEL manufactures and supplies major capital equipment and systems like captive power plants, compressors, industrial boilers, gas turbines, pumps, heat exchangers, electrical machines etc. to a number of industries like metallurgical, mining, cement, paper, fertilizers, refineries & petro-chemicals, etc, other than power utilities. The growth of these industries has multiplied the turnover of the company leaps and bounds in the last few years. HUL: HUL reported a substantial growth in net sales and volume and improvement in pricing. HUL growth slow down due to steady loss in market share. Soaring raw materials prices, along with higher advertisement costs, adversely impacted the margins. Although commodity prices have fallen, HUL needs to spend more on advertisements in order to boost volumes and restrict the loss in market share. Price positioning in some categories allows for low price competition.

CONCLUSION: From the analysis above using the Dividend discount model for the evaluation of the stocks for three companies we found out that the stock prices are overvalued in all the three companies. From the point of view of investors it is better to sell all the stocks of the companies as they are overvalued so that the investors can reduce the loss. The effect of economic factors on the companies clearly states that due to downturn in the global economy and slowdown in credit growth, infrastructure development activities and consumer spending have been adversely affected which in turn affects the overall performance of the company in the industry.

Investments

FIN -651

BMIM

Investments

FIN -651

BMIM