My VST Industries Valuation
I valued VST Industries at Rs. 3,200 using 11.42% Cost of Capital and 20% Margin of Safety (Please note that this was year ago)
My personal preference would be 15% Cost of Capital and 20% Margin of Safety. Also, the Risk-free Rate has lowered quite a bit compared to when I did it. So taking into account all this, I would say Rs. 2,200-2,500 is a safe price for me.
The ESOP is a fresh news. If my estimates are right, the dilution might be ~Rs. 100 at the most. Of course, if the ESOP turns out to be more lucrative to employees or if the management plans to issue ESOPs regularly in the future, the dilution will be well north of that.
DCF Vs DDM
I liked the way you structured your post. It shows great understanding about the Value Drivers and how they impact Value.
However in your DDM, you did not include the additional Cash Balance to the final value. Your cashflows are all non-cash items and so, your final PV is also all non-cash. Of course, if you’re assuming that the company will squander all the Cash they have, it makes sense. But short of making that assumption, you should add Cash at the end, which will bring your DDM value to Rs. 2,690.
The ‘Risk’ in Cash
Also, consider this: Cash does not have Business Risk. Unless the management willingly adds some other Risk to it (Ex: Investing in risky Bonds/Equities), it should always be considered at Face Value. Of course, if the management itself is questionable or they’ve had a bad capital allocation history, then you are better off not Valuing the company at all. All the same, it’s not that straight forward.
Prof. Aswath Damodaran talked about it in one of his Apple Valuations:
Cash has “Option Value”
If you want to get really technical about it, Cash has “Option Value”.
Michael Mauboussin Paper on “Real Option Value”: http://www.capatcolumbia.com/Articles/FoFinance/Fof10.pdf
Easier context from Prof. Sanjay Bakshi: The Value of Cash on Vimeo
My personal opinion of Cash Holdings
I personally think it won’t make much of a difference to the final value how you treat Cash, at least based on my experience Valuing Indian companies. Even when you consider companies with a sizeable Cash balance like VST Industries (Or for instance, Goodyear India - which I hold), the impact due to Cash “mismagamement” is not very high. When I value a company, I am not looking to find out ‘exactly how much it is worth’. I am looking to find ‘a low enough price at which my capital will be safer’. In that context, I wouldn’t worry too much about this.