project report_ fm

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FINANCIAL MANAGEMENTI

PROJECT REPORT

ON

EVALUATION OF FIRMSRANBAXY AND CIPLAUSING

DIFFERENT FINANCIAL METHODS

SUBMITTED BY:STUDY GROUP NUMBER 103Nikhil Goyal Seat no: 4

Rupsha Majumder Seat No: 5

Nikita Berry Seat No: 27

Nikita Agrawal Seat No: 29

Arti Kapri Seat No: 73


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Dinesh Boppana Seat No: 84

TABLE OF CONTENTS

ABBREVIATIONS ................................................................................................................................................... 4

OBJECTIVE .............................................................................................................................................................. 5

INTRODUCTION ..................................................................................................................................................... 6

1) RISK AND RETURN ............................................................................................................................................ 6

2) RELATIVEVALUATION ................................................................................................................................. 8

3) CAPITALASSETPRICINGMODEL(CAPM) .............................................................................................. 13

4) DIVIDENDDISCOUNTMODEL ................................................................................................................... 15

5) WEIGHTEDAVERAGECOSTOFCAPITAL ............................................................................................... 16

RANBAXY .............................................................................................................................................................. 19

1) RISK AND RETURN .......................................................................................................................................... 22

2) RELATIVEVALUATION ............................................................................................................................... 28




CIPLA ...................................................................................................................................................................... 35

1) RISK AND RETURN .......................................................................................................................................... 37


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2) RELATIVEVALUATION ............................................................................................................................... 43




CONCLUSION ........................................................................................................................................................ 47


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ABBREVIATIONS

SD Standard Deviation

(Beta) Risk of the security

CAPM Capital Asset Pricing Model

Rf Risk Free Return

Rm Effective Rate per annum

Ke Cost of Equity

DPS Dividend Per Share

BSE Bombay Stock Exchange

EPS Earnings Per Share

PAT Profit After Tax

BV Book Value

EV Enterprise Value

EBITDA Earnings Before Interest Taxes Depreciation & Amortization

EBIT Earnings Before Interest and Taxes

SPS Sales Per Share

BVPS Book Value Per Share

CF Cash Flow

PBT Profit Before Tax


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Kd Cost of Debt

OBJECTIVE

The main objective of the project is to compare two companies from the same industry and analyze various aspects

based on Risk and Return and Share valuation using Capital Asset Pricing Model (CAPM), Relative Valuation,

Dividend Discount Model and Weighted Average Cost of Capital method.

For our analysis, we have taken two companies from the Pharmaceutical industry. The companies are:

RANBAXY CIPLA

The various calculations have been done by comparing the performance of each of these companies with respect to

the market (BSE). For our calculations, we have taken values of BSE Sensex and the companys share values of 10

years.

The values of all share prices have been taken fromhttp://www.bseindia.com/
http://www.bseindia.com/http://www.bseindia.com/http://www.bseindia.com/http://www.bseindia.com/


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INTRODUCTION

1)RISKANDRETURNBeta is the systematic risk; it measures the volatility of the security.

We calculate risk and return as follows:

1. Find out the percentage return in the price of both market as well as the respective company% return = (share price of current yearshare price of previous year)/ share price of previous year * (100)

The mean % return is calculated next.

2. We find out the deviation from the mean value of market as well as company that is :For market: X-X

For company: Y-Y

Where, X: % return in the price of market values

X: mean value of the % return in the price of market valuesY: % return in the price of company values

Y: mean value of the % return in the price of company values

3. Calculate the squared deviation of market as well as the company:For market: (X-X) ^ 2

For company: (Y-Y) ^ 2


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4. We calculate the product of deviation from mean for market and for the company that is (X-X)(Y-Y)

5. Then we calculate the market variance by the following formula:Market Variance= (X-X) ^2/n-1

Where, n is the number of samples

6. We calculate the covariance of the company by the following formula:Cov(X, Y) = (X-X) (Y-Y) / n-1

7. Then we calculate the systematic risk () by the following formula:= Cov(X, Y) / market variance

When,

= 1; Script is at par with market

< 1; Script is less than market (not performing well)

> 1; Script is greater than market (very effective)


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Returns:

Total % returns = Dividend Yield + Capital gain

Dividend Yield = Dividend per share during the year *100

Price of each share at the beginning of the year

Capital Gain = (Price at the end of the year-Price at the beginning of the year) *100

Price of each share at the beginning of the year

2)RELATIVEVALUATIONAccording to the relative valuation method, for valuing shares, we need to compare with comparables, i.e. we

compare with other companies of the same industry.

For carrying out the valuation, we calculate the various earnings multiples and value multiples and then use them

as a basis for our comparison.

STEP 1: Calculating Earnings Multiples

The earnings multiples that are calculated are:


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1) P/E Ratio : Price / Earnings RatioIt means to earn Re1 profit, how much need to be paid.

Lower the PE ratio, better it is.

PE ratio = Share price per share

EPS

EPS (Earnings per share) = Net Income

Total no. of shares

2) P/S Ratio : Price / Sales RatioPS Ratio = Share price per share

Sales per share (SPS)

Sales per share = Sales

Total no. of shares

3) P/BV Ratio : Price / Book Value RatioP/BV = Share price per share

Book Value per share (BVPS)

Book Value Per Share = Book Value of equity


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No. of shares

Book Value of equity = Total AssetsTotal liabilities (outsiders)

4)P/CF Ratio : Price / Cash Flow Ratio

P/CF = Share price per share

EPS + non-cash charges

Non-cash charges = PAT + Depreciation

Non-cash charges per share = Non-cash charges

No. of shares

STEP 2: Calculating Value Multiples

Before calculating the value multiples, the EV (Enterprise Value) needs to be calculated.

EV = Market Capitalization + Long term debtsCash

Market Capitalization = No. of shares * Share price per share

The following Value multiples are to be calculated:

1) EV/Sales Ratio :EV/Sales = EV

Sales


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2) EV/EBITDA Ratio :EV/EBITDA = EV

EBITDA

3) EV/EBIT Ratio :EV/EBIT = EV

EBIT

STEP 3: Calculating Price per share and Market value of equity using the Earnings Multiples

For this we use:

Price = P/E * EPS

Price = P/S * SPS

Price = P/BV * BVPS

Price = P/CF * CF

Average Price per share is calculated next by taking the average of the prices obtained by the earnings multiples.

Market value of Equity = Average Price per share * No. of shares


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STEP 4: Calculating Price per share and Market value of equity using the Earnings Multiples

For this we use:

EV = EV/Sales * Sales

EV = EV/DBIDTA * EBIDTA

EV = EV/EBIT * EBIT

Market value of Equity = EV + long term debt + cash

Price per share = Average Market Value of Equity / No. of shares

STEP 5: Comparing the calculated (estimated) Price per share and Market value of equity with the market

price

It helps us to take investment decisions.

If Estimated Value > Market Price, Buy

If Estimated Value < Market Price, Sell


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3)CAPITALASSETPRICINGMODEL(CAPM)A model that describes the relationship between risk and expected return and that is used in the pricing of risky

securities.

The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and

risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors

for placing money in any investment over a period of time. The other half of the formula represents risk and

calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking

a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market

premium (Rm-Rf).

Rm is calculated as:

Rm = (1 + monthly average return) ^12 - 1

Using these values, The Cost of Equity is calculated.


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Security Market Line:

This graph shows that when

= 1, the expected return = Rm

= 0, the expected return = Rf


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4)DIVIDENDDISCOUNTMODELShare price can be calculated using the Dividend Discount Model in 3 ways:

1) Constant Dividend No Growth Rate:This model is used when there is no growth in the DPS.

According to this model, price of the equity share is given by,

P = D

Ke

Where,

P = Price of the share

D = Dividend per share

Ke = Cost of equity

2) Constant Dividend Fixed Growth Rate:When the growth rate in DPS remains constant over the years, this method is used to calculate the share

price.

By this method,

D1 = D (1+g)P = D

(Ke-g)

Where,

g = growth rate


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3) Different Dividend Growth Rate:When the growth in DPS varies over the years, we use CAGR (Compound Annual Growth Rate) to calculate

the growth rate and then find the share price.

CAGR = (DPS of last year / DPS of first year) 1/n1

D1 = D (1+g)

P = D

(Ke-g)

Where,

g = calculated CAGR

5)WEIGHTEDAVERAGECOSTOFCAPITALA calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capitalsources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACCcalculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, asan increase in WACC notes a decrease in valuation and a higher risk.

The WACC equation is the cost of each capital component multiplied by its proportional weight and thensumming:


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Where,Re = cost of equityRd = cost of debtE = market value of the firm's equity

D = market value of the firm's debtV = E + DE/V = percentage of financing that is equityD/V = percentage of financing that is debtTc = corporate tax rate

Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, usingthe formula:

NPV = Present Value (PV) of the Cash Flows discounted at WACC.

A companys assets are financed by either debt or equity. WACC is the average of the costs of these sourcesof financing, each of which is weighted by its respective use in the given situation. By taking a weightedaverage, we can see how much interest the company has to pay for every dollar it finances.

A firm's WACC is the overall required return on the firm as a whole and, as such, it is often used internallyby company directors to determine the economic feasibility of expansionary opportunities and mergers. It is

the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.


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RANBAXY

Ranbaxy Laboratories Ltd. (NSE: EQRANBAXY) is the largest generic pharmaceutical company in India by

sales and a top 10 generic company globally.

Company Overview

Ranbaxy Laboratories Limited operates as an integrated international pharmaceuticals organization with businesses

encompassing the value chain in the marketing, production and distribution of pharmaceuticals products. It

operates under two segments: Pharmaceuticals and other business. Pharmaceuticals segment comprises the

manufacture and trading of Formulations, Active Pharmaceuticals Ingredients (API) and Intermediate, Generics,

Drug discovery and Consumer Health Care products. Other business comprises rendering of financial services.

The Company manufactures products for anti-infective, cardiovascular, musculoskeletal, gastrointestinal,

dermatological, and central nervous system.

Ranbaxy Laboratories Limited encompasses the entire pharmaceutical value chain from manufacturing to

marketing generic pharmaceuticals, value added generic pharmaceuticals, branded generics, Active

Pharmaceuticals Ingredients (API) and intermediates. As a research driven company, over 6% of its revenues are

invested in R&D.

Among the pharmaceutical companies in India, Ranbaxy has the largest R&D budget (over U.S.$100 million).

The company has manufacturing operations in eight countries with a ground presence in 49 countries, and its

products available in over 125 countries. It has been aggressively entering into joint ventures and strategically

acquiring companies in the past few years. Besides concluding its acquisition of Be-Tabs in South Africa, which

makes Ranbaxy the 5th largest generic pharmaceutical company in South Africa, the Company acquired 13


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Dermatalogy products from Bristol-Myers Squibb in the U.S in 2007. Ranbaxy acquired RPG Aventis which has

since been renamed Ranbaxy Pharmacie Generiques SAS. It also has subsidiaries in Spain, Netherlands, Russia

and Australia.

Business and Financial Metrics

Second Quarter 2010 Results (ended June 30, 2010): Ranbaxy reported sales for the second quarter of $458 million

(Rs 21,029 million), a growth of 22% over the second quarter of 2009. The Earnings before interest taxes

depreciation & amortization (EBITDA), was $90 million (Rs. 4,168 million), a margin of 20%. Profit after tax was

$72 million (Rs. 3,320 Mn), a margin of 16%.

Business Segments

Anti-Infectives

This segment launched Valacyclovir Hydrochloride in the United States. The product was also launched in United

Kingdom and France.

Cardiovascular

This segment introduced the drug Simvastatin. The Company launched Olvance (Olmesartan Medoxomil) and its

fixed dose combination with Amlodipine (Ol-Vamlo), in India. Further expanding its portfolio in Canada, Ranbaxy

launched two products, Ran-Simvastatin (Simvastatin) and Ran-Amlodipine (Amlodipine).

Musculoskeletal

In the Musculoskeletal segment, Ketorolac was the primary contributor to sales. In the United States, Ranbaxy

entered into an agreement with Validus Pharmaceuticals to market and distribute an Authorized Generic version of

Rocaltrol (Calcitriol). Ranbaxy's flagship brand in this segment is Volini.


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Central Nervous

The key products in Central Nervous System segment are Gabapentin and Sertraline. The two other products

include Oxcarbazepine Suspension and Sumatriptan tablets.

Dermatological

The Company received Dermatological franchises through the acquisition of brands and marketing rights from

Ochoa Laboratories in India for their range of Dermatological products.

Competition

The pharmaceutical industry is characterized by rapid advances in scientific knowledge. The industry is therefore

led by large manufacturers and marketers of drugs investing heavily in research & development, having clinicaltesting, marketing and distribution capabilities. Some of Ranbaxy's main competitors are:

Sun Pharmaceuticals Industries is No. 1 in India in specialty therapy areas like psychiatry, neurology,

cardiology, gastroenterology, diabetology and respiratory. It has brands in 30 markets worldwide and also has a

generic presence in the U.S. with Caraco Pharm Labs, Sun Pharmaceutical Industries Inc (subsidiary).

GlaxoSmithKline is one of the oldest pharma companies in India and with a turnover of Rs. 1500 crore is one of

the market leaders in India with a share of 6.2%. Its main portfolios consist of anti- infectives, dermatologicals and

pain management drugs.

Dr. Reddy's Laboratories is a global pharmaceutical company with its headquarters in India and a presence in

more than 100 countries.In India it the largest drug maker by sales.


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1)RISKANDRETURNBSE (Market) RANBAXY

Month BSE

% Returns

(X)

Deviation

from mean

(X-X')

Square

Deviation

(X-X')^2 RANBAXY

% Returns

(R)

Deviation

from mean (R-

R')

Square

Deviation

(R-R')^2 (X-X')(R-R')

Apr-01 3519.16 500.90

May-01 3631.91 0.0320 0.0166 0.0003 492.45 -0.0169 -0.0292 0.00085 -0.0004844

Jun-01 3456.78 -0.0482 -0.0637 0.0041 490.00 -0.0050 -0.0173 0.00030 0.0011026

Jul-01 3329.28 -0.0369 -0.0523 0.0027 475.00 -0.0306 -0.0430 0.00184 0.0022481

Aug-01 3244.95 -0.0253 -0.0408 0.0017 481.20 0.0131 0.0007 0.00000 -0.0000291

Sep-01 2811.6 -0.1335 -0.1490 0.0222 531.60 0.1047 0.0924 0.00854 -0.0137675Oct-01 2989.35 0.0632 0.0478 0.0023 600.35 0.1293 0.1170 0.01369 0.0055878

Nov-01 3287.56 0.0998 0.0843 0.0071 650.45 0.0835 0.0711 0.00506 0.0059948

Dec-01 3262.33 -0.0077 -0.0231 0.0005 710.45 0.0922 0.0799 0.00638 -0.0018482

Jan-02 3311.03 0.0149 -0.0005 0.0000 752.35 0.0590 0.0466 0.00217 -0.0000246

Feb-02 3562.31 0.0759 0.0604 0.0037 690.35 -0.0824 -0.0947 0.00898 -0.0057262

Mar-02 3469.35 -0.0261 -0.0416 0.0017 721.80 0.0456 0.0332 0.00110 -0.0013802

Apr-02 3338.16 -0.0378 -0.0533 0.0028 819.45 0.1353 0.1229 0.01512 -0.0065494

May-02 3125.73 -0.0636 -0.0791 0.0063 878.30 0.0718 0.0595 0.00354 -0.0047041

Jun-02 3244.7 0.0381 0.0226 0.0005 850.10 -0.0321 -0.0444 0.00198 -0.0010048

Jul-02 2987.65 -0.0792 -0.0947 0.0090 771.05 -0.0930 -0.1053 0.01109 0.0099723

Aug-02 3181.23 0.0648 0.0493 0.0024 882.20 0.1442 0.1318 0.01737 0.0065033

Sep-02 2991.36 -0.0597 -0.0751 0.0056 850.70 -0.0357 -0.0480 0.00231 0.0036102

Oct-02 2949.32 -0.0141 -0.0295 0.0009 900.70 0.0588 0.0464 0.00216 -0.0013703

Nov-02 3228.82 0.0948 0.0793 0.0063 916.30 0.0173 0.0050 0.00002 0.0003949

Dec-02 3377.28 0.0460 0.0305 0.0009 521.90 -0.4304 -0.4428 0.19604 -0.0135148

Jan-03 3250.38 -0.0376 -0.0530 0.0028 536.95 0.0288 0.0165 0.00027 -0.0008748

Feb-03 3283.66 0.0102 -0.0052 0.0000 593.25 0.1049 0.0925 0.00856 -0.0004827


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Mar-03 3048.72 -0.0715 -0.0870 0.0076 650.15 0.0959 0.0836 0.00698 -0.0072711

Apr-03 2959.79 -0.0292 -0.0446 0.0020 613.90 -0.0558 -0.0681 0.00464 0.0030389

May-03 3180.75 0.0747 0.0592 0.0035 624.40 0.0171 0.0048 0.00002 0.0002820

Jun-03 3607.13 0.1341 0.1186 0.0141 675.00 0.0810 0.0687 0.00472 0.0081471

Jul-03 3792.61 0.0514 0.0360 0.0013 680.15 0.0076 -0.0047 0.00002 -0.0001694Aug-03 4244.73 0.1192 0.1038 0.0108 784.85 0.1539 0.1416 0.02005 0.0146913

Sep-03 4453.24 0.0491 0.0337 0.0011 810.80 0.0331 0.0207 0.00043 0.0006977

Oct-03 4906.87 0.1019 0.0864 0.0075 1001.20 0.2348 0.2225 0.04950 0.0192251

Nov-03 5044.82 0.0281 0.0127 0.0002 964.35 -0.0368 -0.0491 0.00242 -0.0006221

Dec-03 5838.96 0.1574 0.1420 0.0202 983.15 0.0195 0.0072 0.00005 0.0010157

Jan-04 5695.67 -0.0245 -0.0400 0.0016 1022.10 0.0396 0.0273 0.00074 -0.0010910

Feb-04 5667.51 -0.0049 -0.0204 0.0004 1098.20 0.0745 0.0621 0.00386 -0.0012671

Mar-04 5590.6 -0.0136 -0.0290 0.0008 993.85 -0.0950 -0.1074 0.01153 0.0031163

Apr-04 5655.09 0.0115 -0.0039 0.0000 940.70 -0.0535 -0.0658 0.00433 0.0002581

May-04 4759.62 -0.1583 -0.1738 0.0302 941.70 0.0011 -0.0113 0.00013 0.0019600

Jun-04 4795.46 0.0075 -0.0079 0.0001 1062.55 0.1283 0.1160 0.01345 -0.0009194

Jul-04 5170.32 0.0782 0.0627 0.0039 988.35 -0.0698 -0.0822 0.00675 -0.0051533

Aug-04 5192.08 0.0042 -0.0112 0.0001 909.45 -0.0798 -0.0922 0.00850 0.0010367

Sep-04 5583.61 0.0754 0.0600 0.0036 941.20 0.0349 0.0226 0.00051 0.0013532

Oct-04 5672.27 0.0159 0.0004 0.0000 958.05 0.0179 0.0056 0.00003 0.0000024

Nov-04 6234.29 0.0991 0.0836 0.0070 1090.65 0.1384 0.1261 0.01589 0.0105424

Dec-04 6602.69 0.0591 0.0436 0.0019 1098.55 0.0072 -0.0051 0.00003 -0.0002224

Jan-05 6555.94 -0.0071 -0.0225 0.0005 1124.30 0.0234 0.0111 0.00012 -0.0002501

Feb-05 6713.86 0.0241 0.0086 0.0001 1251.40 0.1130 0.1007 0.01014 0.0008693

Mar-05 6492.82 -0.0329 -0.0484 0.0023 1084.95 -0.1330 -0.1454 0.02113 0.0070319

Apr-05 6154.44 -0.0521 -0.0676 0.0046 1019.80 -0.0600 -0.0724 0.00524 0.0048915

May-05 6715.11 0.0911 0.0756 0.0057 1003.85 -0.0156 -0.0280 0.00078 -0.0021166

Jun-05 7193.85 0.0713 0.0558 0.0031 912.85 -0.0907 -0.1030 0.01061 -0.0057507

Jul-05 7635.42 0.0614 0.0459 0.0021 1101.00 0.2061 0.1938 0.03755 0.0088991

Aug-05 7805.43 0.0223 0.0068 0.0000 1057.65 -0.0394 -0.0517 0.00267 -0.0003522

Sep-05 8634.48 0.1062 0.0908 0.0082 470.60 -0.5551 -0.5674 0.32193 -0.0514956


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Oct-05 7892.32 -0.0860 -0.1014 0.0103 525.30 0.1162 0.1039 0.01079 -0.0105358

Nov-05 8788.81 0.1136 0.0981 0.0096 491.25 -0.0648 -0.0772 0.00595 -0.0075721

Dec-05 9397.93 0.0693 0.0539 0.0029 350.85 -0.2858 -0.2981 0.08889 -0.0160550

Jan-06 9919.89 0.0555 0.0401 0.0016 385.15 0.0978 0.0854 0.00730 0.0034241

Feb-06 10370.24 0.0454 0.0299 0.0009 362.35 -0.0592 -0.0715 0.00512 -0.0021420Mar-06 11279.96 0.0877 0.0723 0.0052 399.10 0.1014 0.0891 0.00794 0.0064377

Apr-06 12042.56 0.0676 0.0522 0.0027 429.40 0.0759 0.0636 0.00404 0.0033158

May-06 10398.61 -0.1365 -0.1520 0.0231 431.60 0.0051 -0.0072 0.00005 0.0010967

Jun-06 10609.25 0.0203 0.0048 0.0000 472.55 0.0949 0.0825 0.00681 0.0003962

Jul-06 10743.88 0.0127 -0.0028 0.0000 411.45 -0.1293 -0.1416 0.02006 0.0003918

Aug-06 11699.05 0.0889 0.0734 0.0054 356.40 -0.1338 -0.1461 0.02136 -0.0107333

Sep-06 12454.42 0.0646 0.0491 0.0024 373.85 0.0490 0.0366 0.00134 0.0017985

Oct-06 12961.9 0.0407 0.0253 0.0006 406.80 0.0881 0.0758 0.00575 0.0019170

Nov-06 13696.31 0.0567 0.0412 0.0017 439.85 0.0812 0.0689 0.00475 0.0028390

Dec-06 13786.91 0.0066 -0.0088 0.0001 399.70 -0.0913 -0.1036 0.01074 0.0009161

Jan-07 14090.92 0.0221 0.0066 0.0000 372.30 -0.0686 -0.0809 0.00654 -0.0005334

Feb-07 12938.09 -0.0818 -0.0973 0.0095 391.85 0.0525 0.0402 0.00161 -0.0039074

Mar-07 13072.1 0.0104 -0.0051 0.0000 408.60 0.0427 0.0304 0.00092 -0.0001550

Apr-07 13872.37 0.0612 0.0458 0.0021 337.60 -0.1738 -0.1861 0.03463 -0.0085168

May-07 14544.46 0.0484 0.0330 0.0011 352.60 0.0444 0.0321 0.00103 0.0010587

Jun-07 14650.51 0.0073 -0.0082 0.0001 371.35 0.0532 0.0408 0.00167 -0.0003334

Jul-07 15550.99 0.0615 0.0460 0.0021 387.70 0.0440 0.0317 0.00100 0.0014579

Aug-07 15318.6 -0.0149 -0.0304 0.0009 354.95 -0.0845 -0.0968 0.00937 0.0029431

Sep-07 17291.1 0.1288 0.1133 0.0128 389.90 0.0985 0.0861 0.00742 0.0097587

Oct-07 19837.99 0.1473 0.1318 0.0174 391.30 0.0036 -0.0087 0.00008 -0.0011535

Nov-07 19363.19 -0.0239 -0.0394 0.0016 434.40 0.1101 0.0978 0.00957 -0.0038525

Dec-07 20286.99 0.0477 0.0323 0.0010 427.05 -0.0169 -0.0293 0.00086 -0.0009437

Jan-08 17648.71 -0.1300 -0.1455 0.0212 387.15 -0.0934 -0.1058 0.01119 0.0153902

Feb-08 17578.72 -0.0040 -0.0194 0.0004 425.95 0.1002 0.0879 0.00772 -0.0017068

Mar-08 15644.44 -0.1100 -0.1255 0.0157 351.20 -0.1755 -0.1878 0.03528 0.0235711

Apr-08 17287.31 0.1050 0.0896 0.0080 445.75 0.2692 0.2569 0.06599 0.0230054


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May-08 16415.57 -0.0504 -0.0659 0.0043 438.75 -0.0157 -0.0280 0.00079 0.0018476

Jun-08 13461.6 -0.1799 -0.1954 0.0382 480.05 0.0941 0.0818 0.00669 -0.0159823

Jul-08 14355.75 0.0664 0.0510 0.0026 528.65 0.1012 0.0889 0.00790 0.0045309

Aug-08 14564.53 0.0145 -0.0009 0.0000 523.05 -0.0106 -0.0229 0.00053 0.0000209

Sep-08 12860.43 -0.1170 -0.1325 0.0175 499.10 -0.0458 -0.0581 0.00338 0.0076998Oct-08 9788.06 -0.2389 -0.2544 0.0647 518.50 0.0389 0.0265 0.00070 -0.0067480

Nov-08 9092.72 -0.0710 -0.0865 0.0075 247.75 -0.5222 -0.5345 0.28571 0.0462336

Dec-08 9647.31 0.0610 0.0455 0.0021 169.45 -0.3160 -0.3284 0.10784 -0.0149536

Jan-09 9424.24 -0.0231 -0.0386 0.0015 208.80 0.2322 0.2199 0.04835 -0.0084827

Feb-09 8891.61 -0.0565 -0.0720 0.0052 252.40 0.2088 0.1965 0.03860 -0.0141407

Mar-09 9708.5 0.0919 0.0764 0.0058 215.70 -0.1454 -0.1577 0.02488 -0.0120542

Apr-09 11403.25 0.1746 0.1591 0.0253 161.80 -0.2499 -0.2622 0.06876 -0.0417219

May-09 14625.25 0.2826 0.2671 0.0713 165.60 0.0235 0.0111 0.00012 0.0029769

Jun-09 14493.84 -0.0090 -0.0244 0.0006 165.95 0.0021 -0.0102 0.00010 0.0002500

Jul-09 15670.31 0.0812 0.0657 0.0043 278.80 0.6800 0.6677 0.44580 0.0438764

Aug-09 15666.64 -0.0002 -0.0157 0.0002 245.05 -0.1211 -0.1334 0.01779 0.0020930

Sep-09 17126.84 0.0932 0.0777 0.0060 280.10 0.1430 0.1307 0.01708 0.0101611

Oct-09 15896.28 -0.0718 -0.0873 0.0076 327.60 0.1696 0.1572 0.02473 -0.0137281

Nov-09 16926.22 0.0648 0.0493 0.0024 403.05 0.2303 0.2180 0.04751 0.0107536

Dec-09 17464.81 0.0318 0.0164 0.0003 390.50 -0.0311 -0.0435 0.00189 -0.0007115

Jan-10 16357.96 -0.0634 -0.0788 0.0062 455.45 0.1663 0.1540 0.02371 -0.0121389

Feb-10 16429.55 0.0044 -0.0111 0.0001 517.45 0.1361 0.1238 0.01532 -0.0013715

Mar-10 17527.77 0.0668 0.0514 0.0026 453.15 -0.1243 -0.1366 0.01866 -0.0070198

Apr-10 17558.71 0.0018 -0.0137 0.0002 467.05 0.0307 0.0183 0.00034 -0.0002510

May-10 16944.63 -0.0350 -0.0504 0.0025 474.90 0.0168 0.0045 0.00002 -0.0002253

Jun-10 17700.9 0.0446 0.0292 0.0009 443.10 -0.0670 -0.0793 0.00629 -0.0023137

Jul-10 17868.29 0.0095 -0.0060 0.0000 429.85 -0.0299 -0.0422 0.00178 0.0002534

Aug-10 17971.12 0.0058 -0.0097 0.0001 460.60 0.0715 0.0592 0.00350 -0.0005743

Sep-10 20069.12 0.1167 0.1013 0.0103 449.30 -0.0245 -0.0369 0.00136 -0.0037348

Oct-10 20032.34 -0.0018 -0.0173 0.0003 490.25 0.0911 0.0788 0.00621 -0.0013624

Nov-10 19521.25 -0.0255 -0.0410 0.0017 557.15 0.1365 0.1241 0.01541 -0.0050851


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Dec-10 20509.09 0.0506 0.0351 0.0012 579.75 0.0406 0.0282 0.00080 0.0009920

Jan-11 18327.76 -0.1064 -0.1218 0.0148 571.45 -0.0143 -0.0267 0.00071 0.0032472

Feb-11 17823.4 -0.0275 -0.0430 0.0018 598.65 0.0476 0.0353 0.00124 -0.0015152

Mar-11 19445.22 0.0910 0.0755 0.0057 545.40 -0.0890 -0.1013 0.01026 -0.0076513

Apr-11 19135.96 -0.0159 -0.0314 0.0010 433.85 -0.2045 -0.2169 0.04703 0.0068011May-11 18503.28 -0.0331 -0.0485 0.0024 444.05 0.0235 0.0112 0.00012 -0.0005420

Jun-11 18845.87 0.0185 0.0031 0.0000 456.20 0.0274 0.0150 0.00023 0.0000460

Jul-11 18197.2 -0.0344 -0.0499 0.0025 548.90 0.2032 0.1909 0.03643 -0.0095193

Aug-11 16676.75 -0.0836 -0.0990 0.0098 540.35 -0.0156 -0.0279 0.00078 0.0027641

Sep-11 16745.35 0.0041 -0.0113 0.0001 539.00 -0.0025 -0.0148 0.00022 0.0001683

Mean 0.02

SUM of

square

deviations 0.72 Mean 0.012

SUM of square

deviations 2.61 -0.011504

VARIANCE 0.01 VARIANCE 0.02

SD 0.08 SD 0.15

BSE Values RANBAXY Values

Average monthly returns 0.02 Average monthly returns 0.012

Variance 0.01 Variance 0.02

Standard Deviation 0.08 Standard Deviation 0.15

CoVariance = (X-X')(R-R') = -0.000093

n-1

Correlation = CoVariance = -0.0084

(SDx) (SDr)

Risk () = CoVariance = -0.01596

Market

Variance


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INFERENCE:

The systematic risk () is -0.01596, means that Ranbaxys script is performing below market.

Plotting Percentage returns on Ranbaxys shares (monthly basis)

-0.8000

-0.6000

-0.4000

-0.2000

0.0000

0.2000

0.4000

0.6000

0.8000

1 611

16

21

26

31

36

41

46

51

56

61

66

71

76

81

86

91

96

101

106

111

116

121

126

% Returns (Ranbaxy)

% Returns (R)


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2)RELATIVEVALUATION

Company Name

Ranbaxy

Laboratories Ltd. Cipla Limited

Dr. Reddy's

Laboratories

Lupin Ltd.

NSE Symbol RANBAXY CIPLA DR. REDDY LUPIN

BSE Code 500359 500087 934809 500257

Year ending on

December 31,

2010 March 31, 2011March 31, 2011 March 31, 2011

Figs. in Rs. Million Rs. Million Rs. Million Rs. Million

Sale/Revenue 56,721.02 61,351.60 52,181.00 67068.20

Other Income 10,017.82 2,987.20 2,060.00 1341.00

EBITDA 27,649.55 982,344.00 12,998.00 11999.60

EBIT 16,194.39 98,000.40 10,519.00 9963.20Net Income 11,487.26 9,603.90 8,934.00 8825.50

Non Cash Charges 11,455.16 10,609.80 2,479.00 1711.80

Cash 27,122.82 841.30 662.00 4201.20

Total Assets 93,931.07 72,667.90 68,014.00 46741.80

Current Liabilities 34,189.02 11,581.50 16,976.00 11799.60

Longterm Debt 19,672.40 38.30 9,242.00 15406.90

Share price per Share (Rs.) 598.65 321.05 5.01 415.35

Number of Shares 421,040,693.00 802,921,357.00 169,252,732.00 446201189.00

Market Capitalization 252,056.01 257,777.90 847.96 185329.66Earnings Per Share (EPS) (Rs.) 27.28 11.96 52.78 19.78

Sales Per Share (SPS) (Rs.) 134.72 76.41 308.30 150.31

Book Value (BV) 36,213.60 78,508.30 41,796.00 35631.10

Book Value per Share (BVPS) (Rs.) 86.01 97.78 246.94 79.85

Per Share Non-Cash Charges (Rs.) 27.21 13.21 14.65 3.84

P/E 21.94 26.84 0.09 21.00

P/S 4.44 4.20 0.02 2.76


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P/BV 6.96 3.28 0.02 5.20

P/CF 10.99 12.75 0.07 17.59

EV 244,605.59 256,974.90 9,427.96 196535.36

EV/EBIT 15.10 2.62 0.90 19.73

EV/Sales 4.31 4.19 0.18 2.93EV/EBITDA 8.85 0.26 0.73 16.38

Calculations using Earning Multiples:

RANBAXY CIPLA LUPIN MAX AVG MIN RANBAXY Price

P/E 21.94 26.84 21.00 26.841 23.261 20.999 EPS 27.283 572.925296

P/S 4.44 4.20 2.76 4.444 3.803 2.763 SPS 134.716 372.2616067

P/BV 6.96 3.28 5.20 6.960 5.148 3.283 BVPS 145.024 476.1771255

P/CF 10.99 12.75 17.59 17.588 13.776 10.986 CF 54.49 598.65

Average Price per

share 505.0035071

No. of shares (mn) 421.04

Mkt val. Of equity 212626.6766


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Calculations using Value Multiples:

RANBAXY CIPLA LUPIN MAX AVG MIN RANBAXY EVLong Term

debtCash

Mkt Value

of equity

2 3 4 5 6=3-4+5EV/Sales 4.31 4.19 2.93 4.312 3.810 2.930 Sales 56721.02 166214.1865 19672.4 27122.82 173664.6065

EV/EBITDA 8.85 0.26 16.38 16.378 8.496 0.262 EBITDA 27649.55 7232.945274 19672.4 27122.82 14683.36527

EV/EBIT 15.10 2.62 19.73 19.726 12.484 2.622 EBIT 16194.39 42464.64073 19672.4 27122.82 49915.06073

Average Mkt

value of equity 79421.011

No. of shares

(mn) 421.04

Per Share Price 188.63056

So we can calculate that by relative valuation,


Mkt Value of equity 146024

Enterprise Value 71971

Inference:

The Price per share as per our valuation is 346.82 as compared to the market price of598.65 so it is recommendedto sell offthe holding.


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3)CAPITALASSETPRICINGMODEL(CAPM)Cost of Equity (Ke) = Rf + ( Rm - Rf)

Rf= Risk free return = 8.36%

( Rm - Rf) = Market premium

= Risk of the security = -0.01596 (as calculated earlier)

Rm = Effective rate per annum = (1 + monthly average return) ^12 - 1

Monthly average return = 0.015456

Rm = (1+0.015456)12

-1

0.202080367

Ke = 0.0836+(-0.01596)(0.202080367-0.0836)

0.081709092

Therefore, using CAPM model, the cost of equity is calculated to be 0.081709092. This Ke value is further used in

the calculation of share price using dividend discount model and also for weighted average cost of equity

calculation.


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4)DIVIDENDDISCOUNTMODELThe companies DPS was not constant over the 10 years so we calculate the share price using Different

Dividend Growth Rate model

GAGR = (DPS last year/DPS 1st year)12 - 1

= -0.0436475

D = 2

g = -0.0436475

D1 = D (1+ g)

= 1.912705

P = D1

(Ke -g)

= 15.25811263

So the price of the share using Different dividend growth rate model (since the DPS is not constant), is15.25811263.


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5)WEIGHTEDAVERAGECOSTOFCAPITALAmount of Debt = 42607.15 Amount of Equity = 51323.92 Total amount of capital = 93931.07

PBT = 15652.45 Tax = 4165.19 PAT = 11487.26 Tax% = 26.61% Interest = 541.94

Ke (from CAPM) 0.0817 Weight of Equity 0.4536Kd (monthly after tax) 33.14394 Weight of Debt 0.5464

We get that,

Weighted Cost of Equity = Ke * Weight of Equity = 0.0817 * 0.4536 = 0.04464

Weighted Cost of Debt = Kd * Weight of Debt = 33.14394 * 0.5464 = 15.034

Therefore,

Weighted Average Cost of Capital (WACC) = 0.04464 + 15.034 = 15.07873


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CIPLA

Cipla Limited is a prominent Indian pharmaceutical company, best-known outside its home country for

manufacturing low-cost anti-AIDS drugs for HIV-positive patients in developing countries. Founded by KhwajaAbdul Hamied as The Chemical, Industrial & Pharmaceutical Laboratories in 1935, Cipla makes drugs to treat

cardiovascular disease, arthritis, diabetes, weight control, depression and many other health conditions, and its

products are distributed in more than 180 countries worldwide.

COMPANY Overview

Cipla offers services like consulting, commissioning, engineering, project appraisal, quality control, know-

how transfer, support, and plant supply. Apart from its presence in the Indian market, Cipla also has anexport market and regularly exports to more than 185 countries in all corners of the world. It is also highly

regarded for technological innovation and manufacturing processes, and has been approved by numerous

international regulatory bodies such as:

Food and Drug Administration (FDA), USA Medicines and Healthcare Products Regulatory Agency (MHRA), UK Therapeutic Goods Administration (TGA), Australia Medicines Control Council (MCC), South Africa Orszgos Gygyszerszeti Intzet = National Institute of Pharmacy (NIP), Hungary Pharmaceutical Inspection Convention (PIC), Germany World Health Organisation (WHO) Health Canada, Canada SUKL = State Institute for the Control of Drugs, Slovak Republic
http://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Pharmaceutical_companyhttp://en.wikipedia.org/wiki/Khwaja_Abdul_Hamiedhttp://en.wikipedia.org/wiki/Khwaja_Abdul_Hamiedhttp://en.wikipedia.org/wiki/Medicines_and_Healthcare_Products_Regulatory_Agencyhttp://en.wikipedia.org/wiki/Therapeutic_Goods_Administrationhttp://en.wikipedia.org/w/index.php?title=Medicines_Control_Council&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Orsz%C3%A1gos_Gy%C3%B3gyszer%C3%A9szeti_Int%C3%A9zet&action=edit&redlink=1http://en.wikipedia.org/wiki/Pharmaceutical_Inspection_Conventionhttp://en.wikipedia.org/wiki/World_Health_Organisationhttp://en.wikipedia.org/wiki/Health_Canadahttp://en.wikipedia.org/w/index.php?title=SUKL&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=SUKL&action=edit&redlink=1http://en.wikipedia.org/wiki/Health_Canadahttp://en.wikipedia.org/wiki/World_Health_Organisationhttp://en.wikipedia.org/wiki/Pharmaceutical_Inspection_Conventionhttp://en.wikipedia.org/w/index.php?title=Orsz%C3%A1gos_Gy%C3%B3gyszer%C3%A9szeti_Int%C3%A9zet&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Medicines_Control_Council&action=edit&redlink=1http://en.wikipedia.org/wiki/Therapeutic_Goods_Administrationhttp://en.wikipedia.org/wiki/Medicines_and_Healthcare_Products_Regulatory_Agencyhttp://en.wikipedia.org/wiki/Khwaja_Abdul_Hamiedhttp://en.wikipedia.org/wiki/Khwaja_Abdul_Hamiedhttp://en.wikipedia.org/wiki/Pharmaceutical_companyhttp://en.wikipedia.org/wiki/India


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Products

The Company introduced many new drugs and formulations during the year 2010. Some significant products arementioned below:

Entavir (entecavir tablets) - antiviral for hepatitis B Febucip (febuxostat tablets) - drug for gout Flosoft (fluorometholone acetate ophthalmic suspension) - topical steroid for eye infl ammation Foracort (formoterol and budesonide autohaler) - asthma controller therapy in a new easy-to-use breath actuatedinhaler Furamist AZ (fluticasone furoate and azelastine hydrochloride nasal spray) - new combination nasal spray forallergic rhinitis Imudrops (cyclosporine eye drops) - immunomodulatory drug for severe dry eye Lacsyp (lactitol monohydrate liquid syrup) - lactulose analogue for constipation and hepatic encephalopathy Levolin (levosalbutamol tartarate autohaler) - asthma reliever in an easy-to-use breath actuated inhaler Montair FX (montelukast and fexofenadine tablets) - antiallergic combination for rhinitis Moxicip KT (moxifl oxacin and ketorolac eye drops) - topical combination for eye inflammation

The Company is in the process of consolidating and rationalizing its international business and strategies are beingreviewed to optimize value for its technology andproduct range. The Company continues to forge partnerships and alliances with large generic pharmaceuticalcompanies for product development and supply in developed markets. Cipla continues its humanitarian mission of

makingaffordable medicines available to the entire world. It is today the largest single supplier of HIV and anti-malarialdrugs in the world in terms of volume.


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1)RISKANDRETURNBSE (Market) CIPLA

Month BSE

% Returns

(X)

Deviation

from mean

(X-X')

Square

Deviation

(X-X')^2 CIPLA % Returns (C)

Deviation

from mean

(C-C')

Square

Deviation

(C-C')^2 (X-X')(C-C')

Apr-01 3519.16 1146.45

May-01 3631.91 0.032039 0.0165829 0.00027499 1106.85 -0.03454 -0.03706261 0.0013736 -0.0006146

Jun-01 3456.78 -0.048220 -0.0636758 0.00405461 1143.3 0.03293 0.030410087 0.0009248 -0.00193639

Jul-01 3329.28 -0.036884 -0.0523401 0.00273948 1070.35 -0.06381 -0.06632773 0.0043994 0.003471598

Aug-01 3244.95 -0.025330 -0.0407858 0.00166348 1230.55 0.14967 0.147149464 0.021653 -0.00600161

Sep-01 2811.6 -0.133546 -0.1490020 0.02220160 1123.65 -0.08687 -0.08939293 0.0079911 0.013319726

Oct-01 2989.35 0.063220 0.0477642 0.00228142 1062.85 -0.05411 -0.05663058 0.003207 -0.00270491Nov-01 3287.56 0.099757 0.0843014 0.00710673 1108.5 0.04295 0.040429353 0.0016345 0.003408253

Dec-01 3262.33 -0.007674 -0.0231304 0.00053502 1138.3 0.02688 0.024361971 0.0005935 -0.0005635

Jan-02 3311.03 0.014928 -0.0005281 0.00000028 1109.45 -0.02534 -0.02786602 0.0007765 1.47148E-05

Feb-02 3562.31 0.075892 0.0604358 0.00365248 1005.45 -0.09374 -0.09626135 0.0092662 -0.00581763

Mar-02 3469.35 -0.026095 -0.0415515 0.00172652 1017.95 0.01243 0.00991104 9.823E-05 -0.00041182

Apr-02 3338.16 -0.037814 -0.0532700 0.00283770 1026.65 0.00855 0.006025384 3.631E-05 -0.00032097

May-02 3125.73 -0.063637 -0.0790929 0.00625569 989.35 -0.03633 -0.03885296 0.0015096 0.003072993

Jun-02 3244.7 0.038062 0.0226055 0.00051101 940.85 -0.04902 -0.05154329 0.0026567 -0.00116516

Jul-02 2987.65 -0.079221 -0.0946775 0.00896384 931.55 -0.00988 -0.01240588 0.0001539 0.001174558Aug-02 3181.23 0.064793 0.0493374 0.00243418 942.05 0.01127 0.008750332 7.657E-05 0.000431718

Sep-02 2991.36 -0.059684 -0.0751405 0.00564609 946 0.00419 0.001671779 2.795E-06 -0.00012562

Oct-02 2949.32 -0.014054 -0.0295098 0.00087083 876.9 -0.07304 -0.0755656 0.0057102 0.002229929

Nov-02 3228.82 0.094768 0.0793116 0.00629033 917.3 0.04607 0.043550183 0.0018966 0.003454033

Dec-02 3377.28 0.045980 0.0305236 0.00093169 899.35 -0.01957 -0.0220895 0.0004879 -0.00067425

Jan-03 3250.38 -0.037575 -0.0530307 0.00281225 828.35 -0.07895 -0.08146711 0.0066369 0.004320254

Feb-03 3283.66 0.010239 -0.0052172 0.00002722 769.25 -0.07135 -0.07386786 0.0054565 0.000385386


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Mar-03 3048.72 -0.071548 -0.0870042 0.00756974 714.45 -0.07124 -0.07375942 0.0054405 0.006417383

Apr-03 2959.79 -0.029170 -0.0446257 0.00199145 631.35 -0.11631 -0.11883445 0.0141216 0.005303065

May-03 3180.75 0.074654 0.0591979 0.00350439 684.55 0.08426 0.081742675 0.0066819 0.004838995

Jun-03 3607.13 0.134050 0.1185941 0.01406456 755 0.10291 0.100393119 0.0100788 0.011906033

Jul-03 3792.61 0.051420 0.0359643 0.00129343 820.75 0.08709 0.084564888 0.0071512 0.003041321Aug-03 4244.73 0.119211 0.1037547 0.01076505 1010.45 0.23113 0.22860886 0.052262 0.023719254

Sep-03 4453.24 0.049122 0.0336661 0.00113340 1029.45 0.01880 0.016282299 0.0002651 0.000548161

Oct-03 4906.87 0.101865 0.0864091 0.00746654 1298.7 0.26155 0.259026224 0.0670946 0.022382229

Nov-03 5044.82 0.028114 0.0126576 0.00016022 1201.35 -0.07496 -0.07748078 0.0060033 -0.00098072

Dec-03 5838.96 0.157417 0.1419609 0.02015289 1317.25 0.09647 0.093953595 0.0088273 0.013337735

Jan-04 5695.67 -0.024540 -0.0399964 0.00159971 1201.4 -0.08795 -0.09046958 0.0081847 0.003618454

Feb-04 5667.51 -0.004944 -0.0204001 0.00041617 1195.65 -0.00479 -0.00730729 5.34E-05 0.00014907

Mar-04 5590.6 -0.013570 -0.0290264 0.00084253 1169.95 -0.02149 -0.02401579 0.0005768 0.000697091

Apr-04 5655.09 0.011535 -0.0039206 0.00001537 1368.2 0.16945 0.166930482 0.0278658 -0.00065447May-04 4759.62 -0.158348 -0.1738036 0.03020771 234.15 -0.82886 -0.83138394 0.6911993 0.144497563

Jun-04 4795.46 0.007530 -0.0079260 0.00006282 212.4 -0.09289 -0.09541038 0.0091031 0.000756225

Jul-04 5170.32 0.078170 0.0627137 0.00393301 249 0.17232 0.16979518 0.0288304 0.01064849

Aug-04 5192.08 0.004209 -0.0112474 0.00012650 238.05 -0.04398 -0.04649711 0.002162 0.000522972

Sep-04 5583.61 0.075409 0.0599530 0.00359437 296.05 0.24365 0.241125088 0.0581413 0.014456184

Oct-04 5672.27 0.015879 0.0004226 0.00000018 279.5 -0.05590 -0.05842392 0.0034134 -2.4689E-05

Nov-04 6234.29 0.099082 0.0836260 0.00699331 277.45 -0.00733 -0.00985573 9.714E-05 -0.0008242

Dec-04 6602.69 0.059093 0.0436365 0.00190414 317.25 0.14345 0.140928066 0.0198607 0.006149607

Jan-05 6555.94 -0.007080 -0.0225365 0.00050789 286.75 -0.09614 -0.0986599 0.0097338 0.002223447Feb-05 6713.86 0.024088 0.0086320 0.00007451 260.2 -0.09259 -0.09511057 0.009046 -0.000821

Mar-05 6492.82 -0.032923 -0.0483790 0.00234053 254.8 -0.02075 -0.02327447 0.0005417 0.001125995

Apr-05 6154.44 -0.052116 -0.0675721 0.00456598 263.7 0.03493 0.032408152 0.0010503 -0.00218989

May-05 6715.11 0.091100 0.0756440 0.00572202 289.45 0.09765 0.095127639 0.0090493 0.00719584

Jun-05 7193.85 0.071293 0.0558369 0.00311776 313.6 0.08343 0.080912895 0.0065469 0.004517926

Jul-05 7635.42 0.061382 0.0459256 0.00210916 336.3 0.07239 0.069864 0.004881 0.003208543

Aug-05 7805.43 0.022266 0.0068099 0.00004638 341.8 0.01635 0.013833241 0.0001914 9.42034E-05


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Sep-05 8634.48 0.106215 0.0907585 0.00823710 380.05 0.11191 0.109386344 0.0119654 0.009927739

Oct-05 7892.32 -0.085953 -0.1014091 0.01028381 359.9 -0.05302 -0.05554054 0.0030848 0.005632316

Nov-05 8788.81 0.113590 0.0981341 0.00963031 397.65 0.10489 0.102369043 0.0104794 0.010045898

Dec-05 9397.93 0.069306 0.0538503 0.00289985 443.4 0.11505 0.11252972 0.0126629 0.006059756

Jan-06 9919.89 0.055540 0.0400839 0.00160672 441.3 -0.00474 -0.00725733 5.267E-05 -0.0002909Feb-06 10370.2 0.045399 0.0299427 0.00089656 551.9 0.25062 0.248101955 0.0615546 0.007428831

Mar-06 11280 0.087724 0.0722681 0.00522267 661.95 0.19940 0.196880861 0.0387621 0.014228199

Apr-06 12042.6 0.067607 0.0521506 0.00271968 260.8 -0.60601 -0.60853374 0.3703133 -0.03173539

May-06 10398.6 -0.136512 -0.1519677 0.02309418 229.5 -0.12002 -0.12253654 0.0150152 0.018621597

Jun-06 10609.3 0.020257 0.0048005 0.00002304 215.8 -0.05969 -0.06221619 0.0038709 -0.00029867

Jul-06 10743.9 0.012690 -0.0027662 0.00000765 236 0.09361 0.091083986 0.0082963 -0.00025195

Aug-06 11699.1 0.088904 0.0734476 0.00539455 249.95 0.05911 0.056588965 0.0032023 0.004156324

Sep-06 12454.4 0.064567 0.0491107 0.00241187 262.25 0.04921 0.046688638 0.0021798 0.002292914

Oct-06 12961.9 0.040747 0.0252909 0.00063963 262.05 -0.00076 -0.00328384 1.078E-05 -8.3051E-05

Nov-06 13696.3 0.056659 0.0412031 0.00169770 253.85 -0.03129 -0.03381294 0.0011433 -0.0013932

Dec-06 13786.9 0.006615 -0.0088411 0.00007817 250.7 -0.01241 -0.01493011 0.0002229 0.000131999

Jan-07 14090.9 0.022051 0.0065946 0.00004349 245.8 -0.01955 -0.02206648 0.0004869 -0.00014552

Feb-07 12938.1 -0.081814 -0.0972697 0.00946140 233.3 -0.05085 -0.05337556 0.002849 0.005191825

Mar-07 13072.1 0.010358 -0.0050982 0.00002599 235.7 0.01029 0.00776598 6.031E-05 -3.9593E-05

Apr-07 13872.4 0.061220 0.0457637 0.00209431 210.85 -0.10543 -0.10795184 0.0116536 -0.00494027

May-07 14544.5 0.048448 0.0329921 0.00108848 217.65 0.03225 0.029729211 0.0008838 0.000980828

Jun-07 14650.5 0.007291 -0.0081646 0.00006666 208.45 -0.04227 -0.0447909 0.0020062 0.0003657

Jul-07 15551 0.061464 0.0460080 0.00211674 190.7 -0.08515 -0.08767352 0.0076866 -0.00403369

Aug-07 15318.6 -0.014944 -0.0303998 0.00092415 167.35 -0.12244 -0.12496483 0.0156162 0.003798903

Sep-07 17291.1 0.128765 0.1133090 0.01283893 182.4 0.08993 0.087410077 0.0076405 0.009904348

Oct-07 19838 0.147295 0.1318388 0.01738147 178.75 -0.02001 -0.02253217 0.0005077 -0.00297061

Nov-07 19363.2 -0.023934 -0.0393899 0.00155157 183.45 0.02629 0.023772502 0.0005651 -0.0009364

Dec-07 20287 0.047709 0.0322530 0.00104026 212.6 0.15890 0.156377678 0.024454 0.005043656

Jan-08 17648.7 -0.130048 -0.1455039 0.02117139 188.45 -0.11359 -0.11611481 0.0134826 0.016895159

Feb-08 17578.7 -0.003966 -0.0194218 0.00037720 207.25 0.09976 0.097240006 0.0094556 -0.00188857

Mar-08 15644.4 -0.110035 -0.1254914 0.01574808 219.75 0.06031 0.057792427 0.00334 -0.00725245


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Apr-08 17287.3 0.105013 0.0895570 0.00802045 213.05 -0.03049 -0.0330104 0.0010897 -0.00295631

May-08 16415.6 -0.050427 -0.0658826 0.00434052 212.05 -0.00469 -0.00721494 5.206E-05 0.000475339

Jun-08 13461.6 -0.179949 -0.1954053 0.03818324 211.1 -0.00448 -0.00700128 4.902E-05 0.001368087

Jul-08 14355.8 0.066422 0.0509662 0.00259756 218.7 0.03600 0.03348069 0.001121 0.001706385

Aug-08 14564.5 0.014543 -0.0009127 0.00000083 240.2 0.09831 0.09578698 0.0091751 -8.7428E-05Sep-08 12860.4 -0.117003 -0.1324595 0.01754551 228.55 -0.04850 -0.05102245 0.0026033 0.006758407

Oct-08 9788.06 -0.238901 -0.2543571 0.06469752 177.45 -0.22358 -0.22610467 0.0511233 0.05751132

Nov-08 9092.72 -0.071040 -0.0864956 0.00748150 200.55 0.13018 0.12765631 0.0162961 -0.01104172

Dec-08 9647.31 0.060993 0.0455367 0.00207359 186.9 -0.06806 -0.07058403 0.0049821 -0.00321416

Jan-09 9424.24 -0.023123 -0.0385785 0.00148830 192 0.02729 0.024766115 0.0006134 -0.00095544

Feb-09 8891.61 -0.056517 -0.0719731 0.00518012 191.1 -0.00469 -0.0072087 5.197E-05 0.000518833

Mar-09 9708.5 0.091872 0.0764160 0.00583940 219.75 0.14992 0.147400303 0.0217268 0.011263736

Apr-09 11403.3 0.174564 0.1591075 0.02531519 240.7 0.09534 0.092814404 0.0086145 0.014767467

May-09 14625.3 0.282551 0.2670950 0.07133973 222.95 -0.07374 -0.07626445 0.0058163 -0.02036985

Jun-09 14493.8 -0.008985 -0.0244412 0.00059737 253.3 0.13613 0.133607973 0.0178511 -0.00326554

Jul-09 15670.3 0.081170 0.0657143 0.00431837 275.7 0.08843 0.085911484 0.0073808 0.005645614

Aug-09 15666.6 -0.000234 -0.0156902 0.00024618 271.5 -0.01523 -0.01775515 0.0003152 0.000278583

Sep-09 17126.8 0.093204 0.0777484 0.00604481 279.75 0.03039 0.027865536 0.0007765 0.0021665

Oct-09 15896.3 -0.071850 -0.0873058 0.00762231 287.75 0.02860 0.026075757 0.0006799 -0.00227657

Nov-09 16926.2 0.064791 0.0493352 0.00243396 320.15 0.11260 0.110076537 0.0121168 0.005430651

Dec-09 17464.8 0.031820 0.0163638 0.00026777 335.6 0.04826 0.045737424 0.0020919 0.000748439

Jan-10 16358 -0.063376 -0.0788320 0.00621449 317.3 -0.05453 -0.05705041 0.0032547 0.0044974

Feb-10 16429.6 0.004376 -0.0110796 0.00012276 315.3 -0.00630 -0.00882439 7.787E-05 9.77704E-05

Mar-10 17527.8 0.066844 0.0513882 0.00264074 337.1 0.06914 0.066619297 0.0044381 0.003423443

Apr-10 17558.7 0.001765 -0.0136908 0.00018744 342.55 0.01617 0.013646105 0.0001862 -0.00018683

May-10 16944.6 -0.034973 -0.0504290 0.00254308 318.95 -0.06890 -0.07141626 0.0051003 0.00360145

Jun-10 17700.9 0.044632 0.0291758 0.00085123 337.75 0.05894 0.056422204 0.0031835 0.001646163

Jul-10 17868.3 0.009457 -0.0059995 0.00003599 326.6 -0.03301 -0.03553379 0.0012627 0.000213183

Aug-10 17971.1 0.005755 -0.0097011 0.00009411 303.35 -0.07119 -0.0737092 0.005433 0.000715064

Sep-10 20069.1 0.116743 0.1012868 0.01025902 321.65 0.06033 0.057805151 0.0033414 0.0058549

Oct-10 20032.3 -0.001833 -0.0172887 0.00029890 352.25 0.09513 0.092613259 0.0085772 -0.00160116


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Nov-10 19521.3 -0.025513 -0.0409693 0.00167848 343.7 -0.02427 -0.02679374 0.0007179 0.00109772

Dec-10 20509.1 0.050603 0.0351473 0.00123533 369.9 0.07623 0.073708065 0.0054329 0.002590638

Jan-11 18327.8 -0.106359 -0.1218152 0.01483895 332.25 -0.10178 -0.10430547 0.0108796 0.012705993

Feb-11 17823.4 -0.027519 -0.0429749 0.00184685 299.7 -0.09797 -0.1004896 0.0100982 0.004318535

Mar-11 19445.2 0.090994 0.0755378 0.00570596 321.05 0.07124 0.0687167 0.004722 0.00519071Apr-11 19136 -0.015904 -0.0313602 0.00098346 308.85 -0.03800 -0.04052152 0.001642 0.001270763

May-11 18503.3 -0.033062 -0.0485184 0.00235403 326.1 0.05585 0.053331151 0.0028442 -0.00258754

Jun-11 18845.9 0.018515 0.0030591 0.00000936 330.35 0.01303 0.010511608 0.0001105 3.21556E-05

Jul-11 18197.2 -0.034420 -0.0498758 0.00248759 307.85 -0.06811 -0.07063079 0.0049887 0.003522765

Aug-11 16676.8 -0.083554 -0.0990101 0.00980300 280 -0.09047 -0.09298734 0.0086466 0.009206686

Sep-11 16745.4 0.004114 -0.0113425 0.00012865 277.85 -0.00768 -0.01019978 0.000104 0.000115691

MEAN 0.01546

SUM of

square

deviations 0.72 MEAN 0.00252

SUM of

square

deviations 2.03807 0.485451088

VARIANCE 0.01 VARIANCE 0.01644

SD 0.08 SD 0.12820

BSE Values CIPLA Values

Average monthly returns 0.01546

Average monthly

returns 0.00252

Variance 0.00581 Variance 0.01644

Standard Deviation 0.07624 Standard Deviation 0.12820

CoVariance = (X-X')(R-R') = 0.003915

n-1

Correlation = CoVariance = 0.4005

(SDx) (SDr)

Risk () = CoVariance = 0.67346

Market

Variance


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Inference:

INFERENCE:

The systematic risk () is 0.67346, means that Ciplas script is performing below market.

Plotting Percentage returns on Ranbaxys shares (monthly basis):

-1.00000

-0.80000

-0.60000

-0.40000

-0.20000

0.00000

0.20000

0.40000

1 611

16

21

26

31

36

41

46

51

56

61

66

71

76

81

86

91

96

101

106

111

116

121

126

% Returns (Cipla)

% Returns (C)


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2)RELATIVEVALUATIONCalculations using Earnings Multiples:

RANBAXY CIPLA LUPIN MAX AVG MIN CIPLA Price

P/E 21.94 26.84 21.00 26.841 23.261 20.999 EPS 11.961 251.1772135

P/S 4.44 4.20 2.76 4.444 3.803 2.763 SPS 76.410 211.1451794

P/BV 6.96 3.28 5.20 6.960 5.148 3.283 BVPS 97.778 321.05

P/CF 10.99 12.75 17.59 17.588 13.776 10.986 CF 25.17519284 276.5862834

Average Price per share 264.9896691

No. of shares (mn) 802.921357

Mkt val. Of equity 212765.8647

Calculations using Value Multiples:

RANBAXY CIPLA LUPIN MAX AVG MIN CIPLA EV

Long

Term

debt

CashMkt Value

of equity

2 3 4 5 6=3-4+5

EV/Sales 4.31 4.19 2.93 4.312 3.810 2.930 Sales 61351.60 179783.5491 38.3 841.3 180,586.55

EV/EBITDA 8.85 0.26 16.38 16.378 8.496 0.262 EBITDA 982344.00 256974.9017 38.3 841.3 257,777.90

EV/EBIT 15.10 2.62 19.73 19.726 12.484 2.622 EBIT 98000.40 256974.9017 38.3 841.3 257,777.90

Average Mkt

value of equity 232047.45

No. of shares

(mn) 802.92136



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So we can calculate that by relative valuation,


Mkt Value of equity 222,406.66

Enterprise Value 231,244.45

Inference:

The Price per share as per our valuation is 276.9968 as compared to the market price of321.05 so it isrecommended to sell offthe holding.

3)CAPITALASSETPRICINGMODEL(CAPM)Cost of Equity (Ke) = Rf + ( Rm - Rf)

Rf= Risk free return = 8.36% = 0.0836

( Rm - Rf) = Market premium

= Risk of the security = 0.673464587

(as calculated

earlier)

Rm = Effective rate per annum = (1 + monthly average return) ^12 - 1

Monthly average return

= 0.015456036

Rm = (1 + 0.015456036) ^ 12 -1

= 0.202080367

Ke = 0.0836 + 0.6734646 (0.202080367 - 0.0836)

= 0.163392332


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Therefore, using CAPM model, the cost of equity is calculated to be 0.163392332. This Ke value is further used in

the calculation of share price using dividend discount model and also for weighted average cost of equity

calculation.

4)DIVIDENDDISCOUNTMODELThere was no growth in DPS of Cipla over the years, therefore we calculate the share price using Constant

Dividend No Growth Rate model.

DPS = Dividends = 1605800000 = 1.999947

No. ofshares 802921357

Price = DPS

Ke

Price = 1.999946802 = 12.24015094

0.163392332

So the price of the share using Different dividend growth rate model (since the DPS is not constant), is 12.24015.


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5)WEIGHTEDAVERAGECOSTOFCAPITALAmount of Debt = 4413.9 Amount of Equity = 66129.5 Total amount of capital = 70543.4

PBT = 11624.9 Tax = 1952.2 PAT = 96727 Tax% = 16.79% Interest = 51.4

Ke (from CAPM) 0.1633 Weight of Equity 0.9374Kd (monthly after tax) 3.564 Weight of Debt 0.0625

We get that,

Weighted Cost of Equity = Ke * Weight of Equity = 0.1633 * 0.9374 = 0.153082

Weighted Cost of Debt = Kd * Weight of Debt = 3.564* 0.0625= 0.223

Therefore,

Weighted Average Cost of Capital (WACC) = 0.153082 + 0.223 = 0.3761


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CONCLUSION

The results of the calculations can be summarized all together in the table given below:

Particulars Ranbaxy pharmaceuticals Ltd. Cipla Ltd.

Risk (Beta value) -0.01596 0.67346

Share Price by Relative valuation approach 346.82 276.9968

Cost of equity (CAPM) 0.081709092 0.163392332

Share Price using Dividend Discount Model 15.25811263 12.24015

WACC 15.07873 0.3761

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