FINANCIAL MANAGEMENT I

PROJECT REPORT
ON
EVALUATION OF FIRMS RANBAXY AND CIPLA USING
DIFFERENT FINANCIAL METHODS

SUBMITTED BY:
STUDY GROUP NUMBER 103
Nikhil Goyal

Seat no: 4

Rupsha Majumder

Seat No: 5

Nikita Berry

Seat No: 27

Nikita Agrawal

Seat No: 29

Arti Kapri

Seat No: 73
1

Dinesh Boppana

Seat No: 84

TABLE OF CONTENTS

ABBREVIATIONS ................................................................................................................................................... 4
OBJECTIVE .............................................................................................................................................................. 5
INTRODUCTION ..................................................................................................................................................... 6
1) RISK AND RETURN ............................................................................................................................................ 6
2) RELATIVE VALUATION ................................................................................................................................. 8
3) CAPITAL ASSET PRICING MODEL (CAPM) .............................................................................................. 13
4) DIVIDEND DISCOUNT MODEL ................................................................................................................... 15
5) WEIGHTED AVERAGE COST OF CAPITAL ............................................................................................... 16
RANBAXY .............................................................................................................................................................. 19
1) RISK AND RETURN .......................................................................................................................................... 22
2) RELATIVE VALUATION ............................................................................................................................... 28
3) CAPITAL ASSET PRICING MODEL (CAPM) .............................................................................................. 31
4) DIVIDEND DISCOUNT MODEL ................................................................................................................... 32
5) WEIGHTED AVERAGE COST OF CAPITAL ............................................................................................... 33
CIPLA ...................................................................................................................................................................... 35
1) RISK AND RETURN .......................................................................................................................................... 37
2

2) RELATIVE VALUATION ............................................................................................................................... 43

3) CAPITAL ASSET PRICING MODEL (CAPM) .............................................................................................. 44
4) DIVIDEND DISCOUNT MODEL ................................................................................................................... 45
5) WEIGHTED AVERAGE COST OF CAPITAL ............................................................................................... 46
CONCLUSION ........................................................................................................................................................ 47

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

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 from http://www.bseindia.com/

INTRODUCTION
1) RISK AND RETURN
Beta 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 year share 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 values
Y: % 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
6

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)

Returns:
Total % returns = Dividend Yield + Capital gain
Dividend Yield =
Dividend per share during the year
Price of each share at the beginning of the year

*100

Capital Gain = (Price at the end of the year-Price at the beginning of the year)
Price of each share at the beginning of the year

*100

2) RELATIVE VALUATION
According 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:
8

1) P/E Ratio : Price / Earnings Ratio

It 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 Ratio

PS Ratio = Share price per share
Sales per share (SPS)
Sales per share =

Sales
Total no. of shares

3) P/BV Ratio : Price / Book Value Ratio

P/BV =

Share price per share

Book Value per share (BVPS)

Book Value Per Share = Book Value of equity

9

No. of shares
Book Value of equity = Total Assets Total 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 debts Cash
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
10

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
11

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

12

3) CAPITAL ASSET PRICING MODEL (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.

13

Security Market Line:

This graph shows that when

= 1, the expected return = Rm
= 0, the expected return = Rf

14

4) DIVIDEND DISCOUNT MODEL

Share 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

15

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/n 1
D1 = D (1+g)
P= D
(Ke-g)
Where,
g = calculated CAGR

5) WEIGHTED AVERAGE COST OF CAPITAL

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital
sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC
calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as
an 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 then
summing:

16

Where,
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using
the 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 sources
of financing, each of which is weighted by its respective use in the given situation. By taking a weighted
average, 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 internally
by 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.

17

18

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
19

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.
20

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 clinical
testing, 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.

21

1) RISK AND RETURN

BSE (Market)

Month
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-01
Oct-01
Nov-01
Dec-01
Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03

BSE
3519.16
3631.91
3456.78
3329.28
3244.95
2811.6
2989.35
3287.56
3262.33
3311.03
3562.31
3469.35
3338.16
3125.73
3244.7
2987.65
3181.23
2991.36
2949.32
3228.82
3377.28
3250.38
3283.66

RANBAXY

% Returns
(X)

Deviation
from mean
(X-X')

Square
Deviation
(X-X')^2

0.0320
-0.0482
-0.0369
-0.0253
-0.1335
0.0632
0.0998
-0.0077
0.0149
0.0759
-0.0261
-0.0378
-0.0636
0.0381
-0.0792
0.0648
-0.0597
-0.0141
0.0948
0.0460
-0.0376
0.0102

0.0166
-0.0637
-0.0523
-0.0408
-0.1490
0.0478
0.0843
-0.0231
-0.0005
0.0604
-0.0416
-0.0533
-0.0791
0.0226
-0.0947
0.0493
-0.0751
-0.0295
0.0793
0.0305
-0.0530
-0.0052

0.0003
0.0041
0.0027
0.0017
0.0222
0.0023
0.0071
0.0005
0.0000
0.0037
0.0017
0.0028
0.0063
0.0005
0.0090
0.0024
0.0056
0.0009
0.0063
0.0009
0.0028
0.0000

RANBAXY
500.90
492.45
490.00
475.00
481.20
531.60
600.35
650.45
710.45
752.35
690.35
721.80
819.45
878.30
850.10
771.05
882.20
850.70
900.70
916.30
521.90
536.95
593.25

% Returns
(R)

Deviation
from mean (RR')

Square
Deviation
(R-R')^2

(X-X')(R-R')

-0.0169
-0.0050
-0.0306
0.0131
0.1047
0.1293
0.0835
0.0922
0.0590
-0.0824
0.0456
0.1353
0.0718
-0.0321
-0.0930
0.1442
-0.0357
0.0588
0.0173
-0.4304
0.0288
0.1049

-0.0292
-0.0173
-0.0430
0.0007
0.0924
0.1170
0.0711
0.0799
0.0466
-0.0947
0.0332
0.1229
0.0595
-0.0444
-0.1053
0.1318
-0.0480
0.0464
0.0050
-0.4428
0.0165
0.0925

0.00085
0.00030
0.00184
0.00000
0.00854
0.01369
0.00506
0.00638
0.00217
0.00898
0.00110
0.01512
0.00354
0.00198
0.01109
0.01737
0.00231
0.00216
0.00002
0.19604
0.00027
0.00856

-0.0004844
0.0011026
0.0022481
-0.0000291
-0.0137675
0.0055878
0.0059948
-0.0018482
-0.0000246
-0.0057262
-0.0013802
-0.0065494
-0.0047041
-0.0010048
0.0099723
0.0065033
0.0036102
-0.0013703
0.0003949
-0.0135148
-0.0008748
-0.0004827
22

Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05

3048.72
2959.79
3180.75
3607.13
3792.61
4244.73
4453.24
4906.87
5044.82
5838.96
5695.67
5667.51
5590.6
5655.09
4759.62
4795.46
5170.32
5192.08
5583.61
5672.27
6234.29
6602.69
6555.94
6713.86
6492.82
6154.44
6715.11
7193.85
7635.42
7805.43
8634.48

-0.0715
-0.0292
0.0747
0.1341
0.0514
0.1192
0.0491
0.1019
0.0281
0.1574
-0.0245
-0.0049
-0.0136
0.0115
-0.1583
0.0075
0.0782
0.0042
0.0754
0.0159
0.0991
0.0591
-0.0071
0.0241
-0.0329
-0.0521
0.0911
0.0713
0.0614
0.0223
0.1062

-0.0870
-0.0446
0.0592
0.1186
0.0360
0.1038
0.0337
0.0864
0.0127
0.1420
-0.0400
-0.0204
-0.0290
-0.0039
-0.1738
-0.0079
0.0627
-0.0112
0.0600
0.0004
0.0836
0.0436
-0.0225
0.0086
-0.0484
-0.0676
0.0756
0.0558
0.0459
0.0068
0.0908

0.0076
0.0020
0.0035
0.0141
0.0013
0.0108
0.0011
0.0075
0.0002
0.0202
0.0016
0.0004
0.0008
0.0000
0.0302
0.0001
0.0039
0.0001
0.0036
0.0000
0.0070
0.0019
0.0005
0.0001
0.0023
0.0046
0.0057
0.0031
0.0021
0.0000
0.0082

650.15
613.90
624.40
675.00
680.15
784.85
810.80
1001.20
964.35
983.15
1022.10
1098.20
993.85
940.70
941.70
1062.55
988.35
909.45
941.20
958.05
1090.65
1098.55
1124.30
1251.40
1084.95
1019.80
1003.85
912.85
1101.00
1057.65
470.60

0.0959
-0.0558
0.0171
0.0810
0.0076
0.1539
0.0331
0.2348
-0.0368
0.0195
0.0396
0.0745
-0.0950
-0.0535
0.0011
0.1283
-0.0698
-0.0798
0.0349
0.0179
0.1384
0.0072
0.0234
0.1130
-0.1330
-0.0600
-0.0156
-0.0907
0.2061
-0.0394
-0.5551

0.0836
-0.0681
0.0048
0.0687
-0.0047
0.1416
0.0207
0.2225
-0.0491
0.0072
0.0273
0.0621
-0.1074
-0.0658
-0.0113
0.1160
-0.0822
-0.0922
0.0226
0.0056
0.1261
-0.0051
0.0111
0.1007
-0.1454
-0.0724
-0.0280
-0.1030
0.1938
-0.0517
-0.5674

0.00698
0.00464
0.00002
0.00472
0.00002
0.02005
0.00043
0.04950
0.00242
0.00005
0.00074
0.00386
0.01153
0.00433
0.00013
0.01345
0.00675
0.00850
0.00051
0.00003
0.01589
0.00003
0.00012
0.01014
0.02113
0.00524
0.00078
0.01061
0.03755
0.00267
0.32193

-0.0072711
0.0030389
0.0002820
0.0081471
-0.0001694
0.0146913
0.0006977
0.0192251
-0.0006221
0.0010157
-0.0010910
-0.0012671
0.0031163
0.0002581
0.0019600
-0.0009194
-0.0051533
0.0010367
0.0013532
0.0000024
0.0105424
-0.0002224
-0.0002501
0.0008693
0.0070319
0.0048915
-0.0021166
-0.0057507
0.0088991
-0.0003522
-0.0514956
23

Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08

7892.32
8788.81
9397.93
9919.89
10370.24
11279.96
12042.56
10398.61
10609.25
10743.88
11699.05
12454.42
12961.9
13696.31
13786.91
14090.92
12938.09
13072.1
13872.37
14544.46
14650.51
15550.99
15318.6
17291.1
19837.99
19363.19
20286.99
17648.71
17578.72
15644.44
17287.31

-0.0860
0.1136
0.0693
0.0555
0.0454
0.0877
0.0676
-0.1365
0.0203
0.0127
0.0889
0.0646
0.0407
0.0567
0.0066
0.0221
-0.0818
0.0104
0.0612
0.0484
0.0073
0.0615
-0.0149
0.1288
0.1473
-0.0239
0.0477
-0.1300
-0.0040
-0.1100
0.1050

-0.1014
0.0981
0.0539
0.0401
0.0299
0.0723
0.0522
-0.1520
0.0048
-0.0028
0.0734
0.0491
0.0253
0.0412
-0.0088
0.0066
-0.0973
-0.0051
0.0458
0.0330
-0.0082
0.0460
-0.0304
0.1133
0.1318
-0.0394
0.0323
-0.1455
-0.0194
-0.1255
0.0896

0.0103
0.0096
0.0029
0.0016
0.0009
0.0052
0.0027
0.0231
0.0000
0.0000
0.0054
0.0024
0.0006
0.0017
0.0001
0.0000
0.0095
0.0000
0.0021
0.0011
0.0001
0.0021
0.0009
0.0128
0.0174
0.0016
0.0010
0.0212
0.0004
0.0157
0.0080

525.30
491.25
350.85
385.15
362.35
399.10
429.40
431.60
472.55
411.45
356.40
373.85
406.80
439.85
399.70
372.30
391.85
408.60
337.60
352.60
371.35
387.70
354.95
389.90
391.30
434.40
427.05
387.15
425.95
351.20
445.75

0.1162
-0.0648
-0.2858
0.0978
-0.0592
0.1014
0.0759
0.0051
0.0949
-0.1293
-0.1338
0.0490
0.0881
0.0812
-0.0913
-0.0686
0.0525
0.0427
-0.1738
0.0444
0.0532
0.0440
-0.0845
0.0985
0.0036
0.1101
-0.0169
-0.0934
0.1002
-0.1755
0.2692

0.1039
-0.0772
-0.2981
0.0854
-0.0715
0.0891
0.0636
-0.0072
0.0825
-0.1416
-0.1461
0.0366
0.0758
0.0689
-0.1036
-0.0809
0.0402
0.0304
-0.1861
0.0321
0.0408
0.0317
-0.0968
0.0861
-0.0087
0.0978
-0.0293
-0.1058
0.0879
-0.1878
0.2569

0.01079
0.00595
0.08889
0.00730
0.00512
0.00794
0.00404
0.00005
0.00681
0.02006
0.02136
0.00134
0.00575
0.00475
0.01074
0.00654
0.00161
0.00092
0.03463
0.00103
0.00167
0.00100
0.00937
0.00742
0.00008
0.00957
0.00086
0.01119
0.00772
0.03528
0.06599

-0.0105358
-0.0075721
-0.0160550
0.0034241
-0.0021420
0.0064377
0.0033158
0.0010967
0.0003962
0.0003918
-0.0107333
0.0017985
0.0019170
0.0028390
0.0009161
-0.0005334
-0.0039074
-0.0001550
-0.0085168
0.0010587
-0.0003334
0.0014579
0.0029431
0.0097587
-0.0011535
-0.0038525
-0.0009437
0.0153902
-0.0017068
0.0235711
0.0230054
24

May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10

16415.57
13461.6
14355.75
14564.53
12860.43
9788.06
9092.72
9647.31
9424.24
8891.61
9708.5
11403.25
14625.25
14493.84
15670.31
15666.64
17126.84
15896.28
16926.22
17464.81
16357.96
16429.55
17527.77
17558.71
16944.63
17700.9
17868.29
17971.12
20069.12
20032.34
19521.25

-0.0504
-0.1799
0.0664
0.0145
-0.1170
-0.2389
-0.0710
0.0610
-0.0231
-0.0565
0.0919
0.1746
0.2826
-0.0090
0.0812
-0.0002
0.0932
-0.0718
0.0648
0.0318
-0.0634
0.0044
0.0668
0.0018
-0.0350
0.0446
0.0095
0.0058
0.1167
-0.0018
-0.0255

-0.0659
-0.1954
0.0510
-0.0009
-0.1325
-0.2544
-0.0865
0.0455
-0.0386
-0.0720
0.0764
0.1591
0.2671
-0.0244
0.0657
-0.0157
0.0777
-0.0873
0.0493
0.0164
-0.0788
-0.0111
0.0514
-0.0137
-0.0504
0.0292
-0.0060
-0.0097
0.1013
-0.0173
-0.0410

0.0043
0.0382
0.0026
0.0000
0.0175
0.0647
0.0075
0.0021
0.0015
0.0052
0.0058
0.0253
0.0713
0.0006
0.0043
0.0002
0.0060
0.0076
0.0024
0.0003
0.0062
0.0001
0.0026
0.0002
0.0025
0.0009
0.0000
0.0001
0.0103
0.0003
0.0017

438.75
480.05
528.65
523.05
499.10
518.50
247.75
169.45
208.80
252.40
215.70
161.80
165.60
165.95
278.80
245.05
280.10
327.60
403.05
390.50
455.45
517.45
453.15
467.05
474.90
443.10
429.85
460.60
449.30
490.25
557.15

-0.0157
0.0941
0.1012
-0.0106
-0.0458
0.0389
-0.5222
-0.3160
0.2322
0.2088
-0.1454
-0.2499
0.0235
0.0021
0.6800
-0.1211
0.1430
0.1696
0.2303
-0.0311
0.1663
0.1361
-0.1243
0.0307
0.0168
-0.0670
-0.0299
0.0715
-0.0245
0.0911
0.1365

-0.0280
0.0818
0.0889
-0.0229
-0.0581
0.0265
-0.5345
-0.3284
0.2199
0.1965
-0.1577
-0.2622
0.0111
-0.0102
0.6677
-0.1334
0.1307
0.1572
0.2180
-0.0435
0.1540
0.1238
-0.1366
0.0183
0.0045
-0.0793
-0.0422
0.0592
-0.0369
0.0788
0.1241

0.00079
0.00669
0.00790
0.00053
0.00338
0.00070
0.28571
0.10784
0.04835
0.03860
0.02488
0.06876
0.00012
0.00010
0.44580
0.01779
0.01708
0.02473
0.04751
0.00189
0.02371
0.01532
0.01866
0.00034
0.00002
0.00629
0.00178
0.00350
0.00136
0.00621
0.01541

0.0018476
-0.0159823
0.0045309
0.0000209
0.0076998
-0.0067480
0.0462336
-0.0149536
-0.0084827
-0.0141407
-0.0120542
-0.0417219
0.0029769
0.0002500
0.0438764
0.0020930
0.0101611
-0.0137281
0.0107536
-0.0007115
-0.0121389
-0.0013715
-0.0070198
-0.0002510
-0.0002253
-0.0023137
0.0002534
-0.0005743
-0.0037348
-0.0013624
-0.0050851
25

Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11

20509.09
18327.76
17823.4
19445.22
19135.96
18503.28
18845.87
18197.2
16676.75
16745.35

Mean

0.0506
-0.1064
-0.0275
0.0910
-0.0159
-0.0331
0.0185
-0.0344
-0.0836
0.0041

0.0351
-0.1218
-0.0430
0.0755
-0.0314
-0.0485
0.0031
-0.0499
-0.0990
-0.0113

0.0012
0.0148
0.0018
0.0057
0.0010
0.0024
0.0000
0.0025
0.0098
0.0001

579.75
571.45
598.65
545.40
433.85
444.05
456.20
548.90
540.35
539.00

0.0406
-0.0143
0.0476
-0.0890
-0.2045
0.0235
0.0274
0.2032
-0.0156
-0.0025

0.02

SUM of
square
deviations
VARIANCE
SD

0.72
0.01
0.08

Mean

0.012

BSE Values
Average monthly returns
Variance
Standard Deviation

Correlation =
Risk () =

0.00080
0.00071
0.00124
0.01026
0.04703
0.00012
0.00023
0.03643
0.00078
0.00022

0.0009920
0.0032472
-0.0015152
-0.0076513
0.0068011
-0.0005420
0.0000460
-0.0095193
0.0027641
0.0001683

SUM of square
deviations
VARIANCE
SD

2.61
0.02
0.15

-0.011504

RANBAXY Values
Average monthly returns
Variance
Standard Deviation

0.02
0.01
0.08
CoVariance =

0.0282
-0.0267
0.0353
-0.1013
-0.2169
0.0112
0.0150
0.1909
-0.0279
-0.0148

(X-X')(R-R')
n-1
CoVariance
(SDx) (SDr)
CoVariance
Market
Variance

-0.000093

-0.0084

-0.01596

0.012
0.02
0.15

26

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

Plotting Percentage returns on Ranbaxys shares (monthly basis)

% Returns (Ranbaxy)
0.8000
0.6000
0.4000
0.2000
% Returns (R)
1
6
11
16
21
26
31
36
41
46
51
56
61
66
71
76
81
86
91
96
101
106
111
116
121
126

0.0000
-0.2000
-0.4000
-0.6000
-0.8000

27

2) RELATIVE VALUATION

Company Name
NSE Symbol
BSE Code
Year ending on
Figs. in
Sale/Revenue
Other Income
EBITDA
EBIT
Net Income
Non Cash Charges
Cash
Total Assets
Current Liabilities
Longterm Debt
Share price per Share (Rs.)
Number of Shares
Market Capitalization
Earnings Per Share (EPS) (Rs.)
Sales Per Share (SPS) (Rs.)
Book Value (BV)
Book Value per Share (BVPS) (Rs.)
Per Share Non-Cash Charges (Rs.)
P/E
P/S

Ranbaxy
Laboratories Ltd.
RANBAXY
500359
December 31,
2010
Rs. Million
56,721.02
10,017.82
27,649.55
16,194.39
11,487.26
11,455.16
27,122.82
93,931.07
34,189.02
19,672.40
598.65
421,040,693.00
252,056.01
27.28
134.72
36,213.60
86.01
27.21
21.94
4.44

Cipla Limited
CIPLA
500087
March 31, 2011
Rs. Million
61,351.60
2,987.20
982,344.00
98,000.40
9,603.90
10,609.80
841.30
72,667.90
11,581.50
38.30
321.05
802,921,357.00
257,777.90
11.96
76.41
78,508.30
97.78
13.21
26.84
4.20

Dr. Reddy's
Laboratories
DR. REDDY
934809
March 31, 2011
Rs. Million
52,181.00
2,060.00
12,998.00
10,519.00
8,934.00
2,479.00
662.00
68,014.00
16,976.00
9,242.00
5.01
169,252,732.00
847.96
52.78
308.30
41,796.00
246.94
14.65
0.09
0.02

Lupin Ltd.
LUPIN
500257
March 31, 2011
Rs. Million
67068.20
1341.00
11999.60
9963.20
8825.50
1711.80
4201.20
46741.80
11799.60
15406.90
415.35
446201189.00
185329.66
19.78
150.31
35631.10
79.85
3.84
21.00
2.76
28

P/BV
P/CF
EV
EV/EBIT
EV/Sales
EV/EBITDA

6.96
10.99
244,605.59
15.10
4.31
8.85

3.28
12.75
256,974.90
2.62
4.19
0.26

0.02
0.07
9,427.96
0.90
0.18
0.73

5.20
17.59
196535.36
19.73
2.93
16.38

Calculations using Earning Multiples:

RANBAXY CIPLA LUPIN
P/E
P/S
P/BV
P/CF

21.94
4.44
6.96
10.99

26.84
4.20
3.28
12.75

21.00
2.76
5.20
17.59

MAX
26.841
4.444
6.960
17.588

AVG

MIN

23.261 20.999
3.803 2.763
5.148 3.283
13.776 10.986

EPS
SPS
BVPS
CF

RANBAXY

Price

27.283
134.716
145.024
54.49
Average Price per
share
No. of shares (mn)
Mkt val. Of equity

572.925296
372.2616067
476.1771255
598.65
505.0035071
421.04
212626.6766

29

Calculations using Value Multiples:

RANBAXY CIPLA LUPIN

EV/Sales
EV/EBITDA
EV/EBIT

4.31
8.85
15.10

4.19
0.26
2.62

2.93
16.38
19.73

MAX

4.312
16.378
19.726

MIN

RANBAXY

EV

Long Term
debt

3.810 2.930 Sales

8.496 0.262 EBITDA
12.484 2.622
EBIT

2
56721.02
27649.55
16194.39

3
166214.1865
7232.945274
42464.64073

4
19672.4
19672.4
19672.4

AVG

Average Mkt
value of equity
No. of shares
(mn)
Per Share Price

Cash

Mkt Value
of equity

5
6=3-4+5
27122.82 173664.6065
27122.82 14683.36527
27122.82 49915.06073

79421.011
421.04
188.63056

So we can calculate that by relative valuation,

Per Share Price
Mkt Value of equity
Enterprise Value

346.82
146024
71971

Inference:
The Price per share as per our valuation is 346.82 as compared to the market price of 598.65 so it is recommended
to sell off the holding.

30

3) CAPITAL ASSET PRICING MODEL (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.

31

4) DIVIDEND DISCOUNT MODEL

The 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=
g=

2
-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), is
15.25811263.

32

5) WEIGHTED AVERAGE COST OF CAPITAL

Amount of Debt = 42607.15
PBT = 15652.45

Ke (from CAPM)
Kd (monthly after tax)

Amount of Equity = 51323.92

Tax = 4165.19

0.0817
33.14394

PAT = 11487.26

Total amount of capital = 93931.07

Tax% = 26.61%

Weight of Equity
Weight of Debt

Interest = 541.94

0.4536
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

33

34

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 Khwaja
Abdul 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, knowhow transfer, support, and plant supply. Apart from its presence in the Indian market, Cipla also has an
export 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
35

Products
The Company introduced many new drugs and formulations during the year 2010. Some significant products are
mentioned 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 actuated
inhaler
Furamist AZ (fluticasone furoate and azelastine hydrochloride nasal spray) - new combination nasal spray for
allergic 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 being
reviewed to optimize value for its technology and
product range. The Company continues to forge partnerships and alliances with large generic pharmaceutical
companies for product development and supply in developed markets. Cipla continues its humanitarian mission of
making
affordable medicines available to the entire world. It is today the largest single supplier of HIV and anti-malarial
drugs in the world in terms of volume.

36

1) RISK AND RETURN

BSE (Market)

Month
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-01
Oct-01
Nov-01
Dec-01
Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03

BSE
3519.16
3631.91
3456.78
3329.28
3244.95
2811.6
2989.35
3287.56
3262.33
3311.03
3562.31
3469.35
3338.16
3125.73
3244.7
2987.65
3181.23
2991.36
2949.32
3228.82
3377.28
3250.38
3283.66

CIPLA

% Returns
(X)

Deviation
from mean
(X-X')

Square
Deviation
(X-X')^2

0.032039
-0.048220
-0.036884
-0.025330
-0.133546
0.063220
0.099757
-0.007674
0.014928
0.075892
-0.026095
-0.037814
-0.063637
0.038062
-0.079221
0.064793
-0.059684
-0.014054
0.094768
0.045980
-0.037575
0.010239

0.0165829
-0.0636758
-0.0523401
-0.0407858
-0.1490020
0.0477642
0.0843014
-0.0231304
-0.0005281
0.0604358
-0.0415515
-0.0532700
-0.0790929
0.0226055
-0.0946775
0.0493374
-0.0751405
-0.0295098
0.0793116
0.0305236
-0.0530307
-0.0052172

0.00027499
0.00405461
0.00273948
0.00166348
0.02220160
0.00228142
0.00710673
0.00053502
0.00000028
0.00365248
0.00172652
0.00283770
0.00625569
0.00051101
0.00896384
0.00243418
0.00564609
0.00087083
0.00629033
0.00093169
0.00281225
0.00002722

CIPLA
1146.45
1106.85
1143.3
1070.35
1230.55
1123.65
1062.85
1108.5
1138.3
1109.45
1005.45
1017.95
1026.65
989.35
940.85
931.55
942.05
946
876.9
917.3
899.35
828.35
769.25

% Returns (C)

Deviation
from mean
(C-C')

Square
Deviation
(C-C')^2

(X-X')(C-C')

-0.03454
0.03293
-0.06381
0.14967
-0.08687
-0.05411
0.04295
0.02688
-0.02534
-0.09374
0.01243
0.00855
-0.03633
-0.04902
-0.00988
0.01127
0.00419
-0.07304
0.04607
-0.01957
-0.07895
-0.07135

-0.03706261
0.030410087
-0.06632773
0.147149464
-0.08939293
-0.05663058
0.040429353
0.024361971
-0.02786602
-0.09626135
0.00991104
0.006025384
-0.03885296
-0.05154329
-0.01240588
0.008750332
0.001671779
-0.0755656
0.043550183
-0.0220895
-0.08146711
-0.07386786

0.0013736
0.0009248
0.0043994
0.021653
0.0079911
0.003207
0.0016345
0.0005935
0.0007765
0.0092662
9.823E-05
3.631E-05
0.0015096
0.0026567
0.0001539
7.657E-05
2.795E-06
0.0057102
0.0018966
0.0004879
0.0066369
0.0054565

-0.0006146
-0.00193639
0.003471598
-0.00600161
0.013319726
-0.00270491
0.003408253
-0.0005635
1.47148E-05
-0.00581763
-0.00041182
-0.00032097
0.003072993
-0.00116516
0.001174558
0.000431718
-0.00012562
0.002229929
0.003454033
-0.00067425
0.004320254
0.000385386
37

Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03

3048.72
2959.79
3180.75
3607.13
3792.61
4244.73
4453.24
4906.87

-0.071548
-0.029170
0.074654
0.134050
0.051420
0.119211
0.049122
0.101865

-0.0870042
-0.0446257
0.0591979
0.1185941
0.0359643
0.1037547
0.0336661
0.0864091

0.00756974
0.00199145
0.00350439
0.01406456
0.00129343
0.01076505
0.00113340
0.00746654

714.45
631.35
684.55
755
820.75
1010.45
1029.45
1298.7

-0.07124
-0.11631
0.08426
0.10291
0.08709
0.23113
0.01880
0.26155

-0.07375942
-0.11883445
0.081742675
0.100393119
0.084564888
0.22860886
0.016282299
0.259026224

0.0054405
0.0141216
0.0066819
0.0100788
0.0071512
0.052262
0.0002651
0.0670946

0.006417383
0.005303065
0.004838995
0.011906033
0.003041321
0.023719254
0.000548161
0.022382229

Nov-03
Dec-03
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05

5044.82
5838.96
5695.67
5667.51
5590.6
5655.09
4759.62
4795.46
5170.32
5192.08
5583.61
5672.27
6234.29
6602.69
6555.94
6713.86
6492.82
6154.44
6715.11
7193.85
7635.42
7805.43

0.028114
0.157417
-0.024540
-0.004944
-0.013570
0.011535
-0.158348
0.007530
0.078170
0.004209
0.075409
0.015879
0.099082
0.059093
-0.007080
0.024088
-0.032923
-0.052116
0.091100
0.071293
0.061382
0.022266

0.0126576
0.1419609
-0.0399964
-0.0204001
-0.0290264
-0.0039206
-0.1738036
-0.0079260
0.0627137
-0.0112474
0.0599530
0.0004226
0.0836260
0.0436365
-0.0225365
0.0086320
-0.0483790
-0.0675721
0.0756440
0.0558369
0.0459256
0.0068099

0.00016022
0.02015289
0.00159971
0.00041617
0.00084253
0.00001537
0.03020771
0.00006282
0.00393301
0.00012650
0.00359437
0.00000018
0.00699331
0.00190414
0.00050789
0.00007451
0.00234053
0.00456598
0.00572202
0.00311776
0.00210916
0.00004638

1201.35
1317.25
1201.4
1195.65
1169.95
1368.2
234.15
212.4
249
238.05
296.05
279.5
277.45
317.25
286.75
260.2
254.8
263.7
289.45
313.6
336.3
341.8

-0.07496
0.09647
-0.08795
-0.00479
-0.02149
0.16945
-0.82886
-0.09289
0.17232
-0.04398
0.24365
-0.05590
-0.00733
0.14345
-0.09614
-0.09259
-0.02075
0.03493
0.09765
0.08343
0.07239
0.01635

-0.07748078
0.093953595
-0.09046958
-0.00730729
-0.02401579
0.166930482
-0.83138394
-0.09541038
0.16979518
-0.04649711
0.241125088
-0.05842392
-0.00985573
0.140928066
-0.0986599
-0.09511057
-0.02327447
0.032408152
0.095127639
0.080912895
0.069864
0.013833241

0.0060033
0.0088273
0.0081847
5.34E-05
0.0005768
0.0278658
0.6911993
0.0091031
0.0288304
0.002162
0.0581413
0.0034134
9.714E-05
0.0198607
0.0097338
0.009046
0.0005417
0.0010503
0.0090493
0.0065469
0.004881
0.0001914

-0.00098072
0.013337735
0.003618454
0.00014907
0.000697091
-0.00065447
0.144497563
0.000756225
0.01064849
0.000522972
0.014456184
-2.4689E-05
-0.0008242
0.006149607
0.002223447
-0.000821
0.001125995
-0.00218989
0.00719584
0.004517926
0.003208543
9.42034E-05
38

Sep-05
Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08

8634.48
7892.32
8788.81
9397.93
9919.89
10370.2
11280
12042.6
10398.6
10609.3
10743.9
11699.1
12454.4
12961.9
13696.3
13786.9
14090.9
12938.1
13072.1
13872.4
14544.5
14650.5
15551
15318.6
17291.1
19838
19363.2
20287
17648.7
17578.7
15644.4

0.106215
-0.085953
0.113590
0.069306
0.055540
0.045399
0.087724
0.067607
-0.136512
0.020257
0.012690
0.088904
0.064567
0.040747
0.056659
0.006615
0.022051
-0.081814
0.010358
0.061220
0.048448
0.007291
0.061464
-0.014944
0.128765
0.147295
-0.023934
0.047709
-0.130048
-0.003966
-0.110035

0.0907585
-0.1014091
0.0981341
0.0538503
0.0400839
0.0299427
0.0722681
0.0521506
-0.1519677
0.0048005
-0.0027662
0.0734476
0.0491107
0.0252909
0.0412031
-0.0088411
0.0065946
-0.0972697
-0.0050982
0.0457637
0.0329921
-0.0081646
0.0460080
-0.0303998
0.1133090
0.1318388
-0.0393899
0.0322530
-0.1455039
-0.0194218
-0.1254914

0.00823710
0.01028381
0.00963031
0.00289985
0.00160672
0.00089656
0.00522267
0.00271968
0.02309418
0.00002304
0.00000765
0.00539455
0.00241187
0.00063963
0.00169770
0.00007817
0.00004349
0.00946140
0.00002599
0.00209431
0.00108848
0.00006666
0.00211674
0.00092415
0.01283893
0.01738147
0.00155157
0.00104026
0.02117139
0.00037720
0.01574808

380.05
359.9
397.65
443.4
441.3
551.9
661.95
260.8
229.5
215.8
236
249.95
262.25
262.05
253.85
250.7
245.8
233.3
235.7
210.85
217.65
208.45
190.7
167.35
182.4
178.75
183.45
212.6
188.45
207.25
219.75

0.11191
-0.05302
0.10489
0.11505
-0.00474
0.25062
0.19940
-0.60601
-0.12002
-0.05969
0.09361
0.05911
0.04921
-0.00076
-0.03129
-0.01241
-0.01955
-0.05085
0.01029
-0.10543
0.03225
-0.04227
-0.08515
-0.12244
0.08993
-0.02001
0.02629
0.15890
-0.11359
0.09976
0.06031

0.109386344
-0.05554054
0.102369043
0.11252972
-0.00725733
0.248101955
0.196880861
-0.60853374
-0.12253654
-0.06221619
0.091083986
0.056588965
0.046688638
-0.00328384
-0.03381294
-0.01493011
-0.02206648
-0.05337556
0.00776598
-0.10795184
0.029729211
-0.0447909
-0.08767352
-0.12496483
0.087410077
-0.02253217
0.023772502
0.156377678
-0.11611481
0.097240006
0.057792427

0.0119654
0.0030848
0.0104794
0.0126629
5.267E-05
0.0615546
0.0387621
0.3703133
0.0150152
0.0038709
0.0082963
0.0032023
0.0021798
1.078E-05
0.0011433
0.0002229
0.0004869
0.002849
6.031E-05
0.0116536
0.0008838
0.0020062
0.0076866
0.0156162
0.0076405
0.0005077
0.0005651
0.024454
0.0134826
0.0094556
0.00334

0.009927739
0.005632316
0.010045898
0.006059756
-0.0002909
0.007428831
0.014228199
-0.03173539
0.018621597
-0.00029867
-0.00025195
0.004156324
0.002292914
-8.3051E-05
-0.0013932
0.000131999
-0.00014552
0.005191825
-3.9593E-05
-0.00494027
0.000980828
0.0003657
-0.00403369
0.003798903
0.009904348
-0.00297061
-0.0009364
0.005043656
0.016895159
-0.00188857
-0.00725245
39

Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10

17287.3
16415.6
13461.6
14355.8
14564.5
12860.4
9788.06
9092.72
9647.31
9424.24
8891.61
9708.5
11403.3
14625.3
14493.8
15670.3
15666.6
17126.8
15896.3
16926.2
17464.8
16358
16429.6
17527.8
17558.7
16944.6
17700.9
17868.3
17971.1
20069.1
20032.3

0.105013
-0.050427
-0.179949
0.066422
0.014543
-0.117003
-0.238901
-0.071040
0.060993
-0.023123
-0.056517
0.091872
0.174564
0.282551
-0.008985
0.081170
-0.000234
0.093204
-0.071850
0.064791
0.031820
-0.063376
0.004376
0.066844
0.001765
-0.034973
0.044632
0.009457
0.005755
0.116743
-0.001833

0.0895570
-0.0658826
-0.1954053
0.0509662
-0.0009127
-0.1324595
-0.2543571
-0.0864956
0.0455367
-0.0385785
-0.0719731
0.0764160
0.1591075
0.2670950
-0.0244412
0.0657143
-0.0156902
0.0777484
-0.0873058
0.0493352
0.0163638
-0.0788320
-0.0110796
0.0513882
-0.0136908
-0.0504290
0.0291758
-0.0059995
-0.0097011
0.1012868
-0.0172887

0.00802045
0.00434052
0.03818324
0.00259756
0.00000083
0.01754551
0.06469752
0.00748150
0.00207359
0.00148830
0.00518012
0.00583940
0.02531519
0.07133973
0.00059737
0.00431837
0.00024618
0.00604481
0.00762231
0.00243396
0.00026777
0.00621449
0.00012276
0.00264074
0.00018744
0.00254308
0.00085123
0.00003599
0.00009411
0.01025902
0.00029890

213.05
212.05
211.1
218.7
240.2
228.55
177.45
200.55
186.9
192
191.1
219.75
240.7
222.95
253.3
275.7
271.5
279.75
287.75
320.15
335.6
317.3
315.3
337.1
342.55
318.95
337.75
326.6
303.35
321.65
352.25

-0.03049
-0.00469
-0.00448
0.03600
0.09831
-0.04850
-0.22358
0.13018
-0.06806
0.02729
-0.00469
0.14992
0.09534
-0.07374
0.13613
0.08843
-0.01523
0.03039
0.02860
0.11260
0.04826
-0.05453
-0.00630
0.06914
0.01617
-0.06890
0.05894
-0.03301
-0.07119
0.06033
0.09513

-0.0330104
-0.00721494
-0.00700128
0.03348069
0.09578698
-0.05102245
-0.22610467
0.12765631
-0.07058403
0.024766115
-0.0072087
0.147400303
0.092814404
-0.07626445
0.133607973
0.085911484
-0.01775515
0.027865536
0.026075757
0.110076537
0.045737424
-0.05705041
-0.00882439
0.066619297
0.013646105
-0.07141626
0.056422204
-0.03553379
-0.0737092
0.057805151
0.092613259

0.0010897
5.206E-05
4.902E-05
0.001121
0.0091751
0.0026033
0.0511233
0.0162961
0.0049821
0.0006134
5.197E-05
0.0217268
0.0086145
0.0058163
0.0178511
0.0073808
0.0003152
0.0007765
0.0006799
0.0121168
0.0020919
0.0032547
7.787E-05
0.0044381
0.0001862
0.0051003
0.0031835
0.0012627
0.005433
0.0033414
0.0085772

-0.00295631
0.000475339
0.001368087
0.001706385
-8.7428E-05
0.006758407
0.05751132
-0.01104172
-0.00321416
-0.00095544
0.000518833
0.011263736
0.014767467
-0.02036985
-0.00326554
0.005645614
0.000278583
0.0021665
-0.00227657
0.005430651
0.000748439
0.0044974
9.77704E-05
0.003423443
-0.00018683
0.00360145
0.001646163
0.000213183
0.000715064
0.0058549
-0.00160116
40

Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11

19521.3
20509.1
18327.8
17823.4
19445.2
19136
18503.3
18845.9
18197.2
16676.8
16745.4

MEAN

-0.025513
0.050603
-0.106359
-0.027519
0.090994
-0.015904
-0.033062
0.018515
-0.034420
-0.083554
0.004114

-0.0409693
0.0351473
-0.1218152
-0.0429749
0.0755378
-0.0313602
-0.0485184
0.0030591
-0.0498758
-0.0990101
-0.0113425

0.01546

SUM of
square
deviations
VARIANCE
SD

0.00167848
0.00123533
0.01483895
0.00184685
0.00570596
0.00098346
0.00235403
0.00000936
0.00248759
0.00980300
0.00012865

0.72
0.01
0.08

BSE Values
Average monthly returns
Variance
Standard Deviation

Correlation =
Risk () =

MEAN

-0.02427
0.07623
-0.10178
-0.09797
0.07124
-0.03800
0.05585
0.01303
-0.06811
-0.09047
-0.00768

-0.02679374
0.073708065
-0.10430547
-0.1004896
0.0687167
-0.04052152
0.053331151
0.010511608
-0.07063079
-0.09298734
-0.01019978

0.0007179
0.0054329
0.0108796
0.0100982
0.004722
0.001642
0.0028442
0.0001105
0.0049887
0.0086466
0.000104

0.00109772
0.002590638
0.012705993
0.004318535
0.00519071
0.001270763
-0.00258754
3.21556E-05
0.003522765
0.009206686
0.000115691

0.00252

SUM of
square
deviations
VARIANCE
SD

2.03807
0.01644
0.12820

0.485451088

CIPLA Values
Average monthly
returns
Variance
Standard Deviation

0.01546
0.00581
0.07624
CoVariance =

343.7
369.9
332.25
299.7
321.05
308.85
326.1
330.35
307.85
280
277.85

(X-X')(R-R')
n-1
CoVariance
(SDx) (SDr)
CoVariance
Market
Variance

0.003915

0.4005

0.67346

0.00252
0.01644
0.12820

41

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

Plotting Percentage returns on Ranbaxys shares (monthly basis):

% Returns (Cipla)
0.40000
0.20000

1
6
11
16
21
26
31
36
41
46
51
56
61
66
71
76
81
86
91
96
101
106
111
116
121
126

0.00000
-0.20000
% Returns (C)
-0.40000
-0.60000
-0.80000
-1.00000

42

2) RELATIVE VALUATION
Calculations using Earnings Multiples:
RANBAXY CIPLA LUPIN
P/E
P/S
P/BV
P/CF

21.94
4.44
6.96
10.99

26.84
4.20
3.28
12.75

21.00
2.76
5.20
17.59

MAX

AVG

MIN

26.841 23.261 20.999

4.444 3.803 2.763
6.960 5.148 3.283
17.588 13.776 10.986

EPS
SPS
BVPS
CF

CIPLA

Price

11.961
76.410
97.778
25.17519284
Average Price per share
No. of shares (mn)
Mkt val. Of equity

251.1772135
211.1451794
321.05
276.5862834
264.9896691
802.921357
212765.8647

Calculations using Value Multiples:

RANBAXY CIPLA LUPIN

EV/Sales
EV/EBITDA
EV/EBIT

4.31
8.85
15.10

4.19
0.26
2.62

2.93
16.38
19.73

MAX

AVG

MIN

CIPLA

2
4.312 3.810 2.930 Sales
61351.60
16.378 8.496 0.262 EBITDA 982344.00
19.726 12.484 2.622
EBIT
98000.40

EV
3
179783.5491
256974.9017
256974.9017
Average Mkt
value of equity
No. of shares
(mn)
Per Share Price

Long
Term
debt
4
38.3
38.3
38.3

Cash

Mkt Value
of equity

5
6=3-4+5
841.3 180,586.55
841.3 257,777.90
841.3 257,777.90

232047.45
802.92136
289.00396

43

So we can calculate that by relative valuation,

Per Share Price
Mkt Value of equity
Enterprise Value

276.996814
222,406.66
231,244.45

Inference:
The Price per share as per our valuation is 276.9968 as compared to the market price of 321.05 so it is
recommended to sell off the holding.

3) CAPITAL ASSET PRICING MODEL (CAPM)

Cost of Equity (Ke) = Rf + ( Rm - Rf)
Rf = Risk free return =
8.36% =
( Rm - Rf) = Market premium

0.0836

(as calculated
= Risk of the security =
0.673464587 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

44

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) DIVIDEND DISCOUNT MODEL

There 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
No. ofshares

Price =

DPS
Ke

Price =

1.999946802
0.163392332

1605800000
802921357

12.24015094

1.999947

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

45

5) WEIGHTED AVERAGE COST OF CAPITAL

Amount of Debt = 4413.9
PBT = 11624.9

Ke (from CAPM)
Kd (monthly after tax)

Amount of Equity = 66129.5

Tax = 1952.2

0.1633
3.564

PAT = 96727

Total amount of capital = 70543.4

Tax% = 16.79%

Weight of Equity
Weight of Debt

Interest = 51.4

0.9374
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

46

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

Particulars
Risk (Beta value)
Share Price by Relative valuation approach
Cost of equity (CAPM)
Share Price using Dividend Discount Model
WACC

Ranbaxy pharmaceuticals Ltd.

-0.01596
346.82
0.081709092
15.25811263
15.07873

Cipla Ltd.
0.67346
276.9968
0.163392332
12.24015
0.3761

47