CORPORATE FINANCE
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TABLE OF CONTENTS INTRODUCTION ...........................................................................................................................1 Business description ............................................................................................................... 1 Value to shareholders in recent history .................................................................................. 2 Industry overview and competitive position .......................................................................... 2 Investment summary .............................................................................................................. 3 Valuation including explanation of assumptions ................................................................... 3 Investment risks ..................................................................................................................... 5 CONCLUSION ................................................................................................................................6 REFERENCES ................................................................................................................................7 APPENDIX ......................................................................................................................................9
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INTRODUCTION Sun pharma is the India largest pharmaceutical company and in order to understand concept of equity valuation, mentioned firm is taken in the report. In the report, EVA and TSR analysis is done and their results are explained in detail. Along with this, valuation methods like DCF, PE, PB, EV/EBITDA and net present value is also mentioned in the report. Out of these methods best technique is identified for the share price valuation. Apart from this, assumptions are used for conducting analysis in the report are also mentioned. At the end of the report, investment risks are pointed out and global and domestic economic environment are considered. Business description Sun pharma is a leading pharmaceutical company of India and it is the world fifth largest generic medicine manufacturer across the globe. Currently, it is operating in several nations and supplying active pharmaceutical ingredients (API) to many large pharmaceutical corporations all over the world. Its inception is focused on research & development, developing API and generic medicine and launching medicines in major therapeutic areas. It also brings large strategic change in its distribution strategy by following front end model in largest pharmaceutical market in the world that is USA. Due to this reason, it rapidly grows its business in the mentioned geographic region. Time to time it is also entering into strategic partnership with the leading pharmaceutical firms that are headquartered in the USA, UK and Japan. This is the big reason behind fast growth of the mentioned firm (Chaudhuri, 2005). Currently, it is producing medicines related to various therapeutic areas like Oncology, respiratory and neurology etc. Recently, it acquires Ranbaxy which was also giant firm of India. Due to some mistakes in its operations, USFDA took strict action against the firm. After that, Ranbaxy was continuously facing a lot of problems. In such a situation, Sun pharma decided to acquire Ranbaxy by following a merger process. Regarding this, firm has completed all legal formalities and in FY 2015 it completely acquired a giant firm. After acquisition, firm distribution network got increased and its product portfolio also enhanced (Kamath, 2008). After acquisition of Ranbaxy, firm became number one company in the generic dermatology space and many projects of Ranbaxy are in pipeline. Hence, it can be said that in future time period, firm will grow at a rapid pace across the globe.
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Value to shareholders in recent history Shareholder value is the sum of positive and negative impact of all strategic decisions on the return that they earn on the invested amount. Making wise investment and good return on investment are the major components of shareholder value. Sun pharma is a large pharmaceutical company in India and across the globe. Since its inception it pays due attention on increasing its business at a rapid rate. With the passage of time it also changes its strategy. Since FY 2011, it gives good return to the shareholders. From FY 2011 to 2015 return percentage is 68.32%, which is very huge in nature. Firm gives this return in the situation when economic health of the nations was not well and people lose their confidence on the firm earning capability (Kale, and Little, 2007). During this period, Sun Pharma undertook and completed many projects that were related to the development of the innovative medicines. It also carries out research projects in collaboration with other well known pharmaceutical firms. Its main objective was to increase presence in USA and Europe and in this regard it adopted front end model for distributing its product. This model to large extent reduces firm dependency on other pharmaceutical firms to distribute its product in the international market. This helps Sun pharma in running its business smoothly and in proper manner. Continue approval of generic medicines from USFDA and increase in demand for the company API in preparation of medicines by foreign companies in international market increases confidence of investors in the company (Chittoor and et.al, 2009). This is evident from the higher return percentage. Hence, it can be said that Sun pharma gives good value to the shareholders. Industry overview and competitive position India pharmaceutical industry is one of the largest in the world. In mentioned industry, there are many large companies like Cipla and Dr Datson etc. Indian companies have good presence across the globe especially in USA. Preparation of generic medicines is one of the unique selling prepositions of this industry. In USA, there is high demand for generic medicines because medical operation cost is already high in the mentioned nation. Moreover, price of newly developed medicines is already high in USA. Due to this reason, people mostly prefer to consume generic medicines so as to reduce their treatment cost to some extent (Greene. 2007). In USA, 80-85% prescriptions are based on generic drugs. Hence, in future also demand for generic medicines will increase in the world’s largest pharmaceutical market. Other major USP or unique selling proposition of Indian pharmaceutical industry is API or active pharmaceutical ingredient. 4|Page When students ask ‘ can someone Do My Assignment for me’. Our expert writers provide them best assignment help to make their assignment more impressive.
It is a component of the tablet which plays a most important role in treatment of the patient who is suffering from the specific disease. India is at second rank in API production after China across the globe. There is a growing demand for API in the world. This is because cost of preparing medicines API is very high in the large pharmaceutical markets like USA and Europe. Due to this reason, companies that are headquartered in these continents are importing API from countries like India and China. Indian companies are supplying API to companies like Glaxosmitkline. This indicates that cost of API is small and quality of same supplied by the Indian companies is of excellent quality (Chittoor and Ray, 2007). Thus, it can be said that Indian pharmaceutical industry is highly competitive and companies operating in this industry are giving stiff competition to the companies of USA and Europe etc. Investment summary In order to make investment in any company it is necessary to understand the same. By creating a broad understanding it can be determined whether investment will be profitable or unprofitable. In this report, Sun pharma is taken for valuation of equity. On the basis of valuation of equity it can be determined that whether firm share is valued at its fair price in the stock exchange. In this regard, techniques like discounted cash flow method and EV/EBITDA technique is used in the report. But every time for earning profit an investor cannot entirely rely of valuation of the company shares (Bhaumik, Driffield and Pal, 2010). With the change in time shares gives profit or loss to an investor. If investment on 100 shares of the company is made then it will be valued at 48,465 in the FY 2011. In FY 2015, the value of these 100 shares was 81,575. This clearly indicates that investment gives huge profit to the investor and even market fluctuate sharply and investor gets a higher return on the invested amount.
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Valuation including explanation of assumptions In the report, valuation of the company shares is done by using several techniques. These techniques are PE, PB, EV/EBITDA, DCF and net present value method. The results of these techniques are explained below. ➢ PE ratio- This ratio indicates that firm share price is overvalued or undervalued in the stock exchange. If firm PE ratio is below industry PE ratio then it is assumed that firm share is undervalued and recommendation for investment is made (Hodder, Hopkins and Wahlen, 2006). On other hand, if vice verse happen then it is assumed that share price is overvalued and recommendation for investment is not made in this case by the investment experts. PE ratio of the Sun pharma is below and on this basis it can be said that firm shares valuation is proper. If we compare Sun pharma with other companies on the basis of this ratio then it can be said that firm share is positively valued and at low PE ratio. Thus, there is a high probability of growth in the firm share value in future. Hence, it will be profitable to make investment in the company equity share. ➢ PB ratio- In this technique, valuation is done by comparing share value with the book value of per share. By comparing with the same ratio of the other firms operating in the industry it can be accessed whether firm shares are overvalued or undervalued (Roehling and et.al, 2005). On comparison of value of ratio of Sun pharma with other companies it can be seen that shares are overvalued so, on the basis of this technique it can be said that investors must abstain from making investment in the firm. ➢ EV/EBITDA- In this ratio, enterprise value is calculated and divided by the EBITDA in order to identify fair value the shares (EV/EBITDA ratio. 2016). By doing calculation, it is identified that real value of the company share is 2332. Current share price is below these 6|Page When students ask ‘ can someone Do My Assignment for me’. Our expert writers provide them best assignment help to make their assignment more impressive.
values and this reflects that share price is undervalued and there is very high probability of increase in the share price. ➢ DCF or discounted cash flow technique- In this method, share price is calculated by using discounted cash flows. By using forecasting methodology, firm revenue is projected and cost of the firm to earn that revenue is also computed (Fernández, 2007). On the basis of this technique, fair value of per share is 1170. This is nearby the company share price to some extent. Hence, it can be said that this technique is producing good results. ➢ Net present value- In this method it is identified whether firm is earning profit on capital expenditures (Net present value. 2013). For this, CAPEX for each year is computed and future investment value if forecasted. NPV is positive and this reflects that firm is earning good return on investment. Due to this reason, it can be said that investment in the firm will be profitable for the investor.
Which technique is best? PE ratio is best for the firm in comparison to other techniques. This is because market players only understand pricing patterns and other large investor investing behavior. They have deep knowledge of PE ratio. People do not understand DCF technique EV/EBITDA valuation techniques for making investment decisions. PE ratio concept is also related to the price pattern or technical analysis. Concept of PE ratio is simple and by comparing firm’s earning to shares price is easily identified that company shares are fairly priced or not. This technique fairly valued share price in comparison to other complicated techniques. DCF technique requires preparation of assumptions and they may prove wrong in the future. Due to these reasons PE ratio is considered better than other techniques. Assumptions •
In order to compute cost of equity, market returns are assumed by considering specific time period of economic condition of India and relevant stock exchange performances.
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Tax rate is assumed constant at 15%.
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In past years, cost as a percentage of revenue does no change sharply. So, cost as a percentage of revenue is taken same from FY 2016-2020 with reference to earlier year cost percentages.
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•
Every year, revenue growth rate is increasing and on the basis of acquisition of Ranbaxy in FY 2015 it is assumed that revenue will grow at a rapid rate. On the basis of hope of approval from USFDA on several generic medicines whose production is in pipeline it is assumed that revenue will increase at a rapid rate.
EVA and TSR analysis Economic value added technique shows that Sun pharma EVA is above the average EVA. Hence, it can be said that firm is giving elegant performance on this front. On other hand TSR technique is also used in the report and it is identified that in last five years Sun pharma shares gives return above the minimum return that investors must earn on the investment. Hence, it can be said that investors earn good return on the Sun pharma shares. Investment risks Following are the investment risks. •
If market becomes bearish then share price of Sun pharma will also fall. Hence, investment needs to be made with full caution.
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Frequent change in currency and interest rates in negative direction may lead to fall in share price (Yang and Blyth, 2007).
CONCLUSION On the basis of above discussion it is concluded that there are many techniques of valuation. But investor cannot use all techniques in order to make its investment decisions. Hence, investors must abstain from using complicated methods for equity valuation. In DCF techniques, assumptions are made and these may prove incorrect in the future. Hence, if investment decisions are taken on the basis of this technique then investor may bear loss on the investment. Hence, it is concluded that investors must use simple methods for equity valuation.
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REFERENCES ◆ Bhaumik, S.K., Driffield, N. and Pal, S., 2010. Does ownership structure of emergingmarket firms affect their outward FDI? The case of the Indian automotive and pharmaceutical sectors. Journal of International Business Studies. ◆ Chaudhuri, S., 2005. The WTO and India's pharmaceuticals industry: Patent protection, TRIPS, and developing countries. New Delhi: Oxford University Press. ◆ Chittoor, R. and Ray, S., 2007. Internationalization paths of Indian pharmaceutical firms—A strategic group analysis. Journal of International Management. ◆ Chittoor, R., et.al., 2009. Third-world copycats to emerging multinationals: Institutional changes and organizational transformation in the Indian pharmaceutical industry. Organization Science, 20(1). ◆ Fernández, P., 2007. Valuing companies by cash flow discounting: ten methods and nine theories. Managerial Finance. ◆ Greene, W., 2007. The emergence of India's pharmaceutical industry and implications for the US generic drug market. US International Trade Commission, Office of Economics. ◆ Hodder, L.D., Hopkins, P.E. and Wahlen, J.M., 2006. Risk-relevance of fair-value income measures for commercial banks. The Accounting Review. ◆ Kale, D. and Little, S., 2007. From imitation to innovation: The evolution of R&D capabilities and learning processes in the Indian pharmaceutical industry. Technology Analysis & Strategic Management. ◆ Kamath, G., 2008. Intellectual capital and corporate performance in Indian pharmaceutical industry. Journal of Intellectual Capital. ◆ Roehling, M.V., et.al., 2005. The future of HR management: Research needs and directions. Human Resource Management. ◆ Yang, M. and Blyth, W., 2007. Modeling investment risks and uncertainties with real options approach. International Energy Agency.
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