Corporate Finance - I Analysis of Price-to-Earnings Ratio:

Ranbaxy Laboratories Limited

Presented By:Group 4 Aquil Arif Himank Kochhar Pranav Bajaj Ritwik Vijayan Rohit Chandak Sukriti Tayal

(11DM-025) (11DM-046) (11DM-104) (11IT-026) (11FN-081) (11DM-161)

Price-to-Earnings Ratio (P/E Ratio)

The P/E ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. The P/E ratio can therefore alternatively be calculated by dividing the company's market capitalization by its total annual earnings.

Where, Market Price per share is determined by the price at which the shares are traded in an public exchange and, Earnings per share are calculated from the net income of the company for the most recent 12 month period, divided by the number of shares issued.

P/E Ratio for Ranbaxy

Ranbaxy EPS Market Price P/E ratio Date Dec-11 27.28 ` 393 14.41 12-12-2011 Apr-11 17.68 ` 475 26.73 26-04-2011

Analysis:
The P/E ratio for Ranbaxy is at 14.41. A P/E ratio between 10-17 is considered at fair value hence the preliminary look at the EPS suggests that the company is valued close to its actual value The P/E ratio in the month of April was 26.73 which suggest a sharp decline in the P/E ratio. The P/E ratio decline might indicate that some future gains were expected in April which have either materialized or are not expected to give returns in the future. A closer look at the financial statements of Ranbaxy revealed that the company posted a loss in the second quarter and hence caused a decline in the P/E ratio. The loss was attributed to currency fluctuations in international markets. Ranbaxy has been making headway in launching some breakthrough drugs in the US for which it has already received the necessary FDA approvals and has also partnered a deal with TEVA for the same. This increases the future return prospects for the company and hence the company may be considered undervalued at `393.

P/E ratio in various Pharmaceutical Companies

Ranbaxy Abbott Cadila Cipla Dr Reddys Labs GlaxoSmithKline GlenMark Merck Novartis Pfizer Piramal Health Sun Pharma Wockhardt EPS 27.28 43.34 29.00 12.57 60.24 48.35 8.42 33.51 48.60 65.53 27.30 15.22 21.51 Market Price 393.00 1,415.00 708.00 328.45 1,585.75 1,844.00 305.60 622.00 686.00 1,120.00 371.00 521.95 352.65 P/E ratio 14.41 32.65 24.41 26.13 26.32 38.14 36.29 18.56 14.12 17.09 13.59 34.29 16.39

Analysis:
The P/E ratio for the major players in the pharmaceutical industry ranges from 13-38. A P/E ratio of 14.41 for Ranbaxy is at the lower end of the spectrum which might indicate that the company may be slightly undervalued when compared to its peers in the same industry. This might also be indicative of the poor financials of the company in the previous quarter, but investors may still buy the stock considering the future prospects of the company from its new drug Lipitor

P/E ratio of Pharmaceutical Industry (Weighted by Market Capitalization)

P/E ratio Ranbaxy 14.41 Abbott 32.65 Cadila 24.41 Cipla 26.13 Dr Reddys Labs 26.32 GlaxoSmithKline 38.14 GlenMark 36.29 Merck 18.56 Novartis 14.12 Pfizer 17.09 Piramal Health 13.59 Sun Pharma 34.29 Wockhardt 16.39 Industry P/E [Weigthed as per market Capitalization] Market Cap (In Crores) 16,183.69 2,981.28 14,669.21 26,335.82 26,686.56 15,585.78 8,238.44 1,020.70 2,205.14 3,297.48 6,186.79 53,964.18 3,841.20 28.02

Analysis:
The P/E ratio of the pharmaceutical industry by weighted mean of market capitalization comes out to be 28.02 A P/E ratio of 14.41 for Ranbaxy is almost half the industry average indicating that the company is undervalued. We must also note that the top 3 companies by market capitalization have PE ratios of the tune of 26 to 34 indicating that these companies may be overvalued as compared to the peers Ranbaxy is also the only company with a market cap of over `10,000 crore which has a PE ratio of less than 20, indicating that it is an anomaly in the industry.

Sources
http://www.topnews.in/companies/ranbaxy as on 15 December, 2011 http://money.rediff.com/companies/ranbaxy-laboratories-ltd/12540040/ratio as on 15 December, 2011 10:07 hours http://www.moneycontrol.com/stocks/marketstats/indcomp.php?optex=BSE&indcode=Pha rmaceuticals as on 15 December, 2011 10:07 hours http://www.moneycontrol.com/news/buzzing-stocks/ranbaxy-gets-us-fda-nod-stocktouches-52-week-low_634043.html