Company Valuation: Team Paisa Vasool

•Amber Gupta
•Sidharth Sachdeva
•Priyanka Bagree WIDESCREEN
•Aayush Singh Sengar
•Deep Ray PRESENTATION
CFA Research Challenge
Methodology
Sector Overview

Company Overview

Valuation : DCF

Valuation : Relative Multiple

Sector Overview
 
 The pharmaceutical industry in India ranks 3rd in the world terms of volume and 14th
in terms of value
 2.4 per cent of the global pharmaceutical industry in value terms and 10 per cent in
volume terms
 Expected to expand at a Compound Annual Growth Rate (CAGR) of 15.92 per cent to
US$ 55 billion by 2020 from US$ 20 billion in 2015
 The industry is marked with high fragmentation and relatively low drug prices, as
compared with the regulated markets
 Indian drugs are exported to more than 200 countries in the world, with the US as the
key market
Sector Overview
Generic drugs form the largest segment
 With 70 per cent of market share (in terms of revenues), generic  drugs

form the largest segment of the Indian pharmaceutical sector.

 India supply 20 per cent of global generic medicines market exports in

terms of volume, making the country the largest provider of generic

medicines globally and expected to expand even further in coming years
 Over the Counter (OTC) medicines and patented drugs constitute 21 per

cent and 9 per cent, respectively, of total market revenues of US$ 20

billion
Sector Overview
Rank Company Market Capitalization
2015 (INR crores) Chart Title
1 Sun Pharmaceutical 2,17,636
4% Sun Pharmaceutical
4%
2 Lupin Ltd 84,193 5% Lupin Ltd
3 Dr. Reddy's Laboratories 63,779 5% Dr. Reddy's Laboratories

4 Cipla 52,081 36% Cipla

6%
5 Aurobindo Pharma 42,454 Aurobindo Pharma
Cadila Healthcare
6 Cadila Healthcare 38,677
7%
Glenmark
7 Glenmark Pharmaceuticals 29,047 Pharmaceuticals
8 GlaxoSmithKline Pharmaceuticals 28,587 9% GlaxoSmithKline
Ltd Pharmaceuticals Ltd
9 Divis Laboratories 24,847 14% Divis Laboratories
11%
10 Torrent Pharmaceuticals 22,320 Torrent Pharmaceuticals
Company Overview: Sun Pharma.
 Specializes in technically Complex
products Geographic Segmentation
 With Ranbaxy Laboratories’ merger,
India
the company is now the segment 26%
leader with a 9.2% market share in the
domestic formulation market
Rest
 In terms of ANDAs, the company of the
World
cumulatively has 413 products, out of 74%
which 159 products now await
USFDA approval, including 13
tentative approvals.
Compnay Overview : Acquisitions
 Company overview
Revenue growth rate Revenue
80 300,000.00 277,441.60
60 250,000.00
200,000.00
40
150,000.00
20
100,000.00
0 50,000.00
-20 0.00

%change -

CAGR 22% 5TH Largest specialty Pharma company

 Company Overview
Net Profit Margin ROE and ROC
50.00% 50.00%
40.00% 40.00%
30.00% 30.00%
20.00% 20.00%
10.00% 10.00%
0.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Net Profit Margin
Return on Capital Return on Equity
EBIT Margin R&D Spend % of Net Sales
50.00%
40.00% 8
30.00%
4
20.00%
10.00% 0
2012 2013 2014 2015 2016
0.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
R&D Spend % of Net Sales
EBIT Margin Exponential (R&D Spend % of Net Sales)
Historic performance
Current market Price 787.35

52wk Range: 704.00 - 966.00

Volume: 5,64,737

Avg Vol (3m): 34,67,180

Market Cap: 1.90T

P/E (ttm): 40.18

EPS (ttm): 19.6
Valuation

Company Stock Valuation

2 Approaches
Relative
DCF Analysis
Multiple
DCF: Rationale for choosing FCFF
Company FCFE vs Dividends
paying 60000

Dividends 50000

much less 40000

than its
30000
capable of
20000

10000

0
1 2 3 4 5 6 7 8 9 10

-10000

fcfe Total Dividends Paid

DCF: Rationale for choosing FCFF
Total Debt/Capital
The company
60.00%
has entered
into a volatile 50.00%

phase
40.00%

Change in 30.00%
capital
structure : 20.00%

Increasing use 10.00%

of debt
0.00%
2004 2006 2008 2010 2012 2014 2016 2018

Total Debt/Capital
DCF: WACC Computation
TICKERS UNLEVERED BETA
Cost of Equity
SUNP in equity 0.5
 Regression Beta: High
Standard error LPC IN equity 0.19

 Beta computed by DRRD IN equity 0.27

unlevering peer group CDH IN equity 0.17

Beta BIOS IN equity 0.71

 Industry average Beta WPL IN equity 0.16
Levered again STR IN equity 0.41
 Beta for SUN Pharma:
0.32
DCF: WACC Computation
Equity Risk Premium
 ERP value for
India=7.2%  Cost of Equity=9.6%
 Source: PWC
research on equity
risk premium India
 DCF: WACC Computation
Cost of Debt

Spread 0.27%

10 yr G-sec 7.294%

Cd 7.564%
DCF: WACC Computation

Cost of Debt 7.564%

Cost Of Equity 9.6%

WACC 9.46%
DCF: Assumptions
Future Growth rate Projections
 Q4 US sales were affected by competitive pressure and

supply restraints due to Halol remediation measures

 Would lose anywhere between 5‐10% on product

pricing but overall erosion would be <10%

 Volatile currency and non participation in low margin

business affected emerging market sales

 DCF: Assumptions
Future Growth rate Projections
2016 2017 2018 2019 2020
Best Case
1.7% 7.5% 8% 9% 12%
Scenario
Worst case
1.7% 6% 6.5% 6.75% 7%
Scenario
 DCF: Assumptions
Future Growth rate Projections: FCFF
2016 2017 2018 2019 2020
Best Case 7,360 44,723 50,144 52,422 59,891
Scenario
Worst case 7,360 42,982 47,131 47,932 51,393
Scenario
Assumptions: Terminal Value
Perpetual Growth rate
 CAGR of 17.29% for 2005
-2015 Cost of Debt 7.564%
 The Industry is expected to grow
Cost Of Equity 9.6%
at CAGR of 15.9% till 2020-
CRISL Sector Report WACC 9.46%
 Positive long term trends: Life Perpetual Growth
expectancy rates, Inorganic Rate 7%
growth strategy
 DCF: Results
Best case Scenario
Share price: 883.46184
WACC
 Side by side material fits
0.0625
0.0825
1141.973
0.085
1007.107
0.09
811.0006
0.0946
684.6009
0.0975
622.0172
0.1
575.8502299
0.1025
535.4675

more naturally.
Perpetua 0.065
0.0675
1300.076
1510.879
1128.665
1284.955
888.7577
983.7943
739.69075
804.94479
667.4293
720.41
614.7621674
659.6605569
569.1311
607.6039
l Growth
Widescreen adds drama
0.07 1806.003 1493.34 1102.59 883.46184 783.0237 712.0420113 651.9955
rate 0.0725 2248.689 1785.08 1255.327 979.74293 858.1601 773.9473665 703.7858
0.075 2986.5 2222.69 1458.977 1100.5855 949.9934 848.2337927 764.9924
to graphics and images.
0.0775 4462.12 2952.039 1744.087 1256.7622 1064.785 939.0283136 838.4404

0.08 8888.983 4410.738 2171.751 1466.4241 1212.374 1052.521465 928.2102

 DCF: Results
Worst Case Scenario ,Share price =726.48
WACC
 Side by side material
8.25% fits
8.50% 9% 9.46% 9.75% 10% 10.25%

more naturally.
6.25% 939.3698 828.3852 666.9776 562.9166 511.3817 473.3586 440.0938

6.50% 1069.415 928.3715 730.9358 608.2301 548.7349 505.3652 467.7834

 Widescreen adds drama
Perpetual 6.75% 1242.808 1056.925 809.1069 661.904 592.3135 542.2958 499.4287

growthto graphics
rate 7.00% and
1485.559images.
1228.33 906.8208 726.4872 643.8156 585.3815 535.9425

7.25% 1849.685 1468.297 1032.453 805.6821 705.6181 636.301 578.5419

7.50% 2456.562 1828.247 1199.963 905.0796 781.1545 697.4044 628.8867

7.75% 3670.315 2428.165 1434.476 1033.541 875.575 772.0863 689.3004

8.00% 7311.576 3627.999 1786.246 1205.996 996.9727 865.4386 763.1394

DCF: Results

Price Weights
We take
Weighted Best case 883.461 60% Rs.820.6715
Average to
arrive at final Worst case 726.4872 40%
result
Valuation: Relative Multiples
40

35

30

Relative
25
multiples PE Ratio
Exponential (PE Ratio)
show a 20
TEV / EBITDA
decreasing Price / CF
15 Price / Book
trend
10

0
TTM FY1 NTM FY2
Price to Earning Ratio
90

80 76.53

Industry P/E 70

has been 60

calculated 50
using 5-year 40.28 38.86214474
37.75
moving 40

28.5 29.58 28.51

average EPS 30 26.47

as weights 20 16.32

10

0
Sun Pharma Lupin Dr Reddys Aurobindo Cipla Divis Lab GSK Pharma Glenmark Industry
Labs Pharm Pharma Average
Price to Book Ratio
18
16.93

16

Industry P/E 14

has been 12

calculated 10
8.94
using 5-year 8 7.41 7.68
8.010758775

moving
6.95

average EPS
6 5.25
4.52
3.83
as weights 4

0
Sun Pharma Lupin Dr Reddys Aurobindo Cipla Divis Lab GSK Pharma Glenmark Industry
Labs Pharm Pharma Average
Estimated Price
Metric Value Price
Industry P/E 38.86
761.31
Using recent EPS 19.59
data for EPS
and Book Industry P/B 8.01
Value 852.75
Book Value 106.45

As most of the investment is in plant and equipment,

hence, P/B is the better measure than P/E
Statistical Valuation
 Dependent Variable: Price
 Independent Variables: EPS, Book
Using
Industry Data
Value, PBT/Share, NPM, RoA, Current
for past 10 Ratio
years
 Confidence Interval: 95%
Linear Regression result
Regression Statistics
Multiple R 0.963688508
R Square 0.92869554
Adjusted R Square 0.911559302
Standard Error 1.769653171
Current ratio Observations 80
and
PBT/Share   Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

are
Intercept 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A

insignificant Basic EPS (Rs.) -0.177812072 0.039997573 -4.44557157 0.00002984 -0.25749132 -0.09813282 -0.25749132 -0.09813282
Book Value
[ExclRevalReserve]/
Share (Rs.) 0.027825755 0.002556744 10.8832763 0.00000000 0.02273245 0.03291905 0.02273245 0.03291905

PBT/Share (Rs.) 0.053529993 0.029769262 1.79816325 0.07617523 -0.00577341 0.11283340 -0.00577341 0.11283340
Net Profit Margin
(%) -0.104517118 0.019878305 -5.25784852 0.00000132 -0.14411673 -0.06491750 -0.14411673 -0.06491750
Return on Assets
(%) 0.526732711 0.044077167 11.9502397 0.00000000 0.43892649 0.61453893 0.43892649 0.61453893
Price Equation

 P=(-0.18*EPS)+(0.03*BV) -
Price was (0.1*NPM)+(0.53*RoA)
taken as a log
normal  Auto-Correlation and
function
Heteroskedasticity exists
Valuation: Analyst Estimates
Our Valuation Morgan Stanley 762
falls in the
range of Credit Suisse 775

Target Prices
794
recommended
by top
Nomura 817
Investment
Firms Religare 940
CLSA 975

Citi 1020
THANK YOU