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INTRODUCTION
Introduction to the study
1
Value maximization is the central theme in financial management. Owners of corporate
securities will hold management if they fail to enhance value. Hence all senior managers
must understand what determines value and how to measure it. While valuation was
regarded as an abstruse academic subject in the past, it is of considerable importance to
managers now.
In the wake of economic liberalization, companies are relying more on the capital
market, acquisition and restructuring are becoming commonplace, strategic alliances are
gaining popularity, employee stock option plans are proliferating, and regulatory bodies are
struggling with tariff determination. In these exercises a crucial issue is: How should the
value of a company or a division thereof be appraised?
2
Need of the study The goal of such an appraisal is essentially to estimate a fair market value of a
company. The most widely accepted the definition of fair market value was laid down by
the Internal Revenue Service of the US. It defined fair market value as “the price at which
the property would change hands between a willing buyer and a willing seller when the
former is not under any compulsion to buy and the latter is not under any compulsion to sell,
both parties having reasonable knowledge of relevant facts.” When the asset being appraised
is “a company”, the property the buyer and the seller are trading consists of the claims of all
the investors of the company. This includes outstanding equity shares, preference shares,
debentures, and loans.
Valuation is the first step toward intelligent investing. When an Investor attempts to
determine the worth of her shares based on the fundamentals, she can make informed
decisions about what stocks to buy or sell.Without fundamental value, one is set adrift in a
sea of random short-term price movements and gut feelings.
VALUING A BUSINESS
Finding a value for a company is no easy task -- but doing so is an essential component
of effective management. The reason: it's easy to destroy value with ill-judged
acquisitions, investments or financing methods. This module will take participants
through the process of valuing a company, starting with simple financial statements and the
use of ratios, and going on to discounted free cash flow methods and beyond.
How a business is valued depends on the purpose, so the second half of the day will be
devoted to implementation of the methods in different contexts -- such as valuing an
3
acquisition target, and valuing a company in distress, and using valuation in corporate
restructuring
4
OBJECTIVES OF THE STUDY
1. To Study about Corporate Valuation of firms.
2. To Know the value of firms using Discounted Cash Flow Technique (DCF).
3. To Calculate value of Dr Reddy’s Laboratories LTD and Aurobindo Pharmaceutical Ltd.,
4. To Compare the values of the two firms.
5
SCOPE OF THE STUDYThe study is conducted in the hyderabad city only in valuing the business we are considered
Dr.Reddy labs & Aurobindo Pharmaceutical’s financial statements and the study period is
only 45 days.
SOURCES OF DATA AND METHODOLOGY
The study is based on purely secondary data and the data is taken from the Annual
Reports of the two companies for a period of four years ( 2006 – 09).The two companies
taken for analysis are AUROBINDO PHARMACEUTICALS LTD and Dr. REDDY’S
LABORATIRIES LTD.
The methodology includes
1. Discounted Cash Flow (FCF) technique, used to calculate the value of the two firms.
2. Percentages
3. Charts and Graphs
6
LiMITATIONS OF THE STUDY
Considering only the last 4 years Balance Sheet and Profit and Loss Account to evaluate the
value of the firm.
This study has been conducted only based on two companies namely (Dr. Reddy’s
Laboratories Limited, Aurobindo Pharmaceutical Limited), to examine the Financial pattern
of the Companies, which covers a period of four years from 2006-2009.
The major source of information being only through secondary source of data i.e. annual
reports of the company. As the information presented in such report is subject to statutory
obligation, business practices, accounting concepts and conventions and generally Accepted
standards of disclosure in the interest of the company and such information may sometimes
not reveal the correct Financial Positions of the company.
Using only Discounted Cash Flow Approach to find Firm Value.
Valuing a Firm using the Discounted Cash Flow Approach calls for forecasting Cash Flows
over an indefinite period of time for an entity that is expected to grow. This is indeed a
daunting proposition. Forecasting involves a good deal of Judgement and Experience.
Continuing value formula of firm is based on assumptions.
7
THEORITICAL ERSPECTIVE
1. CORPORATE VALUATION
8
Value maximization is the central theme in financial management. Owners of corporate
securities will hold management if they fail to enhance value. Hence all senior managers
must understand what determines value and how to measure it. While valuation was
regarded as an abstruse academic subject in the past, it is of considerable importance to
managers now.
In the wake of economic liberalization, companies are relying more on the capital
market, acquisition and restructuring are becoming commonplace, strategic alliances are
gaining popularity, employee stock option plans are proliferating, and regulatory bodies are
struggling with tariff determination. In these exercises a crucial issue is: How should the
value of a company or a division thereof be appraised?
The goal of such an appraisal is essentially to estimate a fair market value of a
company. The most widely accepted the definition of fair market value was laid down by
the Internal Revenue Service of the US. It defined fair market value as “the price at which
the property would change hands between a willing buyer and a willing seller when the
former is not under any compulsion to buy and the latter is not under any compulsion to sell,
both parties having reasonable knowledge of relevant facts.” When the asset being appraised
is “a company”, the property the buyer and the seller are trading consists of the claims of all
the investors of the company. This includes outstanding equity shares, preference shares,
debentures, and loans.
There are four broad approaches to appraising the value of a company:
1. Adjusted book value approach.
2. Stock and debt approach.
3. Direct comparision approach.
4. Discounted cash flow approach.
GUIDELINES FOR CORPORATE VALUATION
9
Understand how the various approaches compare
The discounted cash flow approach is ideally suited when
(a) Fairly credible business plans and cash flow projections are available for the explicit
forecast period of five to ten years or even more and
(b) The firm is expected to reach a steady state at the end of the explicit forecast period.
Use atleast two different approaches Every approach has its limitations. Hence exclusive reliance on a single approach may
lead to biasis in valuation. Practical wisdom suggest that, in most real life valuations
exercises, the appraiser must use atleast two different approaches. The final value indicator
may be arrived at by taking a weighted average of the valuation figures produced by two or
more different approaches. Weighting should be based on the judgement of the appraiser,
not on a mechanical formula.
Work with a value range Valuation is an inherently imprecise, inexact, and uncertain exercise. Given an
inescapable indeterminateness characterising valuation, it is naïve and foolhardy to attach
great precision to any single value estimate. A more sensible approach would be to look at
two to three plausible scenerios and define a value range, based on the value indicators for
these scenerios, to take care of the imponderables.
Go Behind Numbers As we have seen, there are several value drivers, viz., invested capital, return on
invested capital, growth rate, and cost of capital. Often, appraisers have difficulty in getting
a handle over return on invested capital is mainly a function of entry barriers, the appraiser
must go behind the numbers and examine carefully entry barriers like economies of scale,
product differentiation, technological edge, access to distribution channels, patent
protection, and governmental license.
Value Flexibility
10
The discounted cash flow approach to valuation is based on cash flows forecasted on the
basis of a current assessment of future prospects. This approach, in an important sense, is
incomplete as it does not take it to account the value of flexibility. Remember that the
management may change its policies in the light of future developments and can exercise a
variety of options suited to the needs of the unfolding environment. Flexibility and options
are quite valuable. To ignore them is to overlook an important source of value.
Blend Theory with Judgement Valuing real companies calls for combining theory, judgement, and experience. As
Milton Rock said: “In the end, even when armed with the results of various analyses such as
DCF values, secondary market trading levels, a history of comparable transactions, and
estimates of liquidation or replacement values, the evaluator moves from the arena of
seeming precision and science to the realm of judgement and art.”
Avoid Reverse Financial Engineering
In valuation exercises, the appraiser may sometimes start with a given value estimates
and then work backwards to specify the assumptions that produce the pre-determined value
figure. This may be referred to as ‘reverse financial engineering’. Obviously this is an
elaborate attempt to give a veneer of sophistication or provide pseudo-scientific justification
for a foregone conclusion. At best it is futile and at worst it is highly misleading. A
professionally honest appraiser should resist the temptation to do reverse financial
engineering.
DISCOUNTED CASH FLOW APPROACH
11
Traditionally, the adjusted book value approach and the direct comparison approach
were used more commonly. From the 1990’s however, the discounted cash flow approach
has received greater attention, emphasis and acceptance. This is mainly because of its
conceptual superiority and its string endorsement by leading consultancy organizations.
Valuing a firm using the discounted cash flow approach is conceptually identical to valuing
a capital project using the present value method.
To sum up, valuing a firm using the discounted cash flow approach calls for forecasting
cash flows over an indefinite period of time for an entity that is expected to grow. That
indeed a daunting proposition. To tackle this task, the value of the firm is separated into two
time periods.
VALUE OF THE FIRM = present value of cash flow during an explicit forecast Period + Present value of cash flow after an explicit forecast Period The discounted cash flow approach to valuing a firm involves the following steps:
1. Forecast the cash flow during explicit forecast period.
2. Establish the cost of capital.
3. Determine the continuing value at the end of the explicit forecast period.
4. Calculate the firm value and interpret results.
1. FORECAST THE CASH FLOW DURING EXPLICIT FORECAST PERIOD
Calculating of free cash flow (FCF) is the post-tax cash flow generated from the
operations of the firm after providing for the investments in fixed assets plus net working
capital required for the operations of the firm.
FCF = NOPLAT-Net Investments
FCF = (NOPLAT + Depreciation) – (Net Investment + Depreciation)
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Where Net Investment =
Net Fixed Assets at the + Net Current Assets at the
End of the year End of the year
_
Net Fixed Assets at the + Net Current Assets at the
Beginning of the year Beginning of the year
NOPLAT = EBIT – Taxes on EBIT
2. COST OF CAPITALShareholders want to be suitably compensated for investing funds in the firm. The cost of
capital reflects what they expect. It is the discount rate used for converting the expected FCF
into its present value.
Cost of Capital(K) = [(%Ke*Ke) + (%kd*Kd)]
3. CONTINUING VALUEIt is the value of FCF beyond the explicit forecast period. Typically, the terminal value is the
dominant component in a company’s value.
FCFt + 1
CVt = ------------------
K - g
So where
CVt = Continuing value at the end of the year t
K = Weighted average cost of capital
13
g = Expected growth rate of FCF.
4. FIRM VALUE The value of the firm is equal to the sum of the following components.
Present value of the free cash flow during the explicit forecast period
Present value of the continuing value
Value of non operating assets (which were ignored in FCF analysis)
Firm Value = PV (FCF) + PV (CV) + Non-operating assets.
14
INDUSTRY PROFILE
15
INTRODUCTION OF THE STOCK EXCHANGE
Financial markets first came took prominence during the 17 th century at the start of
the industrial revolution. Business needed vast amount of capital to buy biggest premises
and machinery.
At the time of the industrial revolution there were few investors capable of
supporting business on the vast scale it required. The financial markets arose as result of
several small investors in industries. The first financial markets came about in Europe, to
fund both the industrial revolution and the expansion of the British Empire. The most
common location for the early financial markets was surprisingly in churches.
As the need of the financial trading grew, so did the places of the trading, in London
for example a lot of the London Stock Exchange. Financial markets today exist as a medium
for processing financial transactions. The most common form of financial trading is usually
done on stock exchange in the form of share dealing. Business generates extra investment
capital by releasing share onto the stock exchanges. While investor in shares make money
by selling share for a higher value than they are purchased for.
The majority financial markets are based in the financial capitals of the world such as
the London, New York and Stock Exchanges. Although the emergence of the interest has
seen a rise in the number internet stock exchange such as NASDAQ, as well as several on-
line stockbrokers.
16
If we look at the London Stock Exchange (L.S.E) today, we can state the L.S.E is a
market place, which deal in:
Share trading.
Government bonds.
Debentures.
Insurance-Shot and long term.
Commodities
The way the LSE used to operate involved “Jobbers” and “stockbrokers”. Jobbers
run around the trading floor buying and selling shares for stockbrokers. The jobbers make
money for themselves by the difference between what stockbrokers are prepared to pay for
shares and the price at which they are actually bought and selling shares to the world at
large. The system of the LSE was little changed from the 1800’s until the 1980’s.
The LSE operated on a single capacity basis where it was there to provide
information about share values, while the stockbrokers simply bought and sold. The system
worked fine until the 1880’s where a result of increased public shares ownership meant a
radical rethink of the stock exchange.
The stock exchange needed to adopt a new approach. The statistics showed that
during the 1960’s there were 30 institutions that held most of the shares on sold on the stock
exchange. By 1981 the financial institutions held only 59% of shares.
The growth in the disposable income of society meant the stock exchange had to
deal with a much larger volume of transactions. The stock exchange decided to introduce
dual capacity into the trading floors, this is where the jobbers can now buy and sell shares
like stockbrokers while at the same time serving the stockbrokers. The function was
designed to cope with all the increased transactions.
The LSE is a private company, owned by its members, who are the stockbrokers
who compete against each other in share trading, bizarre.
17
India has well established securities market with a long history of
organized trading. The earliest recorded capital market dealings in India were transaction in
loan stocks of the east India Company towards the end of the 18th century. By 1830, wide
ranges of bank and cotton mill securities were being traded in Bombay and Calcutta.
Trading was concentrated in bank shares.
The enhancement of the Co. Act 1850, which introduced in the concept
of limited liability to India, served to stimulate activity in the securities markets.
The first SE in India was asset up in1875 in Bombay known as “Native
share and stock Brokers Association”. Now known as BSE. It was the first stock exchange
set up in Asia.
From 1956 to 1980, the Indian Stock market grew at affecting the
securities market during the period was the enactment of the foreign exchange regulation
Act. Under FERA, the Indian corporations with more than 40% foreign share holdings were
generally required to reduce their foreign ownership. As a result, many such corporations
offered equity to the Indian public.
1980-1999, Indian SE witnessed a total revamp; automation,
mobilization and the trading and strict surveillance were the hall markets of this period.
What is Stock Exchange?
The SE is an organized market for purchase and sale of listed industrial
and financial securities. The securities traded on stock exchanges include shares and
debentures of public limited companies, govt. securities etc.
According to securities contract (regulation) Act 1956 “ Stock Exchange
is an association, organization or body of individuals, whether incorporated or act,
established for the purchase of assisting, regulation and controlling business in buying,
selling and dealing securities
18
Organization of Stock Exchanges:
Stock Exchanges is formed under the norms of securities contracts
(regulation) Act, 1956. Stock Exchange may be: -
(a) Voluntary non-profit making associations: -
EX. Bombay, Indore.
(b) Public limited company:-
Ex. Calcutta, Delhi, Banglore, (It is a joint stock co.’s)
(c) Company limited by guarantee: -
Ex. Madras, Jaipur, Hyderabad & Pune.
Central govt. prescribes & approves the rules, regulations and by laws of
recognized stock exchanges.
The term “Stock Exchange” implies is evident from the following features
of exchange: -
S: Securities provider for investors.
T: Tax benefits, planning and exemptions.
O: Optimum return on investments.
C: Caution approach.
K: Knowledge of market.
E: Eligibility for accruals.
X: Exchange of securities transacted.
C: Cyclopedia of listed companies.
H: High yield.
A: Authentic information
N: New entrepreneurs encouraged.
G: Guidance to investors & companies
E: Equity cult.
19
Stock Exchanges in India: -
At present in India 24 Stock Exchange duly recognized by the Govt.
They are listed below in the order of year of their establishment.
20
NAME OF EXCHANGE YEAR
Bombay stock exchange. 1875
Ahmedabad share & stockbrokers association. 1957
Calcutta stock exchange association limited 1957
Delhi stock exchange. 1957
Madras stock exchange. 1957
Indore stock brokers association. 1958
Banglore stock e exchange. 1963
Hyderabad stock exchange. 1963
Cochin stock exchange. 1978
Pune stock exchange ltd. 1982
U.P. stock exchange association ltd. 1983
Ludhiana stock exchange association ltd. 1983
Jaipur stock exchange ltd. 1983-84
Mangalore stock exchange ltd. 1984
Gauhati stock exchange ltd. 1985
Magadh stock exchange ltd. Patna 1986
Bhuvaneshwar stock exchange association ltd. 1989
Over the counter exchange of India Bombay 1999
Saurastra Kutch, stock exchange ltd. 1990
Vadodara stock exchange ltd. 1991
Coimbatore stock exchange ltd. 1991
The Meerut stock exchange ltd. 1991
National stock exchange ltd. 1994
Integrated stock exchanges 1999
The Byelaws of the Stock Exchanges:
Bargains – Spot/ hand/ special delivers/ margins.
Clearing for settlement of bargains.
Delivery of securities.
Dealing by members.
Brokerage and contract notes.
Rights & liabilities of members and constituents.
Arbitration between members.
Defaults.
Prohibition & penalties.
HISTORY OF STOCK EXCHANGE
The only stock exchanges operating in the 19th century were those of Bombay set
up in 1875 and Ahmedabad set up in 1894. These were organized as voluntary non profit-
making association of brokers to regulate and protect their interests. Before the control on
securities trading became central subject under the constitution in 1950, it was a state
subject and the Bombay securities contracts (control) Act of 1925 used to regulate trading in
securities. Under this act, the Bombay stock exchange was recognized in 1927 and
Ahmedabad in 1937.
During the war boom, a number of stock exchanges were organized in Bombay,
Ahmedabad and other centers, but they were not recognized. Soon after it became a central
subject, central legislation was proposed and a committee headed by A.D. Gorwala went
into the bill for securities regulation. On the basis of the committee’s recommendations and
public discussion, the securities contracts (regulation) Act became law in 1956
DEFINITION OF STOCK EXCHANGE
21
“Stock exchange means any body or individuals whether incorporated or not,
constituted for the purpose of assisting, regulating or controlling the business of buying,
selling or dealing in securities”.
It is an association of member brokers for the purpose of self-regulation and
protecting the interests of its members.
It can operate only if it is recognized by the Government under the securities
contracts (regulation) Act, 1956. The recognition is granted under section 3 of the Act by
the central government, Ministry of Finance.
BYLAWS
Besides the above act, the securities contracts (regulation) rules were also made in
1975 to regulative certain matters of trading on the stock exchanges. There are also bylaws
of the exchanges, which are concerned with the following subjects.
Opening / closing of the stock exchanges, timing of trading, regulation of blank
transfers, regulation of Badla or carryover business, control of the settlement and other
activities of the stock exchange, fixating of margin, fixation of market prices or making up
prices, regulation of taravani business (jobbing), etc., regulation of brokers trading,
brokerage chargers, trading rules on the exchange, arbitrage and settlement of disputes,
settlement and clearing of the trading etc.
REGULATION OF STOCK EXCHANGES
The securities contracts (regulation) act is the basis for operations of the stock
exchanges in India. No exchange can operate legally without the government permission or
recognition. Stock exchanges are given monopoly in certain areas under section 19 of the
above Act to ensure that the control and regulation are facilitated. Recognition can be
granted to a stock exchange provided certain conditions are satisfied and the necessary
information is supplied to the government. Recognition can also be withdrawn, if necessary.
Where there are no stock exchanges, the government licenses some of the brokers to
perform the functions of a stock exchange in its absence.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI).
22
SEBI was set up as an autonomous regulatory authority by the government of India in 1988
“to protect the interests of investors in securities and to promote the development of, and to
regulate the securities market and for matter connected therewith or incidental thereto”. It is
empowered by two acts namely the SEBI Act, 1992 and the securities contract (regulation)
Act, 1956 to perform the function of protecting investor’s rights and regulating the capital
markets.
BOMBAY STOCK EXCHANGE This stock exchange, Mumbai, popularly known as “BSE” was established in
1875 as “The Native share and stock brokers association”, as a voluntary non-profit making
association. It has an evolved over the years into its present status as the premiere stock
exchange in the country. It may be noted that the stock exchanges the oldest one in Asia,
even older than the Tokyo stock exchange, which was founded in 1878.
The exchange, while providing an efficient and transparent market for trading in
securities, upholds the interests of the investors and ensures redressed of their grievances,
whether against the companies or its own member brokers. It also strives to educate and
enlighten the investors by making available necessary informative inputs and conducting
investor education programs.
A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public
representatives and an executive director is the apex body, which decides is the apex body,
which decides the policies and regulates the affairs of the exchange.
The Exchange director as the chief executive offices is responsible for the daily
today administration of the exchange.
BSE INDICES:
In order to enable the market participants, analysts etc., to track the various ups
and downs in the Indian stock market, the Exchange has introduced in 1986 an equity stock
index called BSE-SENSEX that subsequently became the barometer of the moments of the
share prices in the Indian stock market. It is a “Market capitalization weighted” index of 30
component stocks representing a sample of large, well-established and leading companies.
23
The base year of sensex 1978-79. The Sensex is widely reported in both domestic and
international markets through print as well as electronic media.
Sensex is calculated using a market capitalization weighted method. As per this
methodology the level of the index reflects the total market value of all 30-component
stocks from different industries related to particular base period. The total market value of a
company is determined by multiplying the price of its stock by the nu7mber of shared
outstanding. Statisticians call index of a set of combined variables (such as price and
number of shares) a composite Index. An indexed number is used to represent the results of
this calcution in order to make the value easier to go work with and track over a time. It is
much easier to graph a chart based on Indexed values than on based on actual valued world
over majority of the well-known Indices are constructed using “Market capitalization
weighted method”.
In practice, the daily calculation of SENSEX is done by dividing the aggregate
market value of the 30 companies in the index by a number called the Index Divisor. The
divisor is the only link to the original base period value of the SENSEX. The Devisor keeps
the Index comparable over a period value of time and if the references point for the entire
Index maintenance adjustments. SENSEX
is widely used to describe the mood in the Indian stock markets. Base year average is
changed as per the formula new base year average = old base year average*(new market
value / old market value).
NATIONAL STOCK EXCHANGE
The NSE was incorporated in Nov, 1992 with an equity capital of Rs.25 crs. The
international securities consultancy (ISC) of Hong Kong has helped in setting up NSE. ISC
has prepared the detailed business plans and initialization of hardware and software systems.
The promotions for NSE were financial institutions, insurances, companies, banks and SEBI
capital market ltd, Infrastructure leasing and financial services ltd and stock holding
corporations ltd.
It has been set up to strengthen the move towards professionalisation of the capital
market as well as provide nation wide securities trading facilities to investors.
24
NSE is not an exchange in the traditional sense where brokers own and manage the
exchange. A two tier administrative set up involving a company board and a governing
aboard of the exchange is envisaged.
NSE is a national market for shares PSU bonds, debentures and government
securities since infrastructure and trading facilities are provided.
NSE-NIFTY:
The NSE on Apr22, 1996 launched a new equity Index. The NSE-50. The new Index
which replaces the existing NSE-100 Index is expected to serve as an appropriate Index for
the new segment of future and option.
“NIFTY” mean National Index for fifty stocks. The NSE-50 comprises fifty companies that
represent 20 board industry groups with an aggregate market capitalization of around Rs 1,
70,000 crs. All companies included in the Index have a market capitalization in excess of
Rs. 500 crs each and should have trade for 85% of trading days at an impact cost of less than
1.5%.
The base period for the index is the close of price on Nov 3 1995, which makes one
year of completion of operation of NSE’s capital market segment. The base value of the
index has been set at 1000.
NSE-MIDCAP INDEX:
The NSE madcap index or the junior nifty comprises 50 stocks that represent 21st
board industry groups and will provide proper representation of the midcap segment of the
Indian capital market. All stocks in the Index should have market capitalization of grate than
Rs.200 crs and should have traded 85% of the trading days at an impact cost of less than
2.5%.
The base period for the index is Nov 4 1996, which signifies 2 years for completion
of operations of the capital market segment of the operations. The base value of the Index
has been set at 1000.
Average daily turn over of the present scenario 258212 (Laces) and number of
average daily trades 2160(Laces).
At present there are 24 stock exchanges recognized under the securities contract
(regulation Act, 1956.
25
26
COMPANY PROFILE
COMPANY PROFILE
INDIA INFOLINE GROUP
The India Infoline group, comprising the holding company, India Infoline Limited and its
wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging
27
from Equity research, Equities and derivatives trading, Commodities trading, Portfolio
Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds and other small
savings instruments to loan products and Investment banking. India Infoline also owns and
manages the websites www.indiainfoline.com and www.5paisa.com
The company has a network of 758 business locations (branches and sub-brokers) spread across
346 cities and towns. It has more than 800,000 customers.
India Infoline Ltd
India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both
the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and
Portfolio Management Services. It offers broking services in the Cash and Derivatives segments
of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL
as a depository participant, providing a one-stop solution for clients trading in the equities
market. It has recently launched its Investment banking and Institutional Broking business.
28
India Infoline Media and Research Services Limited.
The content services represent a strong support that drives the broking, commodities, mutual
fund and portfolio management services businesses. Revenue generation is through the sale of
content to financial and media houses, Indian as well as global.
It undertakes equities research which is acknowledged by none other than Forbes as 'Best of the
Web' and '…a must read for investors in Asia'. India Infoline's research is available not just over
the internet but also on international wire services like Bloomberg (Code: IILL), Thomson First
Call and Internet Securities where India Infoline is amongst the most read Indian brokers.
India Infoline Commodities Limited.
India Infoline Commodities Pvt Limited is engaged in the business of commodities broking. Our
experience in securities broking empowered us with the requisite skills and technologies to allow
us offer commodities broking as a contra-cyclical alternative to equities broking. We enjoy
memberships with the MCX and NCDEX, two leading Indian commodities exchanges, and
recently acquired membership of DGCX. We have a multi-channel delivery model, making it
among the select few to offer online as well as offline trading facilities.
India Infoline Marketing & Services
India Infoline Marketing and Services Limited is the holding company of India Infoline
Insurance Services Limited and India Infoline Insurance Brokers Limited.
(a) India Infoline Insurance Services Limited is a registered Corporate Agent with the Insurance
Regulatory and Development Authority (IRDA). It is the largest Corporate Agent for ICICI
29
Prudential Life Insurance Co Limited, which is India's largest private Life Insurance Company.
India Infoline was the first corporate agent to get licensed by IRDA in early 2001.
(b) India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is a newly
formed subsidiary which will carry out the business of Insurance broking. We have applied to
IRDA for the insurance broking licence and the clearance for the same is awaited. Post the grant
of license, we propose to also commence the general insurance distribution business.
India Infoline Investment Services Limited
Consolidated shareholdings of all the subsidiary companies engaged in loans and financing
activities under one subsidiary. Recently, Orient Global, a Singapore-based investment
institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services.
This will help focused expansion and capital raising in the said subsidiaries for various lending
businesses like loans against securities, SME financing, distribution of retail loan products,
consumer finance business and housing finance business. India Infoline Investment Services
Private Limited consists of the following step-down subsidiaries.
(a) India Infoline Distribution Company Limited (distribution of retail loan products)
(b) Moneyline Credit Limited (consumer finance)
(c) India Infoline Housing Finance Limited (housing finance)
The Management
Mr. Nirmal Jain
Chairman & Managing Director
India Infoline Ltd.
Mr. R Venkataraman
30
Executive Director
India Infoline Ltd.
The Board of Directors
Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India Infoline Ltd.
comprises:
Mr Nilesh Vikamsey
Independent Director
India Infoline Ltd.
Mr Sat Pal Khattar
Non Executive Director
India Infoline Ltd.
Mr Kranti Sinha
Independent Director
India Infoline Ltd
.
Mr Arun K. Purvar
Independent Director
India Infoline Ltd.
Products and Services
31
INDIA INFOLINE LTD. is a one-stop financial services shop, most respected for quality
of its advice, personalized service and cutting-edge technology.
Equties
Indiainfoline provided the prospect of researched investing to its clients, which was
hitherto restricted only to the institutions. Research for the retail investor did not exist prior to
Indiainfoline. Indiainfoline leveraged technology to bring the convenience of trading to the
investor’s location of preference (residence or office) through computerised access. Indiainfoline
made it possible for clients to view transaction costs and ledger updates in real time.
PMS
India Infoline Ltd. Portfolio Management Service is a product wherein an equity
investment portfolio is created to suit the investment objectives of a client. We at
Indiainfoline invest your resources into stocks from different sectors, depending on your
risk-return profile. This service is particularly advisable for investors who cannot afford to
give time or don't have that expertise for day-to-day management of their equity portfolio.
Research
Sound investment decisions depend upon reliable fundamental data and stock selection
techniques. Indiainfoline Equity Research is proud of its reputation for, and we want you to
find the facts that you need. Equity investment professionals routinely use our research and
models as integral tools in their work.
Commodities
Indiainfoline’s extension into commodities trading reconciles its strategic intent to
emerge as a one-stop solutions financial intermediary. Its experience in securities broking
has empowered it with requisite skills and technologies. The Company’s commodities
business provides a contra-cyclical alternative to equities broking. The Company was
among the first to offer the facility of commodities trading in India’s young commodities
market (the MCX commenced operations only in 2003). Average monthly turnover on the
commodity exchanges increased from Rs 0.34 bn to Rs 20.02 bn. The commodities market
32
has several products with different and non-correlated cycles. On the whole, the business is
fairly insulated against cyclical gyrations in the business.
Mortgages
During the year under review, Indiainfoline acquired a 75% stake in Moneytree
Consultancy Services to mark its foray into the business of mortgages and other loan
products distribution. The business is still in the investing phase and at the time of the
acquisition was present only in the cities of Mumbai and Pune. The Company brings on
board expertise in the loans business coupled with existing relationships across a number of
principals in the mortgage and personal loans businesses. Indiainfoline now has plans to roll
the business out across its pan-Indian network to provide it with a truly national scale in
operations.
Invest online
Indiainfoline has made investing in Mutual funds and primary market so effortless. All you
have to do is register with us and that’s all. No paperwork no queues and No registration
charges.
INVEST IN MF
Indiainfoline offers you a host of mutual fund choices under one roof, backed by in-depth
research and advice from research house and tools configured as investor friendly.
APPLY IN IPOs
You could also invest in Initial Public Offers (IPO’s) online without going through the
hassles of filling ANY application form/ paperwork.
SMS
Stay connected to the market
The trader of today, you are constantly on the move. But how do you stay connected to the
market while on the move? Simple, subscribe to India Infoline's Stock Messaging Service
and get Market on your Mobile!
There are three products under SMS Service:
Market on the move.
Best of the lot.
VAS (Value Added Service )
Insurance
33
An entry into this segment helped complete the client’s product basket; concurrently, it
graduated the Company into a one-stop retail financial solutions provider. To ensure
maximum reach to customers across India, we have employed a multi pronged approach and
reach out to customers via our Network, Direct and Affiliate channels. Following the
opening of the sector in 1999-2000, a number of private sector insurance service providers
commenced operations aggressively and helped grow the market.
The Company’s entry into the insurance sector derisked the Company from a predominant
dependence on broking and equity-linked revenues. The annuity based income generated
from insurance intermediation result in solid core revenues across the tenure of the policy.
Wealth Mangement Service
Imagine a financial firm with the heart and soul of a two-person organization. A world-
leading wealth management company that sits down with you to understand your needs and
goals. We offer you a dedicated group for giving you the most personal attention at every
level.
Newsletters
The Daily Market Strategy is your morning dose on the health of the markets. Five intra-day
ideas, unless the markets are really choppy coupled with a brief on the global markets and
any other cues, which could impact the market. Ocassionally an investment idea from the
research team and a crisp round up of the previous day's top stories. That's not all. As a
subscriber to the Daily Market Strategy, you even get research reports of India Infoline
research team on a priority basis.
The Indiainfoline Weekly Newsletter is your flashback for the week gone by. A weekly
outlook coupled with the best of the web stories from Indiainfoline and links to important
investment ideas, Leader Speak and features is delivered in your inbox every Friday
evening.
India Info-line distinguished its business through the interplay of knowledge and
technology:
Complete solution:
The Company provides a complete - advice to execution – solution facilitated by
information and advice on likely commodity trends in the Indian and international
environment.
34
Technology:
The Company has extended the trading terminal to the investor’s home/workplace
reinforced with real-time commodity information and ledger position.
Rates:
The Company harnessed technology to offer services at among the lowest rates in the
business. Membership: The Company widened client reach in trading on the domestic and
international exchanges.
Key Features
Enjoys memberships with the MCX and NCDEX, two leading Indian commodities
exchanges
Recently acquired membership of the DGCX
Multi-channel delivery model, making it among the select few to offer online as well as
offline trading facilities
Extended commodity trading to retail investors, among the few Indian financial
intermediaries to do so
Online business at 80% of revenues dominates commodities trading revenues
Provides regular commodity updates pertaining to the Indian and international environment
35
36
1. PROFILE OF AUROBINDO PHARMACEUTICAL COMPANY LIMITED
The company was born of a vision. Founded in 1986 by Mr. P.V. Ramaprasad Reddy,
Mr. K. Nityananda Reddy and a small, highly committed set of professionals, Aurobindo
Pharma became a public company in 1992. It commenced operation in 1988-89 with a
single unit manufacturing semi synthetic penicillin (SSPs) at Pondicherry.
Aurobindo Pharma had gone public in 1995 by listing its shares in various stock
exchanges in the country. The company is the market leader in the semi-synthetic penicillin
drugs. It has a presence in key therapeutic segments like SSPs, cephalosporins, antiviral,
CNS, cardiovascular, gastroenterology, etc.
37
Over the years, the company has evolved into a knowledge driven company. It is R&D
focused, has a multi product portfolio with multi country manufacturing facilities and is
becoming a marketing conglomerate across the world.
Aurobindo Pharma created a name for itself in manufacture of bulk actives, its area of
core competence. After ensuring a firm foundation of cost effective production capabilities
and a clutch of loyal customers, the company has entered the high margin specialty generic
formulations segment with a global marketing network.
The formulation business is systematically organized with a divisional structure, and
has a focused team for each key international market. Aurobindo believes in gaining volume
and market share in every business segment it enters.
The company has set up two state-of-the-art formulation plants. Aurobindo Pharma has
obtaining approvals from UK MCA, UK FDA and various regulatory bodies for these two
plants. This initiative would enter the developed markets.
The company has adopted cost efficient manufacturing processes and has continuously
widened the product portfolio. Older drugs have been replaced, and new introductions made
to meet the needs of society. There is a constant up gradation in product list. The company
applies a premium to remaining contemporary.
The company has forayed into custom synthesis business in a big way and has a
dedicated kilo lab to complement its current infrastructure in manufacturing and R&D.
Aurobindo Pharma has identified international operations as a major engine of growth and
has hence expanded its global network of marketing and manufacturing operations. Joint
ventures\subsidiaries in China, Brazil, and USA, will further expand its international
franchise.
All the key indications of the company confirm the scorching pace of growth. For
instance, the turnover of Aurobindo Pharma has growth at a CAGR of 21 per cent, in the
last four years (FY 1999 to FY 2004). Similarly net profit grew at 32 per cent, in the same
period. Over a period Aurobindo Pharma has become a knowledge company with strong
intellectual properly. It is now positioned to ride the challenges with strengthened
fundamentals.
38
The milestones achieved and the evolution of the company can be summarized as follows:
Vertical integration
Mergers and acquisitions.
Broadening of product portfolio.
Broad basing of the board of directors.
Listing of shares on major stock exchanges.
Thrust on exports.
Cost leadership.
1.DR. REDDY’S LABORATORIES COMPANY LIMITED Dr. Reddy’s Laboratories was founded by Dr Anji Reddy, a entrepreneur-scientist, in
1984. The DNA of the company is drawn from its founder and his vision to establish India’s
first discovery led global pharmaceutical company. In fact, it is this spirit of
entrepreneurship that has shaped the company to become what it is today.
Dr Anji Reddy, having moved out of Standard Organics Limited, a company he had
successfully co-founded, started Dr. Reddy’s Laboratories with $ 40,000 in cash and
$120,000 in bank loan! Today, the company with revenues of Rs.1947 crore (US $446
million), as of fiscal year 2005, is India’s second largest pharmaceutical company and the
youngest among its peer group.
The company has several distinctions to its credit. Being the first pharmaceutical
company from Asia Pacific (outside Japan) to be listed on the New York Stock Exchange
(on April 11, 2001) is only one among them. And as always, Dr. Reddy’s chose to do it in
39
the most difficult of circumstances against widespread skepticism. Dr. Reddy’s came up
trumps not only having its stock oversubscribed but also becoming the best performing IPO
that year.
Dr. Anji Reddy is well known for his passion for research and drug discovery. Dr.
Reddy’s started its drug discovery programme in 1993 and within three years it achieved its
first breakthrough by outlicensing an anti-diabetes molecule to Novo Nordisk in March
1997. With this very small but significant step, the Indian industry went through a paradigm
shift in its image from being known as just ‘copycats’ to ‘innovators’! Through its success,
Dr. Reddy’s pioneered drug discovery in India. There are several such inflection points in
the company’s evolution from a bulk drug (API) manufacturer into a vertically integrated
global pharmaceutical company today.
Today, the company manufactures and markets API (Bulk Actives), Finished Dosages and
Biologics in over 100 countries worldwide, in addition to having a very
promising Drug Discovery Pipeline. When Dr. Reddy’s started its first big move in 1986
from manufacturing and marketing bulk actives to the domestic (Indian) market to
manufacturing and exporting difficult-to-manufacture bulk actives such as Methyldopa to
highly regulated overseas markets, it had to not only overcome regulatory and legal hurdles
but also battle deeply entrenched mind-set issues of Indian Pharma being seen as producers
of 'cheap' and therefore ‘low quality’ pharmaceuticals. Today, the Indian pharma industry,
in stark contrast, is known globally for its proven high quality-low cost advantage in
delivering safe and effective pharmaceuticals. This transition, a tough and often-perilous
one, was made possible thanks to the pioneering efforts of companies such as Dr. Reddy’s
Laboratories.
Today, Dr. Reddy’s continues its journey. Leveraging on its ‘Low Cost, High Intellect’
advantage. Foraying into new markets and new businesses. Taking on new challenges and
growing stronger and more capable. Each failure and each success renewing the sense of
purpose and helping the company evolve.
With over 950 scientists working across the globe, around the clock, the company
continues its relentless march forward to discover and deliver a breakthrough medicine to
address an unmet medical need and make a difference to peoples lives worldwide. And
when it does that, it would only be the beginning and yet it would be the most important
40
step. As Lao Tzu wrote a long time ago, ‘Even a 1000 mile journey starts with a single
step.’
ANALYSIS OF DR. REDDY’S LTD
HistorySince its inception in 1984, DR. Reddy’s has chosen to walk the path of discovery
and innovation in health sciences. There has been a quest to sustain and improve the quality
of life, and they have has nearly two decades of creating safe Pharmaceutical solutions with
the ultimate purpose of making the world a healthier place. Their competencies cover the
entire Pharmaceutical value chain- API and intermediaries, finished dosages (branded and
Generic) and NCE research.
Their research center uses cutting edge technology and has discovered break through
Pharmaceutical solutions in selected therapeutic areas. In short span, they have filed 64
patents. They are the first Indian company to out- license an NCE molecule for clinical
trails. To strengthen their research arm, they have set up a research subsidiary, Reddy Us
therapeutics Inc,. Atlanta, USA.
They export bulk actives branded formulations and generic formulations to over 60
countries. Their inherent strength lies in identifying relevant bulk drugs and formulations,
and selling them at affordable rates across the world. A few of their API such as
Norfloxacin, ciprofloxacin enjoy a large customer base. Their finished dosages have an
enviable track record. Some of them such as nise, omez, enam, ciprolet are among the top
brands in India, and many have become household names in near-regulated countries too.
Their generic formulations have also become very popular in quality- conscious regulated
markets such as the US and Europe. All this has been possible because of their innovative
and sustained marketing efforts. They are all set to spread their wings further and touch
more lives across the globe.
VISION AND VALUES
41
CORE PURPOSE “To help people lead healthier lives”
VISION “To become a discovery led global pharmaceutical company”
VALUES They strive for excellence in everything they think, say and do. The values that
guide their thoughts and actions are:
1. Quality: They are dedicated to achieving the highest levels of quality in
everything they do to delight customers, internal & external, every time.
2. Respect for the Individual: They uphold the self-esteem and dignity of each other by
creating an open culture for expression of views and ideas.
3. Innovation & Continuous Learning: They create an environment of innovation and
learning that fosters, in each one of us, a desire to excel and willingness to experiment.
4. Collaboration &Teamwork: They seek opportunities to build relationship and
leverage knowledge, expertise and resources to create greater value across functions,
business and locations.
5. Harmony & Social Responsibility: They take utmost care to protect their natural
environment and serve the communities in which they live and work.
MILESTONES
Major milestones of Dr.Reddy’s Laboratories Limited are
2006
Acquires betapharm- the fourth-largest generics company in Germany for a total enterprise
value of € 480 million.
2005
Acquires Roche's API Business at the state-of-the-art manufacturing site
in Mexico with a total investment of USD 59 million.
42
Announces the formation of Perlecan Pharma: India’s First Integrated Drug Development
Company.
Announces India's first major co-development and commercialization deal
for it's molecule Balaglitazone (DRF 2593), with Rheoscience.
Announces a unique partnership for the commercialization of ANDAs with
ICICI Venture.
2004
Acquires access to Drug Delivery Technology Platforms in the Dermatology segment
through the acquisition of Trigenesis
2003
Announces a 15-year exclusive product development and marketing agreement for OTC
drugs with Leiner Health Products in the US
Launches Ibuprofen, first generic product to be marketed under the “Dr. Reddy’s” label in
the US
2002
Conducts its first overseas acquisition – BMS Laboratories Limited and Meridian
Healthcare in UK
2001
Becomes the first Asia Pacific pharmaceutical company, outside Japan, to list on the New
York Stock Exchange. Listed with the symbol ‘RDY’ on April 11, 2001.
Out-licenses DRF 4158 to Novartis for up to US $55 million upfront payment
Launches its first generic product, Ranitidine, in the US market
Becomes the first Indian pharmaceutical company to obtain an 180-day exclusive marketing
rights for a generic drug in the US market with the launch of Fluoxetine 40 mg capsules on
August 3, 2001
2000
Dr. Reddy's Laboratories becomes India's third largest pharmaceutical company with the
merger of Cheminor Drugs Limited, a group company
Reddy US Therapeutics, a wholly-owned subsidiary, is established at Atlanta, US to
conduct target based drug discovery
43
1986
Dr.Reddy’s had gone for public issue.
1985
Dr.Reddy’s enters international market with the export of Methyldopa.
1984
Dr.Reddy’s is established with an initial capital of Rs.25lakhs.
BOARD OF DIRECTORS
Whole Time Directors
DR. Anji reddy-Chairmen
G. V. Prasad- Vice Chairmen and CEO
Satish Reddy- Chief Operating Officer
Independent and non whole time directors
DR. Omkar Gowsawmi
P.n. Devarajan
Ravi Bhootalingam
P.Satyanarayana Rao
Dr. v. Mohan
Dr. Krishna palepu
Anupam puri
STRATEGIC BUSINESS UNITSBranded finished dosages
Generic finished activities
Bulk activities
Customs chemicals
Biotechnology
Critical care
Discovery research
44
45
AUROBINDO PHARMACEUTICALS
1. Calculation of Free Cash Flows (Rs in crores)
Free Cash Flows
Years 2006 2007 2008 2009
Net Fixed Assets at
the end of the year
170.07 298.28 473 578.05
Net Current Assets at
the end of the year
420.12 530.88 728.38 786.14
Total 590.19 829.16 1201.38 1364.19
46
Net Fixed Assets at
the beginning of the
year
160.60 170.07 298.28 473
Net Current Assets at
the beginning of the
year
307.30 420.12 530.88 728.38
Total 467.9 590.19 8209.16 1201.38
Net Investment 122.29 238.97 372.22 162.81
NOPLAT 89.23 114.79 143.25 38.82
FCF -33.06 -124.18 -228.97 -123.99
FREE CASH FLOWS OF AUROBINDO PHARMACEUTICALS (Rs in crores)
Years 2006 2007 2008 2009
FCF -33.06 -124.18 -228.97 -123.99
47
Free Cash Flows of Aurobindo
-33.06
-124.18
-228.97
-123.99
-250
-200
-150
-100
-50
01 2 3 4
Years
FCF Series1
INTERPRETATIONThe FCF of Aurobindo has been decreasing over the period of the study. In the year 2006it
was -33.06 and in 2009 it was -123.99.
CALCULATION OF COST OF CAPITAL (Aurobindo) (Rs in crores)
Years 2006 2007 2008 2009
% of Equity
Shareholders Fund 361.36 533.39 756.37 788.59
48
Total Source of Fund 698.42 1096.69 1461.87 1708.69
Cost of Equity
Dividend 60.6 79.4 114.2 25.4
Shareholders Fund 698.42 1096.69 1461.87 1708.69
2006 2007 2008 2009
% of Debt
Loan Fund 336.0 525.47 618.39 829.12
Total Source of Fund 698.42 1096.69 1461.87 1708.69
2006 2007 2008 2009
Cost of Debt
Interest 42.39 42.59 32.24 39.99
Loan Fund 336.0 525.47 618.39 829.12
3.COST OF CAPITAL (Aurobindo) (Rs in crores)
(% Ke*Ke)+(% Kd*Kd)
Years 2006 2007 2008 2009
% of Equity 0.51739 0.48636 0.51739 0.461517
49
Cost of Equity 0.08676 0.07239 0.078119 0.014865
Total 0.04488 0.03521 0.04041 0.00686
% of Debt 0.481085 0.47914 0.42301 0.485237
Cost of Debt 0.12616 0.08105 0.052135 0.048231
Total 0.06069 0.03883 0.02205 0.02340
Cost of Capital 0.10557 0.07404 0.06246 0.03026
% for Present Value 11% 7% 6% 3%
CONTINUING VALUE
Years 2006 2007 2008 2009
FCF -33.06 -124.18 -228.97 -123.99
K 11% 7% 6% 3%
G 26% 40% 45% 14%
Continuing Value = 1127.18
4. FIRM VALUE (Aurobindo) (Rs in crores)
PV(FCF)
+PV(CV)
50
Years 2006 2007 2008 2009 Continuing
Value
FCF -33.06 -124.18 -228.97 -123.99 1127.18
Present Value 11% 7% 6% 3% 3%
Total -29.78 -108.46 -192.25 -110.16 1001.49
Total Firm Value = 560.84
Dr. REDDY’S LABORATORIES LTD
1. Calculation of Free Cash Flows (Dr. Reddy’s) (Rs in crores)
Free Cash Flows
Years 2006 2007 2008 2009
51
Net Fixed Assets at
the end of the year
395.76 458.1 538.13 563.40
Net Current Assets at
the end of the year
1231.87 929.84 1025.7 1139.47
Total 1627.63 1387.94 1563.83 1702.87
Net Fixed Assets at
the beginning of the
year
348.35 395.76 458.1 538.13
Net Current Assets at
the beginning of the
year
1011.91 1231.87 929.84 1025.7
Total 1360.26 1627.63 1387.94 1563.83
Net Investment 267.37 239.69 175.89 139.04
NOPLAT 392.09 283.2 435.6 447.83
FCF 124.72 43.51 259.71 308.79
FREE CASH FLOWS OF Dr. REDDY’s LABORATORIES LTD (Rs in crores)
Years 2006 2007 2008 2009
FCF 124.72 283.2 259.71 308.79
52
Free Cash Flow of Dr.Reddy's
124.72
283.2259.71
308.79
0
50
100
150
200
250
300
350
1 2 3 4
Years
FCF fcf
INTERPRETATIONThe Free Cash Flow of Dr. Reddy’s in 2006 was 124.72 crores and it increased to 283.2
crores by 2007 and decreased to 259.71 crores by 2008 and it again increased to 308.79
crores by 2009. Overall the FCF was increasing.
2. CALCULATION OF COST OF CAPITAL (Dr. Reddy’s) (Rs in crores)
Year 2006 2007 2008 2009
% of Equity
Shareholders Fund 1806.92 2047.02 2047.01 2074.08
53
Total Source of Fund 1835.68 2105.24 2109.09 2149.97
2006 2007 2008 2009
Cost of Equity
Dividend 150 100 100 100
Shareholders Fund 1806.92 2047.02 2047.9 2074.08
2006 2007 2008 2009
% of Debt
Loan Fund 28.76 58.22 62.08 75.89
Total Source of Fund 1835.68 2105.24 2109.09 2149.97
2006 2007 2008 2009
Cost of Debt
Interest 6.05 4.23 1.48 9.96
Loan Fund 28.76 58.22 62.08 75.89
3. COST OF CAPITAL (Dr.Reddy’s) (Rs in crores)
(% Ke*Ke)+(% Kd*Kd)
Years 2006 2007 2008 2009
54
% of Equity 0.984332 0.972345 0.970987 0.964701
Cost of Equity 0.083014 0.048851 0.048831 0.048214
Total 0.0817133 0.04750 0.047414 0.046512
% of Debt 0.015667 0.027654 0.02943 0.035298
Cost of Debt 0.2103616 0.072655 0.02384 0.131242
Total 0.003295 0.002009 0.000701 0.00463
Cost of Capital 0.085008 0.049509 0.048115 0.051142
% for Present Value 9% 5% 5% 5%
CONTINUING VALUE
Years 2006 2007 2008 2009
FCF 124.72 283.2 259.71 308.79
K 9% 5% 5% 5%
G 20% 15% 13% 9%
Continuing Value = -7719.75
4. FIRM VALUE (Dr.Reddy’s) (Rs in crores)
PV(FCF)
+PV(CV)
Years 2006 2007 2008 2009 Continuing
55
Value
FCF 124.72 43.51 259.71 308.79 -7719.75
Present Value 9% 5% 5% 5% 5%
Total 114.42 39.46 224.35 254.04 -6351.09
TOTAL FIRM
VALUE
= -5718.82
COMPARISION OF VALUE OF THE FIRM’S
(Rs in crores)
Company AUROBINDO Dr.REDDY’S
56
value 560.84 -5718.82
Value of the Firms
560.84
-5718.82-7000
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
Aurobindo Dr. Reddy's
Company
Valu
e in
Cro
res
value
INTERPRETATIONThe Value of Aurobindo Pharmaceutical Limited is 560.84 Crores and Dr. Reddy’s
Laboratories Limited is -5718.82 Crores. The Value of Aurobindo Pharmaceutical is greater
than Dr. Reddy’s Laboratories.
ANNEXUREFinancial Analysis of Aurobindo Pharmaceuticals Ltd
Profit & Loss Accounts
57
(Rs in crores)Years Mar-
05Mar-06
Mar-07
Mar-08
Mar-09
INCOME 12 mths
12 mths
12 mths
12 mths
12 mths
Sales Turnover 996.10
1037.72
1190.38
1341.07
1159.17
-Exercise Duty 46.91 62.37 76.46 81.18 74.15Net Sales 949.1
9975.35
1113.92
1259.89
1085.02
Other Income 10.37 14.68 11.65 22.06 16.56+Stock Adjustments 47.24 17.05 31.89 36.35 13.24TOTAL INCOME(A) 1006.
801007.08
1157.46
1318.30
1114.82
EXPENDITURERaw Material 581.2
1602.45 734.14 753.18 640.48
Purchase of Trading Goods
115.63
64.72 20.63 33.90 16.96
Other Manufacturing Exp
96.31 98.70 120.53 153.74 172.46
Payments to & Provisions for Employees
21.62 25.18 33.52 51.35 66.22
Administration & Selling Expenses
44.86 43.23 42.78 87.31 95.3
TOTAL EXPENSES(B) 859.63
834.28
951.6 1079.38
991.42
Operating profit
PBDIT (A-B) 147.17
172.8 205.86
238.92
123.4
58
-Interest 41.68 42.39 42.59 32.24 39.99PBDT 105.4
9130.41
163.27
206.68
83.41
-Depreciation 14.78 15.81 23.18 34.16 40.49Profit Before Tax 90.71 114.6 140.0
9172.52
42.92
-Extra-ordinary items - 10.0 - - -PBT(post-ord- items) 90.71 104.6 140.0
9172.52
42.92
-Tax 15.09 15.37 25.3 29.27 4.1NET PROFIT 75.62 89.23 114.7
9143.25
38.82
Earnings per share(rs) 33.82 33.89 22.73 26.54 6.91Preference Dividend 1.9 - - - -Equity Dividend 60.6 60.6 79.4 114.2 25.4
Balance Sheets of Aurobindo Pharmaceutical Ltd59
(Rs in crores) Years Mar-05 Mar-06 Mar-07 Mar-08 Mar-09SOURCES OF FUNDS 12
mths12
mths12
mths12
mths12
mthsTotal Share Capital 20.0 20.67 23.25 25.38 25.39
Equity Share Capital 20.0 20.67 23.25 25.38 25.39
Preference Share Capital 0 0 0 0 0
Reserves & Surplus 256.42 340.69 510.14 730.99 763.2
Share Capital Suspense 0.2 - - - -
Equity Share Warrants - 1.06 2.15 35.00 35.00
Secured Loans 137.45 181.4 406.57 514.61 624.4
Unsecured Loans 88.45 154.51 118.90 103.78 204.72
Deferred Tax Liability - - 35.95 52.11 55.98
TOTAL 502.52 698.42 1096.96 1461.87 1708.69
APPLICATION OF FUNDS
Gross Block 198.19 219.12 378.91 584.41 729.74
Less: Depreciation 37.59 49.05 80.63 111.41 151.69
Net Block 160.60 170.07 298.28 473.00 578.05
Capital Work-in-Progress 10.86 55.96 115.49 111.60 176.50
Investments 23.76 73.73 413.77 584.60 151.27
Current Assets Loans &
Advances
Inventories 172.99 125.46 203.52 259.64 323.58
Sundry Debtors 201.30 367.57 407.65 453.85 441.38
Cash & Bank Balances 4.55 11.13 33.15 37.41 13.8
Loans & Advances 63.75 70.45 107.07 149.45 213.47
Interest Accured on
Investments
- 0.02 0.03 0.03 0.03
Other Current Assets - - - 0.34 0.02
442.59 574.63 751.42 903.72 992.28
60
Less: Current Liabilities 127.92 142.45 206.49 155.09 195.19
Provisions 7.37 12.06 14.05 20.25 10.99
135.29 154.51 220.54 175.34 206.14
Net Current Assets 307.3 420.3 530.88 728.38 786.14
Miscellaneous Expenditure - 0.65 - - -
TOTAL 502.52 698.42 1096.96 1461.87 1708.69
Financial Analysis of Dr. Reddy’s Ltd
Profit & Loss Acconts(Rs in crores)
61
Years Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Income 12 mths
12 mths
12 mths
12 mths
12 mths
Sales Turnover 1565.74
1598.33
1740.20
1740.20
1825.08
-Exercise Duty 78.97 84.72 79.98 73.57 57.38Net Sales 1486.7
71513.61
1661.22
1666.63
1767.70
Other Income 85.89 46.46 75.74 75.74 69.58+Stock Adjustments 11.02 23.64 9.66 9.66 29.62TOTAL INCOME(A) 1583.6
81583.71
1746.62
1752.03
1866.9
EXPENDITURERaw Material 402.71 426.82 526.81 590.96 574.04Power & Fuel 32.84 38.12 41.23 43.96 45.35Employee cost 100.59 126.63 153.83 153.84 182.36other manufacturing exp
83.008 105.39 131.28 230.15 293.30
Selling & administration expenses
282.3 248.06 444.74 169.52 186.59
Miscellaneous expenses
149.82 40.64 69.43 34.56 23.98
preoperative exp capitalized
0 0 0 0 0
TOTAL EXPENSES(B)
1051.34
1085.66
1367.32
1222.99
1305.62
Operating profit 446.45 451.59 303.56 432.56 332.26
PBDIT (A-B) 532.34 498.0 379.3 529.04 561.2
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5 8-Interest 14.15 6.05 4.23 1.48 9.96PBDT 518.19 492 375.07 527.56 551.3
2-Depreciation 47.42 60.84 71.72 71.72 92.46Profit before Tax 518.19 492 375.07 527.56 551.3
2-Extra-ordinary items 47.42 60.84 71.72 71.72 92.46PBT(post-ord- items) 470.77 431.1
6303.35 455.84 458.8
6-Tax 11.12 39.07 20.15 20.24 11.01NET PROFIT 459.65 392.0
9283.2 435.6 447.8
3Earnings per share(rs)
42.9 58.4 43.8 52.3 57.9
Preference Dividend 0 0 0 0 0Book value(rs) 190.54 236.14 237.51 294.24 328.45Equity Dividend 40 150 100 100 100
63
Balance sheet of Dr reddy’s Ltd
( Rs in crores)
YearsMar-05 Mar-06 Mar-07 Mar-08 Mar-09
Sources of fund 12 mths 12 mths 12 mths 12 mths 12 mths
Total share capital 38.26 38.26 38.26 38.26 38.26
Equity share capital 38.26 38.26 38.26 38.26 38.26
preference share capital 0 0 0 0 0
Reserves 1419.73 1768.66 2008.76 2008.75 2035.82
Revaluation Reserve 0 0 0 0 0
Net worth(A) 1457.99 1806.92 2047.02 2047.01 2074.08
Secured loans(a) 5.3 4.29 35.64 36.45 56.24
un secured loans(b) 8.52 24.47 22.58 25.63 19.65
Total Debt(a+b)(B) 13.82 28.76 58.22 62.08 75.89
Total Liabilities(A+B) 1471.81 1835.68 2105.24 2109.09 2149.97
Application of Funds
Gross Block 569.94 685.12 810.95 956.45 1035.65
Less: Accum.Depreciation 221.56 289.36 352.85 418.32 472.25
Net Block(I) 348.35 395.76 458.1 538.13 563.40
Capital work in progress(II) 47.61 51.41 105.25 145.36 186.32
Investments(III) 63.94 156.64 612.05 254.35 365.41
Inventories 189.81 240.11 258.01 231.57 254.84
Sundry Debtors 444.95 432.11 444.05 489.23 462.63
Cash & Bank Balance 488.56 688.4 408.08 543.36 498.21
Total current asset 1123.32 1360.96 11110.14 1264.16 1215.68
Loans & Advances 135.88 201.28 233.56 287.36 331.42
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(+)Total CA, Loans &
Advances (IV)1259.20 1562.24 1343.70 1551.52 1547.1
Deferred credit 4.73 4.29 3.7 5.21 5.11
Fixed deposit 0 0 0 0 0
Current Liabilities 219.26 275.14 355.73 425.65 512.34
(+)Provision 28.03 55.23 58.13 62.13 68.52
Total CL & Provisions(VI) 247.29 330.37 413.86 487.78 580.86
NET Current Assets 1011.91 1231.87 929.84 1025.7 1139.47
Miscellaneous Expenses(V) 0 0 0 0 0
Total Assets{(I:V)-VI 1471.81 1835.68 2105.24 2345.52 2541.36
Contingent Liabilities 151.65 166.7 226.69 295.32 364.25
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FINDINGS, SUGESSIONS
&
CONCLUSSIONS
FINDINGS
66
FREE CASH FLOWThe FCF of Aurobindo Pharmaceutical has been decreasing over the period of the study. In
the year 2006 it was -33.06 crores and in 2009 it was-123.99 crores. Whereas the FCF of Dr.
Reddy’s has been increasing over the period of the study.In the year 2006 it was 124.72
crores and in 2009 it was 308.79 crores.
COST OF CAPTIALThe Cost of Capital of Aurobindo has been decreasing. It was 11% in the year 2006 and
decreased to 3% in the 2009. Whereas the cost of capital of Dr. Reddy’s also decreased and
remained constant. In the year 2006 it was 9% and decreased to 5% in 2007 and remained
constant at 5% in 2008 and 2009
CONTINUING VALUEThe Continuing Value of Aurobindo Pharmaceutical was positive at 1127.18 crores in the
year 2009. Where as the Continuing Value of Dr. Reddy’s was negative at -7719.75 crores
in 2009
VALUE OF THE FIRMThe value of Aurobindo Pharmaceutical was positive at 560.84 crores in 2009 and whereas
the value of Dr. Reddy’s was negative at -5718.82 crores in 2009.
The value of Aurobindo Pharmaceutical Ltd is higher than Dr. Reddy’s Laboratories
EQUITY DIVIDENDThe Equity Dividend of Aurobindo was 60.6 in 2006 and increased to 114.2 in 2007 and
decreased to 25.4 in 2009. Whereas Equity Dividend of Dr. Reddy’s has been increasing
from 40 in 2005 to 150 in 2006 and remained constant at 100 from 2007 to 2009 the
dividend of Dr. Reddy’s is higher than Aurobindo
CONCLUSIONS AND SUGGESTIONS
67
As the Corporate value of the firm Aurobindo Pharmaceutical Ltd has been showing higher
trend than the Dr. Reddy’s Laboratories Ltd, the investor should consider in investing
Aurobindo Pharmaceutical Ltd
The value of the Dr. Reddy’s Laboratories company is less than Aurobindo company, hence
it can suggested that the Dr. Reddy’ company should take considerable steps to improve its
overall firm value
Research and Technology: Research and Technology is back bone of the companies so
both companies should pay more attention to build effective tols to be used in research and
technology and widened it to the possible extend.
Marketing Strategies: The companies must develop more effective marketing strategies to
the greatest extent, which displays and meet customer’s requirement and help in meeting the
companies objectives and expectations.
Terms of offer: The investor must go through all the terms and conditions of the offer
document thoroughly and always deal in legal transactions.
The Investors has to make proper investments after making necessary calculations.
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The Value of firm depends upon many factors. Some of them are
FCF - Free Cash Flow
K - Cost of Capital
g - Expected Growth rate of Free Cash Flow for ever
The FCF’s of Aurobindo Pharmaceutical were Negative over the period of the study
(2006 – 2009), but it’s Value of Firm was positive at 560.84 crores. Whereas the FCF’s of
Dr. Reddy’s were Positive and increased over the period of study (2006 – 2009), but it’s
Value of Firm was negative at -5718.82 crores.
The reasons for above values may be due to changes in Cost of Capital and Growth
Rate of firm’s. The Cost of Capital of Aurobindo has decreased to 3% in 2009 from 11% in
2006 and the Growth rate increased to 45% in 2008 and decreased to 14% by 2009.
Whereas the Cost of Capital of Dr. Reddy’s was 5% in 2009 and the Growth rate has
decreased to 9% in 2009 from 20% in 2006.
69
BIBLIOGRAPHY
Prasanna Chandra, “Financial Management”, Sixth Edition.
I.M.Panday, “Financial Management”.
Websites referred
www.auribindo.com
www.drreddys.com
www.google.com
www.indiainfoline.com
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