Investment Management (Group Project) ON EQUITY VALUATION

Submitted to: Dr. Asheesh Pandey

Submitted by:
Abhishek Pramanik (PGFA1103) Sushant (PGFA1153) Mohd Danish (PGFA1127) Davesh (PGFA1113) Vikas (PGFA1156) Ayush Goyal (PGFA1111)

COMPANY PROFILE
Lupin pharmaceuticals, INC.Is the u.s. Wholly owned subsidiary of lupin limited, which is among the top five pharmaceutical companies in India. Through our sales and marketing headquarters in Baltimore, md, lupin pharmaceuticals, INC.... Is dedicated to delivering highquality, branded and generic medications trusted by healthcare professionals and patients across geographies. Lupin limited, headquartered in Mumbai, India, is strongly research focused. It has a program for developing new chemical entities. The company has a state-of-the-art red center in Pune and is a leading global player in anti-tub, cephalosporins (anti-infective) and cardiovascular drugs (ace-inhibitors and cholesterol reducing agents) and has a notable presence in the areas of diabetes, anti-inflammatory and respiratory therapy. We are building on our parent companys strengths of vertical integration in discovery research, process chemistry, active pharmaceutical ingredient production, formulation development and regulatory filings. Lupine pharmaceuticals, INC.... Is committed to achieving its vision and mission of becoming an innovation led transnational pharmaceutical company. Vinita gupta, ceo of lupin pharmaceuticals, INC.... Says "founded on the strengths of our parent company lupin limited, lupin pharmaceuticals, INC.... Intends to bring a portfolio of generics as well as branded products to the us market." For the financial year ended march 2010, lupin limited's revenues and profit after tax were rs.47,678 million (us$ 1.1 billion) and rs.6,186 million (us$ 152 million) respectively. Mission/vision Lupins mission is to become a transnational pharmaceutical company through the development and introduction of a wide portfolio of branded and generic products in key markets. Our vision Lupin pharmaceuticals, INC.... Is committed to bringing innovative products for the healthcare professional to improve the health and wellbeing of individuals. Lupin pharmaceuticals, INC.... Is well positioned for growth in the us market. We can capitalize on the strengths of our parent company, lupin limited:

Scientific expertise to develop new and improved products and product line extensions; Manufacturing technology, expertise and infrastructure; Financial resources.

PRODUCT
Generics Lupin pharmaceuticals, Inc. Entered the u.s. Generic pharmaceutical market in 2003 with the and approval for cefuroxime axetil. Since then we have received more than a dozen fda approvals. Six of lupin's 14 and a approvals were the first granted by the us fda, reinforcing our ability to submit high quality dossiers and gain on time approvals. We are vertically integrated, from process development of the api to the submission of dossiers for finished dosages. This provides control over the supply chain and the ability to offer quality products at the right time and at competitive prices. Our integrated manufacturing capability provides a portfolio of the highest quality generic products. Expanding the product portfolio, lupin pharmaceuticals, INC Is geared to file 15 or more andas per year in some of the following areas: Oral and injectable cephalosporins; Cardiovascular; Controlled release andas; Paragraph ivs.

Our oral and injectable cephalosporin facilities, us fda approved manufacturing sites and the new tablet and capsule facility in goa, allow us to file and manufacture a wide range of finished products for the us market. Specialty A commitment to caring for kids Lupin pharmaceuticals, INC.... Is committed to developing a branded pharmaceutical presence for pediatric practice in the us market. We are committed to identifying, developing and marketing prescription drugs for children of all ages. Lupin has created a dedicated national sales force to call upon pediatricians. Lupin pharmaceuticals, INC...., is very pleased to offer suprax, an important anti-infective product in pediatric and other physician practices within the united states. Suprax is now available in tablets and suspension formulations. Lupin pharmaceuticals, INC...., has an exclusive license in the united states to use the suprax trademark. We plan to expand our family of pediatric products to help meet needs of children. Our focus is on in-house product development with our proprietary oral controlled release and taste masking platforms. Lupin pharmaceuticals, INC.... Is also open to marketing alliances, and to licensing/acquisitions.

API Lupin is recognized as a leading manufacturer of cephalosporin apis, with fda approval to manufacture complex oral and injectable cephalosporins. Lupin is fast gaining share in the cardiovascular segment manufacturing a wide range of ace-inhibitors and cholesterol reducing agents. Lupins capabilities in sterile processing, synthetic process development and fermentation skills coupled with its intellectual property strengths, puts the company in a very strong position to offer a diverse portfolio of niche apis to its customers.

Manufacturing / R&D Lupin Pharmaceuticals, INC.... provides the advanced manufacturing capabilities and processes that create quality specialty and generic products. Lupin is amongst the world's largest manufacturers of products in its chosen therapeutic areas. Lupin has manufacturing operations in 5 cities in India and also a site in Thailand. Our plants are located at Mandideep, Aurangabad, Tarapur, Ankleshwar and Goa, in India. The new tablet/capsule facility in Goa, India allows Lupin to file and manufacture a wide range of finished products for the US market: Diverse / Integrated manufacturing capability; Synthetic APIs; Fermentation products; Oral and injectable finished products.

We have cost leadership with large scale, complex products. Research and Development Research is and will continue to be the main driver for success of Lupin Pharmaceuticals, INC.... Research is the foundation upon which Lupin Pharmaceuticals, INC.... will participate in a variety of therapeutic areas. State of the Art Research Park The Lupin Research Park is located at Pune, India. 19 acre site with built area of 150,000 sq.ft. Home to 320 scientists. Lupins core site for innovation: - Process development; - Technology development; - Basic preclinical, phase1 and phase 2 research. 145 patents filed, 53 patents granted worldwide.

Works closely with an extensive network of global laboratories, companies and academic institutions.

Technology Generics Drug master files (DMFs) for APIs and Formulation development. Abbreviated new drug applications (ANDAs) for finished products.

New Drug Delivery Systems (NDDS) Oral controlled release systems (OCRS). Advanced drug delivery systems (ADDS). Taste masking system.

New Chemical Entities (NCE) Basic drug discovery research has yielded proprietary molecules with potential as anti-migraine, anti T B, anti-psoiasis agents. Investigating herbal and synthetic routes.

INDUSTRY OF THE COMPANY

The Indian Pharmaceutical industry is highly fragmented with about 24,000 players (around 330 in the organised sector). The top ten companies make up for more than a third of the market. The Indian pharma industry (IPM) grew by 16% YoY in 2012 to ` 629 bn. It accounts for about 1.4% of the world's pharma industry in value terms and 10% in volume terms Besides the domestic market, Indian pharma companies also have a large chunk of their revenues coming from exports. While some are focusing on the generics market in the US, Europe and semi-regulated markets, others are focusing on custom manufacturing for innovator companies. Biopharmaceuticals is also increasingly becoming an area of interest given the complexity in manufacture and limited competition. The drug price control order (DPCO) continues to be a menace for the industry. There are three tiers of regulations on bulk drugs, on formulations and on overall profitability. This has made the profitability of the sector susceptible to the whims and fancies of the pricing authority. In connotation, with pricing policy of 354 drugs, NLEM (National list of essential medicines) was released, which covered the list of the drugs which the authority intends to put under price control. The policy has been stiffly opposed by the pharmaceutical industry. Introduction of GDUFA (Generic drug user fee Act) in US. As per this act, the generic companies are required to pay user fees to USFDA, for application of drugs and manufacturing facilities. This fee will be utilized by USFDA to engage additional resources in order to reduce current and pending applications and speed up the approval process. (Note: This act was passed in 2011, which was signed into Law in July 2012). The R&D spends of the top five companies is about 5% to 10% of revenues. This ratio is still way below the global average of 15% to 20% of sales. Indian companies have adopted various strategies for their R&D efforts. Some have entered into collaboration and partnership agreements with innovator companies; others have out-licensed their molecules for milestone payments. Hiving off R&D units into separate companies has also become a preferred option for many Indian pharma players. That said, given that the research pipelines of Big Pharma are drying up, they have now begun to dabble in generics. In this regard, these innovator companies are either buying out Indian firms or are forging alliances with them.

Key Points Supply Higher for traditional therapeutic segments, which is typical of a developing market. Relatively lower for lifestyle segment. Very high for certain therapeutic segments. Will change as life expectancy, literacy increases. Licensing, distribution network, patents, plant approval by regulatory authority.

Demand

Barriers to entry

Bargaining power of suppliers Distributors are increasingly pushing generic products in a bid to earn higher margins. Bargaining power of buyers High, a fragmented industry has ensured that there is widespread competition in almost all product segments. (Currently also protected by the DPCO). High. Very fragmented industry with the top 300 (of 24,000 manufacturing units) players accounting for 85% of sales value. Consolidation is likely to intensify.

Competition

Financial Year '12 FY12/CY11 was a challenging on domestic front. The companies witnessed a sluggish growth in the 1HFY12, on the back of severe competition in the acute segment. Increasing competition from MNCs and unlisted companies impaired the growth of local players. Though the Indian Pharma Industry grew by 16% vs 18% in FY11, large part of the growth was contributed by the chronic segment. MNC pharma companies continued to excel during FY12/CY11. Of the 25 top selling brands, 13 were from the MNCs. On the margin front, performance was not good. Most of the companies saw increase in raw material and employee costs. Companies continued to increase their MR strength and expand their reach to rural areas. In the US, generic companies witnessed robust growth, as billion dollar products like, Lipitor, Zyprexa, Plavix came off patent. On the other hand Europe continued to face pressure. Rupee depreciation was one important aspect which helped the industry. Many companies benefited due to rupee depreciation, especially the companies who had not hedged their receivables. Many companies had received warning letters from the USFDA in the past. The year saw some green signals from US regulator. While Aurobindo, Cadila and Claris got USFDA clearances, Ranbaxy entered into a consent decree with USFDA in order to gets its two manufacturing facilities re-approved by the US authorities.

Prospects The product patents regime heralds an era of innovation and research resulting in the launch of new patented product launches. In the longer run, domestic companies would face fresh competition from MNCs, as they would make aggressive new launches. However, the latter would most likely be subject to price negotiation. Drugs having estimated sales of over US$ 80 bn are expected to go off patent between CY12 and CY15. With the governments in the developed markets looking to cut down healthcare costs by facilitating a speedy introduction of generic drugs into the market, domestic pharma companies will stand to benefit. However, despite this huge promise, intense competition and consequent price erosion would continue to remain a cause for concern. The developing markets viz; Brazil, Turkey, Mexico, Russia etc are expected to witness growth of around 25% during 2014-15. Like India, emerging markets are also Branded by nature, thus Indian companies are well poised to capitalise on the opportunities in these markets as well. The life style segments such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers will continue to be lucrative and fast growing owing to increased urbanisation and change in lifestyle patterns. High growth in domestic sales in the future will depend on the ability of companies to align their product portfolio towards the chronic segment as the lifestyle diseases like hypertension, congestive heart failure, depression, asthma, and diabetes are on the rise. Contract manufacturing and research (CRAMS) is expected to gain momentum going forward. Indias competitive strengths in research services include Englishlanguage competency, availability of low cost skilled doctors and scientists, large patient population with diverse disease characteristics and adherence to international quality standards. As for contract manufacturing, both global innovators and generic majors are finding it profitable to outsource production. Although the scenario has yet not improved for this space after the financial crisis, it is expected to improve going forward as the pressure to prune costs increases. As per the McKinsey report, Indian pharmaceuticals market is expected to grow to US$ 55 bn in 2020 and has a potential to reach US$ 70 bn by 2020.

THE VALUATION TECHNIQUE

Dividend discount model

The dividend discount model (DDM) is a way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments. In other words, it is used to value stocks based on the net present value of the future dividends. The equation most always used is called the Gordon growth model. It is named after Myron J. Gordon, who originally published it in 1959;although the theoretical underpin was provided by John Burr Williams in his 1938 text "The Theory of Investment Value". The variables are: is the current stock price. is the constant growth rate in perpetuity expected for the dividends. is the constant cost of equity for that company. is the value of the next year's dividends. There is no reason to use a calculation of next year's dividend using the current dividend and the growth rate, when management commonly disclose the future year's dividend and websites post it.

Derivation of equation
The model sums the infinite series which gives the current price P.

Income plus capital gains equals total return

The equation can also be understood to generate the value of a stock such that the sum of its dividend yield (income) plus its growth (capital gains) equals the investor's required total return. Consider the dividend growth rate as a proxy for the growth of earnings and by extension the stock price and capital gains. Consider the company's cost of equity capital as a proxy for the investor's required total return.

Growth cannot exceed cost of equity

From the first equation, one might notice that cannot be negative. When growth is expected to exceed the cost of equity in the short run, then usually a two stage DDM is used:

Therefore,

Where denotes the short-run expected growth rate, denotes the long-run growth rate, and is the period (number of years), over which the short-run growth rate is applied. Even when g is very close to r, P approaches infinity, so the model becomes meaningless.

Some properties of the model

A) When the growth g is zero the dividend is capitalized.

. B) This equation is also used to estimate cost of capital by solving for .

Problems with the model

A) The presumption of a steady and perpetual growth rate less than the cost of capital may not be reasonable. B) If the stock does not currently pay a dividend, like many growth stocks, more general versions of the discounted dividend model must be used to value the stock. One common technique is to assume that the Miller-Modigliani hypothesis of dividend irrelevance is true, and therefore replace the stocks's dividend D with E earnings per share. However, this requires the use of earnings growth rather than dividend growth, which might be different. C) The stock price resulting from the Gordon model is hyper-sensitive to the growth rate chosen.

VALUATION OF LUPIN:Assumptions
1. Company will grow at 8% for next 10 years and would stable after that at 5%. 2. Payout at stable growth would be 15% more than the high period.

% Rf* Rmh* Rms* beta ke (h) ke (s) 8 10 8 -0.39611 .0720778 8

= =

Rf= Risk free Rmh=Market Return(high) Rms=Market Return(stable) Note: Are there actual investments out there that have negative betas? I know that there are stocks
with negative regression betas, but those are the mostly the result of something strange happening during the period of the regression - an extended lawsuit or acquisition battle throwing off the correlation with the market- rather the true betas.

Stable Growth Model

2008
Column1 Profit after tax Paid up equity capital roe retention ratio pay out ratio g Column2 443.38 82.08 5.401803119 77.89 22.11 4.207464449

2009
Column3 416.97 82.82 5.034653465 76.61 23.39 3.85704802

2011
Column5 809.98 89.24 9.076423129 80.99 19.01 7.350995092

2012
Column6 804.37 89.33 9.004477779 79.86 20.14 7.190975954

Earning Per Share (Rs) dividend paid

54.02 11.943822

50.35 11.776865

18.15 3.450315

18.01 3.627214

cagr ke avg pay-out ratio

5.6682699

0.0566827 0.08 21.21 0.05 0.2121 0.3621 stable growth model p0 256.683 5.9851553

satable growth pay out ratio satable growth eps1 28.21855409 div1

Gordan growth two stage model (based on calculated beta value)

Assumption: 1.company will grow at 8% for next 10 years & would stablise after that at 5% 2. payout ratio at stable rate would be 15% more than the high growth period.

eps1 eps2 eps3 eps4 eps5 eps6 eps7 eps8 eps9 eps10

19.4508 21.006864 22.68741312 24.50240617 26.46259866 28.57960656 30.86597508 33.33525309 36.00207333 38.8822392

g= 9.5% 19.72095 21.59444 23.645912 25.892274 28.35204 31.045483 33.994804 37.224311 40.76062 44.632879

div1 div2 div3 div4 div5 div6 div7 div8 div9 div10

4.1255147 4.4555559 4.8120003 5.1969603 5.6127172 6.0617346 6.5466733 7.0704072 7.6360398 8.2469229

dicounted value at ke calculated 3.8481486 3.8765848 3.9052311 3.9340891 3.9631603 3.9924464 4.0219489 4.0516694 4.0816095 4.1117709

at satble growth = 5% EPSn+1 40.82635116 47.087688 DIVn+1 14.783222

pn

492.77406

245.68849 in Rs 285.47515

gordan growth two stage model p0

Gordan growth two stage model( based on published beta value)

Again, taking assumption: :beta published 0.54 ke(h) = 13.4 ke(s) = 16 g(h) = 9.5 g(s) = 5.5

0.134 0.16 0.095 0.055

div1 div2 div3 div4 div5 div6 div7 div8 div9 div10

at payout 36.21% 7.140956 7.819347 8.562185 9.375592 10.26627 11.24157 12.30952 13.47892 14.75942 16.16157

dicount at ke= 13.42% 6.297139 5.811048 6.521421 7.568135 10.26627 11.24157 12.30952 13.47892 14.75942 16.16157

DIVn+1

17.05045

TV

162.3853 p0 =

46.17597

150.591

RESULT
Since the current market price of a share of LUPIN ltd. is Rs. 595 and the intrinsic value when calculated with the beta calculated, stable growth and published beta comes out to be Rs. 285.57515, Rs. 256.683 and Rs. 150.591 respectively the share price is over value in the market.

ANNEXURE
SUMMARY OUTPUT Regression Statistics Multiple R 0.208131 R Square 0.043319 Adjusted R Square 0.022059 Standard Error 0.140131 Observations 47

ANOVA df Regression Residual Total 1 45 46 SS 0.040012 0.883648 0.923659 MS 0.040012 0.019637 F 2.037602 Significance F 0.160354

Coefficient s

Standar d Error 0.02109 4 0.27749 5

t Stat 0.6868 6 1.4274 5

P-value 0.49569 3 0.16035 4

Lower 95% 0.0569 7 0.9550 1

Upper 95% 0.02799 6 0.16279 4

Lower 95.0% 0.0569 7 0.9550 1

Upper 95.0% 0.02799 6 0.16279 4

Intercept X Variable 1

-0.01449

-0.39611

Indices :BSE-100 Period : Jan 09 to Dec 12 Month 9-Jan 9-Feb 9-Mar 9-Apr 9-May 9-Jun 9-Jul 9-Aug 9-Sep 9-Oct 9-Nov 9-Dec 10-Jan Close

Company :LUPIN LTD. 500257

Period: Jan 2009 to Dec 2012

change
2,778.39 2,619.50 2,866.66 3,366.30 4,419.68 4,391.46 4,742.39 4,770.79 5,179.58 4,833.24 5,170.57 5,353.23 5,050.54

% change -0.06 0.09 0.17 0.31 -0.01 0.08 0.01 0.09 -0.07 0.07 0.04 -0.06

-158.89 247.16 499.64 1,053.38 -28.22 350.93 28.40 408.79 -346.34 337.33 182.66 -302.69

Close Price 569.9 650.25 689.2 717.05 833.85 817.1 945.9 1015.15 1136.85 1226.25 1374.45 1490.3 1420.45

change -80.35 -38.95 -27.85 -116.8 16.75 -128.8 -69.25 -121.7 -89.4 -148.2 -115.85 69.85

% change -0.14099 -0.0599 -0.04041 -0.16289 0.020088 -0.15763 -0.07321 -0.11988 -0.07864 -0.12086 -0.08429 0.04687

10-Feb 10-Mar 10-Apr 10-May 10-Jun 10-Jul 10-Aug 10-Sep 10-Oct 10-Nov 10-Dec 11-Jan 11-Feb 11-Mar 11-Apr 11-May 11-Jun 11-Jul 11-Aug 11-Sep 11-Oct 11-Nov 11-Dec 12-Jan 12-Feb 12-Mar 12-Apr 12-May 12-Jun 12-Jul 12-Aug 12-Sep 12-Oct 12-Nov 12-Dec

5,079.94 5,394.12 5,439.84 5,243.91 5,476.70 5,542.87 5,584.08 6,163.86 6,171.18 5,962.87 6,191.51 5,550.03 5,370.50 5,855.53 5,795.29 5,638.16 5,686.26 5,531.70 5,062.17 4,995.67 5,334.14 4,831.73 4,598.21 5,202.65 5,406.46 5,315.15 5,268.41 4,942.13 5,279.22 5,229.16 5,251.07 5,701.39 5,620.99 5,908.97 5,927.58

29.40 314.18 45.72 -195.93 232.79 66.17 41.21 579.78 7.32 -208.31 228.64 -641.48 -179.53 485.03 -60.24 -157.13 48.10 -154.56 -469.53 -66.50 338.47 -502.41 -233.52 604.44 203.81 -91.31 -46.74 -326.28 337.09 -50.06 21.91 450.32 -80.40 287.98 18.61

0.01 0.06 0.01 -0.04 0.04 0.01 0.01 0.10 0.00 -0.03 0.04 -0.10 -0.03 0.09 -0.01 -0.03 0.01 -0.03 -0.08 -0.01 0.07 -0.09 -0.05 0.13 0.04 -0.02 -0.01 -0.06 0.07 -0.01 0.00 0.09 -0.01 0.05 0.00

1497.65 1624.55 1707.75 1861 1966.1 1878.6 356.05 388.55 438.2 509.85 480.45 422.6 381.75 415.35 439 469.85 448.55 454.6 449.95 472.95 470 472.75 447.2 473.75 480.4 529.65 551.8 539.4 539 601.1 593.35 596.3 566.6 590.7 593.65

-77.2 -126.9 -83.2 -153.25 -105.1 87.5 1522.55 -32.5 -49.65 -71.65 29.4 57.85 40.85 -33.6 -23.65 -30.85 21.3 -6.05 4.65 -23 2.95 -2.75 25.55 -26.55 -6.65 -49.25 -22.15 12.4 0.4 -62.1 7.75 -2.95 29.7 -24.1 -2.95

-0.05435 -0.08473 -0.05121 -0.08974 -0.05648 0.044504 0.810471 -0.09128 -0.12778 -0.16351 0.057664 0.120408 0.096664 -0.08802 -0.05694 -0.07027 0.045334 -0.01349 0.010229 -0.05112 0.006237 -0.00585 0.054045 -0.05937 -0.01404 -0.10252 -0.04182 0.022472 0.000742 -0.11521 0.012893 -0.00497 0.049807 -0.04253 -0.00499