Assignment-Strategic Corporate Finance

Analysis of Pharmaceutical Industry

UNDER THE GUIDANCE OF: PROF.ALOK KUMAR SUBMITTED BY:
AMAN SINGHANIA

THE INTERNATIONAL INSTITUTE OF PLANNING AND MANAGEMENT

NEW DELHI

PART - I

CORPORATE GOVERNANCE ANALYSIS

CORPORATE GOVERNANCE ANALYSIS

Corporate Governance refers to the process, which should safeguard and add value in the long-term for the interest of its various Partners such as shareholders, creditors, customers and employees. The culmination of good Corporate Governance policy is:y y y Transparency and professionalism in all activities of the Company. Implementation of procedures and policies prescribed by the Company to ensure high ethical standards in all its business activities. Responsive management which meets the needs of its Partners.

In this section will understand the corporate governance strategy followed by the industry through the four companies which we are analysing in this report. These Companies pursues the process of Corporate Governance in compliance with Clause 49 of the Listing Agreement with Stock Exchanges and in this regard, submits a report on the matters mentioned in the said clause and practices followed by the respective Companies. The Three companies which we are analysing to study The Pharmaceutical Industry are... 1. Glenmark Pharmaceutical 2. Biocon. 3. Cipla.

1. Management and Shareholders

The Three companies which we are analysing belongs to the different domains, we mean the Glenmark Pharmaceutical Ltd. and the Cipla Ltd. Biocon are the global companies which have its firm roots in many developed and developing country. These companies have got management from all around the globe. Following is the table showing CEOs of these companies and the information about them

Chief Executive Officer

Company Name CEO Age Years at the company Years as CEO/MD Studies Glenmark Glen Sadanha 39 15 9 Cipla Hamied Y 60 40 33 Biocon Kiran M.Shaw 56 30 30 B.Sc Zoology 51 28.3 24 Industry

B.Pharma ,MBA Doct(Chemistry)

CEO compensation
Glenmark
Salary Bonus/Allowances Others Comission Stock gains Total compensation Stock ownership Stock ownership (%) Market Value Rs. 24,720,000.00 Rs. 0.00 Rs. 9,372,800.00 Rs. 0.00 Rs. 0.00 Rs. 34,092,800.00 0 0.00% 0

Cipla
Rs. 4,700,000.00 Rs. 0.00 Rs. 3,275,000.00 Rs. 75,000,000.00 Rs. 0.00 Rs. 82,975,000.00 0 0% 0

Biocon
Rs.112,283,000.00 Rs. 0.00 Rs. 485280 Rs. 5,74,633.00 Rs. 0.00 Rs. 11,769,080.00 0 0.00% 0

Industry
Rs.42,945,626.67 -

It can be seen that the CEOs all the companies are having long history with their respective countries of 25-30 years as employees and 3-5 years as the CEO. The CEO of the Cipla projects Mr. Hamied.Y has been working with Cipla parent unit since 40 years,. The CEOs of the Cipla Hamied Y earns total compensation of about half times that of industry average. The compensation of the Biocon CEO is about 0.27 time s of the Industry average while considering Glenmark its CEOs compensation is pretty high .80 times as compared to the Industry average.. It is interesting to see that none of the CEO is having stock ownership in the companies as maximum stake in all the companies is owed by their respective promoters. The Idea is to make the CEO focus towards maximizing shareholders wealth and not his own. This style also separates the management and the ownership which allows the owners to relax a bit.

Board of Directors 1. Glenmark Pharmaceuticals Ltd.

Glenamrk
Board of Directors Gracias Saldanha B .E. Saldanha (Ms.)* Glenn Saldanha Cheryl Pinto (Ms.) J. F. Ribeiro R.V .Desai * A. S. Mohanty N.B Desai M. Gopal Krishnan Sridhar Gorthi Designation Non-Executive Promoter Non-Executive Promoter Managing Director &CEO Executive Promoter Non-Executive Independent Executive Executive Non-Executive Independent Non-Executive Independent Non-Executive Independent Other Boards 1 1 4 -6 3 -2 1 3

2. Cipla limited
Board of Directors
Dr. Y.K. Hamied Mr. M.K. Hamied Mr. Amar Lulla Dr. H.R. Manchanda Mr. S.A.A. Pinto Mr. Ramesh Shroff Mr. V.C. Kotwal

Designation Executive Executive Executive Independent Director Independent Director Independent Director Independent Director

Other Boards 4 2 -

3. Biocon
Board of Directors Dr. Kiran Mazumdar-Shaw Mr. John Shaw Dr. Neville Bain Prof. Charles L Cooney Mr. Suresh N Talwar Prof. Ravi Mazumdar Dr. Bala S Manian Designation Chairman & M D Vice Chairman Director Director Director Director I Director Other Boards 6 5 3 4 4 2 4

The Firms and Society:

Most of the companies have Board of directors who are working with the company since last 8-10 years and they joined the board before 3-5 years. The average age of the Directors in the industry is 55 years. Only C G (Crompton Greaves) has a Director who is the promoter of the company through individual shares holding (0.06 %) as well as through 10 holding companies (41.27 %). All other companies have Directors who are not the promoters of the company. The share holding pattern of the these companies is given below. The Indian Pharmaceutical Industry today is in the front rank of Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously.

Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world. The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It is an extremely fragmented market with severe price competition and government price control. The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations. Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the drugs and pharmaceutical products has been done away with. Manufacturers are free to produce any drug duly approved by the Drug Control Authority. Technologically strong and totally selfreliant, the pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpower, strength of national laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and research capabilities, supported by Intellectual Property Protection regime is well set to take on the international market.

Cipla
Safety and Environment Care Various health, safety and environment awareness programmes were organised for villagers and school children living around the Companys units at Baddi (Himachal Pradesh), Patalganga (Maharashtra), Kurkumbh (Maharashtra), Verna (Goa) and Bengaluru (Karnataka).As always, the Company kept up high standards of occupational health, safety and environment preservation practices at all its manufacturing units.

Biocon
HealthARY (Arogya Raksha Yojana) Primary Healthcare Clinics We have four clinics in the districts of Huskur, Bagalkot, Pavagada and Chikkballapur and two within Bangalore City in Austin Town and Kavalbyrasandra. Under construction are three more in Yarandahalli Village (Hennagara Gram Panchayat), Krishnarajpuram and Whitefi eld (Bangalore City). Specialist Services: To augment our primary healthcare services with that of specialized care, we try to bring specialists from leading hospitals to our Clinics for consultation on a regular basis. To that end, a pediatrician from Narayana Hrudayalaya visits the Huskur Clinic once a week and a cardiac consultant from MSR NH Heart Centre is available for Echo,ECG and consultation at our Chikkballapur Clinic, also on a weekly basis. Additionally, the Chikkballapur Clinic offers telemedicine consultation with NH Hospital doctors and online ECG service, 6 days a week . Outreach Services: Health camps are an ongoing feature of all our Clinics. This year, the Bagalkot District hosted multispecialty camps organized in the villages of Kaladgi, Simmikeri, Kulageri. A team of 16 doctors from Jain Institute of Vascular Sciences (Bangalore), Narayana Hrudayalaya (Bangalore), Kerudi Hospital (Bagalkot), M.M. Joshi Eye Hospital (Hubli),Nijalingappa Medical College (Bagalkot) and the ARY Clinic (Kaladgi) worked together over a period of three days to treat 1800+ patients for a range of cardiac, diabetic, ophthalmic, ob/gyn illnesses as well as other minor ailments The Chikkballapur District also benefi ted from two cardiac camps held in Nandi and Chikkballapur town. A total of 500 patients were attended to in these camps. Additionally, free medicines were supplied to Shri V. R. Deshpande Memorial Trust for its health camps conducted in the Uttar Kannada District. Outreach services from our two urban Clinics saw our community health workers make house-to-house visits providing information on best practices in health and hygiene besides educating the neighbourhood about services available at ARY Clinics. Ragpickers Education & Development Scheme (REDS) Deephalli: REDS works with children who survive by collecting waste/ garbage off the streets of Bangalore. The organization runs a resident facility in Deephalli for 60 children between the ages of 4 to 14. The residence is located about 4 kms from the ARY Clinic in Huskur. Our ARY team visits REDS once a week to provide the young residents medical care. Me dicines are subsidized and when necessary, children are taken to the Clinic for diagnostic tests. Health Cities Narayana Hrudayalaya and Biocon Foundation have entered into a collaboration to offer high technology, affordable healthcare across India. The aim is to set up large health cities in every

state capital and large hospitals in every district headquarter, strategically positioning them between government and corporate hospitals. The mission is to create at least 20,000 beds within the next 3-5 years in various parts of the country. The Bangalore Health City has a 1,000-bed heart hospital performing approximately 30 major heart surgeries a day; supported by an eye hospital that performs approximately 300-500 cataract surgeries daily; and a large orthopedic hospital Sparsh equipped with state-of-the-art infrastructure to perform complex orthopedic procedures and address every type of trauma and injury. In 2009, a 1,000-bed, modern cancer hospital will be commissioned at the health city project in Bangalore. Education Chinnara Ganitha This year, the Chinnara Ganitha program covered 70,000 children from Classes 1 to 7 in three districts Anekal, Chikkballapur and Coorg. A test of math comprehension and application was administered to 1,000 children in Coorg before they started using the books. This test will be repeated after one year of using the books to help us assess the effi cacy of the program and fi ne tune content where necessary.

Shareholders Analysis
Share Class/Company Promoter's holding Indian Promoters Foreign Promoters Sub total (A) Institutional investors Banks Fin. Inst. and Insurance FII's Subtotal (B) Other investors Private Corporate Bodies NRI's/OCB's/Foreign Others Other Government Bodies Direcctors/Employees Others Subtotal (C) General public (D) Grand total (A+B+C+D) Glenmark
52.09% 0.00 52.09% 0.00% 1.45% 28.25% 29.730% 3.31% 0.80% 0.09% 2.76% 6.84% 11.34% 100.00%

Cipla
17.36% 22.02% 39.38% 0.00% 13.87% 13.40% 27.27% 2.14% 4.52% 0% 4.62% 11.28% 22.07% 100%

Biocon
40.45% 0.00% 40.45% 0.00% 0.70% 19.77% 20.47% 0.00% 22.11% 0.00% 0.00% 22.11% 16.97% 100.00%

. The Firms and Society:In Glenmark Pharmaceutical the promoters has major holding in the name

of Saldanha Family trust 52.09 % . Cipla has global operations in of which Indian promoters hold about 17.36% shares and the foreign promoters has share of 22%the general public listing is also high as compare to other two companies that is 22% of cipla ,17% of Biocon and around 12% shareholding in Glenmark. Glenmark has the highest FII,s holding of about 28% and 13% and 17% in cipla and Biocon respectively.

Company Market Cap

Glenmark
Rs. 110,435,704,468.00

Cipla
Rs. 159,900,656,798.40

Biocon
Rs. 51,538,000,000.00

Industry Market Capital

Rs. 321,874,361,2666.40

Cipla is the largest company according the market capital as well as the book value of all the companies with the market capital of Rs.159,900,656,798.40. Glenmark is having market capital of Rs 110,435,704,468.00. Biocon is with market cap of Rs 51,538,000,000.00 and Overall industry is with the market cap of Rs. 321,874,361,26666.40. All these values are calculated as on 31st March 2009. There is no Insider Holding in any of the company.

PART - II

RISK PROFILE

Risk Profile
I. - Market analysis of risk and return in the Pharmaceutical industry Calculating Top-Down Betas: For each company we ran a regression of the individual stocks monthly prices against the CNX Nifty index for the period 2006 to 2009. We concentrated to on intercept to calculate Jensens Alpha, the slope of the regression i.e the Beta of the stock. We also saw the R square to know which beta should we use for further calculations, top down Beta or Bottom up Beta. Our findings are in the following table.

Jensens alpha Beta R2 Stand.Error

Glenmark -0.55 0.92 0.22 0.15

Cipla -4.57 0.39 0.10 0.10

Biocon 0.48 1.06 0.44 0.10

(1) Jensens Alpha We compared the intercepts of the regressions with (Risk-free rate x (1-Beta))

Jensens Alpha=[Intercept Rf x (1-Beta)]

Here the Rf we took is 0.625 monthly i.e 7.5 % annually. When we annualize the obtained figure, we get stocks performance on a yearly basis. If Jensens Alpha is positive, we say that the stock performed better than expected by the market.

Jensens alpha

Glenmark -0.55

Cipla -4.57

Biocon 0.48

Here we can easily see that the company Biocon has performed better than the market. This would be clearer when we see the Beta of the company that is the Slop, which is also higher in case of Biocon.

(2) Beta (Slop): The slop i.e the beta of the stock shows the sensitivity of the Stock of the company with index. Here we see that Biocon is having the highest Beta of 1.06 which indicates that the stock moves 100% of the market movements in either Direction. Whereas the beta of other three companies is about less than1 which shows that the stocks moves similar to the market movements.

Beta

Glenmark 0.92

Cipla 0.39

Biocon 1.06

(3) Risk : The R2 indicates the risk associate with the stock. As greatest part of the risk comes from the companies itself, it is diversifiable. It can be seen that the risk associated with all the stocks is very low and hence one can think about investing in these stocks. R2 Glenmark 0.22 Cipla 0.10 Biocon 0.44

(4) Standard Error: The standard errors associated with these stocks are very low, so we have used these Betas in all our further calculations. Glenmark 0.15 Cipla 0.10 Biocon 0.10

Stand.Error

2) Identifying the Financial Leverage Effect on Betas: In order to understand the importance and role that financial leverage plays in assessing the level of risk of the companies, we calculated the value of the companies unlevered betas.For the calculation we used the market value of debt and equity in order to come up with the D/E ratio to apply in the formula:

Unlevered Beta = Levered Beta/[1+(1-marginal tax rate) x D/E]

We used a marginal tax rate of 33.99%, which was common across the companies. The values for unlevered Betas are: Glenmark 0.82 0.19 0.92 Cipla 0.37 0.05 0.39 Biocon 1.04 0.031 1.06 Indt. Avg 0.86 0.099 0.92

Unlevered Beta D/E Beta

As shown in the table, the companies betas are nearly equal to the industry average beta accept for the Biocon which has outperformed in the stocks. All other companies have betas nearly equal to the industry Beta. The Stocks Moves with the index Nifty in either directions.

3) Bottom-up Beta Estimate: As all the companies are in only one sector i.e power equipment manufacturing we didnt need to bother about the segments of the companies, so the calculation of the bottom up betas was not that hard. This betas are as follows Business units Bottom up Beta Glenmark 0.50 Cipla 0.40 Biocon 0.41

Comparison between Top down and Bottom up Betas We again levered the unlevered betas using the debt equity ratio to get the Bottom up betas. Following is the comparison between the top down Betas and the Bottom up Beta Business units Top down Beta Bottom up Beta Ind. avg Beta Glenmark 0.92 0.50 0.92 Cipla 0.39 0.40 0.92 Biocon 1.06 0.41 0.92

The bottom-up beta estimates are lower than those of the top-down method with the exception of Cipla. However, as previously stated, the Top-Down Betas are reliable because the standard errors of the betas from the regressions are low, we therefore will stick with those estimates.

4) Market Value of Equity and Debt: a) Market value of equity: By multiplying the number of shares outstanding in the market at the end of the 31st March 2009 and the market price of each stock for the same period, we calculated the market value of equity for each firm. This is as follows I term of Ruppes. Glenmark Market value of equity(Rs) Rs.110,435,700,468 Cipla Rs.159,900,656,798.40 Biocon Rs.51,538,000,000.00

b) Market value of debt: None of the company is having Debt through the corporate bonds hence the book value of the firm is the market value as well as the total value of the debt. Glenmark Market Value of Debt(a) Rs.20,943,465,000.00 Cipla Rs 9,402,400,000.00 Biocon Rs. 1,639,427,000.00

As we have got the market value of equity as well as debt we can now obtain the figures of the relative weight of equity and debt on the overall firm value in market terms: Glenmark Market Value of Equity(a) Rs. Market Value of Debt(b) Rs. Firm Value(a)+(b) Rs D/(D+E) Rs.110,435,700,468.00 Rs.20,943,465,000.00
Rs. 131,379,169,468.00

Cipla
Rs.159,900,656,798.40

Biocon Rs51,538,000,000.00 Rs. 1,639,427,000.00

Rs. 53,177,427,000.00

Rs.9,402,400,000.00
Rs. 169,303,056,798.40

0.15%

0.05%

0.03%

Industry Debt ratio= 0.090389768

It can be seen that Glenmark has highest debt as compared to Cipla and Biocon. Whereas Biocon has the least debt as compared to other companies, as far as Industry has also least debt.

5) Cost of capital: The cost of capital is the weighted average cost of equity (Ke) and cost of debt (Kd). The following table gives us the information about the cost of debt of each of the company according to interest paid during last fiscal year. Risk free rate we have taken as 7.5%, market return as 15%, All betas are top down Betas from regration. EBIT and Capital are from the balace sheet

Glenmark Kd Rf Rm Beta EBIT (Rs.) Capital (Rs.)

8.93% 7.50 15.00 0.92 2502300000 110,435,700,468.00

Cipla
5.55% 7.50 15.00 0.39 9535400000 159,900,656,798.40

Biocon
3.01% 7.5 15 1.06 1194100000

51,538,000,000.00

Weighted average cost of capital: We now have all the inputs to solve the following equation that gives us the cost of capital:

WACC = KE (E/(D+E)) + K d (D/(D+E))

Following are the details about the current WACC structure followed by all the companies.. Glenmark 0.92 14.40 0.84 5.90% 0.15 12.11 Cipla 0.39 10.425 0.94 3.67% 0.05 9.84 Biocon 1.06 15.45 0.96 1.99% 0.03 14.97

Beta Cost of Equity E/(D+E) After-tax Cost of Debt D/(D+E) WACC

Industry Avg. = 13.10

16 14 12 10 8 6 4 2 0 1 2 3 company industry

Cipla and Glenmark have less WACC as compared to the industry average so therefore This means they can raise their funds at much lower cost then the average industry practice, wheras Biocon is paying a higher cost for financing its project.

PART - III INVESTMENT RETURN ANALYSIS

INVESTMENT RETURN ANALYSIS

This section analyzes the quality of the firms current projects and the managers abilities to contribute to increasing the firms values. This analysis relies on the valuation of the returns of the projects based on accounting methods. In particular the return on equity(ROE) and the return on capital (ROC). Glenmark 18.3 14.40 3.9 18.9 12.11 6.79 Cipla 23.7 10.425 13.275 17.1 9.84 7.26 Biocon 15.3 15.45 -0.15 13.1 14.97 -1.87

ROE (a) Cost of Equity(b) Excess return on Equity (a)-(b) ROC (c) Cost of Capital (d) Excess Return on Cap. (c)-(d)

This table shows that Glenmark and Cipla has given excess returns over the cost of equity as well as the cost of capital, whereas Biocon has both the factors negative .Cipla has given maximum returns over the cost of equity as well as cost of debt.
16 14 12 10 8 excess return on equity 6 excess return on capital 4 2 0 -2 -4 1 2 3

The graph shows that the all the companies have return on ROC better that the return on ROE, but for Cipla the case is reverse. Its return on ROE is greater than return on ROC. On the other hand Biocon has the negative return on excess of equity as well as Return on capital.

Converting the excess returns into monetary values Once we have determined the excess returns (for the latest period) it is interesting to see how they contributed to increasing the value of the firms. This is the concept of Economic Value added (EVA). It is calculated both in terms of equity (EVA for equity) and in terms of the entire firm value (EVA for firm). The computation is:

EVA for equity = Excess Return on Equity x Book Value of Equity EVA for the firm = Excess Return on Capital x Book Value of the Firm
For the companies analyzed the results follow: Glenmark EVA Equity EVA Firm Rs.47968830000 Rs.83514963000 Cipla Rs.576371295000.00 Rs.315864450000.00 Biocon Rs.-2060895000 Rs.-25710256000

Over the last few years Cipla has added the largest EVA of Rs. 315864450000.00 and Rs. 576371295000.00over the Equity and Capital Respectively. Glemnmark have also added EVA of about but Biocon has not been able to add economic value to its shareholder, in the other terms it can be said the shareholder became the stake holder in the company .

PART - IV CAPITAL STRUCTURE CHOICES

CAPITAL STRUCTURE CHOICES

The purpose of this section is to qualitatively analyze the existing financial mix and to assess the benefits and costs of debt. We included in debt the short-term debt, long-term debt and present value of any lease obligations whether operating or capital .The debt of a company is classified in three categories: short-term debt, long-term debt and capital and operating leases. The three companies have the same marginal tax rate of 33.99%, so in terms of savings no company has an advantage over the other one. However, the current amount depreciated by each firm will make a difference in terms of tax savings. In this respect, Biocon has benefited by having a greater depreciation expense in relation to the companys book value. On the other hand, Cipla Motors benefited least by the tax reductions due to its low current depreciation relative to its book value.

Glenmark
Current Dep./BV of firm 0.15%

Cipla
0.09

Biocon
1.40%

The table below shows that Cipla will be able to have more debt since Cipla EBITDA in relation to the value of the firm is the highest in this comparison. This means that the company can face higher levels of debt. Overall, the three companies under analysis have similar EBITDA/Firm Values. Glenmark EBIDTA Firm Value EBIDTA/Firm Value 2693300000 Rs. 110,435,704,468.00 2.44% Cipla 11053300000 Rs. 159,900,656,798.40 6.91% Biocon 1936900000 Rs. 51,538,000,000.00 3.76%

To continue with the comparison, all three companies have large percentages of shares held by the promoters suggesting that there is a strong link between stockholders and managers. In this respect, taking on additional debt could add discipline to management. In the same line of reasoning all the three companies have high cash flows and low leverage that make managers not to use debt as a source of capital.

PART - V OPTIMAL CAPITAL STRUCTURE

PART V OPTIMAL CAPITAL STRUCTURE The objective of this section is to come up with the optimal financing mix for each firm. This was first done on a quantitative basis using the Minimization of Cost of Capital Approach. After the model determined the optimal financing mix, we built constraints to determine the costs of maintaining a determined credit rating classification. Since the results of this optimization could be biased by a latest unusual good or bad year, we ran the same model using a conservative level of EBITDA for each company. As the results of the quantitative analysis could be way off what is considered normal for the industry, we enriched our analysis by using a comparative analysis between the firms under analysis and the oil sector and with the total market as a whole. 1.The Cost of Capital Approach: The current cost of equity, after tax cost of debt, and cost of capital for the firms under analysis are (these numbers were calculated in section II): Glenmark Cost of Equity After-tax Kd D/(D+E) E/(D+E) Rating Stock Price WACC MV of Firm 14.4% 5.90% 15.94% 84.06% A+ 156.90 12.11% 110735704,468.00 Cipla 10.425% 3.67% 5.55% 94.45% AAA 220.05 9.84% 159,900,656,798.40 Biocon 15.45% 1.99% 3.08% 96.92% AA+ 143.15 14.97% 51,538,000,000.00

The optimization process: Cost of Capital at different financing mixes: Optimal Capital Structure Debt Ratio 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% Glenmark 14.40 13.96 13.60 13.21 12.84 12.65 12.72 12.93 13.56 13.46 10.19 Cipla 10.43 10.16 10.11 10.06 9.93 10.39 11.47 14.88 18.15 19.12 18.15 Biocon 15.45 15.78 16.12 17.44 18.10 18.77 19.43 20.09 20.75 21.42 16.43

Therefore, the optimal ratios and values without constraints for each firm are: Glenmark At Kd* Ke D/(D+E) E/(D+E) Rating Cost of Capital Summary of Important Results: To have a better assessment of the changes that has to be done on each firm to go from the current situation to the optimal: Glenmark Debt Ratio Rating Cost of Capital Current Optimal Current Optimal Current Optimal 15.94% 50% A+ A11.66% 7.12% Cipla 5.55% 40% AAA BB 14.15% 5.61% Biocon 3.08% 0% AA+ 14.86% 10.92% 6.35% 18.95% 50% 50% A12.65 Cipla 7.26 11.71% 40% 60% BB 9.93 Biocon 4.95% 15.45% 0% 100% 15.45

This table helps to assess the nature of the changes that must be done in the current financing mixes to reach the optimal levels.

PART - VI

MECHANICS OF MOVING TO THE OPTIMAL LEVEL

MECHANICS OF MOVING TO THE OPTIMAL LEVEL

The purpose of this section is to determine how fast these companies should move towards their optimal financing mix and what should be the general characteristics of the new debt issued. This section does not suggest that the companies actually move to the optimal, because such a decision includes a lot of subjectivity. Therefore, we will only recommend, according to the characteristics of each company, a possible path to achieve the new optimal debt structure.

1. The Immediacy Question: To answer this question we present a summary table:

Glenmark Current Debt Level Optimal Level Cost of Equity RoE Cost of Capital RoC Market Value 15.94% 50% 14.4 18.3 12.11 18.9 110735704,468.00

Cipla 5.55% 40% 10.425 23.7 9.84 17.1 159,900,656,798.40

Biocon 3.08% 0% 15.45 15.3 14.974 13.1 51,538,000,000.00

From the table above, it can be said that these companies are large in market value terms (all over $30,000 million). In terms of the earnings performance of these companies: * All of them had excess accounting returns to the stockholders over the corresponding hurdle rates(except Biocon ) (ROE > COE). * None of them (except Biocon) also had excess returns to the firm (all claim holders), i.e. ROC > COC.

Based on this analysis we conclude that all of these companies are possible targets for hostile takeovers. Therefore, the recommended path tells us that these firms should change their debt ratios on a quick or rushed basis. Moving to the optimal level will require taking good projects and alter in the financing mix (increasing the level of debt to converge to the optimal). It is important though to determine what will be the structure of the debt.

PART - VII

DIVIDEND POLICY

Dividend Policy
The purpose of this section is to analyze how much the firm has returned to stockholders in the past, and to assess from a qualitative perspective whether it should return more or less.

Summary of Averages Glenmark Dividend Yield% Average Dividend Payout % Average 0.25% 5.18% Cipla 0.91% 20.01% Biocon 2.10% 29.44% Industry 1.09% 18.21%

Dividends Policy and Industry Comparison: The three companies under analysis have paid dividends during the past three years. Since the six companies are major participants in the industry, the industry averages reflect their dividend yield ratios as well as their dividend payout ratios. In particular, the three companies have had high and fairly steady earnings, and the projects undertaken have been within their core businesses. Consequently, each company could afford to pay high dividends. These companies needs for financial flexibility have been warranted by their low financial leverage. Additionally, stock prices had not been affected by the dividend policy, but rather by macroeconomic trends and by changes in real estate prices.

PART - VIII

VALUATION

Valuation
In this final section, our objective is to merge all the analysis conducted in parts I IX. The previous sections allowed us to determine the fundamental inputs and assumptions for the final evaluation of the companies examined in this project. We hereby present the single steps and the findings of the valuations.

1. Choosing the right Model: The two main inputs needed to conduct the valuation of the six companies are: Growth Discount Rate

a) Growth Rate: The expected growth in earnings per share (EPS) is the basis on which we estimated the companies growth potential. If this figure results considerably higher than the expected growth of the overall economy (stable growth of 6%), the company is expected to experience a two stage growth pattern. This pattern consists of a growth equal to the expected growth in EPS for the first five years and a stable growth of 6% forever after. In the period of high growth the discount used in the evaluation is the current cost of capital or equity (depending on the model used) of each firm. In the period of stable the discount rate employed reflects the beta of a large stable mature company (Beta =1), and the capital expenditure assumed in the cash flow computation must offset the level of depreciation. Example DLF; its current EPS growth rate is around 15.92%, thus we have assumed this high growth for the first five years and then a period of stabilization at a rate of 6%.

The table below illustrated the inputs for the EPS growth computation. The expected growth in EPS is given by the retention ration (1-Pay-out ratio) multiplied by the ROE.

Glenmark ROE (1-Payout) EPS Growth b) Discount Rate: 18.3% 94% 26.72%

Cipla 23.7% 74% 14.23%

Biocon 15.7% 77% 16.46%

Because of the type of cash flow used, the cost of equity is the appropriate discount rate. Just as a reminder here is the firms cost of equity. Glenmark 14.40% Cipla 10.425% Biocon 15.45%

Cost of Equity (Ke)

In summary, here is the model used to value the different firms. Company Glenmark Cipla Biocon Model Used 2 stage growth, Dividend 2 stage growth, Dividend 2 stage growth, Dividend

2. Valuation: We do the valuation after discounting to the present the value of the dividends. Company Glenmark Cipla Biocon Value of Stock 31.92 85.34 156.82 Current Stock Price 156.90 220.05 81.85 Situation Overvalued Overvalued Undervalued