2/1/2014

CORPORATE FINANCE

SUN PHARMACEUTICAL

Divya Garg(221042), FMG-22A

SUN PHARMACEUTICALS
Sun Pharmaceutical Industries Limited is a multinational pharmaceutical company headquartered in Mumbai, Maharashtra that manufactures and sells pharmaceutical formulations and active pharmaceutical ingredients (APIs) primarily in India and the United States. The company offers formulations in various therapeutic areas, such as cardiolog, psychiatry, neurology, gastroenterology and diabetology. Sun Pharmaceuticals was established by Mr. Dilip Shanghvi in 1983 in Kolkata with five products to treat psychiatry ailments. Cardiology products were introduced in 1987 followed by gastroenterology products in 1989. Today it is the largest chronic prescription company in India and a market leader in psychiatry, neurology, cardiology, orthopedics, ophthalmology, gastroenterology and nephrology. Some of the top brands of the company include pantocid, susten, aztor, gemer, repace, glucored, strocit, clopilet and cardivas. Over 57% of Sun Pharma sales are from markets outside India, primarily in the US. Manufacturing is across 23 locations, including the US, Canada, Brazil, Mexico and Israel. Sun Pharma was listed on the stock exchange in 1994 in an issue oversubscribed 55 times. The founding family continues to hold a majority stake in the company. Today Sun Pharma is the third largest and the most profitable pharmaceutical company in India as well as the largest pharmaceutical company by market capitalization on the Indian exchanges. The Indian pharmaceutical industry has become the third largest producer in the world in terms of volumes and is poised to grow into an industry of $20 billion in 2015 from the current turnover of $12 billion. In terms of value India still stands at number 14 in the world.

KEY PERFORMANCE INDICATORS

VARIOUS SOURCES OF FINANCE

As at 31st March, 2013 EQUITY AND LIABILITIES Shareholders' Funds (a) Share Capital (b) Reserves and Surplus Non-current Liabilities (a) Long-term Borrowings As at 31st March, 2012

1,035.6 76,853.2 46.4

77,888.8 77,935.2

1,035.6 77,745.6 40.3

78,781.2 78,821.5

FEATURES OF SOURCES OF FINANCE

Share Capital
The term share capital' refers to the amount of capital raised (or to be raised) by a company through the issue of shares. Features of share capital The main features of share capitals are 1. Share capital can be raised only by companies limited by shares and registered with share capital 2. Share capital can be raised by a company either at the time of its formation for starting its operations or later on for further expansion.

3. Share capitals (except in the case of redeemable preference share), one raised, cannot be returned by the company to the shareholders as long as it continues to exist, It can be returned only at time of the winding up of the company. Kinds or Types of Shares: A company issue different types of shares in order to satisfy the requirements of different classes of investors and to collect more capital. A public company can issue only two types of shares, viz., (1) Preference Shares. (2) Equity Shares. 1. PREFERENCE SHARES Preference shares are shares, which have preferential rights (i.e., first priority or preference over other kinds of shares) in respect of payment of dividend during the existence of the company, and also in respect of repayment or refund of share capital in the event of the winding up of the company. In fact, it is because of their preferential rights in respect of the payment of dividend and repayment of capital that these shares are 1 mown as preference shares. 2. EQUITY SHARES Equity shares are those, which are not preference shares. In other words, these are shares, which do not enjoy any preferential right either in respect of payment of dividend or in respect of the repayment of capital at the time of the winding up of the company. These shares are knows as equity shares, as they are the 'ownership shares' conferring the ownership of the company on the holders of these shares, i.e., the holders of these shares are the real owners of the company.

Retained Earnings
Retained or accumulated earnings are the profits a business elects to keep within the company after paying dividends to shareholders. A company may elect to utilize retained earnings in a number of ways, including adding capital to the company's existing business investments and purchasing updated manufacturing equipment. When a business chooses to reinvest its retained earnings, these funds appear as a credit balance in the retained earnings portion of the company's balance sheet. A business can also choose to stockpile retained earnings to build up a large cash reserve to help mitigate the effects of any risks, including downturns in consumer spending. The business records these saved funds as a cash balance in the retained earnings portion of the balance sheet. The business lists all retained earnings in the stockholder's equity portion of the balance sheet.

Long- Term Borrowings

Long-term debt has a number of characteristics that make it distinct from short-term debt financing. Some of these traits are advantageous for you as a borrower, while others pose potential challenges. Taking on too much long-term debt is risky, but it does offer advantages over paying cash for major purchases. Mortgages, equity loans, car loans, boat loans, major appliance financing, student loans and personal loans are among common long-term consumer loans. 1. Principal: Long-term debt typically has a higher principal balance than other debt obligations. This is because people don't usually get long-term loans for smaller purchases. Mortgages are usually the most expensive purchase people make. Loans of $100,000 or more are common. Car loans of $5,000 to $10,000 are routine as well. The idea of taking on this amount of debt can be scary, but it is often the only way to make such large purchases.

2. Rates: Long-term debt usually comes with lower interest rates than short-term financing. This is because mortgages, car loans and boat loans are generally secured with the property as collateral to reduce the lender's risk. While an unsecured personal loan or credit card may have rates ranging from 10 to 25 percent, depending on your credit, home loans in the 4 to 6 percent range are common as of July 2012. Car loans in the 4 to 10 percent range are also the norm for borrowers with decent credit.

3. Collateral: Whereas personal loans, credit cards and store cards are usually available without collateral, you typically can't make a major purchase without securing the debt with collateral. This is because of the more significant risks to the lender of losses if you bail on a $100,000 to $200,000 home loan, as opposed to a $5,000 to $10,000 personal loan or credit card balance. By putting up your home, car or boat to get the long-term debt, you do have risks of loss to repossession if you don't keep up with the payments. 4. Cash Flow: Taking on long-term debt has a more lasting impact on your monthly cash flow. Committing $500 to $1,500 per month to a mortgage, $200 to $400 to a car loan and $300 to $600 on a student loan eats away at your monthly income pretty quickly. These debt commitments are on top of other living expenses like utilities, groceries, entertainment and household items. High monthly debt commitments reduce how much money you can spend on vacations and entertainment, and they increase your potential for debt problems. While credit cards also affect monthly cash flow, it is generally a short-term commitment. Mortgages and car loans are more commonly considered in basic family budgeting.

Cost of Capital of each Component: Cost of Debt

( ( ) )

Working Notes: Interest Paid= Rs.4.2million Total Bank Loan= Rs.46.4 million Tax Paid= Rs.1464.8 Profit before Tax= Rs.6630.3 crores Tax Rate= 1464.8/6630.3= 0.2209 ( ( ) *100)

Cost of Equity

Working Notes: Growth in dividends=0%

Retained Earnings
Cost of Retained Earnings= Cost of Equity= 0.4%

Overall Cost of Capital of the Business

Weighted average Cost of Capital Sources of funds Amount Weights Cost of Capital (C/C) Bank Loan 46.4 0.00059 7.05% Equity Shares 1035.6 0.01328 0.4% Retained Earnings 76,853.2 0.98611 0.4% Total 77,935.2 Thus, the overall Cost of Capital is 0.40%. (Rs.in million) Cost of Capital (Weights*C/C) 4.19852E-05 5.31518E-05 0.003944467 0.004039604

10% Additional Funds are raised through various sources

Original Value EQUITY AND LIABILITIES Shareholders' Funds 1,035.6 (a) Share Capital 76,853.2 (b) Reserves and Surplus 77,888.8 Non-current Liabilities 46.4 (a) Long-term Borrowings Total Liabilities 77,935.2 Increase in equity by 10% Increase in debt by 10%

8,829.120 76,853.2 85,682.32 46.4 85,728.72

1035.6 76,853.20 77,888.80 7839.92 85,728.72

Adjusted WACC if equity is increased by 10%

Sources of funds Bank Loan Equity Shares Retained Earnings Total Amount 7839.92 1035.6 76,853.2 85728.72 Weights Cost of Capital(C/C) 0.091450333 7.05% 0.012079966 0.4% 0.896469701 0.4% (Rs. In million) Cost of Capital (Weights*C/C) 0.006447248 4.83199E-05 0.003585879 0.010081447

Thus, the overall Cost of Capital is 1.01%.

Adjusted WACC if debt is increased by 10%

Sources of funds Bank Loan Equity Shares Retained Earnings Total Amount 46.4 1035.6 76,853.2 77,935.2 Weights Cost of Capital (C/C) 0.10298 7.05% 0.89646 0.4% 0.00054 0.4% (Rs. In million) Cost of Capital (Weights*C/C) 0.007260728 0.003585879 2.16497E-06 0.010848772

Thus, the overall Cost of Capital is 1.08%.

Share Market Price in BSE of last 5 year

EXPECTED RETURN AND REGRESSION ANALYSIS

The Y-intercept of the SML is equal to the risk-free interest rate. The slope of the SML is equal to the market risk premium and reflects the risk return trade off at a given time:

Where: E (Ri) is an expected return on security E (RM) is an expected return on market portfolio M is a non-diversifiable or systematic risk RM is a market risk Rf is a risk-free rate Risk free rate = Rf = 8.2% as per RBI interest rate.
Expected return on market = RM = 19.14% This expected market risk return is obtained by finding the average Nifty return in last 4 years.

DATE BSE ROI (Rm)

1/4/2009 10385

1/4/2010 1/4/2011 1/4/2012 1/4/2013 17933 72.68% 19451 8.46% 17486 -10.10% 18450 5.51%

Share Price DATE SHARE PRICE DIVIDEND PAID ROI (Ri) 01-04-2009 150.71 2.5 01-04-2010 242.33 4.25 60.94% 01-04-2011 248.43 3.5 2.17% 01-04-2012 367.75 2.75 47.06% 01-04-2013 567.75 2.10 53.80%

SUMMARY OUTPUT Regression Statistics Multiple R 0.388520047 R Square 0.150947827 Adjusted R Square -2 Standard Error 0.299002461 Observations 1

ANOVA df Regression Residual Total 4 2 6 SS MS F 0.031788644 0.007947161 0.355567848 0.178804943 0.089402472 0.210593588 Significance F #NUM!

Alpha Beta

0.356118424 0.281157809

70.00% 60.00% 50.00% ROI (Ri) 40.00% 30.00% 20.00% 10.00% 0.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00% Series1 Linear (Series1)

ROI (Rm)

Hence, slope of regression line = = 0.2811 Ri = Rf + (RM - Rf ) Thus, Colgate-Palmolive (India) Limited returns = Ri = 8.2 + 0.2811 (19.14 8.2) =11.27 % Hence, finally returns of Sun Pharmaceutical (India) Limited = Ri = 11.27%