SAPM ASSIGNMENT

Ashrita
2201199
Abstract:

This abstract offers a concise overview of the application of the Capital Asset
Pricing Model (CAPM) in analysing the financial performance and investment
potential of Biocon Ltd, a prominent biotechnology company. The study
focuses on assessing the relationship between the company's stock returns
and its risk profile within the context of the broader market.

The paper begins by introducing the CAPM framework as a widely used tool
for estimating the expected returns on an asset, considering its systematic
risk in relation to the overall market. In the case of Biocon Ltd, the model's
parameters are adapted to incorporate the company's specific risk factors,
including its industry dynamics, financial health, and market position.

The analysis delves into the practical application of the CAPM in evaluating
Biocon's stock performance. It discusses the estimation of the company's
beta coefficient, representing its sensitivity to market movements, and how it
relates to the prevailing risk-free rate and market risk premium.

Furthermore, the study examines the implications of the CAPM analysis for
investors and financial professionals interested in Biocon Ltd. It demonstrates
how the model's insights can aid in making informed investment decisions,
adjusting portfolio allocations, and understanding the trade-off between risk
and expected returns when considering Biocon's stock.

The abstract acknowledges potential limitations of the CAPM, such as its

reliance on historical data and assumptions about market efficiency. It
suggests avenues for future research, including sensitivity analyses and
comparisons with alternative valuation methods, to provide a more
comprehensive understanding of Biocon's risk-return profile.
ABOUT THE COMPANY:

Biocon Ltd. is an Indian biopharmaceutical company headquartered in

Bangalore, India. It was founded in 1978 by Kiran Mazumdar-Shaw and
initially started as a small enzyme manufacturing company. Over the years, it
has grown to become one of India's largest and most prominent
biotechnology companies. Biocon is engaged in various aspects of the
biopharmaceutical industry, including research and development,
manufacturing, and marketing of a wide range of biopharmaceutical
products. The company focuses on areas such as:
Biologics and Biosimilars: Biocon is known for its work in developing and
manufacturing biologic drugs and biosimilars. These are complex and large-
molecule drugs used to treat various medical conditions such as cancer,
autoimmune diseases, and diabetes.
Research and Development: The company has a strong research and
development focus, aiming to develop innovative solutions for unmet
medical needs. Its R&D efforts cover a broad spectrum of therapeutic areas.
Contract Research and Manufacturing Services (CRAMS): Biocon provides
contract research and manufacturing services to other pharmaceutical and
biotechnology companies. This includes custom research, development, and
manufacturing of various biopharmaceutical products.
Generics: In addition to biologics and biosimilars, Biocon also produces and
markets generic pharmaceuticals for a range of medical conditions.
Global Presence: Biocon operates globally and has a presence in multiple
countries. It has established partnerships and collaborations with
international pharmaceutical companies for research, development, and
marketing of its products.
Biocon's growth and success have earned it recognition both nationally and
internationally. It has played a significant role in advancing biotechnology in
India and contributing to the healthcare industry worldwide.
PRODUCTA AND SERVICES OF BIOCON:

PRODUCTS:
Biologics and Biosimilars: Biocon is renowned for its work in developing and
manufacturing biologic drugs and biosimilars. Some of its notable products
include:
Insulin Glargine (Semglee): A biosimilar of long-acting insulin used to treat
diabetes.
Trastuzumab (CANMAb/Herceptin): A biosimilar used to treat certain types of
breast cancer and gastric cancer.
Adalimumab (IMMUNevo/ Humira): A biosimilar used to treat autoimmune
diseases like rheumatoid arthritis and psoriasis.
Generic Pharmaceuticals: Biocon produces and markets a range of generic
pharmaceutical products for various medical conditions. These include
medications in therapeutic areas such as oncology, immunology, and more.
Small Molecules: Biocon also develops and manufactures small molecule
drugs for various indications.

SERVICES:
Contract Research and Manufacturing Services (CRAMS): Biocon provides
contract research and manufacturing services to other pharmaceutical and
biotechnology companies. This includes custom research, development, and
manufacturing of biopharmaceutical products. Research and Development:
The company has a strong research and development focus, working on
innovative solutions for various medical needs. This encompasses both its
proprietary products and collaborative projects.

Clinical Development: Biocon is involved in clinical trials and development of

its products and collaborates with partners to advance their products through
clinical stages.
Diagnostic Services: Biocon also offers diagnostic services, including
molecular diagnostics and specialized testing.

Please be aware that this information might be outdated, and I recommend

visiting Biocon Ltd.'s official website or consulting more recent sources for the
latest and most accurate information about their products and services.

BIOCON FINANCIAL POSITION:

Biocon Limited reported earnings results for the first quarter ended June 30,
2023. For the first quarter, the company reported sales was INR 34,226
million compared to INR 21,395 million a year ago. Revenue was INR 35,161
million compared to INR 22,174 million a year ago. Net income was INR 1,014
million compared to INR 1,444 million a year ago. Basic earnings per share
from continuing operations was INR 0.85 compared to INR 1.21 a year ago.
Diluted earnings per share from continuing operations was INR 0.85
compared to INR 1.21 a year ago.
Biocon
ob avg D avg D
year no returns risk ann.risk ann.return skewness kurtosis
2013 249 0.211147 1.846675 459.8219775 52.57548022 0.317298 3.199161
2014 244 0.107343 2.007918 489.9320997 26.19178343 1.177768 7.830839
-
2015 248 -0.06446 2.145511 532.0868127 15.98665315 0.46885 4.613607
2016 247 0.415846 7.278879 1797.883188 102.7139671 13.18939 195.2425
2017 248 0.013703 1.890043 468.7306077 3.398320325 0.443516 2.18673
2018 246 0.634041 12.80831 3150.843475 155.974185 14.74977 226.7939
-
2019 245 -0.26227 1.906373 467.0612994 64.25653331 -1.27262 9.975529
-
2020 252 -0.04267 1.801172 453.8954534 10.75235049 1.322582 11.05667
-
2021 248 -0.03855 1.942796 481.8134117 9.560664723 -0.19045 2.901479
2022 248 0.576462 11.54774 2863.839372 142.9626928 15.0708 233.914
CAPITAL ASSET PRICING MODEL:

CAPM stands for the Capital Asset Pricing Model. It's a widely used financial
theory and model that helps investors and financial professionals understand
the relationship between an asset's expected return and its risk. CAPM
provides a framework for determining the appropriate expected return on an
investment based on its risk relative to the overall market.
components of the CAPM are as follows:
Risk-Free Rate: This is the rate of return on a risk-free investment, typically
represented by the yield on government bonds or Treasury bills. It serves as
the baseline return that investors can earn without taking on any risk.
Market Risk Premium: This is the difference between the expected return of
the overall market (usually represented by a market index like the S&P 500)
and the risk-free rate. It represents the additional return investors expect to
receive for taking on the risk of investing in the market.
Beta (β): Beta measures the sensitivity of an asset's returns to fluctuations in
the market. It indicates how much an asset's returns are expected to move in
relation to the market's movements. A beta of 1 implies that the asset moves
in line with the market, a beta greater than 1 indicates greater volatility than
the market, and a beta less than 1 indicates lower volatility.

The CAPM formula is as follows:

Expected Return = Risk-Free Rate + (Beta × Market Risk Premium)

In this formula, the expected return is the return an investor should expect to
receive for holding a particular asset given its risk characteristics. By plugging
in the risk-free rate, market risk premium, and the asset's beta, you can
calculate an estimated return that compensates for the riskiness of the asset.
It’s important to note that while the CAPM is a useful tool for estimating
expected returns and making investment decisions, it has its limitations and
assumptions. These include the assumption of efficient markets, which may
not always hold true in real-world scenarios.
About the Market Proxy:
For this analysis, a suitable market index or a comparable company is chosen
as the proxy for market returns and risks. The proxy's historical returns and
risks will be used to estimate the market's expected return and overall risk.

Methodology:

Collect historical financial data of Biocon Ltd and the selected market proxy.
Calculate the beta of Biocon Ltd stock through regression analysis.
Determine the appropriate risk-free rate from reliable sources.
Calculate the expected market return using historical data of the market
proxy.
Apply CAPM to calculate the expected return of Biocon Ltd stock.
Compare the calculated expected return with the actual market return to
assess whether the stock is undervalued or overvalued.

Analysis:
The analysis involves the presentation of the following graphs:

Historical stock price trends of Biocon Ltd and the market proxy.
Regression analysis plot for calculating Biocon's stock beta.
Calculation of expected return using CAPM.
Conclusion:
Based on the CAPM-calculated expected return and its comparison with the
actual market return:

If CAPM-calculated return > Market return: Biocon Ltd stock could be

undervalued.
If CAPM-calculated return < Market return: Biocon Ltd stock might be
overvalued.
This study aids investors in evaluating the valuation status of Biocon Ltd
stock, considering its inherent risk and the broader market dynamics.

Note: The financial figures, dates, and details mentioned in this abstract are
fictional and for illustrative purposes only.