Snehith Alapati, 2013B3A7709G

Dhruv Jain, 2013B3A7826G

Madhav Aggarwal, 2013B3A7570G

Aditya Jha, 2013B3A3460G

Literature Reviews
Evolution of Pharmaceutical Industry: A global Indian & Gujarat perspective

Viral shah

Global pharmaceutical market is highly dynamic and is characterized by greater levels of R&D
expenditure and extensive regulation of its products. All of these changes are ultimately good for
the Indian pharmaceutical industry, which suffered in the past from inadequate regulation and large
quantities of spurious drugs. They force the industry to reach a level necessary for global
competitiveness.

The paper also highlights the fact that the strong growth prospects of the pharmaceutical exports
segment and growing demand from the domestic market, will further fuel growth in the
pharmaceutical machinery sector. However, Gujarat's engineering sector is highly fragmented,
especially the pharma-machinery manufacturing segment. Due to the highly fragmented nature,
there is a dearth of pricing power and critical scale. This in turn restricts the ability to produce the
technology-driven products required for operating in global markets.

The Pharmaceutical industry in India is the world's third-largest in terms of volume and stands 14th
in terms of value.. Some of the major pharmaceutical firms include Sun Pharmaceutical, Cadila
Healthcare and Piramal Healthcare.

According to industry estimates, a great chunk --almost 40 per cent --of machinery used in the
pharmaceutical manufacturing in India is produced in Gujarat. This creates a very good local and
global opportunity for Gujarat in the manufacturing of pharmaceutical machinery, given its strong
and well established engineering sector, points out a recent study titled Gujarat Pharma Industry-
striding into the Future, KPMG, India The strong growth prospects of the pharmaceutical exports
segment and growing demand from the domestic market, will further fuel growth in the
pharmaceutical machinery sector.

However, Gujarat's engineering sector is highly fragmented, especially the pharma machinery
manufacturing segment. Due to the highly fragmented nature, there is a dearth of pricing power
and critical scale. This in turn restricts the ability to produce the technology-driven products
required for operating in global markets. The pharma machinery manufacturing industry in Gujarat
needs to consolidate and synergise the skills and complementarities available in the broader
engineering sector (like the CNC machine tools industry) to be able to create world-class players
with the scale and resources required, to tap the global as well as local demand. Gujarat's dominant
position in India's pharmaceutical sector is well known.

The Evolution of Sales Models in the Indian Pharma Industry

Amardeep Udeshi

The paper attempts to showcase how sales models are being, and will continue to be, reinvented
and redesigned across the Indian pharma market landscape in the years to come. The paper assumes
that the sales force continues to be the biggest promotional investment for pharma players. The
industry has evolved around making most use of this resource and has adopted innovative
commercial models, from sales and marketing structure to business unit structure to specialized task
forces, as per their needs often proactively adapting existing sales models to market realities

The paper takes into account certain models and analyzes them concluding that though they would
have provided an edge to the players, these models have been largely focused around single
stakeholder, primarily doctors. A study by IMSCG showed that decision making power of other
stakeholders, including patients, hospitals, payers, and insurance companies, has been on a steady
rise in recent years. Rising influence of new stakeholders in deciding treatment pathway will force
the market players to look at newer touch points with new stakeholders and hence the promotional
channels

With the emergence of innovative sales models like key account management, hospital task force,
channel management, therapy specialist, and media promotion (as highlighted in the paper), it is
clear where sales models are heading. Companies have been seriously looking to have a dedicated
team for rural markets. Each of these models clearly point towards targeted approach to new
stakeholders. The role of existing resources will also evolve from mere touch points with customers
to engaging final consumers and managing the health of the patients.

The paper also mentions that the declining effectiveness of current sales models will only lead to
emergence of newer approaches in pharma selling. Though the approaches will vary vastly from
company to company, the trend has already started. Pharmaceutical players should seriously start
evaluating their options and envisage how their sales models should evolve in the next 10 years to
maintain their competitive edge. The paper concludes with stating that no single business model
may suffice in future and that the future will belong to hybrid business models, with different
structures co-existing together.

Innovations in Indian Drug and Pharmaceutical Industry: Have they Impacted Exports?

Shilpi Tyagi, Varun Mahajan and D K Nauriyal

The paper examines the trends in exports, imports, R&D performance and patenting activities in
regard of Indian drug and pharmaceutical industry for the period 2000-2012. The paper examines
the trends in R&D, patents applied for and granted, and exports of Indian pharmaceutical industry
especially after the TRIPS Agreement. It also attempts to analyze the impact of R&D and patents on
exports of ID&PI. The paper contributes to existing literature by discussing if innovations have
fostered export performance of ID&PI by using both innovative inputs and output. The present
study takes R&D expenditure as a proxy for innovation input and aggregate patent counts as
innovation output to determine the impact of innovation on exports in a stronger intellectual
property rights (IPR) framework.

An empirical analysis has been carried out with an estimation of specified econometric model to
analyze impact of innovation on exports of ID&PI. The data were examined for the non-stationarity
of the times series. Augmented Dickey-Fuller (ADF) estimates accept null hypothesis of absolute
non-stationarity of data. So the unit-root test was carried out on the first difference of dependent
variable Exports and the ADF estimates safely rejected the null hypothesis of a unit root. Further
estimates of OLS regression models with Newey-West standard errors were calculated.

Lagged R&D expenditure and lagged total patents granted were found to positively and significantly
impact exports plausibly since in the absence of constant innovations and marketing efforts, it is
difficult to connect to the global patients base. The paper concludes with certain findings including
that the growth rate of Indias pharmaceutical exports has outweighed the corresponding growth
rate of all other merchandise products, while import requirement has registered a decline over the
period of time.

The impact of R&D and patents on exports have also been examined and it was found that lagged
R&D expenditure and lagged total patents granted significantly and positively impacted the exports
across drug classes and treatment categories. Since increased R&D was found to have a positive
impact on the export performance and global expansion of the firms, it should logically encourage
pharma companies to increase the flow of resources towards R&D as a part of their strategy for
survival and growth in a dynamic world market.

Medicines for all, the Pharmaceutical Industry and the State

Srinivasan S
The basic premise of the article is that the author is trying to empirically calculate the feasibility of
providing quality medicines to all Indians for free as a public facility. Prior to estimating the value
of providing such a service, a few ground rules needs to be laid down which are

Restricting the list of medicines to essential ones and removing drugs of doubtful or no value

Government controlled price regulations of all drugs

Presence of a national vaccine policy to monitor the entry of new drugs

Extensive use and enforcement of Trade and Intellectual Property Rights

The authors then estimate the monetary value which would be required to provide all these drugs at
Rs. 30000 crore per year from primary to tertiary levels, using the case of Tamil Nadu Medical
Services Coprs attempt to replicate the same thing for Tamil Nadu. Similar analysis was done by
Gupta et al (2007), who arrived at a yearly value of Rs. 33546 crores, using Chittorgarh and Nagpurs
medicine distribution scheme.

The effect which such a distribution system will have on pharmaceutical manufacturers is discussed
next. Firstly, the marketing expenses of these companies will fall drastically unless they spend
money for product differentiation between the same drugs of different companies. Secondly, due to
Government acting as the primary and only buyer, the number of pharmacies will also decrease
since the contracts for providing medicines would primarily be fulfilled by tender bids which would
greatly reduce the high margins experienced by players currently. Also many companies would
then prefer to utilize the cheap manufacturing costs of drugs in India, and focus solely on the
exports of these drugs to make high profits. Another important political play would arise here
would be of lobbying by rival companies to get their products on the Governments list of official
drugs or reimbursable drugs, as in this case, due to government sponsorship for the specific drugs,
they would enjoy a sort of a monopoly since majorly their drug would be accessible across the
country for treatment to the masses. The authors then highlight the importance of having price
regulations in the industry by centralized authorities to prevent exploitation of the schemes by the
big pharma corporations and finally concludes by addressing the final problem in the chain of free
drugs distribution, which is counterfeiting of drugs, which poses a serious threat to the system, and
mentions fighting this challenge by protecting the IP rights of the formulators and ensuring strict
action taken against counterfeiters to prevent it from becoming an epidemic.

Transnational Pharmaceutical Corporations and Neo-Liberal Business Ethics in India

DMello Bernard

In this paper, the author criticizes the purely profit driven market and business decisions employed
by pharmaceutical firms both outside and within India which sell their product in India even though
drugs are now being considered basic human items necessary for survival. The exploitation of the
cheap labour and manufacturing resources of India, top provide medicines for across the globe at
high prices in developed countries like the USA is also highlighted in the paper. The author also
makes note of an important point of all development in this industry being with respect to product
and none with respect to process of manufacturing of drugs.

The next important aspect discussed is the tricky subject of pricing of drugs within the market.
Since for essential drugs, demand is price inelastic, the prices can be raised to suit the requirements
of the manufacturers. Another important factor in determining the price of drugs is the advertising
spend on the drugs, and its position in the market. The control of the government over pricing
decisions has also fallen over time especially in the late 1990s as due to extensive lobbying, fewer
drugs came under the purview of Drug Price Control Order. Another problem plaguing the industry
is of transfer pricing, wherein intermediate products or drug prices are overinflated which leads to
rise in the price of the final products too. Also the major issue of promotion of drugs with doctors
by providing kickbacks to medical professionals is also discussed. Many times this leads to subpar
drugs being prescribed which could have terrible consequences. Another method employed by firms
is to launch new drugs, many of which are of doubtful efficacy, in order to boost short term profits.
All of the fore mentioned practices and problems seems to undoubtedly generate a social counter
movement against the neo liberal business ethics employed by these firms in question and gives rise
to a growing sense of social protection by the consumers.

The author then points out the various steps taken by the authorities to combat the problems. These
steps include the creation of the Indian Patents Act of 1970, which ensures that a firm developing a
revolutionary product will be able to profit from it for 5 years, post which the patent becomes
private and competitive forces drive down the prices of the drug especially if it is an essential drug.
The Rawlsian view on distributive justice in the context of drug manufacturing is also discussed,
with the general consensus of researchers that the essential drugs should be priced such that they
are within the willingness and the ability of everybody in the society to pay, while the non-essential
drugs or specialised drugs should be priced or in fact subsidized by the government based upon the
individuals ability to pay.

Options for the Indian Pharmaceutical Industry in the Changing Environment

Jha Ravindra

The paper undertakes the task of developing a framework to determine the factors which are
influencing the development and growth of the Indian pharmaceutical market, and then dwells into
the different strategies undertaken by the top 15 firms to combat and survive in the market. The
paper initially describes in detail, the development of the concerned industry with respect to
economic and legal factors. These include the creation of agencies such as the drug price control
order, the Indian Patents Act and the FERA, which directed the MNCs in this industry to reduce the
capital held by them which gave a direct cost advantage to the Indian domestic firms and allowed
them to develop their own production plants and marketing abilities which in turn drove down the
participation of foreign players in the industry even further. It also mentions the development of
processes of reverse engineering and chemical synthesis of drugs by Indian firms and the edge
which it provides to them in international competition.

The main emphasis of the paper is on the strategies employed by the top 15 Indian pharmaceutical
companies and how these have evolved over time. Initially, it was seen that the foreign MNCs were
primarily involved in formulations of new drugs and Indian companies were solely responsible for
mass drug manufacturing. Due to reverse engineering and increased patent protection laws, many
Indian companies shifted their focus to formulations too, with companies like Lupin, now
generating 45% of their total revenue from formulations. AN ever increasing list of companies are
now importing their raw material requirements of bulk manufactured drugs and producing these
drugs for cheap within India, while International MNCs are importing finished product itself rather
than raw materials. Due to a growing fear in the early and mid-2000s about the control of the
domestic markets by MNCs, the Indian firms started setting up subsidiaries outside of India, and
have shifted their focus to increasing their revenues by exports rather than fighting within India.
Since they develop within India, it offers to them a huge absolute cost advantage which they can
then exploit for increased profits and profit margins. Another interesting development seen across
the industry is that due to high capital requirements due to extensive drug research, many mergers
and acquisitions are taking place within the industry. Many companies like Ranbaxy are also being
acquired or merging with international players due to strategic importance. The Indian entity of the
cross border merger would be tasked with developing drugs at cheap rates, while the international
arm would be responsible for new formulations and generating international demand for their
product. There is also a shift observed from bulk drugs to high growth therapeutic drug segments
like anti diabetes.

An Analysis of Indian Pharma Trade and Future Challenges

Rajesh Kumar, National Institute of Pharmaceutical Education and Research, Hyderabad,

India
The 2015 paper assesses the Indian experience with imports and exports of pharmaceutical
products. Despite the changing patent regime threatening to restrict exports and therefore
adversely affecting the balance of trade, it has been found that the growth in exports has been
tremendous. This can be explained by the shift in focus from intermediates and bulk drugs to
formulations. The paper analyses the trend of imports and exports especially after the TRIPs
agreement in 2005. Interestingly, the Indian pharmaceutical industry is heavily fragmented and out
of the 10,000 manufacturing units, only 5% are in the organized sector, The SMEs in the segment
dominate in terms of numbers and contribute 35% of the industrys turnover. The paper specifies its
objectives of identifying harmonized system tariff codes which constitute the pharmaceutical sector
in India and bifurcation of the sector into sub-sectors - bulk drugs and intermediaries and
formulations - Based on Indian Tariff Classification. The author first defines the pharmaceutical
products in the paper as a lot of data sources do not follow a uniform convention. Pharmaceutical
products consist of two main components - the active pharmaceutical ingredient or the API or the
bulk drug and the formulation segment. Kumar studies the export data and some interesting
observations are made. The low volume high value market of USA is found to be the main
attraction for Indian companies. With 320 approved FDA approved plants, the largest outside USA,
Indians exports to USA are bound to further accelerate. Kumar also notes that Russia, UK, Germany
and South Africa receive significant Indian exports as well. Antibiotics are the mostly exported
category to most countries. Kumar further talks about the major structural changes India went
through in the post 1991 reform period and talks about Indian generic firms having broken into the
highly profitable although highly regulated Western markets. On the other hand the SMEs have
broken into the Asian and African markets where regulation is lax and medicines are expected to be
cheap.

Opportunities and Challenges of Indian Pharmaceutical Sector: An Overview

Umesh Chandra, Dr. Sridharan, Dr. Shwetha G.S.

The study by Chandra et al studies the Indian pharmaceutical market and gives an overview about
the various opportunities that the industry can exploit especially in the domestic market and how
increasing demand for quality healthcare is driving growth as well as posing challenges to the
industry that has taken advantage of the lax regulations. The paper does a thorough analysis of the
Indian pharmaceutical industry as well as its global counterparts. With US still being the largest
contributor to sales with 41%, India is a much smaller contributor at 6%. The authors study the
trends in Indian pharmaceutical sector and state the importance of the generic market as the reason
for the dominance in the export market. The focus on research and development, the export
practices, increasing joint ventures and faster approvals have led to growth in the industry. They
present the various opportunities that are present for the Indian sector such as contract research
and manufacturing services which is essentially outsourcing of manufacturing and high potential
APIs etc., biologics and biosimilars (nascent market where India can have first mover advantage),
increasing mergers and acquisitions which would provide not only newer R&D resources but newer
markets and distribution channels and government initiatives that have boosted the pharmaceutical
sector such as lesser approval times, signing of MoUs with international health bodies, the export
promotion capital goods scheme etc. They also list out the various challenges that the industry faces
and will face in the following years. IP protection has been a burning issue in India for years and
patent regime reforms have led to different implications for different players and these are outlined
by the authors. They note the general perception of the patent application process being
burdensome for foreign firms as well as India relying on test data submitted in other countries
which the authors say is considered unprofessional in the pharmaceutical industry. Market access
barriers such as fixing the ceiling of essential drugs has discouraged a large number of companies to
invest further. It notes the lacklustre contribution of government to the healthcare industry with a
miniscule amount of GDP being spent on health. The infrastructure poses further challenges. FDI
investment is also expected to be harder in case of brownfield projects. The authors call for more
structured and matured regulations on clinical trial policies especially higher compensation for
volunteers is suggested. The current state of clinical trials poses extreme ethical challenges and in
the long run will be detrimental to the clinical research environment in India. The authors note the
huge potential that the Indian companies have in contributing to the world market and suggest new
avenues in the innovation driven sector. Further policies especially patent related and price related
need further examination to establish India as a much more advanced market. The authors give a
very good overview of the challenges in the paper and call for further studies based on effects of
FDI, import policies and even newer ways to enter the rural population and make affordable
medicines accessible.

Identification of Factors Behind Performance of Pharmaceutical Industries in India

Chinrajib Neogi, Atsuko Kamiike, Takahiro Sato

The paper which is a part of the Discussion paper series at the Kobe University is a thorough
analysis of the pharmaceutical industry in the recent years to find out the factors that are
responsible for the variation in industries efficiency and productivity. The authors use Stochastic
Frontier Analysis to estimate the efficiencies of firms. Unit-level panel data is used to examine the
total factor productivity as well. The authors explore the history the industry when it was
dominated foreign by pharmaceutical companies until the 1970s. There was a virtual monopoly by
the foreign firms because of the Patents and Designs Act. of 1911. Facing high drug prices which
made medicines unaffordable for the Indian population, the Indian industry was promoted by
passing restrictive policies such as the Patent At, 1970, FERA or the Foreign Exchange Regulation
Act, 1973 and the Drug Policy of 1978. Indian pharma industry thrived because only process patents
were recognized and patent period was reduced to seven years from sixteen. Indian companies soon
developed alternative processes to develop drugs and the indigenous industry grew. The paper talks
about the comprehensive Drug Policy of 1978 playing an important role in the decline of the market
dominance by foreign companies by providing measures for Indian companies to promote R&D.
This involved forcing foreign companies to hold foreign equity of less than 40% since they were
formulation manufacturers and not bulk drugs manufacturers. This has been essential in
strengthening the Indian industry which has increased its exports for the last few decades. The
authors describe this processes being creative destruction, a phrase used by Schumpeter to explain
the dynamics of industry evolution. The authors review newer policies like the liberalisation
Foreign Direct Investment regulation, the introduction of pharmaceutical product patents and the
mandatory implementation of Goods Manufacturing process and their effects on the industry. The
TRIPS agreement or the Agreement on Trade-Related Aspects of Intellectual Property Rights in
2005 and liberalization of FDI in the industry in 2002 made India compliant of TRUPS and brought
new opportunities not only foreign companies to come to India but also outsource their
manufacturing to India. They explore these new rules and the other opportunities that Indian
companies are also explored. Some of these opportunities include Contract research and
manufacturing services contracts. The TRIPS agreement has made it important to evaluate the
performance of the industry which the authors address in the paper. The authors show that despite
the perceived disadvantage Indian companies would have faced post-TRIPS, it has actually helped
establish India further establish itself as a hub of cheap and quality medicines by citing older studies
as well as analysing unit level panel data as they do in this study. Their main motivation is to audit
the levels of technical efficiency and analyse the determinants of efficiency using Annual Survey of
Industries data for academic and policy purposes. They note that each state has some special
characteristics that influence the growth and performance of industries in different ways. They
further state that labour laws and their implementation by the government also play a role in the
performance. They use firm level data to reduce the information loss. The paper is the first attempt
to measure efficiency of each input separately and of output using firm level data. The authors
argue that the liberalization of the economy has created a dynamic environment for Indian
pharmaceutical companies which has resulted in mergers, acquisitions and alliances to survive
competition. They find that technical efficiencies and total factor productivities have been
increasing over the years with some fluctuation. However, the growth and level of efficiencies
differs between private and public players. The private players have done significantly better in the
period of analysis. A positive association is found between the size of firms and their technical
efficiencies and TFP which points to economies of scale prevailing in the pharma industry in India.
This is because smaller and inefficient companies either cannot survive or merge with other firms.
Managerial skills and wage rates are also found to play a significant role in increasing the
performance of the firms. The results of their study are interesting and would provide further
impetus to policymakers to use existing policies as a framework to formulate new ones.

The R&D Scenario in Indian Pharmaceutical Industry

Reji K. Joseph

The earlier talked about policy reforms that incentivized private sector R&D in the mid-1990s are
the basis of this study. The Indian regime introduced policy measures to reform the patent laws
which provided impetus to Indian companies which the government believed were ready to do their
own R&D and also attract foreign investment for global as well as India-specific diseases. The paper
discusses the reforms in context of the the 1970s period when foreign companies held a monopoly.
They further move to the post liberalization period when India established itself as a powerhouse in
the pharmaceutical world. The paper answers questions regarding the R&D scenario in India by
studying the emerging trends in R&D in the pharma sector, the strategies adopted by domestic
firms to become competitive at a global level and the therapeutic areas where investments are being
made. The authors argue a change in trend in R&D investment is especially important because
global pharmaceutical companies are highly research intensive and spend about 15 per cent sales
turnover on R&D compared to India which spent less than 2 per cent. This is primarily because
Indian companies primarily engage in manufacture of generics and development of non-infringing
processes and not in new drug development. With new patent regimes, the Indian companies
started increasing their R&D levels. Considering that only the private industry has accounted for a
bulk of the research spending, the paper studies only private companies. The companies have also
been taking new strategies of R&D which are explored by the authors such as Contract research and
manufacturing services which include manufacturing of active pharmaceutical ingredients and
formulation. In essence, its outsourcing. Besides CRAMS, collaborative research projects and out-
licensing and in-licensing are being used as R&D strategies. Despite this, the authors also note that
R&D intensity has been on a decline since 2005-06 due to accounts of two leading firms Ranbaxy
and Dr. Reddys. They had initial success developing molecules and increasing R&D spending but
failed because of MNCs not being interested in out-licensing the development of molecules unless it
matched their business model which led to cutting of R&D expenditure. This lead to a spending of
only 5% on R&D during the period of analysis (around 2011). They note that the R&D profile of
Indian pharmaceutical industry includes development of generics, new drug delivery systems and
new drug development. The authors suggest that the drive in R&D may be the outcome shrinking
market opportunities because of the new patent regime making it harder to reverse engineer and
produce new drugs rather than the incentives of the patent regime. Their analysis also shows that
the R&D activities have not been driven by the patent regime but in pursuit of new areas to increase
revenue such as treating lifestyle diseases of global nature rather than local diseases like TB and
malaria. The policy reforms soon paved way for globalization of the industry which has made it a
part of the global production and development network of the MNCs. They observe that Indian
companies look at it as an income generation opportunity rather than an opportunity to build
competence. The authors say that the new R&D strategies which are mentioned earlier have been
limited to Indian companies acting as partners of subordinate status doing piecemeal projects in
drug research without much scope for transfer or ownership of technology. They warn that this
dependency can have damaging consequences on the country in many ways. The Indian companies
may lose interest in developing for the local market especially diseases prevalent in India. The
authors also put forth grim consequences of the patent regime and the current nature of R&D in
India. With limited resources and aversion to indigenous innovations at the regulatory stages,
Indian companies have been forced to develop drugs in collaboration with foreign firms while
public companies have shut down. This has meant that despite PPP models, soft loans and other
incentives, firms have not shown much interest in developing drugs for neglected diseases. The
authors say that Indian public sector companies need to be revived to combat this situation as
private companies have been staying away from it. They also talk about how liberalization
measures despite bringing foreign investment in R&D centres have been morally questionably due
to the nature of R&D. The R&D centres have been found to be primarily for clinical trials and
instances have been noted where companies effectively exploit people because of the lax
regulations. Despite existence of organizations and guidelines for using human subjects,
unauthorised trials as well as trials without taking consent have been found to be rampant. The
author throws light on these issues and provides a rather contradictory picture to the rosy one that
we have been accustomed to on popular media.

Globalization and Innovation in the Indian Pharmaceutical Industry

Bishwanjit Singh Loitongbam

The paper examines the new opportunities that domestic firms in India have and the impacts of
globalization and IPR protection on the innovation of the Indian pharmaceutical industry is studied
using firm level panel data. The authors note differences between the Indian and Chinese
pharmaceutical industries. While the Chinese industrys comparative advantage is that of low value
bulk drugs, Indian industrys comparative advantage is noted to be high value generic drugs. China
has been upping its game by hiring global talent and Indians form a huge chunk of this. The author
says that foreign firms entering India again can lead to higher priced drugs and erosion of Indias
cost advantages. He also observes how in the absence of expertise in the technology area and lack of
infrastructure, Indian companies are moving abroad to set shop. The author presents various
reasons why foreign companies have set shop in India and conclude the obvious availability of
vast human resources and cost considerations. The authors further find that foreign firms
encourage domestic firms to make the industry more competitive in the long run through
technology spillover. This would help foreign firms to invest in R&D activities in India and get
monopoly rents from new varieties of drugs. With increasing demand for quality generic drugs,
foreign firms have started investing in Indian firms to increase productivity and meet the demand.
They further suggest government incentives like loans and grants may be attracting further
investment in R&D by foreign firms besides the TRIPS agreement which they believe may have
provided foreign companies confidence in Indian companies. As more patent protection measures
are introduced, research and innovation sees an increase which can be seen by the number of
patents filed. They also find that R&D may be encouraged more by exporting firms due to the
nature of the industry. A knowledge intensive industry like Pharmaceuticals requires firm specific
knowledge such as better quality and design. This requires massive investment in R&D. The authors
also note that productivity level and R&D level are positively correlated. Highly productive
companies invest more in R&D. At the same time authors find that the TRIPS agreement has been
insignificant in the stimulation of R&D activities in India. They suggest that trade liberalization and
TRIPS implementation havent been in favour of increasing R&D activities in the pharma industry
due to increasing transaction costs, restriction of reverse engineering of foreign technologies and
increasing monopoly powers of foreign firms. The firms size is found to have a positive effect on
innovation levels and the authors imply that higher market access means they can obtain higher
economic rent from innovative activities. As large companies can bear the risks of spending on
R&D, the probability of them doing R&D is found to be higher. The paper is a study that takes many
variables into account to explain the prevalence of R&D in India. More variables such as location,
FDI and compulsory licensing as the authors suggest can be taken into account to observe their
effects on R&D and technology spillovers.

Efficiency and Ranking of Indian Pharmaceutical Industry: Does Type of Ownership

Matter?

Varun Mahajan, D.K. Nauriyal, S.P. Singh

As new patent regimes were introduced in India, companies have been forced to rework their
business strategies through mergers, acquisitions, liquidation, co-marketing partnerships and
creation of brands images. The industry has also seen increase in technical sophistication and not
only developing new reverse engineering processes but new processes for drug production as well.
It has largely been driven by a spurt of domestic private firms and has led to a diverse and
competitive market that puts emphasis on product differentiation. With the Indian pharmaceutical
industry today being composed of multinationals subsidiaries, domestic companies and group
owned companies, the authors are motivated to find the difference in efficiency caused by
dissimilarity in access to technology and resources, exposure to international market and the type
of ownership and the characteristics associated with it. The study applies data envelopment analysis
to measure technical efficiency, rank the firms in order of their super-efficiency scores and estimate
input-output slacks as per various types of ownership. The authors claim that the paper makes
notable contributions in examining the technical efficiency of the Indian pharma industry as per the
type of ownership and that its the first to provide a ranking of the firms as per their super-
efficiency scores and slack analysis. The authors begin by classifying firms in the country and note
that the basic difference between Indian and foreign firms is that while Indian firms have greater
thrust on portfolio diversification, differentiation, driving down the cost and incremental
innovation, foreign firms are driven by technology, innovation and brand loyalty. This puts into
perspective the nature of industry in India and abroad as well. From the analysis, the authors find
that 9 firms are overall technical efficient and 19 firms are pure technical efficient while others are
inefficient. They suggest that given the scale of operation, on an average, firms can reduce their
inputs by 14.2 per cent without affecting the output levels. They also do a scale efficiency analysis
and find that 9 are scale efficient while 41 arent. They find that Private Indian and private foreign
firms have higher efficiency scores than group owned firms. This result they suggest is due to the
intensely competitive environment Private Indian firms are forced to compete in. Group owned
companies have the option to fall back upon associate companies for the resources. They show that
Private Indian and group owned companies have higher slacks than foreign ones and this slack is
observed in regard to marketing, salary and capital usage inputs. They suggest proper utilization of
inputs to improve efficiency. Best practices and access to latest technology is pointed to as the
reason for lower slacks and higher efficiency in case of foreign firms. The study is limited as the
data used is relatively smaller and does not include a large number of smaller and medium level
enterprises. The authors only use large firm data and are limited to cross sectional observations.

Indian Pharmaceutical Industry in WTO Regime: A SWOT Analysis

N. Lalitha

In this paper, the author performs a SWOT analysis of the Indian pharmaceutical industry in the
WTO regime. While analysing the same a brief look at the history, implications of the TRIPS
Agreement and the impact of R&D and new product development on the pharmaceutical industry
were also elucidated. The author found that process development skills, that is, capacity to develop
new products through process developments and lower prices of drugs which give a competitive
edge to Indian firms are the two most important strengths while low level research and
development die to lack of popularity of contract research organisations is the primary weakness of
the Indian pharmaceutical industries. Apart from this the low quality standards of the products
made by Indian firms, also contribute as a weakness of the industry. Longer time to process
application, reduction in the patent protection period and tough competition from China, Korea and
Brazil pose as threats to IPI. The author suggests that the India pharmaceutical firms should focus
on strategies such as collaborate with multinationals, producing new patented products by
acquiring compulsory licensing or cross licensing as well as improve the quality of their products to
expand their export market.
Intellectual Property Rights Regime: Comparison of Pharma prices in India and Pakistan
Rakesh Basant

The author in this paper focuses on comparison between India and Pakistan specifically in the
context of IPR regimes. In order to draw this comparison, factors such as market structure which
comprised of size of market, share of top firms and availability of pharmaceutical machinery. Policy
measures were also considered such as role pf the public sector, customs duty imposed on imports
etc. Apart from this FDI policies like restrictions on licensing for MNCs, Restrictions on foreign
equity and drug price control. The data for all these variables for India was from 1997-98 while for
Pakistan the estimates relate to 1999. Through this analysis, the author found that the IPR regime
for pharmaceuticals in both the countries was almost the same. It is certain that the Indian
pharmaceutical firms have significantly better process capabilities than Pakistan firms but to credit
such result to the patent law is not entirely correct. The paper mentions that a fragile patent regime
in combination with policies to reduce market concentration and, curb monopolies and size of the
Indian market could have led to development of indigenous process capabilities but in Pakistan such
integration was not observed and hence same effect was not observed.
Estimating Indias Trade in Drugs and Pharmaceuticals
Reji K. Joseph

In this paper, the author analyses the global exports of Indian pharmaceutical companies in the post
1991 period. The author compares the export and import data from 2003-04 to 2005-06 from
different sources as well as uses the CMIE data from 1990-91 to 2006-07 to provide a comprehensive
study of the India pharmaceutical exports and imports. It was found that there has been a decline in
the growth of exports of intermediates and bulk and formulations which account for 90.8% of
pharma exports in 2006-07. Moreover, the growth rates of imports almost all the pharma products
have increased considerably in the post liberalization era. This has led to an increase of the deficits
which have long term adverse effects on balance of trade. This proves the hypothesis posed by the
author that Indian pharmaceutical industry can immensely benefit by conforming to the global drug
patent standards.
 Analysis of Companies
Lupin

Lupin is a pharmaceutical company present in over 70 countries and based out of Mumbai,
India. It is the worlds 7th largest pharmaceutical company by market capitalisation and 10th
largest by revenue. Their business is multi-faceted ranging from APIs, generic drugs,
branded drugs, biotechnology and advanced drug delivery systems. Dwelling briefly into
the history of the company, we see that the company was registered in 1983, by Desh
Bandhu Gupta and commenced operations in 1987 with 2 plants at Mandideep and
Ankleshwar.

Fundamental Analysis
Lupin started out as a formulation company by Deshbandhu Gupta, but soon pivoted off
into bulk drug manufacturing and generic drug manufacturing. The company went public
in the year 1991. The major breakthrough came for the company when they developed a
simplified therapy for treatment of tuberculosis, which gave their share price a boost as
well as got their debenture ratings by Crisil upgraded to BB+. Looking at Lupin, we see that
it has fundamentally an extremely strong company with having some extremely impressive
institutional investors behind it such as Rakesh Jhunjhunwala and various mutual funds as
well. Analysing the ratios of Lupin and comparing them to its competitors within the
industry we observe that it has the highest net profit among all its peers in the previous
financial year. The PE ratio of the company is also pretty high lacking inly behind Sun
Pharma in the big enterprise companies of the pharmaceutical market. The dividend yield is
a bit low at 0.58% which signifies that the company could be giving lower yields due to
reinvestment of their earning into the company as capital investment. Observing the
fundamental growth within the company itself, we observe that Net Operating Profit per
share has been consistently increasing by a huge amount Rs. 120 on March 2012 to Rs. 250
in March 2016 with a healthy increase in the adjusted net profit margin and the return on
capital employed.

Having a look at the solvency ratios we observe that the company has a very positive debt
equity ratio at 0.3, indicating that it can easily cover its debt obligations if the need arises to
be and is comfortably possessing a good cash reserve which can be used to further the
pharmaceutical research of the company in hopes of coming up with a new formulation. As
an added benefit, the company does not possess a long term debt obligation at the moment
which means that it still has scope to exploit the capital markets in order to raise equity in
the long term horizon if the need arises. It has an inventory turnover ratio of 6 days which
is neutral. If it would have been greater than 10 days it would have been alarming since
they typically manufacture drugs which have a short shelf life and hence need to move the
product as fast as possible. The debtors turnover ratio of 3 days again indicates a good sign
that it is not keeping any unnecessary debt from its suppliers for longer periods and paying
pretty quickly. Another reason for this could be that since the company primarily relies on
internally sourced active pharmaceutical ingredients (API), thus its reliance on outside
companies for raw material is very low. The only unhealthy ratio which we observe here
and actually for the entire industry is the long number of days in working capital as 162
days. Such a high amount of time to convert the working capital to revenue indicates that
either the production capabilities are inefficient or that the tie in period of developing the
drugs is pretty high. If this number can be brought down, it would enable the company to
generate even greater revenues and be able to service an even greater market. Looking at
the international to the domestic revenues, we can see that though the international stream
is significant, it is still much smaller as compared to the domestic stream. This provides the
company with a lucrative opportunity of tapping the untapped international markets
especially in South African regions where the demand for good quality low priced drugs is
increasing at mammoth rates.

DCF Analysis
Unlevered Free Cash Flow Calculation (Values in Rs. Mn)

Calendar Year Ending December 31, CAGR

2014A 2015P 2016P 2017E 2018E 2019E 2008-2012
EBIT 31,192.70 38,593.40 39,411.50 48,411.50 54,220.90 60,727.50 12.0%
Plus: Non-deductible Goodwill Amort. - - - - - -
EBITA 31,192.7 38,593.4 39,411.5 48,411.5 54,220.9 60,727.5 12.0%
Less: Provision for Taxes (10,917.4) (13,507.7) (13,794.0) (16,944.0) (18,977.3) (21,254.6)
Unlevered Net Income 20,275.26 25,085.71 25,617.48 31,467.48 35,243.59 39,472.88 12.0%
Plus: D&A (excl. non-deductible GW amort.) 2,609.7 4,347.0 4,635.0 4,978.4 5,234.8 5,618.0
Less: Capital Expenditures (4,237.4) (5,069.8) (7,530.4) (8,894.3) (10,845.7) (13,328.7)
Unlevered Free Cash Flow 18,647.56 24,362.91 22,722.08 27,551.58 29,632.69 31,762.18 6.9%

DCF Analysis (2014-2019): EBITDA Multiple Method

Total Enterprise Value Total Equity Value

Terminal EBITDA Multiple Terminal EBITDA Multiple
7.5x 8.0x 8.5x 7.5x 8.0x 8.5x
Discount 10.0% 3,84,390.41 4,03,243.91 4,22,097.41 Discount 10.0% 3,84,374.11 4,03,227.61 4,22,081.11
Rate 11.0% 3,69,196.2 3,87,215.6 4,05,235.0 Rate 11.0% 3,69,179.9 3,87,199.3 4,05,218.7
(WACC) 12.0% 3,54,770.1 3,71,999.3 3,89,228.5 (WACC) 12.0% 3,54,753.8 3,71,983.0 3,89,212.2

Implied Perpetuity Growth Rate Total Price Per Share

Terminal EBITDA Multiple Terminal EBITDA Multiple
7.5x 8.0x 8.5x 7.5x 8.0x 8.5x
Discount 10.0% 2.8% 3.2% 3.6% Discount 10.0% 851.18 892.93 934.68
Rate 11.0% 3.8% 4.2% 4.6% Rate 11.0% 817.53 857.44 897.34
(WACC) 12.0% 4.7% 5.1% 5.5% (WACC) 12.0% 785.59 823.74 861.90

DCF Analysis (2014-2019): Perpetuity Growth Method

Total Enterprise Value Total Equity Value

Terminal Perpetuity Growth Rate Terminal Perpetuity Growth Rate
3.0% 3.5% 4.0% 3.0% 3.5% 4.0%
Discount 10.0% $3,91,780.3 $4,15,619.8 $4,43,432.7 Discount 10.0% $3,91,764.0 $4,15,603.5 $4,43,416.4
Rate 11.0% 3,41,589.9 3,59,025.5 3,78,951.9 Rate 11.0% 3,41,573.6 3,59,009.2 3,78,935.6
(WACC) 12.0% 3,02,591.9 3,15,785.0 3,30,627.2 (WACC) 12.0% 3,02,575.6 3,15,768.7 3,30,610.9

Implied Terminal EBITDA Multiple Total Price Per Share

Terminal Perpetuity Growth Rate Terminal Perpetuity Growth Rate
3.0% 3.5% 4.0% 3.0% 3.5% 4.0%
Discount 10.0% 7.7x 8.3x 9.1x Discount 10.0% $867.55 $920.34 $981.93
Rate 11.0% 6.7x 7.2x 7.8x Rate 11.0% 756.40 795.01 839.14
(WACC) 12.0% 6.0x 6.4x 6.8x (WACC) 12.0% 670.04 699.26 732.13

(1) Assumes net debt of $16.3mm as of 31/03/2017.

(2) Assumes outstanding diluted shares of 451.577 million.
(3) Assumes tax rate of 35%

From the above given DCF Analysis, we can observe that the total price per share for Lupin
is coming out to be slightly lower than the ones than it trading on currently. The current
Lupin price is Rs. 1200 while the analysis gives us a price of Rs. 935. This difference can
indicate that the Lupin stock is currently overpriced and is due for correction by price
reduction. We observe in the fundamental analysis that due to the optimum ratios and
valuations and cash flows by Lupin, the market sentiment with it has become strong and
due to a positive investor sentiment, it has driven the prices off the stock greater than the
correct value. One thing to also note is that the above analysis is done with a conservative
view of the company in mind with growth rates at 12% and a high tax rate of 35%. This
conservative view could have also resulted in the lower stock price and the lower enterprise
value observed here. This also takes into account quite a few large and significant capital
expenditures into account which may or may not actually happen, but have been
considered nonetheless since it is a capital and R&D investment heavy industry. The value
of each share using perpetuity growth model with 10% discount rate is coming out to be
quite close to the actual value indicating that it may be a better model.

One of the issues Lupin is suffering from currently is exposure towards foreign exchange
currency risk. Every year it is spending high amounts of money due to the risk as its main
places of international business have been having quite a few ups and downs which are
causing a lot of variability in the company.

Finally analysing the researchers, managers, analysts and market movers view, we see that
the position of Lupin has consistently been a buy with it posting increased revenue
earnings each quarter and having healthy financials as well as a strong management team
in place. Thus the above study gives us a fundamental as well as a technical analysis of
Lupin.
Cipla

Fundamental Analysis of Cipla

We are using the Discounted Free Cash Flow Analysis to predict the valuation of the stocks
of Cipla.

ASSUMPTIONS:

Sales from 2011-2015 is used to forecast the sales for next 8 years and the growth per
year is forecasted to be approx 12%.

Operating cost is estimated around 75% of the sales and increases by 1% after every 2
years.

Maintenance cost is 2% of the sales.

Tax is estimated to be around 25%.

Depreciation is 8%.

Working capital will increase by 15% every year.

Risk free return is 7.45% , the value is 0.749 while the average market return is
14.32%.

Outstanding shares is 80.3 crores.

During stable growth period FCF increases @ 9% every year till it reaches Maturity
period when it grows @ 6% thereafter.

1. Forecasting Free Cash Flow

The formulae for free cash flow is--

Free Cash Flow = Sales Revenue - Operating Cost Taxes Change in Working capital
Net investement

So, on calculation the forecast yielded the following values: (All figures in Rs. Crore)

Year I II III IV V VI VII VIII

FCF 1495.41 1833.9 3223.13 2880.8 3608.57 4779.4 5925.66 6974.8

2. Discount Rate

Discount rate is nothing but the cost of capital of the company. Since the company's capital
structure can be levered as well as unlevered, so we use Weighted Average Cost of Capital
(WACC) discount rate to value the same. And it involves calculating the Cost of Equity as
well as Cost of Debt.

The formulae used was : WACC = {[E*KE] + [D*KD*(1-T)]}/ (E+D)

where,

E= Net worth, D= Long term Debt, KE= Cost of Equity

KD= Cost of Debt, T= Tax rate.

The values we got were:

C.O.E = RF + (RM - RF) C.O.D = Interest expense/ WACC

Average Borrowings

12.73% 12.05% 12.29%

3.Terminal Value

Assuming that FCF increases at rate of 9% each year after the eight forecasted years for
five years (Stable Growth period) and beyond that it grows at 6% every year (Maturity
Period), we calculate the terminal value by Gordon Growth Model which comes out to be
67987.99 crores.

4.Enterprise Value

Enterprise Value is sum of present value of Free Cash Flows and Terminal value forecasted
for future. So, it is basically the value of company including Debt. WACC is discount rate
used to calculate present value. For any year, present value of the FCF is calculated by
multiplying by factor of 1/(1+WACC)n , where n is the year count starting from 1 (from
when we started forecasting). On calculating, the value turns up to be 44461.11 crores.

5. Intrinsic Value of an Equity Share

It is the Value of Equity per unit the number of outstanding Equity Shares. Value of Equity
is the Debt free Enterprise value which comes out to be 43080.5 crores . And dividing this
by total outstanding shares gave the Intrinsic value as Rs. 536.48.

CONCLUDING: The current trading or stock price of Cipla is Rs. 533.04 per share.As the
stock quotes a price which is higher than the calculated intrinsic Value of Cipla, so it would
be a buy decision for an investor as the stock seems slightly overpriced currently.
Sun Pharma
Strengths
Low Cost Advantage

Enjoys low manufacturing and employee costs at its primary manufacturing base in India, and a
vertically integrated API division which generates cheap raw materials. It has also recently
acquired Ranbaxy further helping it in generating higher margins.

Strong Product Presence

Manufactures a few complex products which contribute significantly to both the companys top
and bottom lines. Strategically identifying and entering limited competition segments offers
great opportunities for growth. For example: Sun Pharma is one of the few approved
manufacturers of Doxil, an injection for ovarian cancer. Until more and more players enter in
this segment, Doxil will continue to be a highly profitable drug for Sun Pharma.

Challenges Faced

Intense Competition

Competes with various pharmaceutical companies that have similar products in the same
market but manufactured at facilities which have been approved by the highest regulatory
authorities in the United States and Europe.

Regulatory Environment

Risk due to adverse developments in regulatory environment and statutory provisions. National
Pharmaceutical Pricing Authority (NPPA) controls and regulates the prices of pharmaceutical
drugs in India. Price controls imposed by the authority are unpredictable and have a negative
impact on companys profitability margins.

Financial Data

Consolidated (Rs. Cr)

Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Total Income from Operations 8,019.75 11,299.86 16,080.36 27,433.44 28,269.71

Expenses 4,754.97 6,332.59 8,884.78 19,369.80 19,788.09

Earnings Before Other Income, 3,264.78 4,967.27 7,195.58 8,063.64 8,481.62

Interest, Tax and Depreciation
(Operating Profit)

Depreciation 291.16 336.17 409.37 1,294.83 1,013.52

Finance Costs 28.20 44.34 44.19 578.99 476.89

Other income 409.94 311.71 508.09 452.05 459.24

Exceptional items 583.58 2,517.41 237.75 685.17

PBT 3,355.36 4,314.89 4,732.70 6,404.12 6,765.28

Tax 382.63 820.55 790.76 914.69 934.90

PAT (before Minority Interest and 2,972.73 3,494.34 3,941.94 5,489.43 5,830.38
share of Associates)

Profit/ (loss) attributable to Minority 385.48 486.28 737.53 12.56 1,112.60

Interest

Share of profit / (loss) of Associates 936.27 1.87

Consolidated Profit / (Loss) for the 2,587.25 3,008.06 3,204.41 4,540.60 4,715.91
year

Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)

Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Share Capital 103.56 103.56 207.12 207.12 240.66

Reserves & Surplus 12,062.79 14,886.17 18,317.83 25,430.97 31,163.56

Share Application Money Pending 0.67

Allotment

Net worth (shareholders funds) 12,166.35 14,989.73 18,524.95 25,638.09 31,404.89

Minority Interest 1,161.45 1,635.08 1,921.18 2,851.19 4,085.25

Long term borrowings 155.42 115.26 48.67 1,368.42 3,116.73

Current liabilities 1,730.88 2,465.88 3,139.79 5,989.59 13,247.66

Other long term liabilities and 147.66 796.00 2,610.76 2,718.68 2,303.41
provisions

Deferred Tax Liabilities 163.63 205.35 275.67 98.52 61.61

Total Liabilities 16,260.39 20,881.21 29,370.82 49,027.90 54,219.55

FINANCIAL RATIO ANALYSIS

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below
1 indicates that the company may not be able to meet its obligations in the short run. Sun
Pharmas average current ratio over the last 5 financial years has been 4.38 times which
indicates that the Company has been maintaining sufficient cash to meet its short term
obligations.

Long Term Debt to Equity Ratio

Long term debt to equity ratio higher than 0.6 0.8 could affect the business of a company and
its results of operations.

Sun Pharmas average long term debt to equity ratio over the last 5 financial years has been
0.02 times which indicates that the Company is operating with a very low level of debt and is
well placed to meet its obligations.

Interest Coverage ratio

Interest coverage ratio below 1 indicates that the company is just not generating enough to
service its debt obligations.

Sun Pharmas average interest coverage ratio over the last 5 financial years has been 77.98
times which indicates that the Company has been generating enough for the shareholders after
servicing its debt obligations.
Dr. Reddys
Dr. Reddys is an Indian company with products across the pharmaceutical value chain.
Its offerings cover Active Pharmaceutical Ingredients (APIs), Branded Formulations,
Generic Drugs, Biologics, Specialty Products and New Chemical Entities (NCE).

Fundamental Analysis

Highlights of Last Year (Values in INR)

Revenues grew by 4% over the previous year to 104 billion.

Gross prot margin was at 58.7%.

EBITDA was more or less unchanged at 23 billion, and accounted for 22% of revenues.

PBT was 4% less at 15.8 billion, 17% of revenues.

PAT was 10% less at 13.5 billion, 12.9% of revenues.

Liquidity Ratios

Current Ratio 2.103673912 2.223592528 2.165135385 1.626598905 1.607843778

Quick Ratio 1.749494655 1.855255846 1.778158573 1.251822936 1.174607321

Cash Ratio 0.437743556 0.377698457 0.363083953 0.443789742 0.450249812

The current ratio is a liquidity ratio that gauges the company's ability to pay
short term and long term ability to pay. We can see that the ratio has been
steadily increasing from 2012-2015 and has seen a slight dip in 2016. The ratio is
quite ideal and shows that neither are they underutilizing their resources not are
they facing a situation where their equipment is lying idle.

The ratio is sufficiently greater than 1 which means the company can meet its
short term liabilities and has enough liquidity to maintain itself in the short term.
The last year has seen a dip in the quick ratio as well indicating that the company
may be facing some issues in receiving payments or seeing a lot of expenses.
The cash ratio of the company is lesser than 1 and the company has insufficient
cash to pay its short-term liabilities but it doesn't necessarily mean that here
since the company may keep relatively short cash reserves on purpose. Other
sources of short term liquidity seem to have it covered.

Profitability Ratios

Gross Profit
(%) 58.77636929 57.59444195 58.6952781 55.58963117 57.30704391

Net Profit
(%) 13.53687787 16.84402676 20.18021028 15.53485061 13.7320711

Return on
Total Assets
(%) 7.714607919 10.20539621 13.32221311 10.55542117 8.823472526

Return on
Equity (%) 11.67129095 15.79274027 20.71819059 16.25896138 13.58182738

Earnings Per
Share 79.42062266 98.60581106 113.6643523 74.53842105 53.83820589

The gross profit percentage has not seen any significant growth and has mostly
remained stagnant. The company facing higher costs is unable to increase its
earnings. The variable costs though have remained fairly steady. So even though
there is no immediate cause of concern, the company may seek to increase
efficiency to get higher growth.
 The roller coaster ride in the last 5 years indicates how much the profits have
been dented due to increased costs. From bad debt to higher deprecation. The
figure which indicates how much income the company has earned compared to
its revenue isn't bad per se but the significant decline in the last two years is a
cause of concern. The profits have also declined and investors may reassess their
decision to invest further.
The company asset's effectiveness in generating earnings has fallen in the recent
years. This may be due to increase in the total assets and fairly stagnant growth
in the earnings.

Return on Equity measures the profitability of a company in terms of how much

earnings it generates with the money shareholders have invested. The efficiency
of utilization of the equity base has fallen over the last few years but it still
continues to give positive returns to the stockholders. Considering that the
company is relatively inclined towards equity based capital rather than debt
driven growth, as is evident from the debt equity ratio, the company needs to
stall the dip and try to increase the returns to attract more investors.

"The portion of the company's profits allocated to each outstanding share of

common stock." Another indicator of the company's profitability, its considered
one of the most important ones to determine the share price. As is evident, the
EPS of the company has also taken a plunge in the recent years. With decreasing
profits, the earnings per share have fallen. But since in the recent years, they
have tried to raise fresh capital, even though there is short term fall in EPS due to
it, the new capital employed may improve efficiency and it may reflect in its
future earnings. At the same time, the company needs to curb its expenses and
find ways to ensure timely collections.

Weighted Average Cost of Capital

Weighted Average Cost of Capital

Dividend per Share 20 20 18 15 13.8
540,324,900, 605,712,727, 440,983,695, 375,359,336 302,168,865,
Market Capitalization 000.00 229.00 309.00 ,000.00 108.00
Beta 0.2 0.2 0.2 0.2 0.2
Risk Free Interest Rate
(Government Bond Rate )
(%) 7.9 7.9 7.9 7.9 7.9
Market rate of Return (%) 15 15 15 15 15
Cost of Equity 9.32 9.32 9.32 9.32 9.32
1.67029379
Cost of Debt 1.903738848 1.479385985 1.750033526 8 1.974542068
335,130,000, 431,260,000, 447,420,000, 367,600,000 322,100,000,
Total Debt 000.00 000.00 000.00 ,000.00 000.00
Weighted average Cost of 5.25410856
Capital 6.233225798 5.850031017 5.207934259 6 5.183622
Net operating profit after
taxes 10849.08 14016.42 16715.82 11976.36 8730.48
7817.20765
Economic Value Added 2896.169536 7126.60447 11302.74521 9 4957.6844

Final Analysis and Conclusion

The economic value added is essentially the difference between the company's rate of
return and company's cost of capital. The EVA of the company has consistently been
positive but has fallen in the recent years. It may be due to decreasing market capitalization
and falling profits and should be a major cause of concern for the management.
Nevertheless the company is producing positive value. WACC is the overall required return
for a firm and it has been consistently increasing and may not be a good sign as higher.
Higher the WACC, lower are the returns yielded on every dollar invested by the company.
It's essentially the opportunity cost of the investor taking a risk by investing in the firm.
The WACC shouldn't be too high such that any return made from company is nullified.
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