About The CompaniesSUN PHARMA

Established by Mr. Dilip Shanghvi in 1983 in Vapi with five products to treat psychiatry ailments and with two person marketing team. In the same year, Sun Pharma sets up compact manufacturing facility for tablets and capsules at Vapi, Gujarat.

The company offers formulations in various therapeutic areas, such as cardiology, psychiatry, neurology, gastroenterology and diabetology.

In 1994, Sun Pharma come up with an IPO which was oversubscribed by 55 times. In 1996, Sun Pharma expands sales network across 24 countries. In 2007, Sun Pharma demerges Sun Pharma Advanced Research Company (SPARC)

into a separate entity becoming the first pure research company to be listed on Indian Stock Exchanges.

Cardiology products were introduced in 1987 followed by gastroenterology products in 1989.

In 1991, Sun Pharma establishes first research centre to create a base for strong product and process development and establishes new research centre facility in Mumbai in the year 1997.

In 1999, Sun Pharma acquires Milmet Labs and Gujarat Lyka Organics, India and Pradeep Drug Company in 2000.

In 2004, Sun Pharma commissions first joint venture manufacturing unit in Dhaka, Bangladesh.

In 2014, Sun Pharma acquires Ranbaxy in a US$ 4 billion landmark transaction to create the world’s 5th largest speciality generic pharma company.

Ranbaxy

Ranbaxy was started by Ranbir Singh and Gurbax Singh in 1937 as a distributor for a Japanese company Shionogi. Ranbaxy got its name from its first owners Ranbir and Gurbax.

Bhai Mohan Singh bought the company in 1952 from his cousins Ranbir and Gurbax. After Bhai Mohan Singh's son Parvinder Singh joined the company in 1967, the company saw an increase in scale.

In 1961, it was incorporated as a company and in 1973 launches its IPO. In 1985, Ranbaxy research foundation was set up. In 1998, Ranbaxy enters USA with products under its own name. In 2004, Ranbaxy joins the elite club of Billion Dollar Companies, achieving global

sales of US$ 1 Billion. In 2008, it redefines its business model, bringing in Daiichi Sankyo Co. Ltd. as a

majority partner which had a 34% stake in Ranbaxy for US$ 2.4 billion. In 2011, Ranbaxy crosses global revenues of US$ 2 billion, becoming the first

pharmaceutical company of Indian origin to achieve. During 2004–2005, Dinesh Thakur and Rajinder Kumar, two Indian employees of

Ranbaxy, blew the whistle on Ranbaxy's fabrication of drug test reports. In 2009 the US Food and Drug Administration said it halted reviews of all drug

applications including data developed at Ranbaxy's Paonta Sahib Plant in India

because of a practice of falsified data and test results in approved and pending drug applications.

Company Analysis

Current ratio -The current ratio helps investors and creditors understand the liquidity of a company and how easily that company will be able to pay off its current liabilities. This ratio expresses a firm's current debt in terms of current assets. A higher current ratio is always more favorable than a lower current ratio because it shows the company can more easily make current debt payments. The Current Ratio of the firm Ranbaxy is 1.11 which can be better and the liquidity is very less. It is 4.04 for Sun Pharma, the company is more Liquid.

Quick ratio - Quick ratio measures the liquidity of a business by matching its cash and near cash current assets with its total liabilities. It helps us to determine whether a business would be able to pay off all its debts by using its most liquid assets. Quick Ratio for the Ranbaxy is 0.8121 which means the cash which can easily arranged is good. For Sun Pharma the Quick Ratio is 3.14 which very good and good for the company.

Cash ratio - The cash ratio shows how well a company can pay off its current liabilities with only cash and cash equivalents. This ratio shows cash and equivalents as a percentage of current liabilities. Ranbaxy it is 0.5131 and for Sun Pharma it is 1.42 sun Pharma has more cash available.

Debt equity ratio - Each industry has different debt to equity ratio benchmarks, as some industries tend to use more debt financing than others. Higher debt to equity ratio is considered more risky. Ranbaxy is exposed to higher debt and is having D/E ratio as 1.18 for Sun Pharma at 0.013 which is very less and it has better opportunity of borrowing.

Inventory Turnover Ratio - Inventory turnover is a measure of how efficiently a company can control its merchandise, so it is important to have a high turn. Both Sun Pharma and Ranbaxy have similar Inventory Turnover Ratio and are at 0.75 which is equally good and the inventory is being produced and is having good turnover.

Net Profit Ratio - It measures how much profits are produced at a certain level of sales. This ratio also indirectly measures how well a company manages its expenses relative to its net sales. The Profit Ratio of Ranbaxy is very less and is at 12%, needs to be increased. Sun Pharma is at 43% which is a good sign, Still can be increased.

ROE - Return on equity measures how efficiently a firm can use the money from shareholders to generate profits and grow the company. Unlike other return on investment ratios, ROE is a profitability ratio from the investor's point of view—not the company. Sun Pharma has ROE lesser compared to Ranbaxy and is at 0.32 where as Ranbaxy has 0.36.

ROA - The return on assets ratio measures how effectively a company can turn earn a return on its investment in assets. ROA for Sun Pharma is at 0.23 and for Ranbaxy is 0.08. Ranbaxy has very less return compared to Sun Pharma.

EPS - Earning per share was very good in 2011 and 2012 but it decreased by significant number due to increase in number of shares (company doubled their outstanding shares).

Ranbaxy has very little earnings per share and is 29.2 where as for Sun Pharma is at 134.The more the EPS, the better the performance.

Valuation:

File

Assumptions

To calculate the individual stock returns, monthly returns has been collected from Yahoo Finance since for Ranbaxy it is not available in both NSE and BSE anymore. The returns have been collected for the period of 10 years, i.e., April 2006 to December 2012. The reason why we have collected the returns only upto December 2012 is that, we took into our assumption that Ranbaxy has been valued as on December 2012.

The Beta for Ranbaxy has been calculated using “Slope” function in excel. To calculate Rm, we have collected the yearly returns of Sensex from 2005 to 2014

(10 years). Rm has been calculated using Marshal Blume’s formula which turns out to be 15.18%.

For Risk Free Rate (Rf), We have assumed the 10 Year Bond Yield as Rf, i.e., 7.527 as on 6th October, 2015. The link has also been provided in the excel file.

For Tax rate, we have used the corporate tax rate of 34% for our calculation of WACC.

For Growth rate during explicit period, we have used 18% as 5 years CAGR for Pharmaceutical industry turns out to be 20%. The reason behind taking 18% as the growth rate during explicit period is assuming the worst case scenario (slightly lower than the CAGR of pharmaceutical industry). The growth rate after the explicit period is 5% assuming it to be slightly lower than the current India’s GDP growth rate of 7.4%.

While calculating the FCFF, we have assumed that Ranbaxy is following the Straight Line Method (SLM) of depreciation and therefore the depreciation remains the same for all the years. The other assumption that we took into our FCFF calculation is that the CAPEX for Ranbaxy will remain the same for all the years starting from year 1 itself. With regards to changes in Net Working Capital, we have assumed that since the EBIT or revenue is growing by 18% (during the explicit period) and 5% (after explicit period); the same will be reflected in Trade receivables and thus reflecting the changes in net working capital.

Synergies to be gained:

1. The first and important category of the operational synergy is the product portfolio and marketing followed by supply chain and manufacturing.

2. Becomes the 5th largest global specialty generic Pharma Company.3. No. 1 Pharma Company in India, one of the fastest growing markets.4. No. 1 Indian Pharma Company in US market.

5. Increase in its presence over rest of the world.6. Number 1 position 13 class of specialist Doctors (Psychiatrists, Neurologists,

Cardiologists, Orthopaedic, Ophthalmologists, Gastroenterologists, Nephrologists, Diabetologists, Physicians, Gynaecologists, Dermatologists, Oncologists, and Urologists).

7. Sun Pharma has estimated that it will save $250 million (Rs.1, 505 crores) in the third year of the merger because of operating synergy, which will likely come from trimming the field force of the two companies and integration of its supply chain.

8. The merged entity will certainly look at the productivity of sales teams as well as job overlaps, and will lead to the pruning of the large sales force, he said.

It will start with layoffs in the sales force. This will not only save on salaries, but also other overheads attached with those individual sales personnel such as the cost of travel, prescription promotion expenses, administration costs, among others

While at least 40% of this savings is expected from a cut in sales force at various locations, another 20-25% is expected through rationalizing the distribution channel, mainly in India and the US. The rest will be from cutting overlaps in products and manufacturing sites, industry consultants and analysts say.

Overall it will help Sun Pharma establish full spectrum presence, both therapeutically and geographically.

Conclusion:

As per the Valuation process, we got the Equity Value of Ranbaxy to be 270461.82 Millions and the Firm value is 244170.20 Millions.

As per the Market Price, the Market Value of Sun Pharma is 378439 Million. Comparison of Ranbaxy with respect to Sun Pharma is 0.71. So as per the Conclusion the value of one Ranbaxy share is 0.71 shares of Sun

Pharma

Sun Pharma has said it expects to get $250 million, or Rs.1,550 crore, in merger-related synergies by the third year after the acquisition is completed. That is fairly significant and these savings should be from sales growth, procurement and supply chain efficiencies

In the Indian market, the combined entity’s portfolio becomes much larger, covering more therapeutic areas.

Their efforts to grow their combined business in Europe and emerging markets

The combination allows Sun Pharma to: 1. Significantly expand its R&D capabilities and global presence, especially across emerging markets 2. Enhance product portfolio and market depth in India, US as well as Rest of the World markets 3. Improve strategic flexibility, ability to pursue partnerships and strengthen M&A bandwidth