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Market Feedback and Valuation of Arvind Remedies Limited

SIP project report submitted in partial fulfillment of the requirements for the

PGDM Programme

By: Raghav Bhatter

Roll No: 2013216

Supervisor 1: Mr. Rajesh Bajaj

(Managing Director, Lohia Securities Limited)

Supervisor 2: Prof. Anil Kshatriya

(Faculty, IMT Nagpur)

Institute of Management Technology, Nagpur.

2013-2015

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ACKNOWLEDGEMENT

The Satisfaction and Euphoria that accompany the successful completion of the

project without the mention of the people who made it possible.

I would like to take this opportunity to express my sincerest thanks and gratitude to

Lohia Securities Limited.

I would like to extend my gratitude to my mentors, Mr. Rajesh Bajaj (Managing

Director, Lohia Securities Limited) who gave me the opportunity to work as a

summer intern at Lohia Securities Limited and for giving me a lot of

encouragement through his words of wisdom and sharing of rich experiences. I am

also indebted to my supervisor Professor Anil Kshatriya(Institute of Management

Technology, Nagpur) whose consistent guidance, suggestions and encouragement

helped me in completing this project.

This project has provided me with valuable insights into the practical aspects of

Investment Banking and Financial Modelling.

I hope that Lohia Securities Limited and IMT Nagpur are benefited from the

inferences, conclusions and recommendations made by me in this report.

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TABLE OF CONTENTS

Serial Number Particulars Page Number

1 Introduction and Objectives

of Study

5

2 Company Analysis 7

3 Tabulations and Findings 9

4 Interpretations and

Conclusions

19

5 Recommendations 20

6 Limitation of Study 22

7 Scope for Future

Improvements

22

8 Appendices 23

9 Sources 25

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Introduction & Objectives of Study

As the Credit Crisis unfolded, many individuals had one common question on their mind, "What

is an Investment Bank and how is it different from a regular commercial bank?" In Brief,

Investment is different from the corner institutions that the individuals are used to dealing with to

get a loan or deposit money. Investment Bank is a special type of financial institution that works

primarily in higher finance by providing different business entities and organizations access to

capital market to raise capital. It also engages in activities such as Mergers and Acquisitions and

other ancillary service such as Market Making.

As a Summer Intern at Lohia Securities Limited, my task in hand was to prepare an investor

presentation for Arvind Remedies Limited, to prepare a Market Feedback report for Lohia

Securities Limited and to create a list of 2000 companies in Kolkata which were looking to raise

funds.

Objective of preparing an Investor Presentation for Arvind Remedies Limited

Arvind Remedies Limited were planning to raise Rs. 150 Crores for Business Expansion via

qualified institutional placement and had hired Lohia Securities Limited as an investment bank

for the same. The task in hand was to prepare a financial model for Arvind Remedies limited so

as to estimate the value of the firm. The task also involved doing ground work on investors in

India and creating a list of suitable investors

Objective of preparing a list of 2000 Companies in Kolkata

Being Relatively new in the field of Investment Banking, Lohia Securities Limited were

primarily aiming to tap small companies to start with. The list included companies from different

sectors and after the initial list was formed, Lohia Securities Limited bifurcated the list on the

basis of twelve different sectors namely:

1. Spices

2. Poultry

3. irrigation

4. Processed Food

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5. Irrigation

6. Cold Storage

7. Agro Chemical

8. Food Restaurant

9. Bakery

10. Plywood

11. Paper

12. Vegetable Oils

Motivation of Research for Market Feedback

1. The entire world and the success of life are governed by equity investments and stake

holdings. These two measures are heavily dependent on hardcore research.

2. The reason behind why getting a long term view of Investment Trend, Corporate

Thoughts and Global Changes is so important. It is also useful to note that

communicating and understanding is our duty.

The Research will help us generate consciousness, enlightenment and deep conviction within

ourselves.

The purpose for working on Market Feedback was to develop the basis for infrastructure and

logistic for Market Operation Organizations such as Broking Houses, Investment Banks,

Treasury Desks and Financial Institutions.

The purpose is to generate market sensitive information at an earliest so that the information is

received by the firm before it reaches the Market.

The other key issues to be looked upon was whether the brokerage income to firms employing

the services of wire agencies were high enough to cover the cost of wire agencies or not and also

if these wire agencies really brought trade penetration to the firms employing them or not.

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COMPANY ANALYSIS

Lohia Securities Limited is a Kolkata Based Stock Broking and Investment Banking Outfit. The

has a noteworthy presence in the Indian Capital Market. Lohia Securities Limited is a member of

National Stock Exchange of India(Capital Market Segment, Derivative Market Segment),

Bombay Stock Exchange(Capital Market Segment, Derivative Market Segment), Calcutta Stock

Exchange Association Limited(Capital Market Segment) and OTC Exchange of India. Lohia

Securities Limited is also a depository participant of National Securities Depository Limited and

Central Depository Services(India) Limited.

Lohia Securities Limited came into existence as a corporate entity in 1995. The vision was to

make Lohia Securities Limited a professionally run Broking House. The Company opened its

first branch office is 1998 in Mumbai. 1999 saw Lohia Securities Limited start its Institutional

Dealing Business and in 2000, Lohia Securities Limited became the first organization to provide

Bloomberg Online Service to its clients. The year 2000 also saw Lohia Securities Limited start

its NSE future Segment and NSE option Segment Business. In 2001, the firm became a

depository participant of NSDL and CDSL. In 2005, Lohia Securities Limited acquired a

membership to BSE Capital Market and followed it up with a membership to BSE Future and

Option Market in 2006. Today, On the basis of turnover, Lohia Securities Limited is the largest

dealer in F&O Segment in eastern India.

The Services Provided by Lohia Securities Limited are:

1. Equity Trading

- National Stock Exchange

- Bombay Stock Exchange

2. Derivative Trading

- National Stock Exchange

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- Bombay Stock Exchange

3. Commodities Trading

- National Commodity and Derivatives Exchange

- Multi Commodity Exchange

4. Currency Trading

5. Depository

- NSDL

- CDSL

6. Mutual Funds

7. IPOs

8. Institutions

9. Strategy Trading

Lohia Securities Limited follows a strict code of conduct which is applicable for Board Members

and Senior Management. The code of conduct ensures that the company is maintaining highest degree

of corporate governance and is acting in utmost good faith and is exercising due care, diligence and

integrity in day to day work.

The code of conduct adopted by Lohia Securities also ensures that full compliance is met as per SEBI

Regulations 1992 and also other regulations that may be applicable to them from time to time. This

prohibits Insider Trading.

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TABULATIONS AND FINDINGS

Market Feedback

The Purpose of Market Feedback infrastructure is to generate market sensitive information at an

earliest so that the information is received by the firm before it is received by the market.

It was observed that the infrastructure is supposed to make the trading system confident that they

have the information of best level and that the information is at par with that of any trading floor

of world. The infrastructure system needs to work at zero breakdown module to get any earnings

out of the system.

As Lohia Securities Limited Expands its Business into the other parts of the country, the focus

on Information generation has been gaining utmost importance. The Board of Directors of the

company concluded that two different idea generation concepts would be used by the company.

These Concepts are:

By Way of Intellectuals

- Theme Based Trade Generation Idea.

By Way of Information

- Daily Morning Information

- Evening Information

- Information Storage and Dissemination

- Seating Space Reallocation on centralized and decentralized module in various

constituents of dealing room at multiple trading offices.

- Designation of Wire agency analysts and online feedback analysts.

- Full Product Knowledge Group.

- Information provided as and when demanded.

- Communication Team

- Placement Team

- Interaction Team which communicates with different groups on a daily basis.

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Reference and Suggested Reading

Search Sites: Wire Agencies

- Google - Bloomberg

- Yahoo - Reuters

- Investing - Capital line

- CMIE

Exchange site - Prowess

- www.xe.com - Money line

- www.bseindia.com

- www.nseindia.com

- www.moneycontrol.com

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Valuation of Arvind Remedies Limited

Arvind Remedies Limited was Valued at Rs. 1378.71 Crores. The Market Value of

Equity was Rs. 1084.71 Crores. The Cost of Equity was calculated using Capital Asset

Pricing Model. The Weighted Average Cost of Capital has been calculated using Cost of

Debt, Cost of Equity and Cost of Reserve and Surplus and the respective weights of each

of them.

The Price to Earnings Ratio of Arvind Remedies Limited is 5.10 as on May 1, 2014. This

is amongst the lowest in the Industry and it shows that the share is highly undervalued.

Tax Shield = 59 crores * 0.35 = 20.65 Crores

Net Profit Margin of Arvind Remedies Limited is amongst the lowest in profit making

firms in pharmaceutical industry and it can be improved.

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Table 1(Data as on 31st March 2014)

ARVIND REMEDIES LTD DIVISION WISE PROJECTED SALES ABSTRACT & EBITDA FOR THE YEAR 2013-14 TO 2015-16

(Data as on 31st March 2014)

DESCRIPTION 2013-14 2014-15 2015-16

Sales Sales Sales

Hospital 230 253 296

Retails 280 446 580

EXPORTS 10 26 42

Brands 520 725 918

Generics 335 403 422

CRAMS 95 152 200

TOTAL 950 1280 1540

Brands 55% 57% 60%

Generics 35% 31% 27%

CRAMS 10% 12% 13%

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As on 31 March 2011-12 2012-13 2013-14 2014-15 2015-16

Gross Sales 456 704 950 1280 1540

Less: Excise Duty 19 40 58 78 94

Net Sales 437 664 892 1202 1446

Other Income 0.39 0.59 0.66 0.73 0.76

Total Income 437 665 893 1203 1447

Cost of Raw Materials & Packing 347 497 670 905 1084

Employee Related Expenses 9 13 16 18 22

Other Expenses 13 20 23 29 36

Total Operating Expenses 369 531 709 952 1142

EBITDA 68 134 184 251 305

EBITDA margin 15% 19% 19% 20% 20%

Depreciation 3 13 18 20 22

Finance charges 28 59 79 85 91

PBT 37 63 87 146 192

PBT Margin 8% 9% 9% 11% 12%

Income Tax 8 13 13 24 34

Deferred Tax 10 9 8 8 6

Net Profit (PAT) 19 41 66 114 152

PAT Margin 4% 6% 7% 9% 10%

Dividend 3.31 4.82 7.04 7.04 7.04

Dividend tax 0.54 0.78 1.14 1.14 1.14

Retained Profit 15.18 35.00 57.45 105.81 143.32

Projected Profit & Loss

(Amount in Crores)

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Table 2(Data as on 31st March 2014)

As on 31 March 2011-12 2012-13 2013-14 2014-15 2015-16

Liabilities

SHARE CAPITAL & RESERVES

Share Capital 48 48 70 70 70

Reserves & Surplus 95 130 221 327 470

Equity warrants (Pending allotment) - 16 - - -

Deferred Tax Reserve 22 31 40 47 53

Loan Funds

Term Loan 208 303 284 241 194

Bank Loan for Working Capital 147 217 292 367 442

0.31 0.31 0.30 0.29

Current Liabilities & Provisions

Sundry Creditors & Provisions 53 76 92 126 139

Other Liabilities 30 20 36 56 62

Total 603 842 1,036 1,235 1,431

Assets

Gross Block 258 278 469 478 484

Less: Accumulated Depreciation 16 27 44 64 86

Net Block 242 251 425 413 398

Intangible Assets 0.03 0.05 0.05 0.05 0.05

Capital Work in Progress 0.07 0.06 - - -

Investments

Investments in New Projects 49 37

Current Assets, Advances & Loans

Sundry Debtors 170 242 298 415 449

Stock on Hand 88 121 179 227 385

Loans and Advances 5 117 55 84 98

Short term Loans & Advances 24 47 51 73 87

Non-Current Investments 3 3 3 3 3

Other Current Assets 0.3 1 3 2 2

Cash and Bank Balances 22 24 21 16 9

Total 603 842 1,036 1,235 1,431

PROJECTED BALANCE SHEET

(Amount in Crores)

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Table 3(Data as on 31st March 2014)

Arvind Remedies Cost of Equity

Average Market Return 0.003047645 Average Stock Return 0.012932119

Beta Using the slope Function

0.402187789

Nifty Yearly Closing Price

Date Close Index Returns Risk Free Return Market Risk Premium

31-Mar-03 978.2

31-Mar-04 1771.9 0.811388264 0.0708 0.740588264

31-Mar-05 2035.65 0.148851515 0.078 0.070851515

31-Mar-06 3402.55 0.671480854 0.0809 0.590580854

31-Mar-07 3821.55 0.123142937 0.082 0.041142937

31-Mar-08 4734.5 0.238895213 0.071 0.167895213

31-Mar-09 3020.95 -0.361928398 0.08 -0.441928398

31-Mar-10 5249.1 0.737565997 0.0845 0.653065997

31-Mar-11 5833.75 0.111380999 0.0839 0.027480999

31-Mar-12 5295.55 -0.092256267 0.0798 -0.172056267

30-Mar-13 5682.55 0.073080228 0.0904 -0.017319772

0.166030134

β (Rm - Rf) 0.066775293

Risk Free Rate 9.102

CAPM/Required Rate of Return 9.168775293 In terms of %

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Table 4(Data as on 31st March 2014)

Calculation of Cost of Debt and WACC

Particulars Amount

Finance Cost 5918.82

Total Debt 28597.15

Before Tax Cost of Debt 0.206972373

PBT 6255.08

Tax Expense 2193.39

Tax Rate 0.350657386

After Tax Cost of Debt 0.134395982

Weight of Debt 0.666502976

Weight of Equity 0.112419027

Weight of reserve and Surplus0.22107823

Cost of Debt 0.134395982

Cost of Equity 0.090352

Cost of Reserve and Surplus 0.090352

WACC 0.119707466

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Table 5(Data as on 31st March 2014)

Comparison of Different Firms in Pharmaceutical Industry

Name Net Profit(In Crores) Market Capitalization Sales Total Assets EPS PE

Sun Pharma 575.3 119154.06 1657.78 7832.01 9.61 59.8

Elder Pharma 200.55 411.87 1233.1 1750.08 3.7391 53.61

GlaxoSmithKine 2585 21895.73 2546.15 2020.79 59.252 43.44

Glenmark 579.6 15720.12 1949.3 2832.02 13.534 41.81

TTK Health Care 527.95 410.01 382.3 120.36 14.6562 35.72

Biocon 429.35 8587 1938 2243.7 13.729 30.89

Natco Pharma 691.85 2322.26 559.25 822.45 28.8966 27.58

Sanofi India 3055 7035.86 1808.9 1204.12 115.151 26.07

Ipca Labs 833.2 10514.91 2788.42 2093.2 32.9456 25.64

Indoco Remedies 139.35 1284.12 630.4 504.26 5.6636 24.94

Alembic Pharma 282 5316.15 1491.63 600.39 11.7152 24.23

Cadilla Health 1029.15 21071.69 3362.22 4557 42.4369 24.19

Dr Reddys Lab 2584.9 43971.44 8434.01 9372.5 108.14 23.68

Divis Lab 1352.75 17955.63 2128.89 2585.89 58.8009 23.28

Abbott India 1780 3782.38 1803.15 646.85 75.3248 23.27

Cipla 383.7 20808.09 8202.42 9835.33 17.179 22.34

Lupin 943.65 42310.98 7122.51 5402 42.0632 22.25

Wyeth 890 2022.09 678.34 569.3 41.021 21.7

Shilpa 405 1489.84 328.2 412.92 19.2403 21.45

Ajanta Pharma 994.95 3497.32 839.2 479.74 50.5993 19.79

Merck 645 1070.66 687.28 523.03 33.6639 19.17

Pfizer 1317.4 3931.31 1050.07 1694.42 72.7216 16.92

Aurobindo Phar 528.1 15391.85 5425.1 6714.06 31.0519 16.45

JB Chemicals 129 1093.04 816.42 1053.02 7.8772 16.29

Celestial Labs 22 38.18 21.16 91.19 1.3842 15.75

Wockhardt 461 5059.53 2471.18 1289.41 29.9751 15.25

Alembic 17.4 464.64 179.22 230.92 1.2 14.72

Torrent Phama 530.7 8980.65 2767 2230.25 39.1791 13.37

FDC 128 2726.26 764.6 780.94 9.4876 13.28

Amrutanjan Heal 125.45 183.35 135.07 100.44 10.4042 12.06

Dishman Pharma 84.6 682.7 484.64 1180.44 7.0403 11.87

Bafna Pharma 17.7 33.02 167.14 159.36 1.4381 11.82

Shasun Pharma 71.2 403.16 782.76 655.74 6.084 11.63

Hikal 474 779.26 660.42 931.17 42.743 11.01

Gufic Bio 5.3 41 100.41 39.15 0.4813 10.68

Marksans Pharma 23.65 911.25 196.47 -95.7 2.2651 10.57

Vivimed Labs 175.65 284.62 426.5 756.02 19.14 9.25

Neuland Lab 263.35 202.38 463.9 285 29.0961 8.94

Nectar Life 23.3 522.53 1626.25 1637.69 3.0779 7.86

Granules India 259.5 526.92 679.8 488.26 32.5731 7.85

Sharon Bio Medi 42.5 448.67 1059.5 887.81 5.72 7.39

Suven Life Sci 73.65 860.44 257.88 246.46 10.3041 6.98

Aarti Drugs 266.5 322.69 825.75 448.96 43.4817 6.06

Bal Pharma 32 35.56 147.91 90.65 5.2532 5.97

Kopran 21.2 82.78 250.22 221.96 3.8285 5.58

Arvind Remedies 43.1 293.62 664.26 485.57 9 4.86

Venus Remedies 244.1 279.3 461.34 501.49 51.9927 4.73

Brooks Labs 20.9 33.83 80.11 106.49 6.5858 2.79

RPG Life 60.75 100.45 221.64 119.2 37.0784 1.62

Strides Arcolab 384 2287.32 807.11 1949.66 597.859 0.65

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Table 6(Data as on 31st March 2014)

Valuation of Arvind Remedies

Particulars 2013-14 2014-15 2015-16

Net Profit (PAT) 65.63 113.99 151.5

(+)Depreciation 18 20 22

(-)Investment in Working Capital 75 75 75

(+/-) Change in principal Amount -17 -43 -47

Free Cash Flow to Firm -8.87 15.74 51.5

Terminal Value 1346

PV of Futre Cash Flows -7.92 12.55 36.69

Assumed Constant Growth Rate 9%

Market Value of Arvind Remedies Limited 1387.71

Market Value of Debt 303

Market Value of Equity 1084.71

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Interpretations and Findings

Operating Leverage of 1.51 indicates that Arvind Remedies Limited can earn More

Profits from each additional sale as existing fixed assets can do more without any

additional cost.

Arvind Remedies Limited has a current Ratio of 0.94 and there are chances that it may

default on its payments. This increases the risk and investors are likely to demand for

higher returns. Also, high debt equity ratio implies that the required rate of return by

investors is to remain high.

Degree of Operating Leverage of 1.51 signifies that Arvind Remedies Limited may

expand its operation without incurring any significant additional cost as increase in

profits will be greater than increase in revenue. However, during an economic Downturn,

Arvind Remedies Limited can see a plummet in earnings.

Current Ratio of 0.94 Should concern the Management. The Current Liabilities of the

firm exceeds its Current Assets. Though it may not be critical at this point of time, proper

attention needs to be paid.

The Debt to Equity Ratio of Arvind Remedies Limited stands at 2.78. However, a high

interest cover ratio(2.06) means that the firm is able to fulfil its interest obligations.

Also, high debt provides Arvind Remedies Limited with a high level of tax shield. This

increases the value of the leveraged firm. However, Arvind Remedies Limited needs to

improve its Cash Flow times.

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Recommendations

Market Feedback

The Current Scenario at Lohia Securities Limited is that all its focus is towards its Main Trading

office or better described as single trading floor. The Company needs to shift its focus from the

Main trading floor to other trading floors of the company to ensure trade penetration.

Lohia Securities Currently has a centralized online Market Feedback Infrastructure and System.

The Company needs to shift the focus towards individual offices where high frequency trades are

occuring.

Concentrated to Main Trading office

or Single Table Space

Trade Penetration possibility is to be

revived very seriously

A Centralized Online Market

Feedback.

From This Concept to

Where high

frequency trades are occuring.

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Arvind Remedies Limited

Arvind Remedies already has a high Debt to Equity Ratio and it may not be advisable for Arvind

Remedies Limited to take on more debt.

The P/E Ratio is amongst the lowest in the industry and the stock is highly undervalued. The

forecast for Arvind Remedies Limited shows a steep increase in Income and the valuation of the

company. As a Result, it may be advisable for Arvind Remedies Limited to raise funds via

Equity. This will ensure that Interest's do not add any more pressure on the earnings of the

company and at the same time, the share holders receive full value for their investment.

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Limitations of the Study

The Fund Raising Process of Arvind Remedies Limited was not completed during my time as an

intern at Lohia Securities Limited and hence it was not possible to compare the estimates with

the actuals.

Also, the valuation for Arvind Remedies Limited was done before the actual results for 2013-14

came out and hence estimate figures had to be used for valuation purpose and some discrepancy

may arise due to this. Moreover, headquarter visit was not possible and hence, customer and

vendor perception could not be achieved.

Since i was a summer intern at Lohia Securities Limited, I was not given a full insight into what

exactly was the company planning and what the future plan was. My job was restricted to

calculations only.

Scope for Future Study

I am still in touch with all the parties involved in raising funds for Arvind Remedies Limited.

The calculation work is not being done on actual results for 2013-2014 and a Management and

Headquarter visit is being arranged shortly.

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Appendices

A: Asset

AS: Accounting Standard

BS: Balance Sheet

B: Bond

CF: Cash Flow

CA: Current Assets

CL: Current Liabilities

C: Consolidated

CR: Current Ratio

COGS: Cost of Goods Sold

CU: Currency

CO: Commodity

CPI: Consumer Price Index

DFI: Development Financial Institution

DE: Derivatives

ES: Equity Shares

E: Energy

EPS: Earning Per Share

FII: Foreign Institutional Investors

FOREX: Foreign Exchange

FF: Fund Flow

FS: Financial System

FH: Financial Health

FED: Federal Reserve System

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FA: Fixed Assets

FR: Financial Ratios

GDP: Gross Domestic Product

GP: Gross Profit

HF: Hedge Funds

I: Investment

IN: Index

L: Liabilities

MF: Mutual Funds

MSI: Market Sensitive Information

M&A: Mergers and Acquisition

NP: Net Profit

OP: Operating Profit

P/L: Profit and Loss

PS: Preference Shares

PP: Private Placements

PRO: Public Relations Officer

P/E: Price Earning

PAT: Profit after Tax

Q: Quarter

QR: Quick Ratio

ROC: Registrar of Companies

RBI: Reserve Bank of India

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Sources

References

Mr. Rajesh Bajaj, Managing Director, Lohia Securities Limited

Mr. Kamal Kothari, Managing Director, Guiness Group

Mr. Gaurav Kapoor, Manager, Guiness Securities Limited

Mrs. Vandana Bhatter Sharma, Director, Citibank

Mr. Purav Shah, Student, FMB, S.P. Jain Institute of Management and Research

Ms. Sushmita Baheti, Student, FMB, S.P. Jain Institute of Management and Research

Mr. Parikshit Goel, Student, P.G.D.M, Indian Business School, Hyderabad

Mr. Sharad Mohta, Owner, Sharad Mohta and Company

Mr. Mohit Barasia, Institutional Head, Lohia Securities Limited

Bibliography

www.investopedia.com

www.wikipedia.com

www.arvindremedies.com