Valuation of a company is not a straightforward task. There is no particular formula that will give a fixed value for the share of the company. I have tried using DCF (Discounted Cash Flow) method for valuing Biocon Ltd.
In the process of arriving at a particular value, several assumptions are required to be taken. I have tried to keep those assumptions as conservative as possible. The assumption for the same are as follows:
1) CAGR of Sales for the next 5 yrs: 25% (The past 5 yr average for Biocon is 28%, with growth touching 40% in the yr before last)
2) Target Operating Profit Margin of 20% (Past 5 yr avg for Biocon is over 25%. Most of the global players have the same closer to 30%)
3) Sales to capital ratio: 1.16 (Past 5 yr average for Biocon)
4) As the debt ratio of Biocon is very low (less than 0.1), for simplicity, I have taken the cost of capital as the cost of equity, which I obtained using the CAPM model.
5) The terminal value of the return on capital is assumed to be 15.5%. This is much lower than current ROIC of Biocon which is 22%
6) I have considered tax rate as 34% [as Biocon is a domestic company. This rate is supposed to further go down after implementation of the Direct Tax Code]
Considering the above mentioned assumptions, the final value I obtained for Biocon Share was Rs 435. The valuation depends a lot on the assumptions, but I believe the assumption that I have considered for the valuation of Biocon are conservative.
Excel sheet containing the calculation: Biocon Valuation
If you have any comments, please shoot :)
In the process of arriving at a particular value, several assumptions are required to be taken. I have tried to keep those assumptions as conservative as possible. The assumption for the same are as follows:
1) CAGR of Sales for the next 5 yrs: 25% (The past 5 yr average for Biocon is 28%, with growth touching 40% in the yr before last)
2) Target Operating Profit Margin of 20% (Past 5 yr avg for Biocon is over 25%. Most of the global players have the same closer to 30%)
3) Sales to capital ratio: 1.16 (Past 5 yr average for Biocon)
4) As the debt ratio of Biocon is very low (less than 0.1), for simplicity, I have taken the cost of capital as the cost of equity, which I obtained using the CAPM model.
5) The terminal value of the return on capital is assumed to be 15.5%. This is much lower than current ROIC of Biocon which is 22%
6) I have considered tax rate as 34% [as Biocon is a domestic company. This rate is supposed to further go down after implementation of the Direct Tax Code]
Considering the above mentioned assumptions, the final value I obtained for Biocon Share was Rs 435. The valuation depends a lot on the assumptions, but I believe the assumption that I have considered for the valuation of Biocon are conservative.
Excel sheet containing the calculation: Biocon Valuation
If you have any comments, please shoot :)
I Bought biocon in january @426 30 shares what you suggest . should i sell and invest in another one to get @ least bank interest. I got dividend of INR 45.
ReplyDeleteI request your suggestion
rajansoma@gmail.com
Hi Rajan,
ReplyDeleteConsidering the growth opportunity of the stock from this level (360s), I suggest you hold it. If you are just going to switch over to another script, the risk will remain the same.
It happened with me during the recession. I had purchased IndusInd Bank at 122 and during recession it fell to 40. I sold the same and got into Hindalco at 90. By the time Hindalco reached 160, IndusInd quoted at 260 (from 40).
I hope you are getting what I want to say. Patience is very important. Biocon is a promising company. Wait a few years if you can, the growth can be tremendous.
My valuation assumptions are very conservative, their growth can be a lot higher than what I assumed.
So, my final reco is hold (for a long term 1+ yrs).
I would say that an option pricing model is more appropriate than a DCF for such companies, especially Biocon which sinks in a lot of money on developing drugs. Alternately, your DCF could factor in the formulations/API business value, with an option pricing model taking care of drug discovery. But yes, getting the information from the annual report/investor relations presentation would be difficult.
ReplyDelete