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 :)
