Cost of Capital: Pharmaceutical

Sector
Section 2 (MBA F&B)
2/25/2012

ByPurav Gudhka
Saswata Gauna
Shaivi Sharma
Sharad Thampy
Yash Khandelwal
Yogesh Nivangune

1|Page

Table of Contents
Cost of Capital: Pharmaceutical Companies Summary .................................................................................................. 3
Source of Data................................................................................................................................................................... 3
List of Companies Analysed .............................................................................................................................................. 3
Authors and Contribution ............................................................................................................................................. 3
Objective ........................................................................................................................................................................... 4
Divis Laboratories Ltd....................................................................................................................................................... 6
Diviss Laboratories: Charts & Graphs........................................................................................................................... 7
Dishman Pharmaceuticals & Chemicals Ltd ...................................................................................................................... 8
Dishman Pharmaceuticals: Charts & Graphs ................................................................................................................ 9
Ajanta Pharma Ltd........................................................................................................................................................... 10
Ajanta Pharma: Charts & Graphs ................................................................................................................................ 11
Strides Acrolab Ltd .......................................................................................................................................................... 12
Strides Acrolab Ltd.: Charts & Graphs......................................................................................................................... 13
Opto Circuits ................................................................................................................................................................... 14
Opto Circuits: Charts & Graphs ................................................................................................................................... 15
Jubilant Life Science Ltd .................................................................................................................................................. 16
Jubilant Life Science: Charts & Graphs........................................................................................................................ 17

Cost of Capital: Pharmaceutical Companies Summary

Source of Data

List of Companies Analysed

www.bseindia.com
www.moneycontrol.com
www.rediffmoney.com
www.tradingeconomics.com

Divis Laboratories
Dishman Pharma
Ajanta Pharma
Strides Arcolab
Opto Circuits
Jubiliant Life Sciences

Authors and Contribution

Name
Purav Gudhka (8829846069)
Saswata Gauna (8829919352)
Shaivi Sharma (8766005400)
Sharad Thampy (8829878960)
Yash Khandelwal (8107865026)
Yogesh Nivangune (8829878943)

Contribution
Data and Analysis of Divis Laboratories
Data and Analysis of Dishman Pharma
Data and Analysis of Ajanta Pharma
Data and Analysis of Strides Arcolab
Data and Analysis of Opto Circuits
Data and Analysis of Jubiliant Life Sciences

Synopsis:
After analyzing trends of WACC for various companies, we can say that CAPM reflects the market trends
better than the other models as the companys returns are calculated using stock beta and market
returns, while WACC calculated using the EPR model follows the EPS trend and WACC calculated using
the Gordons model follows the DPS trend.
Notes:
1. Market Return (Rm) is calculated by taking geometric mean of annual market returns of ten years
preceeding the respective year taken for calculation.
2. Risk Free Rate (Rf) is considered as a average of Government Bond Yield for 10 years Notes from
1998 to 2011 which comes to 7.92%.

Objective
To analyze trends in Weighted Average Cost of Capital of chosen pharmaceutical companies by using different
methods for calculating of Cost of Equity.

Appropriateness of Methodology

Cost of Debt:
Cost of debt (long term loans secured and unsecured) was calculated using the data available but Cost of Debt
(Debentures and Bonds) could not be done since most of the companies have not issued any debentures and Bonds
and even if they have issued it was not possible to find the exact data to calculate its cost for the same.
Debt financing is done through two ways (i) Loans and (ii) Issue of debentures. When a company borrows it uses
financial leverage; so that it can increase its profitability but at the same time it is exposed to financial risk. In general
cost of debt is less than cost of equity.
The following methodology describes how cost of debt was arrived at i.e. the methodology used and various
parameters involved.

Methodology and Parameters involved in calculating Cost of Debt (Kt)

Identified average total debt (long term loans including both secured and unsecured loans) from companys
balance sheets for a period of 5 years.

Average total Debt = (Total debt for current year + Total debt for previous year) / 2

Though corporate tax rate applicable to Corporate is around 33% with surcharges and education cress, to
provide an exact picture of tax rate effective tax rate is used by considering any tax benefits availed.

Effective tax rate (T) = Tax paid / Profit before tax

Nominal interest rate on loans is calculated by dividing Total Interest paid upon Average Total Debt.

Nominal Interest rate (I) = Interest Paid / Average Total Debt

Given the Nominal Interest rate and effective tax rate, Cost of Debt (Kt) is calculated using below formula:

Kt = I * (1-T)

Cost of Equity:
Cost of Equity is calculated using Gordon, Earnings Price Ratio and CAPM models for calculating Cost of Equity. Cost
of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of
debt, the cost of equity is broadly defined as the risk weighted expected return required by the investors. The
following methods were used to calculate cost of equity.

1. Gordons Model:

Ke = (D0*(1 + g)/P0) + g
Here,
Ke = Cost of Equity
D0 = Dividend per share paid by the company for the current year (Rs.)
g = Annual growth rate in dividends and is calculated using geometric mean of growth in dividends
in the past years or by multiplying retention ratio with ROE
P0 = Current market price of the shares (Rs.)

2. Earnings Price Ratio Approach:

Ke = E0*(1 + g) / P0
Here,
Ke = Cost of Equity
E0 = EPS for the current year (Rs.)
P0 = Current market price of the shares (Rs.)

3. CAPM approach:

Ri = Rf + i (Rm Rf)
Here,
Ri = Cost of Equity
Rf = Risk free rate
Rm = Market return
i = Beta of the return of company with respect to market returns

Weighted average Cost of Capital:

The weighted average cost of capital (WACC) of a firm refers to how much on an average it costs a firm to raise
money. The importance of the WACC is in its relation to the evaluation of projects.
The firms WACC is the cost of capital for the firms mixture of debt and stock in its capital structure.

WACC = wd(cost of debt) + ws(cost of equity/retained earnings) + wp(cost of preference stock)

Here,
wd = weight of debt in the firms capital structure
ws = weight of share capital
wp = weight of preference share capital

Divis Laboratories Ltd

Calculations for the year (Rs. in Crs.)

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

27.95
2.19
479.23
43.48
7.84%
9.07%
7.13%

42.75
2.76
391.05
44.14
6.46%
11.29%
5.73%

69.36
7.23
458.34
34.09
10.42%
7.44%
9.65%

120.02
10.18
384.72
29.54
8.48%
7.68%
7.83%

152.07
10.57
226.73
34.79
6.95%
15.34%
5.88%

10.00
64.11%
25.85%
16.57%
674.95
18.30%
32.85
47.54%
674.95
7.18%
1.03
16.83%
7.92%
17.10%

6.00
72.84%
24.55%
17.88%
678.30
18.93%
26.05
58.82%
678.30
6.10%
1.08
17.84%
7.92%
18.63%

6.00
89.08%
39.75%
35.41%
472.15
37.13%
32.77
48.16%
472.15
10.28%
1.02
13.31%
7.92%
13.42%

4.00
91.31%
49.94%
45.60%
634.43
46.52%
27.39
36.46%
634.43
5.89%
1.09
12.18%
7.92%
12.57%

10.00
92.08%
43.44%
40.00%
307.48
44.55%
14.85
14.79%
307.48
5.54%
0.81
18.68%
7.92%
16.64%

708.01
120.02
828.03
0.86
0.14
40.91%
6.17%
11.88%

441.43
152.07
593.50
0.74
0.26
34.64%
5.63%
13.88%

Expected Cost of Debt:

Average Total Debt
Interest
Profit Before Tax
Tax
Cost of debt pre tax
Effective tax rate
Effective cost of debt post tax

Expected Cost of Equity:

DPS (Rs.)
Retention ratio (RR)
ROE (ROE)
Growth rate (g) = RR*ROE
Adjusted Share price
Gordon growth model
Adjusted EPS (Rs.)
EPS growth*
Adjusted Share price
EPS model
BETA
Market Return (Rm)*
Risk free rate (Rf)**
CAPM

Expected WACC (book value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

1685.07
27.95
1713.01
0.98
0.02
18.12%
7.18%
16.93%

1401.94
42.75
1444.68
0.97
0.03
18.54%
6.09%
18.25%

1067.89
69.36
1137.25
0.94
0.06
35.45%
10.24%
13.19%

Expected WACC (market value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

8956.41
27.95
8984.36
1.00
0.00
18.26%
7.18%
17.07%

7539.21
42.75
7581.96
0.99
0.01
18.85%
6.10%
18.56%

7153.21
69.36
7222.57
0.99
0.01
36.86%
10.28%
13.38%

6080.59
120.02
6200.61
0.98
0.02
45.77%
5.93%
12.48%

3187.42
152.07
3339.49
0.95
0.05
42.79%
5.56%
16.15%

Actual Returns:

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

NA
NA
NA

28.10%
435.57
25.85%

27.26%
344.2
24.55%

40.94%
424.46
39.75%

47.69%
353.56
49.94%

ROCE (average capital)

Net Profit
ROE (average share capital)

Diviss Laboratories: Charts & Graphs

Expected Value: Book Value

Weights : Debt to Equity

40%
0.74

0.86

0.94

1.0

0.97

0.98

1.2

48%

0.8

32%
24%

0.14

0.06

0.2

0.03

0.02

0.4

0.26

0.6

16%
8%
0%

Mar '12

0.0
Mar '12

Mar '11

Mar '10

Weight of Share Capital

50%

Mar '09

Mar '08

Mar '10

Mar '09

Mar '08

WACC (EPS Model)

WACC (CAPM)

Weight of Debt

Expected Value: Market Value

50%

40%

Mar '11

WACC (Gordon Growth Model)

Divi's Lab Ltd : ROCE v/s ROE

44%

30%

38%

20%

32%

10%

26%

0%

Mar '12

Mar '11

Mar '10

WACC (Gordon Growth Model)

WACC (CAPM)

Mar '09

Mar '08

WACC (EPS Model)

20%
Mar '11

Mar '10

ROCE (average capital)

Mar '09

Mar '08

ROE (average share capital)

Inference:
There is very little different between Expected WACC calculated using book value and calculated using market value
as the Debt to equity is 5% i.e. 0.05:0.95 and debt taken by the company has been continuously decreasing. Debt to
equity ratio was 0.05:0.95 in March 2007 and it reduced to almost 0.01:0.99 in 2011. As a result the WACC calculated
is almost equal to cost of equity for the last few years.
WACC using Gordon Growth model has been continuously decreasing due to reduction in growth rate as a result of
decrease in ROE as growth rates are calculated by multiplying Retention Ratio with ROE.
WACC calculated using CAPM model is a function of market risk premium and as the market has been increasing
since past decade and beta being almost constant for Divis Laboratories, the cost of equity has been increasing
during the last few years for the company.

Dishman Pharmaceuticals & Chemicals Ltd

Calculations for the year (Rs. In Crs.)

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

497.87
39.97
48.51
8.41
8.03%
17.34%
6.64%

362.30
29.91
80.11
9.04
8.26%
11.28%
7.32%

276.52
26.96
94.64
2.50
9.75%
2.64%
9.49%

280.48
9.76
67.37
11.23
3.48%
16.67%
2.90%

420.03
5.77
54.92
2.89
1.37%
5.26%
1.30%

1.20
75.86%
6.26%
4.74%
103.00
5.97%
4.90
77.96%
103.00
8.47%
0.88
16.83%
7.92%
15.76%

1.20
86.24%
11.49%
9.91%
214.00
10.52%
8.72
31.54%
214.00
5.36%
0.86
17.84%
7.92%
16.45%

1.20
89.54%
16.80%
15.04%
100.00
16.43%
11.47
-32.87%
100.00
7.70%
0.72
13.31%
7.92%
11.80%

1.00
87.01%
13.53%
11.77%
286.00
12.16%
7.70
11.30%
286.00
3.00%
0.84
12.18%
7.92%
11.50%

1.00
88.33%
22.96%
20.28%
212.00
20.85%
8.57
-100.00%
212.00
0.00%
0.81
18.68%
7.92%
16.64%

361.70
280.48
642.18
0.56
0.44
8.12%
2.95%
7.75%

220.57
420.03
640.60
0.34
0.66
8.03%
0.85%
6.58%

Expected Cost of Debt:

Average Total Debt
Interest
Profit Before Tax
Tax
Cost of debt pre tax
Effective tax rate
Effective cost of debt post tax

Expected Cost of Equity:

DPS (Rs.)
Retention ratio (RR)
ROE (ROE)
Growth rate (g) = RR*ROE
Adjusted Share price
Gordon growth model
Adjusted EPS (Rs.)
EPS growth*
Adjusted Share price
EPS model
BETA
Market Return (Rm)*
Risk free rate (Rf)**
CAPM

Expected WACC (book value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

626.93
497.87
1124.80
0.56
0.44
6.26%
7.66%
11.72%

581.67
362.30
943.96
0.62
0.38
9.30%
6.11%
12.95%

502.33
276.52
778.84
0.64
0.36
13.96%
8.34%
10.98%

Expected WACC (market value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

1279.05
497.87
1776.92
0.72
0.28
6.15%
7.95%
13.20%

1266.95
362.30
1629.24
0.78
0.22
9.81%
5.80%
14.42%

1542.97
276.52
1819.48
0.85
0.15
15.37%
7.97%
11.45%

1904.94
280.48
2185.42
0.87
0.13
10.97%
2.98%
10.40%

1469.54
420.03
1889.57
0.78
0.22
16.51%
0.29%
13.23%

Actual Returns:

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

NA
NA
NA

7.87%
40.12
6.40%

11.66%
70.37
12.10%

15.61%
92.56
18.43%

12.01%
61.38
16.97%

ROCE (average capital)

Net Profit
ROE (average share capital)

Dishman Pharmaceuticals: Charts & Graphs

0.66

0.56
0.44

0.64

0.62

24%

0.34

0.4

0.36

0.6

0.38

0.8

0.56
0.44

Capital Structure : Weights of Debt to

Equity
1.0

18%
12%
6%

0.2

0%

0.0

Mar '12

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
Weight of Share Capital
Weight of Debt

20%

Expected WACC : Book Value

Expected WACC : Market Value

16%

Mar '11

Mar '10

WACC (Gordon Growth Model)

Mar '09

Mar '08

WACC (EPS Model)

WACC (CAPM)

Dishman Pharma : ROCE & ROE

20%
16%

12%
8%

12%

4%

8%

0%
Mar '12

Mar '11

Mar '10

WACC (Gordon Growth Model)

WACC (CAPM)

Mar '09

Mar '08

WACC (EPS Model)

4%
Mar '11

Mar '10

ROCE (average capital)

Mar '09

Mar '08

ROE (average share capital)

Inference:
The company has a very stable dividend payout ratio imbuing confidence; it managed its financial risk well during the
period from 2007 to 2010 by issuing FCCBs, and did convert almost 95% of FCCBs to equity share on receipt of
investors requests. The cost of debt remains more or less stable over the years. The WACC calculated taking market
value appears more realistic. The beta of the stock is very stable. We can see that cost of equity going up with debtto-equity ratio going up as investors expect more return.

Ajanta Pharma Ltd

Calculations for the year (Rs. in Crs.)

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

Expected Cost of Debt:

Average Total Debt
Interest
Profit Before Tax
Tax
Cost of debt pre tax
Effective tax rate
Effective cost of debt post tax

158.28
15.66
52.32
5.30
9.89%
10.13%
8.89%

203.29
19.08
35.40
5.12
9.39%
14.46%
8.03%

240.23
22.03
27.94
4.53
9.17%
16.21%
7.68%

165.07
15.09
25.49
6.84
9.14%
26.83%
6.69%

108.48
11.56
18.33
4.42
10.66%
24.11%
8.09%

5.00
25.74%
200.30
28.88%
39.70
12.95%
200.30
22.39%
0.87
16.83%
7.92%
15.67%

3.50
25.74%
182.00
28.16%
24.39
10.11%
182.00
14.76%
0.86
17.84%
7.92%
16.45%

2.50
25.74%
51.35
31.88%
18.27
9.63%
51.35
39.01%
0.86
13.31%
7.92%
12.56%

2.50
25.74%
80.05
29.68%
15.21
29.76%
80.05
24.65%
1.04
12.18%
7.92%
12.36%

2.00
25.74%
71.85
29.24%
11.72
0.00%
71.85
16.31%
1.17
18.68%
7.92%
20.51%

127.41
165.07
292.48
0.44
0.56
16.70%
14.51%
9.16%

115.14
108.48
223.62
0.51
0.49
18.98%
12.32%
14.48%

88.93
165.07
254.00
0.35
0.65
14.74%
12.98%
8.67%

85.36
108.48
193.84
0.44
0.56
17.40%
11.71%
13.56%

Expected Cost of Equity:

DPS (Rs.)
Growth rate (g) = CAGR
Adjusted Share price
Gordon growth model
Adjusted EPS (Rs.)
EPS growth*
Adjusted Share price
EPS model
BETA
Market Return (Rm)*
Risk free rate (Rf)**
CAPM

Expected WACC (book value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

195.73
158.28
354.01
0.55
0.45
19.94%
16.35%
12.64%

164.03
203.29
367.32
0.45
0.55
17.02%
11.03%
11.79%

143.18
240.23
383.41
0.37
0.63
16.72%
19.38%
9.50%

Expected WACC (market value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

223.82
158.28
382.10
0.59
0.41
20.60%
16.80%
12.86%

Actual Returns:

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

ROCE (average capital)

Net Profit
ROE (average share capital)

NA
NA
NA

136.61
203.29
339.90
0.40
0.60
16.12%
10.73%
11.41%

19.20%
47.02
24.02%

76.93
240.23
317.16
0.24
0.76
13.55%
15.28%
8.87%

14.83%
30.27
18.45%

13.03%
23.42
16.36%

13.87%
18.65
14.64%
10

Ajanta Pharma: Charts & Graphs

18%

0.4

0.51
0.49

0.37

0.45
0.55

0.6

0.44
0.56

0.8

0.63

24%

0.55
0.45

Capital Structure : Weights of Debt to

Equity
1.0

12%
6%

0.2

0%

0.0

Mar '12

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
Weight of Share Capital
Weight of Debt

24%

Expected WACC : Book Value

Expected WACC : Market Value

Mar '11

Mar '10

WACC (Gordon Growth Model)

Mar '09

Mar '08

WACC (EPS Model)

WACC (CAPM)

Ajanta Pharma: ROCE & ROE

30%

18%

24%

12%

18%

12%

6%

6%
0%
Mar '12

Mar '11

Mar '10

WACC (Gordon Growth Model)

WACC (CAPM)

Mar '09

Mar '08

WACC (EPS Model)

0%
Mar '11

Mar '10

ROCE (average capital)

Mar '09

Mar '08

ROE (average share capital)

Inference:
The Debt to Equity ratio changes from 0.65:0.35 from 2008-09 to 0.41:0.59 in 2010-11. The cost of equity (CAPM)
rises and due to this the cost of capital (CAPM) also rises with the rise in market returns.
With the increase in EPS the cost of equity (EPR) also increases and due to this WACC (EPR) also increases.

11

Strides Acrolab Ltd

Calculations for the year (Rs. in Crs.)

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

2500.81
70.63
296.69
17.05
2.82%
5.75%
2.66%

2268.96
122.64
459.27
96.17
5.41%
20.94%
4.27%

2095.57
76.65
273.04
12.29
3.66%
4.50%
3.49%

1630.36
21.76
459.92
67.64
1.33%
14.71%
1.14%

1109.60
(38.98)
299.55
68.08
-3.51%
22.73%
-2.71%

2.00
88.61%
12.97%
11.49%
298.34
12.24%
17.56
2.13%
298.34
6.01%
0.79
16.83%
7.92%
14.96%

2.00
91.25%
20.68%
18.87%
239.10
19.86%
22.87
23.79%
239.10
11.84%
0.77
17.84%
7.92%
15.56%

1.51
91.43%
19.19%
17.54%
243.79
18.27%
17.67
19.23%
243.79
8.64%
0.66
13.31%
7.92%
11.48%

1.50
94.41%
33.52%
31.65%
308.64
32.29%
26.83
40.74%
308.64
12.23%
0.56
12.18%
7.92%
10.31%

1.26
92.22%
25.92%
23.90%
237.14
24.56%
16.14
25.23%
237.14
8.52%
0.56
18.68%
7.92%
13.95%

1170.13
1630.36
2800.49
0.42
0.58
14.15%
5.77%
4.97%

893.07
1109.60
2002.67
0.45
0.55
9.45%
2.30%
4.72%

Expected Cost of Debt:

Average Total Debt
Interest
Profit Before Tax
Tax
Cost of debt pre tax
Effective tax rate
Effective cost of debt post tax

Expected Cost of Equity:

DPS (Rs.)
Retention ratio (RR)
ROE (ROE)
Growth rate (g) = RR*ROE
Adjusted Share price
Gordon growth model
Adjusted EPS (Rs.)
EPS growth*
Adjusted Share price
EPS model
BETA
Market Return (Rm)*
Risk free rate (Rf)**
CAPM

Expected WACC (book value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

2156.72
2500.81
4657.53
0.46
0.54
7.10%
4.21%
8.36%

1756.12
2268.96
4025.08
0.44
0.56
11.07%
7.57%
9.20%

1358.99
2095.57
3454.56
0.39
0.61
9.31%
5.52%
6.63%

Expected WACC (market value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

4338.88
2500.81
6839.68
0.63
0.37
8.74%
4.79%
10.46%

4248.72
2268.96
6517.67
0.65
0.35
14.44%
9.21%
11.63%

3546.13
2095.57
5641.70
0.63
0.37
12.78%
6.73%
8.51%

3887.44
1630.36
5517.80
0.70
0.30
23.08%
8.96%
7.60%

8998.56
1109.60
10108.16
0.89
0.11
21.57%
7.29%
12.12%

Actual Returns:

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

NA
NA
NA

7.89%
279.63
12.97%

14.46%
363.1
20.68%

10.12%
260.74
19.19%

17.20%
392.27
33.52%

ROCE (average capital)

Net Profit
ROE (average share capital)

12

Strides Acrolab Ltd.: Charts & Graphs

0.21

24%

0.41

0.59

0.74

0.26

0.69
0.31

0.4

0.38

0.6

0.62

0.8

0.79

Capital Structure : Weights of Debt to

Equity
1.0

18%
12%
6%

0.2

0%

0.0

Dec '11

Dec '11 Dec '10 Dec '09 Dec '08 Dec '07
Weight of Share Capital
Weight of Debt

20%

Expected WACC : Book Value

Expected WACC : Market Value

16%

Dec '10

Dec '09

WACC (Gordon Growth Model)

Dec '08

Dec '07

WACC (EPS Model)

WACC (CAPM)

Strides Acrolab : ROCE & ROE

40%
25%

12%
8%

10%

4%

-5%

0%
Dec '11

Dec '10

Dec '09

WACC (Gordon Growth Model)

WACC (CAPM)

Dec '08

Dec '07

Dec '10

Dec '09

Dec '08

Dec '07

-20%

WACC (EPS Model)

ROCE (average capital)

ROE (average share capital)

Inference:
Average cost of equity increases from 2007 until 2009 because of increase in debt (as investors expect more return
when company is more leveraged), thereafter the cost of equity decreased as the debt ratio decreases. For year
2008 the average cost of equity does not include calculations from Gordon and EPS model as the cost of equity is
less than cost of debt for both the models as well as for the average of CAPM, EPS and Gordon.
For year 2009, the average cost of equity declined due to a sharp decline in market price (impacted the EPS model
cost of equity) coupled with decrease in market return. 2010 saw a sharp decline in cost of equity due to substantial
rise in market price of share. In 2011, though the rise in market rise was substantiated by increase in market return,
hence resulting in a moderate increase in cost of equity.

13

Opto Circuits
Calculations for the year (Rs. in Crs.)

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

724.01
24.93
247.03
2.68
3.44%
1.08%
3.41%

194.60
34.52
163.52
16.49
17.74%
10.08%
15.95%

513.53
41.04
140.81
0.87
7.99%
0.62%
7.94%

88.23
8.77
119.22
0.43
9.94%
0.36%
9.90%

49.25
4.98
73.16
0.97
10.11%
1.33%
9.98%

4.50
65.68%
22.99%
15.10%
298.34
16.84%
13.11
63.06%
275.50
7.76%
0.79
16.83%
7.92%
14.96%

4.00
50.25%
17.07%
8.58%
239.10
10.39%
8.04
-7.27%
217.35
3.43%
0.77
17.84%
7.92%
15.56%

4.00
53.86%
34.81%
18.75%
243.79
20.70%
8.67
-31.25%
100.50
5.93%
0.66
13.31%
7.92%
11.48%

5.00
60.35%
37.18%
22.44%
308.64
24.42%
12.61
7.69%
329.50
4.12%
0.56
12.18%
7.92%
10.31%

5.00
57.30%
34.17%
19.58%
237.14
22.10%
11.71
2.99%
297.35
4.06%
0.56
18.68%
7.92%
13.95%

1170.13
88.23
1258.36
0.93
0.07
23.41%
4.53%
10.28%

893.07
49.25
942.32
0.95
0.05
21.47%
4.37%
13.74%

Expected Cost of Debt:

Average Total Debt
Interest
Profit Before Tax
Tax
Cost of debt pre tax
Effective tax rate
Effective cost of debt post tax

Expected Cost of Equity:

DPS (Rs.)
Retention ratio (RR)
ROE (ROE)
Growth rate (g) = RR*ROE
Adjusted Share price
Gordon growth model
Adjusted EPS (Rs.)
EPS growth*
Adjusted Share price
EPS model
BETA
Market Return (Rm)*
Risk free rate (Rf)**
CAPM

Expected WACC (book value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

2156.72
724.01
2880.73
0.75
0.25
13.46%
6.67%
12.06%

1756.12
194.60
1950.72
0.90
0.10
10.95%
4.68%
15.60%

1358.99
513.53
1872.52
0.73
0.27
17.20%
6.48%
10.51%

Expected WACC (market value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

4338.88
724.01
5062.89
0.86
0.14
14.92%
7.14%
13.31%

4248.72
194.60
4443.32
0.96
0.04
10.64%
3.98%
15.58%

3546.13
513.53
4059.66
0.87
0.13
19.08%
6.19%
11.03%

3887.44
88.23
3975.67
0.98
0.02
24.10%
4.25%
10.30%

8998.56
49.25
9047.81
0.99
0.01
22.04%
4.09%
13.93%

Actual Returns:

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

NA
NA
NA

9.44%
279.63
12.97%

10.15%
363.1
20.68%

9.71%
260.74
19.19%

10.17%
392.27
33.52%

ROCE (average capital)

Net Profit
ROE (average share capital)

14

Opto Circuits: Charts & Graphs

0.18

0.4

0.81

12%
0.22

0.41

0.6
0.2

6%
0%

0.0

Mar '12

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
Weight of Share Capital
Weight of Debt

28%
24%
20%
16%
12%
8%
4%
0%

Expected WACC : Book Value

18%

0.44
0.56

0.59

0.8

24%

0.19

1.0

0.78

0.82

Capital Structure : Weights of Debt to

Equity
1.2

Expected WACC : Market Value

Mar '11

Mar '10

WACC (Gordon Growth Model)

Mar '09

Mar '08

WACC (EPS Model)

WACC (CAPM)

Opto Circuits : ROCE & ROE

40%
32%
24%
16%
8%

Mar '12

Mar '11

Mar '10

WACC (Gordon Growth Model)

WACC (CAPM)

Mar '09

Mar '08

WACC (EPS Model)

0%
Mar '11

Mar '10

ROCE (average capital)

Mar '09

Mar '08

ROE (average share capital)

Inference:
For, 2011 the cost of equity has been calculated by CAPM approach as the average of EPS, Gordon and CAPM was
less than cost of debt which is unacceptable.
Since the ROE is continuously decreasing the cost of equity (DPS) decreases as the growth rate reduces which is
calculated using ROE.
Cost of debt has been fluctuating over the years due to sharp increase and decrease in debt levels over the year.

15

Jubilant Life Science Ltd

Calculations for the year (Rs. in Crs.)

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

2500.81
70.63
296.69
17.05
2.82%
5.75%
2.66%

2268.96
122.64
459.27
96.17
5.41%
20.94%
4.27%

2095.57
76.65
273.04
12.29
3.66%
4.50%
3.49%

1630.36
21.76
459.92
67.64
1.33%
14.71%
1.14%

1109.60
(38.98)
299.55
68.08
-3.51%
22.73%
-2.71%

2.00
88.61%
12.97%
11.49%
298.34
12.24%
17.56
2.13%
298.34
6.01%
0.79
16.83%
7.92%
14.96%

2.00
91.25%
20.68%
18.87%
239.10
19.86%
22.87
23.79%
239.10
11.84%
0.77
17.84%
7.92%
15.56%

1.51
91.43%
19.19%
17.54%
243.79
18.27%
17.67
19.23%
243.79
8.64%
0.66
13.31%
7.92%
11.48%

1.50
94.41%
33.52%
31.65%
308.64
32.29%
26.83
40.74%
308.64
12.23%
0.56
12.18%
7.92%
10.31%

1.26
92.22%
25.92%
23.90%
237.14
24.56%
16.14
25.23%
237.14
8.52%
0.56
18.68%
7.92%
13.95%

1170.13
1630.36
2800.49
0.42
0.58
14.15%
5.77%
4.97%

893.07
1109.60
2002.67
0.45
0.55
9.45%
2.30%
4.72%

Expected Cost of Debt:

Average Total Debt
Interest
Profit Before Tax
Tax
Cost of debt pre tax
Effective tax rate
Effective cost of debt post tax

Expected Cost of Equity:

DPS (Rs.)
Retention ratio (RR)
ROE (ROE)
Growth rate (g) = RR*ROE
Adjusted Share price
Gordon growth model
Adjusted EPS (Rs.)
EPS growth*
Adjusted Share price
EPS model
BETA
Market Return (Rm)*
Risk free rate (Rf)**
CAPM

Expected WACC (book value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

2156.72
2500.81
4657.53
0.46
0.54
7.10%
4.21%
8.36%

1756.12
2268.96
4025.08
0.44
0.56
11.07%
7.57%
9.20%

1358.99
2095.57
3454.56
0.39
0.61
9.31%
5.52%
6.63%

Expected WACC (market value):

AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)

4338.88
2500.81
6839.68
0.63
0.37
8.74%
4.79%
10.46%

4248.72
2268.96
6517.67
0.65
0.35
14.44%
9.21%
11.63%

3546.13
2095.57
5641.70
0.63
0.37
12.78%
6.73%
8.51%

3887.44
1630.36
5517.80
0.70
0.30
23.08%
8.96%
7.60%

8998.56
1109.60
10108.16
0.89
0.11
21.57%
7.29%
12.12%

Actual Returns:

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

NA
NA
NA

7.89%
279.63
12.97%

14.46%
363.1
20.68%

10.12%
260.74
19.19%

17.20%
392.27
33.52%

ROCE (average capital)

Net Profit
ROE (average share capital)

16

Jubilant Life Science: Charts & Graphs

0.42

0.45
0.55

0.58

0.61
0.39

0.6

0.44
0.56

0.8

Capital Structure : Weights of

Debt to Equity
0.46
0.54

1.0

0.4

15%
12%
9%
6%
3%

0.2

0%

0.0

Mar '12

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
Weight of Share Capital
Weight of Debt

24%

Expected WACC : Book Value

Expected WACC : Market Value

Mar '11

Mar '10

WACC (Gordon Growth Model)

Mar '09

Mar '08

WACC (EPS Model)

WACC (CAPM)

40%

18%

32%

12%

24%

Jubiliant Life Science : ROCE &

ROE

16%

6%

8%
0%
Mar '12

Mar '11

Mar '10

WACC (Gordon Growth Model)

WACC (CAPM)

Mar '09

Mar '08

WACC (EPS Model)

0%
Mar '11

Mar '10

ROCE (average capital)

Mar '09

Mar '08

ROE (average share capital)

Inference:
Over the past five years, it is visible that WACC using EPS method in both market value method and book value
method is lower as compared to CAPM or Gordons Growth Model.
Given the lower book value of equity as compared to market value, WACC under market value method is higher for
almost all the years.
Except the marginal rise in debt levels between the ranges of the period, debt to equity structure has more or less
remained constant as per the book value method. However, with price erosion in the past 1-2 years, the ratio of
debt to equity as per the market value has increased and subsequently the WACC has seen a decline.

17