CAPITAL BUDGETING OF THE HIMALAYA DRUG COMPANY

TERM PAPER MADE BY :SAUMYA TRIPATHI

ACKNOWLEDGEMENT

INTRODUCTION
The Himalaya Drug Company is a privately-held herbal healthcare company, established in 1930 by Mr. M. Manal. The company has 260 products in pharmaceutical and consumer care portfolios. It is spread across locations in India, United States, Middle East, South Asia, Europe and the CIS region, while its products are sold in 80 countries. The company has been granted eight international patents. Mr. Meraj Manal, the son of founder, Mr. M. Manal, is the Chairman of Himalaya Global Holdings Limited. The Executive Chairman is Mr. Ravi Prasad, who has served the company since 1991. The pharmaceutical and consumer care verticals are headed by Mr. Philipe Haydon and Mr. Saket Gore, respectively. In the 1920s, on a visit to Burma, Mr. M. Manal, saw restless elephants being fed with a root to pacify them. He discovered that the plant from which the roots were taken was Rauwolfia serpentina. When he had it tested, he found that it was a natural tranquilizer with anti-hypertensive properties. After four years of research, he launched Serpina, the worlds first natural antihypertensive drug.

CAPITAL BUDGETING
Capital budgeting(or investment appraisal) is the planning process
used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.[1] Many formal methods are used in capital budgeting, including the techniques such as

Accounting rate of return Net present value Profitability index Internal rate of return Modified internal rate of return Equivalent annuity

These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period.

Net present value

Each potential project's value should be estimated using a discounted cash flow (DCF) valuation, to find its net present value (NPV). (First applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem,

John Burr Williams: Theory.) This valuation requires estimating the size and timing of all the incremental cash flows from the project. (These future cash highest NPV(GE).) The NPV is greatly affected by the discount rate, so selecting the proper rate - sometimes called the hurdle rate - is critical to making the right decision. The hurdle rate is the Minimum acceptable rate of return on an investment. This should reflect the riskiness of the investment, typically measured by the volatility of cash flows, and must take into account the financing mix. Managers may use models such as the CAPM or the APT to estimate a discount rate appropriate for each particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. A common practice in choosing a discount rate for a project is to apply a WACC that applies to the entire firm, but a higher discount rate may be more appropriate when a project's risk is higher than the risk of the firm as a whole.

Internal rate of return

The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency. The IRR method will result in the same decision as the NPV method for (non-mutually exclusive) projects in an unconstrained environment, in the usual cases where a negative cash flow occurs at the start of the project, followed by all positive cash flows. In most realistic cases, all independent projects that have an IRR higher than the hurdle rate should be accepted. Nevertheless, for mutually exclusive projects, the decision rule of taking the project with the highest IRR - which is often used - may select a project with a lower NPV. In some cases, several zero NPV discount rates may exist, so there is no unique IRR. The IRR exists and is unique if one or more years of net

investment (negative cash flow) are followed by years of net revenues. But if the signs of the cash flows change more than once, there may be several IRRs. The IRR equation generally cannot be solved analytically but only via iterations

. One shortcoming of the IRR method is that it is commonly misunderstood to convey the actual annual profitability of an investment. However, this is not the case because intermediate cash flows are almost never reinvested at the project's IRR; and, therefore, the actual rate of return is almost certainly going to be lower. Accordingly, a measure called Modified Internal Rate of Return (MIRR) is often used. Despite a strong academic preference for NPV, surveys indicate that executives prefer IRR over NPV[citation needed], although they should be used in concert. In a budget-constrained environment, efficiency measures should be used to maximize the overall NPV of the firm. Some managers find it intuitively more appealing to evaluate investments in terms of percentage rates of return than dollars of NPV.

Equivalent annuity method

The equivalent annuity method expresses the NPV as an annualized cash flow by dividing it by the present value of the annuity factor. It is often used when assessing only the costs of specific projects that have the same cash inflows. In this form it is known as the equivalent annual cost (EAC) method and is the cost per year of owning and operating an asset over its entire lifespan. It is often used when comparing investment projects of unequal lifespans. For example if project A has an expected lifetime of 7 years, and project B has an expected lifetime of 11 years it would be improper to simply compare the net present values (NPVs) of the two projects, unless the projects could not be repeated. The use of the EAC method implies that the project will be replaced by an identical project.

Alternatively the chain method can be used with the NPV method under the assumption that the projects will be replaced with the same cash flows each time. To compare projects of unequal length, say 3 years and 4 years, the projects are chained together, i.e. four repetitions of the 3 year project are compare to three repetitions of the 4 year project. The chain method and the EAC method give mathematically equivalent answers.

The assumption of the same cash flows for each link in the chain is essentially an assumption of zero inflation, so a real interest rate rather than a nominal interest rate is commonly used in the calculations.Y

Real options
Real options analysis has become important since the 1970s as option pricing models have gotten more sophisticated. The discounted cash flow methods essentially value projects as if they were risky bonds, with the promised cash flows known. But managers will have many choices of how to increase future cash inflows, or to decrease future cash outflows. In other words, managers get to manage the projects - not simply accept or reject them. Real options analysis try to value the choices - the option value - that the managers will have in the future and adds these values to the NPV.

Ranked Projects
The real value of capital budgeting is to rank projects. Most organizations have many projects that could potentially be financially rewarding. Once it has been determined that a particular project has exceeded its hurdle, then it should be ranked against peer projects (e.g. - highest Profitability index to lowest Profitability index). The highest ranking projects should be implemented until the budgeted capital has been expended.

Funding Sources
When a corporation determines its capital budget, it must acquire said funds. Three methods are generally available to publicly traded corporations: corporate bonds, preferred stock, and common stock. The ideal mix of those funding sources is determined by the financial managers of the firm and is

related to the amount of financial risk that corporation is willing to undertake. Corporate bonds entail the lowest financial risk and therefore generally have the lowest interest rate. Preferred stock have no financial risk but dividends, including all in arrears, must be paid to the preferred stockholders before any cash disbursements can be made to common stockholders; they generally have interest rates higher than those of corporate bonds. Finally, common stocks entail no financial risk but are the most expensive way to finance capital projects.The Internal Rate of Return is very important.

THE HIMALAY DRUG COMPANY

The Beginnings . . . making of an Indian multinational The Himalaya Drug Company was founded in 1930 by Mr. M. Manal with a clear vision to bring Ayurveda to society in a contemporary form and to unravel the mystery behind the 5,000 year old system of medicine. This included referring to ancient ayurvedic texts, selecting indigenous herbs and subjecting the formulations to modern pharmacological, toxicological and safety tests to create new drugs and therapies. Eighty one years ago, on a visit to Burma, Mr. Manal saw restless elephants being fed with a root to pacify them. The plant from which this was taken is Rauwolfia serpentina. Fascinated by the plant's effect on elephants, he had it scientifically evaluated. After extensive research, Serpina , the world's first anti-hypertensive drug, was launched in 1934. The legacy of researching nature forms the foundation of Himalaya's operations. Himalaya has pioneered the use of modern science to rediscover and validate ayurveda's secrets. Cutting edge technology is employed to create pharmaceutical-grade ayurvedic products. As

a confirmation that Himalaya is dedicated to providing the highest quality and consistency in herbal care, the Company was awarded an ISO 9001:2000 certification in 2003.

Since its inception, the company has focused on developing safe, natural and innovative remedies that will help people lead richer, healthier lives. Today, Himalaya products have been endorsed by 300,000 doctors around the globe and consumers in 82 countries rely on Himalaya for their health and personal care needs.

Brand Identity . . .
the promise of health, well-being and a prescription for good living The Himalaya brand has much in common with the mountain range from which it draws its name. For centuries, the Himalayas have been an icon of aspiration, of man's quest to unlock Nature's secrets. They represent purity and lofty ideals. The fact that the Himalayas are the source of many of the herbs that are used in our products, makes our brand name all the more appropriate.

The Himalaya logo is a visual definition of its brand identity.

The leaf that forms the crossbar of the letter H evokes the company's focus on herbal healthcare. The teal green represents proximity to nature, while the orange is evocative of warmth, vibrancy and commitment to caring. The Himalaya brand carries with it the promise of good health and well-being.

Location
Starting off operations in Dehradun way back in the 1930s, the company later spread its wings to Mumbai and across the country. In 1975, the company set up an advanced manufacturing facility in Makali, Bangalore, India, which today houses the Corporate headquarters. In 1991, the company relocated its R&D facility to Bangalore.

Mission
Establish Himalaya as a science-based, problem-solving, head-toheel brand, harnessed from nature's wealth and characterized by trust and healthy lives. Develop markets worldwide with an in-depth and long-term approach, maintaining at each step the highest ethical standards. Respect, collaborate with and utilize the talents of each member of the Himalaya family and the local communities where Himalaya products are developed and/or consumed, to drive our seed-to-shelf policy and to rigorously adopt eco-friendly practices to support the environment we inhabit.

Products
Himalaya's products can broadly be categorized into three main ranges, viz:

Pharmaceutical Personal Care

Animal Health

Pharmaceutical Range . . . health maintenance,

eye, cardiac and skin care, immune booster and cough control The medicinal range of products carry the Himalayan hallmark of researching ayurveda and capturing its benefits in formulations. Using modern research methodology and manufacturing practice, Himalaya has made available to people all over the world, an alternate method of treatment, which has no known side effects. The medicinal range comprises over 35 products and is broadly classified into four categories viz:

Children's Health Men's Health Women's Health General Health

Liv.52, Bonnisan, Himplasia, Menosan, Reosto, Tentex Royal Prominent among Himalaya brands is Liv.52, a liver formulation, which is also the flagship brand of the company. Every one-third of a second, one unit of Liv.52 is bought somewhere in the world.

It is ranked number one in the hepatoprotective - lipotropic segment and number four among all pharmaceutical products in India. (ORG Marg, July 2003). Liv.52 celebrates fifty years in 2005. In 1972, continuing its tradition of introducing safe and natural remedies, Himalaya launched Bonnisan, a natural pediatric digestive tonic. A formulation based on years of research and clinical testing, the product found wide acceptance among doctors and mothers alike. The sweet tasting tonic became a trusted part of a baby's growing up. After extensive work on the formulations and related clinical research, Himalaya introduced Menosan, a herbal non-hormonal product for menopausal women, Reosto, a comprehensive therapy for osteoporosis and Himplasia, a unique product for benign prostatic hyperplasia, a new dimension in BPH management. Some of the other well known products are Abana, Cystone, Gasex, Geriforte, Rumalaya, Diabecon, Mentat, Koflet, Himcolin, Septilin, Pilex, PureHands, etc.

Personal Care Products . . . Health Care,

Oral Care, Hair Care, Skin Care and Baby Care. Himalaya has used its wealth of knowledge and research, in natural herbal remedies, to formulate a range of personal care products that cater to daily health needs. This range offers the goodness of natural solutions for daily use by the complete family.

The use of natural ingredients in personal care products has been practiced since time immemorial, leading to increased use of herbs with a curative value. Modern research proves that herbs while being effective are also mild and soothing. Launched in 1999, Himalaya Herbals is a range of natural herbal personal care products spanning Health Care, Oral Care, Hair Care, Skin Care and Baby Care. The range comprises of fairness cream, soap-free face washes, facial cleansers, face toners, moisturizers, soap-free shampoos, conditioners, hair-loss control, weight control, pimple control, foot care, multi-purpose creams, skin nutrients, dandruff control, antistress, digestive health, pain relievers, cough & cold relievers, oral care and baby care products.

Pure Herbs, Chyavanaprasha and Forest Honey

Pure Herbs, the pure and concentrated strength of a single herb in the right measure, stimulate & improve body functions. Himalaya Pure Herbs is a range of individual herb extracts. Each Pure Herb is the result of strict monitoring from the farm to the lab. At the lab, Himalaya's proprietary techniques are used to extract the optimum value of each herb. This is followed by rigorous tests by R&D team for potency and consistency.

The actions of these extracts benefit the body, irrespective of the individual's body constitution, state of health and metabolic functions. Everyone can benefit from the goodness of these herbs, irrespective of age, sex, body type or other health related factors.

The Pure Herbs range comprises of the following:

Amalaki: Useful in treating cough, cold, sore throat and respiratory tract infections. It protects cells from free radical damage and is an excellent anti oxidant. Arjuna: This herb improves blood circulation and is used as a tonic for the heart. Ashvagandha: Commonly known as Winter Cherry, this herb acts as an ant-stress agent that imparts a sense of well-being and helps in coping with life's daily stresses. Brahmi: A well-known herb that helps in improving general alertness. Karela: Commonly known as Bitter Gourd, it is known to aid in the metabolism of carbohydrates. Lasuna: Commonly referred to as Garlic, Lasuna helps in controlling the excess conversion of lipids and cholesterol. Neem: A popular herb, Neem has anti-bacterial, anti-fungal and blood purifying properties. It is very useful in skin disorders and helps maintain a healthy, beautiful and glowing skin. Shuddha Guggulu: It regulates fat metabolism and helps remove excess cholesterol from the body. Shallaki: This herb treats joint problems. Tagara: It has mild sedative properties, which are useful for insomnia and sleep disorders. Triphala: A digestive aid compound and a bowel cleanser. Tulasi: It has anti-microbial and anti-inflammatory properties, and is useful in
respiratory tract infections like dry or wet cough, cold and sore throat.

Chyavanaprasha: Himalaya Chyavanaprasha is a unique combination of ancient wisdom and modern science. Its natural ingredients are tested to ensure the highest levels of purity.

Honey: Pure unadulterated Himalaya Forest Honey is sourced from India's untouched forests.

Animal Health . . . bringing its expertise in health care to

animal care . . . leveraging R&D strengths in creating natural drugs and therapies . . . daily care for sensitive pets like cats & dogs The Himalaya legacy extends to animal health also. The Company offers well-researched, safe, animal health products, harnessed from nature's wealth to alleviate the suffering of animals, to improve their health and to increase their productivity. World-wide there is a growing concern about the presence of chemical contaminants in dairy, meat and poultry products. Taking a cue, The Himalaya Drug Company has extended its expertise to create Ayurvedic drugs and therapies for animal health care. Concern for animal welfare prompted Himalaya to launch the Animal Health Range of products for commercial livestock in July 1998. The products in this range alleviate the suffering of animals and improve their health. This results in healthy livestock whose animal products are safe for human consumption. Realizing the importance of companion animals in today's life, Himalaya launched the Companion Animal Care Range of products in 2000. Animal Care Range Prominent products

Appetonic Vet, Appetonic forte Vet, Diarex Vet, Galactin Vet, Himfertin Vet, Himpyrin Vet, Livestock HimROP Vet, Inflamin Vet, Liv.52 Vet, Liv.52

Protec, Rumalaya Vet, Scavon Vet, Speman Vet, Styplon Vet, Tentex forte Vet. Diarex PFS, Geriforte Vet, Liv.52 Protec, Nefrotec Vet, Speman Vet, Speman forte Vet, Tentex forte Vet. Geriforte Aqua, Liv.52 Protec. Aquaculture Anxocare, Canisep, Digyton, Erina, Erina EP, Erina Plus, Himpyrin, Immunol, Liv.52 Vet, Companion Nefrotec, Regurin, Scavon.

Poultry

Research & Development

. each

..

Himalaya product undergoes years of primary research and clinical trials before it reaches the market

Himalaya has a well-defined Research and Development policy. It states that no investment is too much when it comes to scientifically creating safe drugs and therapies. Himalaya's history is one of innovation through research. The company believes that the ideal healthcare system lies in the synergy between ayurveda and modern science. Himalaya's constant endeavor is to create innovative products that satisfy the health and personal care requirements of contemporary living. Himalaya prides itself on being a completely research-oriented company. Indeed, it is this emphasis on R&D that allows Himalaya to produce safe, efficacious and consistent remedies using ayurvedic principles. The R&D department is focused on product development, quality control and standardization. All products are derived through rigorous research and produced in state-of-the art facilities. The products represent commitment to continuous investment in the best people, practices and technology. Himalaya does not support "Borrowed Science" or the practice of using published literature to substantiate efficacy claims. Each Himalaya product undergoes years of primary research and clinical trials before it reaches the market.

THE HIMALAY DRUG COMPANY Profit & Loss account

------------------- in Rs. Cr. -------------------

Mar '11 Mar '10 Mar '09 Mar '08 Mar '07 12 mths 12 mths 12 mths 12 mths 12 mths

Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses

83.16 0.00 83.16 0.00 1.14 84.30 28.39 4.12 3.10 4.43 0.00 15.53 0.00 55.57 Mar '11 12 mths 28.73 28.73 8.77 19.96 3.08 0.00 16.88 0.00 16.88 1.52 15.36 27.18 0.00 0.00 0.00 504.32 3.05 0.00 29.46

68.97 0.00 68.97 3.65 3.44 76.06 23.69 3.91 2.68 1.24 16.44 3.78 0.00 51.74 Mar '10 12 mths 20.67 24.32 4.44 19.88 2.88 0.01 16.99 0.00 16.99 0.95 16.04 28.05 0.00 0.00 0.00 405.82 3.95 0.00 27.95

58.71 0.00 58.71 -0.48 8.25 66.48 21.21 4.12 2.30 0.97 16.20 2.35 0.00 47.15 Mar '09 12 mths 19.81 19.33 2.82 16.51 2.69 0.01 13.81 0.00 13.81 0.30 13.51 25.95 0.00 0.00 0.00 288.72 4.68 0.00 24.25

45.87 0.00 45.87 0.89 -0.18 46.58 12.93 2.87 1.77 0.80 13.44 1.82 0.00 33.63 Mar '08 12 mths 12.06 12.95 2.19 10.76 2.16 0.01 8.59 0.00 8.59 0.30 8.30 20.70 0.00 0.00 0.00 274.32 3.03 0.00 19.10

30.77 0.00 30.77 0.28 1.81 32.86 11.53 2.16 1.59 0.68 5.20 4.47 0.00 25.63 Mar '07 12 mths 6.95 7.23 0.97 6.26 1.53 0.41 4.32 0.37 4.69 -0.02 4.38 14.10 0.00 0.00 0.00 220.32 1.99 0.00 16.42

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

Source : Dion Global Solutions Limited

The Himalaya Drug Company

Balance Sheet ------------------- in Rs. Cr. ------------------Mar '11 Mar '10 Mar '09 Mar '08 Mar '07 12 mths 12 mths 12 mths 12 mths 12 mths
Sources Of Funds Total Share Capital 50.43 40.58 28.87 27.43 22.03

Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

50.43 0.00 0.00 98.13 0.00 148.56 93.59 0.00 93.59 242.15 Mar '11 12 mths

40.58 4.29 0.00 72.86 0.00 117.73 39.58 0.00 39.58 157.31 Mar '10 12 mths 82.42 21.52 60.90 47.52 0.00 21.29 22.85 0.37 44.51 8.71 0.00 53.22 0.00 3.56 0.79 4.35 48.87 0.00 157.29 18.72 27.95

28.87 5.23 0.00 41.14 0.00 75.24 33.40 5.07 38.47 113.71 Mar '09 12 mths 78.58 18.64 59.94 14.28 0.00 16.98 15.65 0.23 32.86 9.47 0.00 42.33 0.00 2.79 0.04 2.83 39.50 0.01 113.73 0.13 24.25

27.43 2.34 0.00 24.96 0.00 54.73 11.01 7.52 18.53 73.26 Mar '08 12 mths 45.11 15.95 29.16 22.13 0.00 8.76 10.74 0.37 19.87 3.82 0.00 23.69 0.00 1.69 0.03 1.72 21.97 0.02 73.28 10.81 19.10

22.03 0.00 0.00 14.14 0.00 36.17 9.15 6.75 15.90 52.07 Mar '07 12 mths 40.53 13.79 26.74 7.19 0.00 8.94 9.39 0.07 18.40 2.55 0.00 20.95 0.00 2.83 0.01 2.84 18.11 0.03 52.07 10.76 16.42

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

84.05 24.60 59.45 138.10 0.00 21.97 21.73 0.14 43.84 15.09 0.00 58.93 0.00 12.30 2.04 14.34 44.59 0.00 242.14 15.23 29.46

Source : Dion Global Solutions Limited

THE HIMALAYA DRUG COMPANY

Cash Flow

------------------- in Rs. Cr. -------------------

Mar '10 Mar '09 Mar '08 Mar '07 Mar '06 12 mths 12 mths 12 mths 12 mths 12 mths
Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities 16.04 14.12 -37.09 13.51 1.35 -25.62 8.30 9.12 -19.53 0.00 0.00 0.00 5.99 3.38 -11.59

Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents

23.11 0.14 0.23 0.37

24.13 -0.14 0.37 0.23

10.70 0.30 0.07 0.37

0.00 0.00 0.00 0.00

8.19 -0.02 0.06 0.04

Source : Dion Global Solutions Limited