Chapter 11

Case Studies In Valuation

 Bharat Hotels Company (BHC)

. 14 owned hotels . 21 managed hotels

 Strategy has been to serve the high end of the
international and leisure travel markets in major
metropolises, secondary cities, and tourist
destination.
 Major competitors in India are two other major Indian
hotel chains and a host of other five star hotels which
are extension of multinational hotel chains.
 BHC
BHCs operating revenues and expenses for the year just concluded (year 0) were as follows:

Operating Revenues Rupees (in million)

 Room rent 1043
 Food and beverages 678
 Management fees for managed properties 73

Operating Expenses
 Materials 258
 Personnel 258
 Upkeep and services 350
 Sales and general administration 350

BHC's assets and liabilities (in million rupees) at the end of year 0 were as follows:

Owner's Equity & Liabilities Assets

Net worth 1126 Net Fixed Assets 1510
Debt 900Gross Block : 2110
Accumulated depreciation: 600
Net Current Assets 516

2026 2026

BHC had no non-operating assets

 BHC
At the beginning of year 0, BHC owned 2190 rooms. It has
planned the following additions for the next seven years. Most of
the land needed by the company for these additions has been
already acquired.

Year Rooms Investment (in million rupees)

1 90 200
2 130 300
3 80 240
4 130 500
5 186 800
6 355 1400
7 150 1300

A good portion of investment in year 7 would be toward

purchase of land.
 BHC
Assumptions for financial projections
• Occupancy rate.. 60% for year 1. thereafter increase.. 1% per year for the
next 6 years.
• Average room rent per day: Rs. 2500 for year 1. It is expected to increase ..
15% per year till year 7.
 Food and beverage revenues are expected to be 65 percent of the room rent
 Material expenses, personnel expenses, upkeep and services expenses, and
sales and general administration expenses will be, respectively, 15, 15, 18,
and 18 percent of the revenues (excluding the management fees).
 Working capital (current assets) investment is expected to be 30 percent of
the revenues.
 The management fees for the managed properties will be 7 percent of room
rent. The room rent from managed properties will be more or less equal to
the room rent from owned properties.
 The depreciation is expected to be 7 percent of the net fixed assets.
 Given the tax breaks it enjoys, the effective tax rate for BHC will be 20
percent.
 BHC
Besides financial projections, the following information is
relevant for valuation.

 The market value of equity of BHC at the end of year 0 is Rs.

3050 million. The imputed market value of debt is Rs. 900 million.
 BHC's stock has a beta of 0.921
 The risk-free rate of return is 12 percent and the market risk
premium 8 percent.
 The post-tax cost of debt is 9 percent
 The free-cash flow is expected to grow at a rate of 10 percent per
annum after 7 years.

What is the DCF value of the firm?

 BHC

Financial Projections
PANEL I
Year 1 2 3 4 5 6 7

A. Rooms 2280 2410 2490 2620 2806 3161 3311

B. Occupancy rate 0.60 0.61 0.62 0.63 0.64 0.65 0.66
C. Average room rent 2500 2875 3306 3802 4373 5028 5783
(in rupees)

PANEL II*

D. Room rent from owned

properties 1248 1543 1863 2291 2866 3771 4612
E. Food & beverage 811 1003 1211 1489 1863 2451 2998
revenues
F. Revenue from owned
properties (D + E) 2060 2545 3074 3780 4729 6222 7610
G. Management fees from
managed properties 87 108 130 160 201 264 323
H. Total revenues (F+G) 2147 2653 3204 3940 4930 6486 7933

PANEL III *

I . Material expenses 309 382 461 567 709 933 1142

J. Personnel expenses 309 382 461 567 709 933 1142
K. Upkeep and service 371 458 553 680 851 1120 1370
LSales and general admn
expenses 371 458 553 680 851 1120 1370
M. Total operating 1359 1680 2029 2495 3121 4107 5023
expenses
 BHC
PANEL IV *
N. EBDIT (H-K) 788 973 1176 1445 1809 2380 2910
O. Depreciation 120 132 140 165 210 293 363
P. EBIT 668 841 1036 1280 1599 2087 2547
Q. NOPLAT 534 673 829 1024 1279 1669 2035
R. Gross cash 654 805 968 1189 1489 1962 2401
flow
S. Gross Investment
+ Current assets) 302 446 399 712 1085 1848 1716 (Fixed
assets)
T. Free cash
flow from 352 359 570 478 404 114 685
operations (R-S)
All figures in million rupee

Year 1 2 3 4 5 6 7

A. Net current assets * 516 618 764 924 1134 1419 1867
B. Net current assets addition* 102 146 159 212 285 448 416
C. Gross block * 2110 2310 2610 2850 3350 4150 5550
D. Capital exp * 200 300 240 500 800 1400 1300
E. Acc deprn * 600 720 852 992 1157 1366 1659
F. Net block (C+D- E) 1710 1890 1998 2358 2993 4184 5191
G. Depreciation 120 132 140 165 210 293 363
 BHC
Cost of Capital BHC has two sources of finance, equity and debt. The cost of capital for BHC is (see
Eq):

Cost = Weight of x Cost of + Weight of x Cost of Capital Equity

Equity Debt Debt

The weight of equity and debt, based on market value, are as follows;

Weight of Equity = 3050 = 0.772

3950

Weight of Debt= 900 = 0.228

3950

The cost of debt is given to be 9 percent. The cost of equity using the capital asset pricing model is
calculated below:

Cost of Equity of BHC = Risk-free rate + Beta of BHC( Market risk premium)
= 12 + 0.921(8) = 19.37

Given the component weights and costs, the cost of capital for BHC is:
(0.772)(19.37) + (0.228) (9) = 17.00 percent
 BHC
Continuing Value The continuing value may be estimated using
the growing free cash flow perpetuity method. The projected
free cash flow for year 7 is Rs. 678 million. Thereafter it is
expected to grow at a constant rate of 10 per cent per year.
Hence the expected continuing value at the end of the seventh
year is given by

CV7 = FCF8 = 685 (1.10) = Rs. 10764 million

k-g 0.17-0.10
 BHC
Calculation and Interpretation of Results The value of equity is equal to:
Discounted free cash flow during the explicit forecast period
+ Discounted continuing value +Value of non-operating assets
- Market value of debt claims ( as per excel spreadsheet calculation)

352 359 570 478 404 114

685
= + + + + + +
(1.17) (1.17)2 (1.17)3 (1.17)4 (1.17)5 (1.17)6
(1.17)7

10748
+ + 0 – 900
(1.17)7

= 4311 million
 BHC
Since the discounted continuing value [10764/(1.17) 7 = Rs.3587 million looms
large in this valuation, it is worth looking into it further. Its key determinant
appears to be the expected growth rate in the free cash flow beyond the explicit
forecast period. This has been assumed in the preceding analysis to be 10
percent. What happens to the estimate of equity value if the growth rate
happens to be different? The sensitivity of the estimate of equity value to
variations in the growth rate in a range of, say, 8 percent to 12 percent is shown
below:

Growth rate Equity value estimate

(per cent) (in million rupees)

8 3465
9 3836
10 4311
11 4945
 BHEL
In March 1992, BHEL was a 100 percent government-
owned company. In the wake of the economic reforms
initiated in 1991, BHEL felt that the scope for strategic
alliance with foreign companies had increased. It also
anticipated that the Government of India would
partially disinvest its stake in BHEL. In this context it
asked the author to do a valuation as on March 31,
1992 (the lien date).
 BHEL

The inputs for the valuation exercise came largely from

the five year plan BHEL had developed for the period
1992-1997. From the detailed financial projections
available in the plan, the free cash flow forecast for the
five year period, 1992-1997, was prepared, as shown in
the Exhibit 1. Surprisingly, while the company had
detailed plans and projections for five years, it did not
have any projections for the period thereafter. So, the
explicit forecast period was set at five years.
 BHEL
BHEL: Free Cash Flow Forecast

in million

1992-93 93-94 94-95 95-96 96-97

 Turnover 3350 3700 4200 5000 6000

 EBDIT (12%) 402 444 504 600 720

 Depreciation (3.12%) 104.5 115.4 131.0 156.0 187.2

 EBIT (8.88%) 297.5 328.6 373.0 444.0 532.8

 Tax rate 45% 40% 35% 35% 35%

 Tax 133.9 131.4 130.6 155.4 186.5

 NOPLAT 163.6 197.2 242.4 288.6 346.3

 Add: Depreciation 104.5 115.4 131.0 156.0 187.2

 Gross Cash Flow 268.1 312.6 373.4 444.6 533.5

 Less: (CAPEX + WC) 103.0 135.0 153.0 182.0 219.0

 Free Cash Flow 165.1 177.6 220.4 262.6 314.5

 BHEL
The free cash flow forecast was based on the following
assumptions:

 EBDIT, depreciation, and EBIT would be 12.00 percent, 3.12

percent, and 8.88 percent respectively of the turnover.
 The tax rate would be 45 percent for the year 1992-1993.
Thereafter it would decline by 5 percent each year for two
years and stabilise at 35 percent beyond two years. This
assumption was in line with the indication given by Dr.
Manmohan Singh, the Finance Minister.

The management of BHEL estimated its weighted average

cost of capital at 12.5 percent.

The terminal value at the end of 5 years was estimated as a

multiple (12X) of the free cash flow for year 5. The multiple was
judgmentally determined.
 BHEL
Given the above projection and assumptions, the
enterprise value was calculated as follows:
Present value of free cash flow during the explicit
forecast period:

PV 165.1 177.6 220.4 262.6 314.5

= + + + +
(FCF) (1.125) (1.125)2 (1.125)3 (1.125)4 (1.125)5

= Rs. 780.3 crore

Present value of horizon or terminal value:

PV (HV) = 314.5 X 1 2 x 1
(1.125)5
= Rs.2094.3 crore
Enterprise value = 780.3 + 2094.3
= Rs.2874.6 crore
 BHEL
On March 31, 1992, BHEL had a total debt of Rs. 775
crore on its balance sheet. It was assumed that the
book value of debt was a good proxy for its market
value.

So, the equity value was estimated as:

2874.6 - 775 = Rs. 2099.6 crore

As on March 31, 1992, BHEL had 24 crore shares

outstanding of Rs. 10 each. So, the imputed value per
share worked out to:

2099.6/ 24 = Rs. 87.5

 HLL - Tomco Merger
TOMCO
Market Prices on June 17, 1993: Rs. 52.50
As at 31.03.93 31.03.92 31.03.91

Face value (Rs) 10 10 10

Book value (Rs) 29.75 29.45 36.17

Dividend (%) - 12.5 20.06

Earnings per share (Rs) 0.30 0.50 5.19

HLL
Market Prices on June 17, 1993: Rs. 375
As at 31.12.92 31.12.91 31.12.90

Face value (Rs) 10 10 10

Book value (Rs) 23.80 20.75 27.36

Dividend (%) 42.0 38.5 42.0

Earnings per share (Rs) 7.03 5.73@ 6.29

@ There was a bonus issue in 1991.

With respect to valuation, the Bombay High Court
observed as follows:

1. In arriving at the fair exchange ratio the author has

considered all the three methods, namely, the yield
value, the asset value, and the market value of the
shares of both the companies and has given
appropriate weightages to each of the above values.
2. Since both the companies are in similar business,
uniform basis of capitalisation of profit has been
adopted in determining the yield value.
3. The valuation was confirmed by two other auditors
namely A.F. Ferguson and N.M. Raiji
With respect to valuation, Supreme Court observed as
follows:

1. If the market price basis as on 17.06.93 is adopted, the

exchange ratio of 2:15 was very fair.
2. If the yield method is adopted, the ratio would be
astronomically high in favour of HLL.
3. If book value is taken, then TOMCO shares would be
higher than HLL.
4. The question was what should be adopted for arriving at
a proper exchange ratio? The usual rule is that shares of
the going concern must be taken at quoted market value.

VALUATION:ICICI ICICI BANK

 JM MORGAN STANLEY
 DIVIDEND DISCOUNT ANALYSIS
 HISTORICAL MARKET PRICE ANALYSIS
 PRECEDENT TRANSACTION ANALYSIS
 Dividend Discount Analysis
Present value of the Present value of the
projected dividend + terminal value
stream for 7 years

The terminal value at the end of 7 years was

determined by applying the P/B multiple derived from
Gordon formula using an estimated sustainable (ROE)
and carrying out a sensitivity analysis assuming three
perpetual growth rates to year 2008 projected value.
Po ROE (1 + g) (1 - b)
=
Bo r-g
 Dividend Discount Analysis
 The dividend stream and “terminal value”
were discounted to the present value using
discount rates of 16.5%, 17.0%, and 17.5% for
ICICI and 14.9%, 15.4%, and 15.9% for ICICI
Bank.
 The investments and subsidiaries of ICICI and
ICICI Bank were separately valued and added
to the DDV
 1 equity share of ICICI Bank for 1.83 to 2.11
equity shares of ICICI.
 Historical Market Price
Analysis
 For the one week, one month, and three month
period ending Aug 31,2001, the price and volume
data .. equity shares of ICICI and ICICI Bank on
BSE, NSE and NYSE (ADR)..
 Data .. from Sept 1,2001 ignored because of
rumours .. transaction and 9/11.
 Volume - weighted average of closing market
price for one week, one month and 3-month .. 1
ICICI Bank to 1.44 .. 2.12 ICICI.
 One week volume – weighted average at NSE
2.04
 Precedent Transaction Analysis
 Seven international acquisition transactions that were
structured as minority squeeze-out transactions.
 The premium.(discount) paid in these transactions over
unaffected market prices ranged from a high of 28.0 percent
to a low of 15.2 percent.
 The share ER of 1:2 .. implied the following
premium/(discount) to the unaffected price of ICICI Bank on
August 30,2001

Premium/(discount)
B.S.E (1.7%)
N.S.E (1.4%)
N.Y.S.E 18.9%
 DSP Merrill Lynch
 Historical Market Price Analysis
 Dividend Discount Analysis
 Precedent Transaction Analysis

Market price data of ICICI Bank and ICICI shares

was examined for last 10 trading days to last 6
months.
1 ICICI Bank share for 1.6 to 2 ICICI shares
 Dividend Discount Analysis
 Forecast horizon of 6 years
 A number of operating assumptions
 The cash flow stream was based on the
maximum dividend payable subject to
regulatory constraints in respect of capital
adequacy and prudent transfers to statutory
reserves.
 COE : 17.6% to 19.6% for ICICI 16.5% to 18.5%
for ICICI Bank
 Terminal value : perpetual growth rates
 1 ICICI Bank share for 1.8 to 2.0 ICICI shares.
Precedent Transaction Analysis

Considering ICICI Bank as the target company, various

transactions involving Indian banks were considered
as appropriate comparables.

The following parameters were examined for each of

the selected transactions: (a) P/E ratio, (b) P/BV ratio,
and (c) Premium to 5 – day average market price.

ICICI Bank was valued based on the above

parameters, resulting in a share exchange ratio in the
range of 1 ICICI Bank share for 1.8 to 2.1 ICICI shares.
 Deloitte Haskins and Sells
 Net Asset Value Analysis
 Dividend Discount Analysis
 Historical Market Price Analysis
 NAV .. ICICI : 111.73
ICICI Bank : 67.45

1 share of ICICI Bank for 0.6 share of ICICI

 ICICI .. exposure to cyclical projects (steel)..
ICICI Bank .. New portfolio consisting mainly
of working capital advances.
 Felt that emphasis .. more on future earnings
potential .. less on NAV.
 Dividend Discount Analysis
Deloitte Haskins Sells performed a dividend
discount analysis based on estimates provided
by the respective companies. It valued
separately certain assets, like investment in
subsidiaries and other investments, which
were not considered as part of cash flow
generating assets.

Based on dividend discount analysis, it arrived

at an exchange ratio of 1 ICICI Bank share for
2.17 ICICI shares.
 Historical Market Price
Analysis
Although Deloitte Haskins and Sells looked at
historical prices over periods of 3 months, 6
months, and 12 months, it regarded the
period June – August 2001 to be
representative. The unaffected share prices of
the two companies during this period were Rs.
65.23 for ICICI and Rs. 126.29 for ICICI Bank.

Based on this, it established an exchange ratio

of 1 ICICI Bank share for 1.94 ICICI shares.
 Sasken Communication
Technologies
Set up in 1989, Sasken Communication
Technologies Limited (Sasken, hereafter)
provides telecommunication software
solutions and services to network equipment
manufactures, terminal device manufacturers,
and semiconductor companies around the
world. Headquartered in Bangalore, Sasken
has offices around the world. Sasken presently
employs about 1350 persons.
Sasken is an unlisted public company. It prepares
its financial statements in conformity with the
Indian GAAP (this is required mandatorily) as
well as the US GAAP (this is done optionally).
Sasken plans to issue stock options to its
employees in April 2004. Sasken wants to
ascertain the intrinsic value of its equity shares
to structure its employee stock option scheme
and determine the compensation cost
associated with it.
 Sasken Communication Financials
Rs. in million

(other than per share data)

00 - 01 01 - 02 02 - 03 03 - 4
Net Sales 1428.3 1086.3 1092.6 1636.0
PAT 281.1 (156.4) 12.7 170.1
Net Profit margin (%) 19.7 (14.4) 1.2 10.4%
Equity capital (Rs.5 125.7 126.7 127.1 151.6
par)
Net worth 1017.0 905.2 1012.6 1163.0
Debt 317.7 353.9 267.5 14.0
Return on net worth 27.6% (17.3%) 0.1% 14.6%
Earnings per share 11.2 (6.2) 0.05 5.6
book value per share 40.0 35.6 40.0 38.4
Sales per share 56.1 42.8 43.0 54.7
 Sasken’s future looks promising for the
following reasons: (a) The global; telecom
market is recovering (b) Sasken is well –
positioned in those segments of the telecom
market which are growing rapidly. (c) Sasken
has restructured its licensing arrangement
with its customers and this is expected to
augment its overall income from licensing.
 The software industry in India comprises of firms
varying widely in terms of size, focus area,
revenue-mix (from products and services),
technological intensity, and so on.

Sasken’s focus is exclusively on

telecommunication software solutions and
services. Among the listed software companies in
India, Hughes Software is perhaps closest to
Sasken in terms of focus. Subex Systems is
another company that may be used as a reference
company.
 Hughes Software Financials
Rs. in million
(other than per share data)
00 - 01 01 - 02 02 - 03 03 - 04
Net Sales 1985.4 2348.8 2203.7 3440
PAT 629.3 522.5 378.4 748.0
Net profit margin 31.7% 22.3% 17.2% 21.7%
Equity capital (Rs. 5 par) 167.1 167.5 168.0 168.0
Net worth 2001.3 2469.2 2651.5 3333.1
Debt - - - -
Return on net worth 31.4% 21.2% 14.3% 22.4%
Earnings per share 18.8 15.6 11.3 22.3
Book value per share 59.9 73.7 78.9 99.2
Sales per share 59.4 70.1 65.6 102.4
*Annualised on the basis of 9 months performance upto 31/12/03
@ Assuming a dividend rate of 40 percent
 Subex Systems Financials
Rs. in million
(other than per share data)
00 - 01 01 - 02 02 - 03 03 - 04
Net Sales 552.4 591.8 700.1 837.7
PAT 102.8 41.8 96.1 171.9
Net profit margin 18.6% 7.1% 13.7% 20.5%
Equity capital (Rs. 5 par) 71.3 71.3 73.4 73.4
Net worth 488.5 367.2 474.9 639.5
Debt 123.1 304.6 437.2 -
Return on net worth 21.0% 11.4% 20.2% 26.9%
Earnings per share 14.4 5.9 13.1 23.4
Book value per share 68.5 51.5 64.7 87.1
Sales per share 77.5 83.0 95.4 114.1
*Annualised on the basis of 9 months performance upto 31/12/03
@ Assuming a dividend rate of 40 percent
 The market price per share of Hughes Software and Subex Systems as
on March 23, 2004 was:
Hughes Software : Rs.570
Subex Systems : Rs.280
The relevant multiples for Hughes Software and Subex Sytems are:

Hughes Software Subex System

Price to earnings per share 25.6 12.0
Price to book value 5.75 3.21
Price to sales share 5.62 2.45
 A comparison of Hughes Software, Subex
Systems, and Sasken suggests that:

 In terms of turnover Hughes is nearly twice the

size of Sasken which in turn is nearly twice the size
of Subex.
 Hughes Software has a renowned international
parent. Sasken and Subex Systems do not have
that advantage
 Sasken has historically displayed greater volatility
in performance compared to Hughes Software and
Subex Systems.
 Taking into account factors like size, volatility,
technological intensity, international affiliation,
capital structure and corporate governance,
appropriate multiple values for Sasken were
judgmentally estimated as follows:

P/E : 12.0
P/B : 3.3
P/S : 2.5
 Based on these multiple values estimates for Sasken are:

 Value estimate based on P/E multiple = 12.0 x 5.6 = Rs. 67.2

 Value estimate based on P/B multiple = 3.3 x 38.4 = Rs. 126.7
 Value estimate based on P/S multiple = 2.5 x 54.7 = Rs. 136.8

Taking a simple arithmetic average of these three estimates,

get a direct comparison value of:

67.2+ 126.7 + 136.8

= Rs. 110.2
3
Valuation of Infosys Brand (Extracted from the
2008-2009 Annual Report of Infosys)

Infosys adapted the generic brand-earnings

multiple model (given in the article ‘Valuation
of Trademarks and Brand Names’ by Michael
Birkin in the book Brand Valuation, edited by
John Murphy and published by Business
Books Limited, London) to value its corporate
brand.
 Valuation of Infosys Brand
The methodology followed for valuing the brand is given
as follows

 Determine brand profits by eliminating the non-brand

profits from the total profits.
 Restate the historical profits at present-day values.
 Provide for the remuneration of capital to be used for
purposes other than promotion of the brand.
 Adjust for taxes.
 Determine the brand-strength or brand-earnings
multiple.
 Valuation of Infosys Brand

Brand-strength multiple is a function of a multitude

of factors such as leadership, stability, market,
internationality, trend, support and protection. We
have internally evaluated these factors on a scale of 1
to 100, based on the information available within.
Rs in. crore

2009 2008 2007

Brand value 32,345 31,863 31,617

Market capitalisation 75,837 82,362 1,15,307

Brand value as a percentage of market capitalisation 42.7% 38.7% 27.4%

Brand value / revenue (x) 1.49 1.91 2.28

 Valuation of Infosys Brand
Brand Valuation
Rs. in crore

2009 2008 2007

Profit before interest and tax 6,907 5,344 4,245

Less: Non-brand income 426 634 335

Adjusted profit before tax 6,481 4,710 3,910

Inflation factor 1.000 1.092 1.192

Present value brand profits 6,481 5,142 4,660

Weightage factor 3 2 1

Weighted average profits 5,731 - -

Remuneration of capital 801 - -

Brand-related profits 4,930 - -

Tax 1,676 - -

Brand earnings 3,254 - -

Brand multiple 9.94 - -

Brand value 32,345 - -

 Valuation of Infosys Brand
Assumptions:

 The figures above are based on consolidated Indian

GAAP financial statements.
 Brand revenue is total revenue excluding other income
after adjusting for cost of earning such income, since
this is an exercise to determine our brand value as a
company and not for any of our products or services.
 Inflation is assumed at 8.4% per annum, 5% of the
average capital employed is used for purposes other
than promotion of the brand and tax rate is at 33.99%.
 The earnings multiple is based on our ranking against
the industry average based on certain parameters
(exercise undertaken internally and based on available
information).
 CADMIN PHARMA5

Cadmin Pharma is a multinational pharmaceutical company headquartered in Hyderabad.

The company has three state-of-the-art manufacturing facilities in Hyderabad,
Ahmednagar, and Gangtok and a new facility coming up in Dahej SEZ. The company has
an excellent track record of exports through 15 subsidiaries, the principal ones being in
Brazil, Germany, Russia, and the U.S. Cadmin has a large R&D centre in Hyderabad with
over 700 scientific personnel engaged in development and discovery research.
The company’s strategy for emerging markets is to piggy-ride on the generic product
portfolio developed for the large regulated markets (EU, US, and Brazil) and market these
products either through front end marketing with own field force or through distributors.
The company has identified Indonesia as an attractive market to enter.
Indonesia has a population of 242 million and an ethical pharmaceutical market valued at
USD 2.5 billion, growing at a rate of 12 percent. There are 212 companies operating in the
Indonesian pharmaceutical market. Out of this, 31 are innovator companies with a market
share of 32 percent. Indonesian and other generic companies have a market share of 68
percent (in value).
Cadmin Pharma is primarily planning to enter into the areas of its competitive strength,
i.e., the therapeutic areas of Cardiovascular, Diabetology, and Central Nervous System.
As per Indonesian law, the company needs to have a local manufacturing facility for getting
marketing authorisations. Hence, the company has considered it appropriate to acquire a
company having a local manufacturing facility. Such an acquisition will help the company
fast track the submission of relevant dossiers and consequent marketing of the products.
Presently, Indonesia permits foreign direct investment up to 75 percent of equity. Hence,
the remaining 25 percent will have to be held by Indonesian investors.
After actively exploring acquisition opportunities over one year, Cadmin
Pharma has identified an Indonesian company viz., PT AMIDCO DJAJA
Pharmaceuticals (AMIDCO), which has a manufacturing facility in
Indonesia. AMIDCO is engaged in production and sales of generic
pharmaceuticals in Indonesia.
AMIDCO was set up in 1967 by Mr. Hamid and his family which presently
holds 100 percent of the paid-up equity capital of IDR 31,500,000,000
(equivalent to 3,433,500 USD). AMIDCO has 171 employees with a
manufacturing facility spread over 5100 square metres. Its area of land,
including manufacturing facility, is 11400 square metres. AMIDCO’s plant
has the local FDA approval.

Proposed Ownership and Capital Investment

Presently, Indonesia permits foreign direct investment up to 75 percent of

equity. The remaining 25 percent must be held by a local entity. It is
proposed to acquire 100 percent equity of AMIDCO from Mr. Hamid and his
family. 75 percent of equity will be acquired by Cadmin Pharma and the
balance 25 percent of equity will be held by a yet-to-be-identified local
entity. Once Indonesian laws permit 100 percent FDI by a foreign entity in
pharmaceutical sector, Cadmin Pharma will take the necessary steps to step
up its stake.
Cadmin Pharma will invest additional funds by way of equity and debt for
expansion and modernisation of existing plant, acquisition of additional
land, and working capital. The expansion and modernisation of the plant to
its quality standards will cost USD 16.2 million and the purchase of
additional 6000 metres of adjoining land will cost USD 1.65 million.

The business plan is as follows:

• Complete legal and other formalities in about six months time.
• Submit dossiers from January 2013 which require an approval time of 18
to 24 months.
• Upgrade and expand the plant in about 2 years with a capacity of 750
million tablets per year.
• Increase the marketing field force to 300 representatives initially and
expand it to 600 in 5 years.

Financial Projections
Based on this plan, Cadmin Pharma has developed cash flow projections for
the next ten years. Beyond ten years, the free cash flow is expected to grow
at the rate of 6 percent year. The cash flow projections are given below:
 CASH FLOW PROJECTIONS
in lakhs
Year 0 1 2 3 4 5 6 7 8 9 10

FY FY FY FY FY FY FY FY FY FY FY
12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23

Sales - 0 0 0 12,690 19,989 29,487 39,078 46,839 54,210 63,876

COGS - (0) (0) (0) (2,742) (4,107) (6,060) (7,854) (9,399) (10,29 (13,002)
3)

Contribution - 0 0 0 9,948 15,882 23,427 31,224 37,440 43,917 50,874

Marketing exp (558) (441) (3,414) (9,303) (14,37 (17,391) (21,69 (25,593) (29,42 (33,315)
0) 3) 4)

Admin exp (0) (0) (0) (222) (351) (576) (786) (933) (1,086) (1,257)

R&D exp (453) (2,640) (1,650) (1,710) (1,263) - - - -

(Exhibit batch +
Dev)
Tax (237) (2,586) (3,249)

Working capital (0) (0) (3,369)

Add: 117 162 198 282 351 417 486 567

Depreciation
Construction / (2,460) (4,893) (1,632) (408) (408) (408) (408) (408) (408) (408) (408)
Additional land
cost
Free cash flow (2,460) (5.451) (2,526) (6,345) (6,297) (3,486) 489 5,142 8,037 7,986 10,147

Present value 1.00 0.862 0.743 0.641 0.552 0.476 0.410 0.354 0.305 0.263 0.227
factor at 16%
DCF Valuation

While the free cash flow (FCF) grows in an uneven manner over the 10-year
period, it is expected to grow at a constant rate of 6 percent beyond 10
years. So we can regard 10 years as the explicit forecast period (or planning
period).
The DCF value of the acquisition is:
DCF value of acquisition = Present value of FCF during the 10-year
planning period + Present value of terminal value

Present value of FCF during the 10-year planning period

= –2460(1.00) – 5451(0.862) – 2526(0.743) – 6345(0.641)
6297(0.552) – 3486(0.476)+ 489(0.410) + 5142(0.354) +
8037(0.305) + 7986(0.263) + 10147(0.227)
=- 9362 lakh
Present value of terminal value = 10147 ( 1.06)/(0.16-0.06) x 1/(1.16)10
= 24382 lakh

So, DCF value of acquisition = - 9364 + 24382 = 15020 lakh

THANK YOU