S. K. Lab a pharmaceutical company in Western Indian was expected to have revenues of Rs. 50 lakhs in 2003, and report net income of Rs. 9 lakhs in that year.
The firm had a book value of assets of Rs. 110 lakhs and a book value of equity of Rs.58 lakhs at the end of 2002. Its market value then was Rs.85 per share.
The firm was expected to maintain sales in its niche product, a multivitamin tablet, and grow at 5% a year in the long term, primarily by expanding into the generic drug market. The beta of S. K. Lab traded in Mumbai Stock exchange was 1.25. The return on 10 year GOI bond in India in 2002 was 7% and the risk premium for stocks over bond is assumed to be 3.5%.
Do you consider the market price as the fair value of the shares of S.K. lab?
Waiting for your answer.
Thanks in advance
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Replies (1)
Hi,
When u capitalize earnings (ECM) (Rs. 10 FV share assumed) the value comes to Rs.85 which is in par with the MP of the share. However, the NAV and DCF Value(Assuming Cost of Equity = Cost of Capital and Net profit = Net Cash Flows) works to 19 and 27(after considering growth rate of 5% pa) respectively.
Assuming this is a earnings based company the share is fairly priced. However this valuation is only theoretical.
Any other suggestion or alternative answer is welcome.
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