International Journal of Research in Engineering, IT & Social Sciences (ISSN 2250-0588)

IMPACT FACTOR: 5.07

(Volume 4, Issue 12, December 2014)
VALUATION OF EQUITY RISK OF SELECTED PHARMACEUTICAL
STOCKS IN INDIA
Sunil M Rashinkar
Assistant Professor, Community Institute of Management Studies, Affiliated to Bangalore
University, Bangalore, Research Scholar, Tumkur University, Tumkur

ABSTRACT
Pharmaceutical companies are doing well in India. The beta of Sun Pharma was 0.37, Ranbaxy
was 0.42 and Cipla was 0.48. When compare entire beta of all pharmaceutical companies, they
have less than the market beta which is 1. It is preferable to invest the savings in pharmaceutical
companies in the Indian context. The many external factors are affecting the stock market
volatility, viz. economic condition of the country, politic factor, exchange risk factor, inflation
risk factor, interest risk factor, etc. The investors should be consider the above all the factors for
investing on the equity shares of the Indian context.
Keywords: Beta,Equity Shares, India, Pharmaceutical Companies, Valuation.

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 International Journal of Research in Engineering, IT & Social Sciences (ISSN 2250-0588)
IMPACT FACTOR: 5.07
(Volume 4, Issue 12, December 2014)
INTRODUCTION
The probability of financial loss is called risk. The fluctuation of the equity share depends on
many parameters, even the pharmaceutical industry also not excluding from the fluctuation of the
equity shares. The risk is divided into two types, viz. systematic risk and unsystematic risk. The
systematic risk are whose risk which is uncontrollable by an individual company, viz. market
risk, inflation risk, interest rate risk, exchange risk. Unsystematic risks are whose risk which can
be controllable by an individual company, viz. specific risk to the company.When the
unsystematic risk is zero of a particular company, then the remaining risk is called the beta
coefficient of the equity share. Beta is the systematic risk of the stock and which cannot be avoid
by the investor in the portfolio management. In finance, the beta (β) of an investment is a
measure of the risk arising from exposure to general market movements as opposed to
idiosyncratic factors. The market portfolio of all investable assets has a beta of exactly 1. A beta
below 1 can indicate either an investment with lower volatility than the market, or a volatile
investment whose price movements are not highly correlated with the market. An example of the
first is a treasury bill: the price does not go up or down a lot, so it has a low beta. An example of
the second is gold. The price of gold does go up and down a lot, but not in the same direction or
at the same time as the market.1
The Indian pharmaceutical industry is one of most influential industry in the national stock
exchange. Here more than 30 pharmaceutical companies listed and trading on the daily bases.
The investors have been investing on the pharmaceutical companies, keeping in the mind of
good returns in the near future. As far as, the growth of pharmaceutical companies is concern, it
is growing at a rate of 15 per cent per annum. High burden of disease, good economic growth
leading to higher disposable incomes, improvements in healthcare infrastructure financing are
driving growth in the domestic market.2

1
Sharpe, William (1970). Portfolio Theory and Capital Markets. McGraw-Hill Trade.
2
http://www.pwc.in/press-releases/india-pharmaceutical-industry-is-on-a-good-growth-path.jhtml

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 International Journal of Research in Engineering, IT & Social Sciences (ISSN 2250-0588)
IMPACT FACTOR: 5.07
(Volume 4, Issue 12, December 2014)
REVIEW OF LITERATURE
Diamond (1967)3investigated that, the distributed profits have a greater impact on equity share
prices than retained earnings. He also investigated that, the price earnings ratio of the share of a
firm with a given investment policy are invariant to alternative earnings pay out rations.
Pointon (1996)4said in his studies, the valuation of share mainly depends on the possibility of
shareholding periods extending more than one year, capital gains taxes paid on realized gains,
income taxes, and indexation for inflation.
Zhang and Zhao (2004)5 investigated the segmentation between the domestic market and
foreign market using the Chinese stock market as base. The investigator used the listed
companies issuing class A shares to domestic investors, and class B shares to foreign investors
respectively. Both class A and class B traded differently. But, foreign investors would require a
higher rate of return to adjust for the country specific risk related to the Chinese stock market.
The country irks of China can be decomposed into exchange rate risk, interest rate risk etc.
OBJECTIVES OF THE STUDY
1. To find the factors affecting the valuation of pharmaceutical equity shares in India.
2. To find out beta coefficient of selected pharmaceutical equity shares in India.
3. To recommend the pharmaceutical equity shares based on beta coefficient.
SCOPE OF THE STUDY
The one year data have been taken from the national stock exchange of India. The scope of the
study covers the one year from 1 st November, 2013 to 30th October, 2014. The daily price of
three equity share prices has been taken for the study.
METHODOLOGY OF THE STUDY
The daily price quoting was taken for the study and net asset value was calculated on daily basis
using the following formula.

3
Diamond, James J. (1967). Earning Distribution and the Valuation of shares: Some Recent Evidence, Journal of
Financial & Quantitative Analysis, Vol. 2 Issue 1, pp. 15-30.
4
Pointon, John (1996). Inflation, Taxation and the Valuation of Shares,Accounting & Business Research (Wolters
Kluwer UK), Vol. 27 Issue 1, pp. 51-57.
5
Zhang, Yimin; Zhao, Ronald. (2004). The Valuation Differential between Class A and B Shares: Country Risk in the
Chinese Stock Market.Journal of International Financial Management & Accounting, Vol. 15 Issue 1, p44-59.

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 International Journal of Research in Engineering, IT & Social Sciences (ISSN 2250-0588)
IMPACT FACTOR: 5.07
(Volume 4, Issue 12, December 2014)

After calculating the net asset value of each equity share on daily basis, the beta coefficient have
been calculated on month basis for twelve months for three pharmaceutical companies, which
was listed on national stock exchange of India, using the following formula.

Analysis
Table No.: 1
SUN PHARMA
Month Beta
Nov-13 0.3978
Dec-13 0.3689
Jan-14 -0.1425
Feb-14 -0.0143
Mar-14 0.3931
Apr-14 1.8735
May-14 -0.0231
Jun-14 0.0681
Jul-14 -0.2638
Aug-14 0.5337
Sep-14 0.9022
Oct-14 0.4047
Analysis
From the above table depicted that the beta of sun pharmaceutical is volatile very drastically
during the month of April 2014, because of the general election in India. But, in the month of
January, February, May, and July the value of beta was negative i.e., -0.1425, -0.0143, -0.0231,

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 International Journal of Research in Engineering, IT & Social Sciences (ISSN 2250-0588)
IMPACT FACTOR: 5.07
(Volume 4, Issue 12, December 2014)
and -0.2638 respectively. The remaining months the beta of security was moved with the market
returns.

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 International Journal of Research in Engineering, IT & Social Sciences (ISSN 2250-0588)
IMPACT FACTOR: 5.07
(Volume 4, Issue 12, December 2014)
Graph No.: 1

Sun Pharmaceuticals

1.8735
2.0000

1.5000
Beta of the Security

0.9022
1.0000
0.5337
0.3978 0.3689 0.3931 0.4047
0.5000
0.0681
0.0000
-0.0143 -0.0231
-0.1425
-0.5000 -0.2638

Month

Inference
From the graph depicted that the beta of the sun pharmaceuticals for a year from November 2013
to October 2014 is 0.3748. It shows that the beta of the sun pharmaceuticals had moderate of
beta when compare with the market beta which is always 1.
Table No.: 2
RANBAXY
Month Beta
Nov-13 0.6136
Dec-13 0.5228
Jan-14 0.0730
Feb-14 1.2719
Mar-14 0.1410
Apr-14 0.0846
May-14 -0.2695
Jun-14 -0.2977
Jul-14 -0.2048
Aug-14 0.8962

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 International Journal of Research in Engineering, IT & Social Sciences (ISSN 2250-0588)
IMPACT FACTOR: 5.07
(Volume 4, Issue 12, December 2014)
Sep-14 1.6654
Oct-14 0.6864
Analysis
From the above table depicted that the beta of the Ranbaxy Laboratories limited was not much
volatile except in the month of February and September 2014. But, in the month of May, June,
and July consistantly it was negative to the market returns.
Graph No.: 2

Ranboxy

2.0000 1.6654

1.5000 1.2719
Beta of the Security

0.8962
1.0000 0.6864
0.61360.5228
0.5000
0.0730 0.14100.0846

0.0000

-0.5000 -0.2695-0.2977-0.2048

Month

Inference
From the above graph depicted that the beta of Ranbaxy Laboratories Limited has high risk in
the month of February and September 2014. During the month of November, December, 2013
and August, October 2014 the beta was quit close to the market risk.
Table No.: 3
CIPLA
Month Beta
Nov-13 0.5371
Dec-13 0.3520
Jan-14 0.7240
Feb-14 0.3625

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 International Journal of Research in Engineering, IT & Social Sciences (ISSN 2250-0588)
IMPACT FACTOR: 5.07
(Volume 4, Issue 12, December 2014)
Mar-14 -0.0444
Apr-14 0.3916
May-14 0.3762
Jun-14 -0.2908
Jul-14 0.4923
Aug-14 1.3820
Sep-14 1.3396
Oct-14 0.3566
Analysis
From the above table depicted that the beta of Cipla Limited. The beta of the security was
positive from the month of November 2013 to October 2014 except in the month of March and
June 2014. During the month of August and September 2014 the beta of the security was quiet
high.
Graph No.: 3

Cipla
1.3820 1.3396
1.4000
1.2000
1.0000
Beta of the Security

0.7240
0.8000
0.5371 0.4923
0.6000 0.3916 0.3762
0.3520 0.3625 0.3566
0.4000
0.2000
0.0000
-0.2000 -0.0444
-0.4000 -0.2908
Month

Inference
From the above graph depicted that the beta of the security of Cipla Limited was moving along
with the market beta except in the month of March and June which was negative and August and
September which was extremely high.
LIMITATIONS

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 International Journal of Research in Engineering, IT & Social Sciences (ISSN 2250-0588)
IMPACT FACTOR: 5.07
(Volume 4, Issue 12, December 2014)
1. The study contains only the pas one year data.
2. The study focused on selected pharmaceutical companies listed in the NSE.
CONCLUSION
The pharmaceutical companies are doing well in India. The Sun Pharmaceuticals, Ranbaxy, and
Cipla’s mean betas of the three companies are 0.3748, 0.4319, and 0.4982 respectively. The Sun
Pharmaceuticals beta is lesser than other two companies. But, all three companies are better to
invest because the entire beta coefficient was less than market beta which is 1. Investors can
invest their savings into any of the three pharmaceutical companies.
REFERENCES
1. Diamond, James J. (1967). Earning Distribution and the Valuation of shares: Some
Recent Evidence, Journal of Financial & Quantitative Analysis, Vol. 2 Issue 1, pp. 15-
30.
2. http://www.pwc.in/press-releases/india-pharmaceutical-industry-is-on-a-good-growth-
path.jhtml
3. Pointon, John (1996). Inflation, Taxation and the Valuation of Shares, Accounting &
Business Research (Wolters Kluwer UK), Vol. 27 Issue 1, pp. 51-57.
4. Sharpe, William (1970). Portfolio Theory and Capital Markets. McGraw-Hill Trade.
5. Zhang, Yimin; Zhao, Ronald. (2004). The Valuation Differential between Class A and
B Shares: Country Risk in the Chinese Stock Market.Journal of International Financial
Management & Accounting, Vol. 15 Issue 1, p44-59.s

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