Intrinsic value of Dr. Reddy's Laboratories ADR - RDY

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$41.53

  Intrinsic Value

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  Value-price divergence*

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$41.53

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of RDY stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 6.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -8.98
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  2,108
  157,802
  161,432
  165,580
  170,238
  175,399
  181,062
  187,228
  193,903
  201,094
  208,812
  217,068
  225,878
  235,258
  245,227
  255,806
  267,016
  278,882
  291,431
  304,690
  318,690
  333,462
  349,041
  365,462
  382,763
  400,985
  420,171
  440,365
  461,615
  483,971
  507,486
Variable operating expenses, $m
 
  81,418
  83,282
  85,412
  87,804
  90,455
  93,362
  96,529
  99,957
  103,649
  107,612
  111,467
  115,991
  120,808
  125,927
  131,359
  137,116
  143,210
  149,654
  156,462
  163,651
  171,237
  179,237
  187,669
  196,554
  205,911
  215,763
  226,133
  237,045
  248,525
  260,600
Fixed operating expenses, $m
 
  48,372
  49,581
  50,821
  52,091
  53,393
  54,728
  56,096
  57,499
  58,936
  60,410
  61,920
  63,468
  65,055
  66,681
  68,348
  70,057
  71,808
  73,603
  75,443
  77,330
  79,263
  81,244
  83,276
  85,357
  87,491
  89,679
  91,921
  94,219
  96,574
  98,988
Total operating expenses, $m
  1,906
  129,790
  132,863
  136,233
  139,895
  143,848
  148,090
  152,625
  157,456
  162,585
  168,022
  173,387
  179,459
  185,863
  192,608
  199,707
  207,173
  215,018
  223,257
  231,905
  240,981
  250,500
  260,481
  270,945
  281,911
  293,402
  305,442
  318,054
  331,264
  345,099
  359,588
Operating income, $m
  202
  28,012
  28,569
  29,347
  30,343
  31,551
  32,971
  34,603
  36,448
  38,509
  40,790
  43,681
  46,419
  49,395
  52,619
  56,098
  59,843
  63,864
  68,174
  72,784
  77,709
  82,962
  88,559
  94,517
  100,852
  107,583
  114,729
  122,311
  130,351
  138,872
  147,897
EBITDA, $m
  355
  38,293
  39,077
  40,116
  41,404
  42,936
  44,711
  46,730
  48,993
  51,505
  54,270
  57,294
  60,585
  64,150
  67,998
  72,141
  76,589
  81,354
  86,451
  91,893
  97,695
  103,875
  110,449
  117,437
  124,857
  132,730
  141,080
  149,929
  159,301
  169,224
  179,723
Interest expense (income), $m
  14
  374
  414
  460
  513
  572
  638
  711
  790
  875
  967
  1,065
  1,171
  1,283
  1,403
  1,531
  1,666
  1,809
  1,961
  2,121
  2,291
  2,469
  2,658
  2,857
  3,067
  3,288
  3,521
  3,766
  4,024
  4,296
  4,582
Earnings before tax, $m
  219
  27,638
  28,155
  28,887
  29,830
  30,979
  32,333
  33,892
  35,658
  37,634
  39,823
  42,616
  45,248
  48,112
  51,216
  54,567
  58,177
  62,055
  66,213
  70,663
  75,418
  80,493
  85,901
  91,660
  97,785
  104,295
  111,208
  118,545
  126,327
  134,576
  143,315
Tax expense, $m
  39
  7,462
  7,602
  7,800
  8,054
  8,364
  8,730
  9,151
  9,628
  10,161
  10,752
  11,506
  12,217
  12,990
  13,828
  14,733
  15,708
  16,755
  17,878
  19,079
  20,363
  21,733
  23,193
  24,748
  26,402
  28,160
  30,026
  32,007
  34,108
  36,335
  38,695
Net income, $m
  180
  20,176
  20,553
  21,088
  21,776
  22,615
  23,603
  24,741
  26,031
  27,473
  29,071
  31,109
  33,031
  35,122
  37,387
  39,834
  42,469
  45,300
  48,336
  51,584
  55,055
  58,760
  62,708
  66,911
  71,383
  76,135
  81,182
  86,538
  92,219
  98,240
  104,620

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  598
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  3,109
  170,967
  174,899
  179,394
  184,440
  190,032
  196,167
  202,848
  210,080
  217,871
  226,232
  235,177
  244,722
  254,884
  265,685
  277,146
  289,291
  302,148
  315,743
  330,109
  345,276
  361,281
  378,159
  395,950
  414,694
  434,437
  455,223
  477,102
  500,125
  524,346
  549,822
Adjusted assets (=assets-cash), $m
  2,511
  170,967
  174,899
  179,394
  184,440
  190,032
  196,167
  202,848
  210,080
  217,871
  226,232
  235,177
  244,722
  254,884
  265,685
  277,146
  289,291
  302,148
  315,743
  330,109
  345,276
  361,281
  378,159
  395,950
  414,694
  434,437
  455,223
  477,102
  500,125
  524,346
  549,822
Revenue / Adjusted assets
  0.840
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
  0.923
Average production assets, $m
  1,017
  69,275
  70,868
  72,690
  74,735
  77,000
  79,486
  82,193
  85,124
  88,280
  91,668
  95,293
  99,161
  103,278
  107,655
  112,299
  117,220
  122,429
  127,938
  133,759
  139,905
  146,390
  153,229
  160,438
  168,033
  176,032
  184,455
  193,320
  202,649
  212,463
  222,786
Working capital, $m
  824
  38,662
  39,551
  40,567
  41,708
  42,973
  44,360
  45,871
  47,506
  49,268
  51,159
  53,182
  55,340
  57,638
  60,081
  62,672
  65,419
  68,326
  71,401
  74,649
  78,079
  81,698
  85,515
  89,538
  93,777
  98,241
  102,942
  107,889
  113,096
  118,573
  124,334
Total debt, $m
  502
  11,815
  13,140
  14,655
  16,355
  18,240
  20,307
  22,559
  24,996
  27,621
  30,439
  33,454
  36,670
  40,095
  43,735
  47,597
  51,690
  56,023
  60,604
  65,446
  70,557
  75,951
  81,639
  87,634
  93,951
  100,604
  107,609
  114,982
  122,741
  130,903
  139,489
Total liabilities, $m
  1,187
  57,616
  58,941
  60,456
  62,156
  64,041
  66,108
  68,360
  70,797
  73,422
  76,240
  79,255
  82,471
  85,896
  89,536
  93,398
  97,491
  101,824
  106,405
  111,247
  116,358
  121,752
  127,440
  133,435
  139,752
  146,405
  153,410
  160,783
  168,542
  176,704
  185,290
Total equity, $m
  1,921
  113,351
  115,958
  118,938
  122,284
  125,991
  130,059
  134,488
  139,283
  144,448
  149,992
  155,922
  162,251
  168,988
  176,149
  183,748
  191,800
  200,324
  209,338
  218,862
  228,918
  239,529
  250,719
  262,515
  274,942
  288,032
  301,813
  316,318
  331,583
  347,641
  364,532
Total liabilities and equity, $m
  3,108
  170,967
  174,899
  179,394
  184,440
  190,032
  196,167
  202,848
  210,080
  217,870
  226,232
  235,177
  244,722
  254,884
  265,685
  277,146
  289,291
  302,148
  315,743
  330,109
  345,276
  361,281
  378,159
  395,950
  414,694
  434,437
  455,223
  477,101
  500,125
  524,345
  549,822
Debt-to-equity ratio
  0.261
  0.100
  0.110
  0.120
  0.130
  0.140
  0.160
  0.170
  0.180
  0.190
  0.200
  0.210
  0.230
  0.240
  0.250
  0.260
  0.270
  0.280
  0.290
  0.300
  0.310
  0.320
  0.330
  0.330
  0.340
  0.350
  0.360
  0.360
  0.370
  0.380
  0.380
Adjusted equity ratio
  0.662
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663
  0.663

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  180
  20,176
  20,553
  21,088
  21,776
  22,615
  23,603
  24,741
  26,031
  27,473
  29,071
  31,109
  33,031
  35,122
  37,387
  39,834
  42,469
  45,300
  48,336
  51,584
  55,055
  58,760
  62,708
  66,911
  71,383
  76,135
  81,182
  86,538
  92,219
  98,240
  104,620
Depreciation, amort., depletion, $m
  153
  10,281
  10,509
  10,769
  11,061
  11,385
  11,740
  12,127
  12,545
  12,996
  13,480
  13,613
  14,166
  14,754
  15,379
  16,043
  16,746
  17,490
  18,277
  19,108
  19,986
  20,913
  21,890
  22,920
  24,005
  25,147
  26,351
  27,617
  28,950
  30,352
  31,827
Funds from operations, $m
  510
  30,457
  31,062
  31,857
  32,837
  33,999
  35,343
  36,868
  38,576
  40,469
  42,551
  44,723
  47,197
  49,876
  52,767
  55,877
  59,215
  62,790
  66,613
  70,693
  75,042
  79,673
  84,598
  89,831
  95,388
  101,283
  107,533
  114,155
  121,168
  128,592
  136,447
Change in working capital, $m
  -108
  758
  889
  1,016
  1,141
  1,264
  1,387
  1,511
  1,635
  1,762
  1,891
  2,023
  2,158
  2,298
  2,442
  2,592
  2,747
  2,907
  3,074
  3,249
  3,430
  3,619
  3,817
  4,023
  4,239
  4,464
  4,700
  4,948
  5,206
  5,477
  5,761
Cash from operations, $m
  618
  36,508
  30,173
  30,840
  31,696
  32,735
  33,956
  35,357
  36,941
  38,707
  40,660
  42,700
  45,038
  47,578
  50,324
  53,285
  56,468
  59,883
  63,538
  67,444
  71,612
  76,053
  80,781
  85,808
  91,149
  96,818
  102,832
  109,207
  115,962
  123,115
  130,686
Maintenance CAPEX, $m
  0
  -9,707
  -9,896
  -10,124
  -10,384
  -10,676
  -11,000
  -11,355
  -11,742
  -12,161
  -12,611
  -13,095
  -13,613
  -14,166
  -14,754
  -15,379
  -16,043
  -16,746
  -17,490
  -18,277
  -19,108
  -19,986
  -20,913
  -21,890
  -22,920
  -24,005
  -25,147
  -26,351
  -27,617
  -28,950
  -30,352
New CAPEX, $m
  -180
  -1,327
  -1,593
  -1,821
  -2,045
  -2,266
  -2,486
  -2,707
  -2,930
  -3,157
  -3,388
  -3,625
  -3,868
  -4,118
  -4,376
  -4,644
  -4,921
  -5,209
  -5,509
  -5,821
  -6,146
  -6,485
  -6,839
  -7,209
  -7,595
  -8,000
  -8,423
  -8,865
  -9,329
  -9,814
  -10,323
Cash from investing activities, $m
  -306
  -11,034
  -11,489
  -11,945
  -12,429
  -12,942
  -13,486
  -14,062
  -14,672
  -15,318
  -15,999
  -16,720
  -17,481
  -18,284
  -19,130
  -20,023
  -20,964
  -21,955
  -22,999
  -24,098
  -25,254
  -26,471
  -27,752
  -29,099
  -30,515
  -32,005
  -33,570
  -35,216
  -36,946
  -38,764
  -40,675
Free cash flow, $m
  312
  25,474
  18,683
  18,895
  19,267
  19,793
  20,470
  21,295
  22,268
  23,390
  24,661
  25,980
  27,558
  29,294
  31,194
  33,262
  35,505
  37,928
  40,539
  43,346
  46,358
  49,582
  53,029
  56,709
  60,634
  64,814
  69,262
  73,992
  79,016
  84,351
  90,011
Issuance/(repayment) of debt, $m
  -179
  1,130
  1,325
  1,515
  1,701
  1,884
  2,068
  2,251
  2,437
  2,626
  2,818
  3,015
  3,217
  3,425
  3,640
  3,862
  4,093
  4,333
  4,582
  4,841
  5,111
  5,394
  5,688
  5,995
  6,317
  6,653
  7,005
  7,373
  7,759
  8,162
  8,586
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -194
  1,130
  1,325
  1,515
  1,701
  1,884
  2,068
  2,251
  2,437
  2,626
  2,818
  3,015
  3,217
  3,425
  3,640
  3,862
  4,093
  4,333
  4,582
  4,841
  5,111
  5,394
  5,688
  5,995
  6,317
  6,653
  7,005
  7,373
  7,759
  8,162
  8,586
Total cash flow (excl. dividends), $m
  54
  26,604
  20,008
  20,410
  20,967
  21,677
  22,537
  23,546
  24,705
  26,015
  27,479
  28,994
  30,774
  32,719
  34,834
  37,124
  39,598
  42,261
  45,121
  48,188
  51,469
  54,976
  58,717
  62,705
  66,951
  71,467
  76,267
  81,365
  86,775
  92,513
  98,596
Retained Cash Flow (-), $m
  -255
  -2,142
  -2,607
  -2,980
  -3,346
  -3,707
  -4,068
  -4,429
  -4,795
  -5,165
  -5,544
  -5,931
  -6,328
  -6,738
  -7,161
  -7,599
  -8,052
  -8,524
  -9,014
  -9,524
  -10,056
  -10,611
  -11,190
  -11,795
  -12,428
  -13,089
  -13,781
  -14,506
  -15,264
  -16,059
  -16,891
Prev. year cash balance distribution, $m
 
  17,127
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  41,589
  17,401
  17,430
  17,622
  17,970
  18,470
  19,117
  19,911
  20,850
  21,935
  23,064
  24,446
  25,981
  27,673
  29,526
  31,545
  33,737
  36,107
  38,663
  41,413
  44,365
  47,527
  50,910
  54,523
  58,378
  62,486
  66,859
  71,511
  76,455
  81,706
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  39,874
  15,930
  15,169
  14,510
  13,929
  13,404
  12,915
  12,445
  11,977
  11,500
  10,953
  10,432
  9,878
  9,290
  8,668
  8,016
  7,341
  6,649
  5,953
  5,262
  4,589
  3,943
  3,337
  2,777
  2,271
  1,823
  1,435
  1,106
  835
  615
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Dr. Reddy’s Laboratories Limited operates as an integrated pharmaceutical company worldwide. It operates through three segments: Global Generics, Pharmaceutical Services and Active Ingredients (PSAI), and Proprietary Products. The Global Generics segment manufactures and markets finished pharmaceutical products as branded formulations or generic finished dosages. This segment also engages in biologics business. The PSAI segment manufactures and markets active pharmaceutical ingredients (APIs) and intermediates, which are used as principal ingredients for finished pharmaceutical products. This segment also offers contract research services; and manufactures and sells APIs and steroids in accordance with the specific customer requirements. The Proprietary Products segment focuses on the research, development, and manufacture of differentiated formulations and new chemical entities (NCEs) for dermatology and neurology therapeutic areas. It also engages in the discovery, development, and commercialization of novel small molecule agents in therapeutic areas, such as metabolic disorders, and pain and inflammation; and has a portfolio of in-licensed patented dermatology products. As of March 31, 2016, this segment had 19 active products in development programs pipeline that are in various stages of development. The company’s therapeutic categories primarily include gastro-intestinal, cardiovascular, pain management, oncology, dermatology, urology, and nephrology. It has strategic partnership with GlaxoSmithKline plc to develop and market products outside India; collaboration, license, and option agreement with Curis, Inc. to discover, develop, and commercialize small molecule antagonists for immuno-oncology and precision oncology; and collaboration agreements with Merck Serono and Amgen. Dr. Reddy’s Laboratories Limited was founded in 1984 and is headquartered in Hyderabad, India.

FINANCIAL RATIOS  of  Dr. Reddy's Laboratories ADR (RDY)

Valuation Ratios
P/E Ratio 39.4
Price to Sales 3.4
Price to Book 3.7
Price to Tangible Book
Price to Cash Flow 11.5
Price to Free Cash Flow 16.2
Growth Rates
Sales Growth Rate -9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 28.6%
Cap. Spend. - 3 Yr. Gr. Rate 12.5%
Financial Strength
Quick Ratio 2
Current Ratio 0.1
LT Debt to Equity 8.3%
Total Debt to Equity 26.1%
Interest Coverage 17
Management Effectiveness
Return On Assets 6.4%
Ret/ On Assets - 3 Yr. Avg. 10.8%
Return On Total Capital 7.6%
Ret/ On T. Cap. - 3 Yr. Avg. 13.2%
Return On Equity 10%
Return On Equity - 3 Yr. Avg. 19%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 55.6%
Gross Margin - 3 Yr. Avg. 57.7%
EBITDA Margin 18.3%
EBITDA Margin - 3 Yr. Avg. 22.1%
Operating Margin 9.6%
Oper. Margin - 3 Yr. Avg. 15.5%
Pre-Tax Margin 10.4%
Pre-Tax Margin - 3 Yr. Avg. 15.6%
Net Profit Margin 8.5%
Net Profit Margin - 3 Yr. Avg. 12.2%
Effective Tax Rate 17.8%
Eff/ Tax Rate - 3 Yr. Avg. 21.7%
Payout Ratio 33.9%

RDY stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the RDY stock intrinsic value calculation we used $154708 million for the last fiscal year's total revenue generated by Dr. Reddy's Laboratories ADR. The default revenue input number comes from 2017 income statement of Dr. Reddy's Laboratories ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our RDY stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for RDY is calculated based on our internal credit rating of Dr. Reddy's Laboratories ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Dr. Reddy's Laboratories ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of RDY stock the variable cost ratio is equal to 51.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $47192 million in the base year in the intrinsic value calculation for RDY stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Dr. Reddy's Laboratories ADR.

Corporate tax rate of 27% is the nominal tax rate for Dr. Reddy's Laboratories ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the RDY stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for RDY are equal to 43.9%.

Life of production assets of 7 years is the average useful life of capital assets used in Dr. Reddy's Laboratories ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for RDY is equal to 24.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $128336 million for Dr. Reddy's Laboratories ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 163.566 million for Dr. Reddy's Laboratories ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Dr. Reddy's Laboratories ADR at the current share price and the inputted number of shares is $6.8 billion.


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Stock chart of RDY Financial statements of RDY Annual reports of RDY
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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