Quantitative Analysis of Pharma Sector and Pharma Companies in India
Indian pharmaceutical industry supplies over 50% of global demand for various vaccines, 40% of generic demand in the USA, and 25% of all medicines in the UK.
India is also the second-largest contributor to the global biotech and pharmaceutical workforce.
Indian pharmaceutical sector is expected to grow at a CAGR 22.4% in near future. In this blog, we will do a quantitative analysis of the pharma sector and Pharma Companies in India.
Please note that we have done this analysis of Pharma Companies in India with the only purpose of screening good companies. The analysis done is completely on a quantitative basis.
No suggestions are being made to directly go and invest in the top-scoring pharma companies in India of this analysis.
We suggest that one should perform a qualitative analysis of top-scoring companies in this analysis and take investment decisions based on risk profile.
Pharma Companies in India selected for analysis:
The procedure of Analysis of Pharma Companies in India and its Interpretation
- These 14 companies are analyzed on the following parameters and ranked and scored accordingly. For example, if a company has a higher PE ratio, it has a lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has a higher rank and has scored higher points.
- Here, 1 means the company has scored the lowest points, and 14 means the company has scored the highest points.
- In the end, we have added all the points together and companies are ranked accordingly.
- PE is basically how much an investor pays for each rupee of profit earned.
- Here Lupin has PE of zero, which indicates that its earnings are negligible, hence it is at the lowest rank.
- Aurobindo Pharma has the lowest PE after Lupin and hence it ranks first, while GSK Pharma has the highest PE of 295.2 x and hence it ranks last.
- EV/EBITDA is another valuation metric to value companies, based on the operating profit generated as compared to their Enterprise Value.
- Enterprise value is basically the value of the total company. Here, the market value of debt is also considered in addition to the market valuation of equity.
- Thus, Enterprise Value basically gives the valuation of total assets of the company in the market. Hence, the lower the EV/EBITDA, the better its valuation.
- Since the Pharma sector is a capital-intensive sector, EV/EBITDA is also a relevant valuation metric.
- Analogous to PE valuations, Aurobindo Pharma and GSK Pharma rank first and last respectively.
3. Return on Capital Employed (RoCE) of Pharma Companies in India
- Return on Capital Employed (RoCE ) is one of the return ratios commonly used in fundamental analysis. RoCE is Earnings before Interest and Taxes (EBIT)/ Total Capital Employed (Debt+Equity)
- It gives us a perspective of how the company is earning profits by allocating its overall capital. So higher the RoCE, the better.
- As seen, Abbott India has the highest RoCE of 36.5% mainly because it is a debt-free company.
- On the other hand, Lupin has the lowest RoCE and hence ranked at last position.
4. Return on Equity (ROE) of Pharma Companies in India
- Another return ratio that is used widely in fundamental analysis of Pharma Companies in India or any other company is Return on Equity (RoE) which is Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).
- Like RoCE, Abbott has the highest RoE mainly because of its debt-free status. Abbott is followed by Torrent Pharma with RoCE of 15%.
- Lupin has a RoCE of -2.1% and hence it is at the lowest rank.
5. Debt to Equity (D/E)
- Here, Divis Lab and Abbott India are zero debt companies. Hence they are at the first rank in the pharma companies of India list.
- On the other hand, Torrent Pharma has the highest D/E, but it has healthy RoE, which indicates the company is successful at capital allocation and it is able to generate healthy returns.
6.Interest coverage ratio
- The interest coverage ratio is Earnings before Interest and Taxes (EBIT)/ Interest expense.
- This ratio gives the ability of the company to pay interest from its operating profit.
- Overall the companies have a good interest coverage ratio. Usually, an interest coverage ratio above 2.5 x is healthy.
- Here, since Divis and Abbott are debt-free companies, they have higher interest coverage ratios in Top 14 Pharma Companies of India, whereas Lupin has the lowest interest coverage ratio.
7. Pledged Promoter %
- Pledged Promoter shares are usually not so healthy signs of corporate governance. Hence, ideally, there should not be any pledged promoter shares.
- Here, Sun Pharma and Aurobindo Pharma have pledged shares, hence they are at the lowest rank.
8. Institutional Holding (FIIs + DIIs) in Pharma Companies of India
- Institutional Investor’s shareholding in a company is also one of the important parameters while analyzing a company. The more the institutional holding, the better it is.
- Dr. Reddy’s Labs has an institutional holding of ~44% and hence ranks first. This is mainly since Dr. Reddy’s Lab is a NIFTY 50 company and hence has healthy passive fund flow.
- Abbott India has the lowest institutional holding and hence it is ranked at last position.
9. Operating Profit Margin (%) of Pharma Companies in India
- Divis Labs has a stellar operating profit margin of 37.3% and hence it is at first rank, whereas Lupin is ranked last due to an operating profit margin of 17.57%.
10. 5-Year CAGR of Pharma Companies in India
- Here, Alkem Labs has the highest 5 year Sales CAGR while Pfizer has the highest 5-year CAGR
11. 3-year CAGR of Pharma Companies in India
- Here, Biocon has the highest sales CAGR, while Ipca Labs has the highest PAT CAGR.
12. TTM growth
- Here Ipca Lab ranks first w.r.t sales CAGR while Torrent Pharma ranks first w.r.t PAT CAGR
13. Revenue Mix (FY 20) of Pharma Companies in India
- The Pharma sector is a highly export-oriented sector. However, higher export means more dependency on foreign regulations like the US FDA. Changes in these regulations can severely impact the company’s sales. Hence lower the export dependency, the better it is.
- Here, GSK has the lowest export mix while Aurobindo Pharma has the highest and hence ranked accordingly.
14. Inventory Turnover Ratio of Pharma Companies in India
- Inventory Turnover Ratio is Cost of Goods Sold/ Average Inventory. The average Inventory is (Starting Inventory + Ending Inventory)/2.
- It gives us an idea about how the company is stocking up its inventory as well as how many times the company has sold its inventory in a given period. Hence higher the inventory turnover ratio, the better it is.
- Here Lupin has the highest inventory turnover ratio while Divis Labs has the lowest.
15. Debtor Days of the Pharma Companies in India
- Debtor days are basically how quickly the debtors/customers are paying back the company. It is (Average Accounts Receivables/Credit Sales)*365.
- The lower the debtor days, it is better as it means that the company is receiving its accounts receivables early, which aides its liquidity position.
- Dr. Reddy’s Labs has the lowest debtor days and hence ranks first, whereas Torrent Pharma has the highest debtor days and hence ranks last.
16. Cash Conversion Cycle
- The cash conversion cycle tells us the number of days a company usually takes to convert its investment in inventories and accounts receivables to turn into cash flows.
- The formula of the cash conversion cycle is Inventory Days + Debtor Days – Payable Days. The lower this cycle, the better as it signifies that the company does not have a significant working capital requirements.
- Here, although Torrent Pharma has the highest debtor days, it has the best cash conversion cycle and hence it ranks first.
- On the other hand, Divis Labs has the longest cash conversion cycle and hence ranks last.
Final Points on Top 14 Pharma Companies in India
Read more Companies Analysis here.
Cover Image: Pharma Adda