Comparison of Top 14 Pharma Companies6 min read
Quantitative Analysis of Pharma Sector in India
Indian pharmaceutical industry supplies over 50% of global demand for various vaccines , 40% of generic demand in USA and 25% of all medicines in UK. India is also the second largest contributor of 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 Indian pharma sector.
Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on quantitative basis. No suggestions are being made to directly go and invest in the top scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top scoring companies in this analysis and take investment decision based on risk profile.
Pharma Sector Quantitative Analysis
Companies selected for analysis
Procedure of Analysis and its Interpretation
- These 14 companies are analysed on following parameters and ranked and scored accordingly. For example, if a company has higher PE ratio, it has a lower rank , hence has scored lesser points. Similarly, if a company has higher RoE, it has higher rank and has scored higher points.
- Here , 1 means the company has scored lowest points and 14 means the company has scored highest points.
- At 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 lowest rank.
- Aurobindo Pharma has 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 total company. Here, 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 market. Hence, lower the EV/EBITDA, better its valuation.
- Since 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)
- 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 highest RoCE of 36.5% mainly because it is a debt free company.
- On the other hand, Lupin has lowest RoCE and hence ranked at last position.
4. Return on Equity (ROE)
- Another return ratio that is used widely in fundamental analysis is Return on Equity (RoE) which is Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).
- Like RoCE, Abbott has highest RoE mainly because of its debt free status. Abbott is followed by Torrent Pharma with RoCE of 15%.
- Lupin has RoCE of -2.1% and hence it is at lowest rank.
5. Debt to Equity (D/E)
- Here, Divis Lab and Abbott India are zero debt companies. Hence they are at first rank.
- On the other hand, Torrent Pharma has highest D/E , but it has healthy RoE, which indicates company is successful at capital allocation and it is able to generate healthy returns.
6.Interest coverage ratio
- 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 good interest coverage ratio. Usually interest coverage ratio above 2.5 x is healthy.
- Here, since Divis and Abbott are debt free companies, they have higher interest coverage ratios, whereas Lupin has lowest interest coverage ratio.
7. Pledged Promoter %
- Pledged Promoter shares are usually not so healthy sign of corporate governance. Hence, ideally there should not be any pledged promoter shares.
- Here, Sun Pharma and Aurobindo Pharma has pledged shares , hence they are at lowest rank.
8. Institutional Holding (FIIs + DIIs)
- Institutional Investor’s shareholding in a company is also one of the important parameter while analyzing a company. More the institutional holding, better it is.
- Dr Reddy’s Labs has 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 lowest institutional holding and hence it is ranked at last position.
9. Operating Profit Margin (%)
- 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 operating profit margin of 17.57%.
10. 5-Year CAGR
- Here , Alkem Labs has highest 5 year Sales CAGR while Pfizer has highest 5-year CAGR
11. 3 year CAGR
- Here, Biocon has highest sales CAGR, while Ipca labs has 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)
- Pharma sector is highly export oriented sector. However, higher export means more dependency on foreign regulations like US FDA. Changes in these regulations can severely impact company’s sales. Hence lower the export dependency, better it is.
- Here, GSK has lowest export mix while Aurobindo Pharma has highest and hence ranked accordingly.
14. Inventory Turnover Ratio
- Inventory Turnover Ratio is Cost of Goods Sold/ Average Inventory. 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, better it is.
- Here Lupin has highest inventory turnover ratio while Divis Labs has lowest.
15. Debtor Days
- Debtor days is basically how quickly the debtors/customers are paying back company. It is (Average Accounts Receivables/Credit Sales)*365.
- The lower the debtor days, it is better as it means that 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 highest debtor days and hence ranks last.
16. Cash Conversion Cycle
- 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 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 significant working capital requirement.
- Here, although Torrent Pharma has highest debtor days, it has best cash conversion cycle and hence it ranks first.
- On the other hand, Divis Labs has longest cash conversion cycle and hence ranks last.
Alkem Labs and Ipca Labs lead the lot followed by Abbot India, Divis Labs and others.
9 thoughts on “Comparison of Top 14 Pharma Companies”
good analysis to learn the investment idea about stock
Thanks a lot.
Very good analysis. However such articles should only be available to Subscribers and not for free
Where is Laurus Lab?
For your Premium subscribers you should give monthly 5 scripts analysis free as per their request. Where are Laurus Labs and Neuland Labs?