Top 5 Pharma Stocks- Quantitative Analysis

Introduction:

According to the Indian Economic Survey 2021, the domestic market is expected to grow 3x in the next decade. India’s domestic pharmaceutical market is estimated at US$ 42 billion in 2021 and likely to reach US$ 65 billion by 2024 and further expand to reach ~US$ 120-130 billion by 2030.

India’s biotechnology industry comprising biopharmaceuticals, bio-services, bio-agriculture, bio-industry, and bioinformatics. The Indian biotechnology industry was valued at US$ 64 billion in 2019 and is expected to reach US$ 150 billion by 2025.

Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on a 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 decisions based on risk profile.

Pharma SectorCompanies Quantitative Analysis

Companies selected for Analysis:

We have selected the following five Pharma Sectorcompanies for our Quantitative Analysis.

• Sun Pharmaceutical Industries
• Divi’s Laboratories
• Dr. Reddys Laboratories
• Cipla
• Cadila Healthcare

Market Capitalization of 5 Pharma SectorStocks (Rs. Cr):

• Sun Pharmaceutical Industries- 1,59,616
• Divi’s Laboratories- 1,12,150
• Dr. Reddys Laboratories- 88,152
• Cipla- 77,252
• Cadila Healthcare- 63,835

The procedure of Analysis and its Interpretation

• These 5 Companies are analyzed on the following 20 parameters and ranked and scored accordingly. For example, a company with a higher PE ratio is provided with 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 that the company has scored the lowest points and 5 means the company has scored the highest points.
• In the end, we have added all the points together and companies are ranked accordingly.

Parameters of Quantitative Analysis:

1. PE Ratio:

• PE of a company means that how much investors should pay for the stock based on their current earnings. A company with a lower PE Ratio is considered to be undervalued and has a huge potential to unlock its value. Hence, full points will be rewarded to that company.
• With the lowest PE Ratio of 29.92, Cadila Healthcare gets the first position and 5 points. And Divi’s Laboratories with the highest PE of 56.52 among peers is awarded 1 point only.

2. EV/EBITDA:

• EV/EBITDA ratio measures Enterprise Value (EV) to the Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). This ratio assesses the overall financial performance of the firm.
• EV/EBITDA of value below 10 is considered healthy.
• Here, Sun Pharmaceutical Industries bags the first position among the Top 5 Companies with the lowest EV/EBITDA ratio of 17.31. Divi’s Laboratories with the highest EV/EBITDA ratio of 38.34 receives the last position and one point only.

3. Return on Capital Employed (ROCE):

• ROCE signifies that how the company is using its capital to generate a return for the company and investors. The high ROCE, the better it is for the company.
• In this parameter, Divi’s Laboratories outperforms other peers by scoring the highest ROCE of 32% and hence obtains the 1^st position as well as 5 points.
• Sun Pharmaceutical Industries get the last position and 5^th rank due to the lowest ROCE of 14%.

4) Return on Equity (ROE):

• RoE signifies how well the company generates the return on shareholders’ investment. Companies with higher RoE are considered good.
• In this parameter, Divi’s Laboratories again beat other peers by scoring the highest ROE of 23.9% and hence obtains the 1^st position as well as 5 points.
• Sun Pharmaceutical Industries with the lowest RoE of 6.3% receives the last rank.

5.Debt-to-Equity Ratio:

• The debt-to-equity ratio is a leverage ratio that measures the debt of a company against its total shareholder’s equity.
• Accordingly, the lesser is the debt, the better it is for the company and vice-versa.
• Divi’s Laboratories is a debt-free company and hence rewarded with full points and given the first position.
• Sun Pharmaceutical Industries has a total D/E of 0.07 and it is ranked 2^nd.
• Cadila Healthcare has the highest D/E ratio of 0.28 and hence given 5^th rank.

6.Interest Coverage Ratio:

• The Interest Coverage ratio is in direct relation with the D/E ratio. It can be calculated by dividing EBIT from Interest Expenses.
• This ratio gives the ability of the company to pay interest from its operating profit.
• Since Divi’s Laboratories is a zero-debt company, hence, it maintains a good Interest Coverage Ratio. Divi’s Laboratories, with an Interest Coverage Ratio of 3065.4, the highest among peers, gets the first rank.
• Due to the lowest Interest Coverage Ratio of 16.2, Cadila Healthcare is ranked last and scored accordingly.

7. Pledged %:

• All the 4 companies in the list have not pledged their share and hence are rewarded with full points and first rank.
• Sun Pharmaceutical Industries has a pledge of 8.62%, hence, given 5^th rank and only 1 point.

8. Institutional Holding (FII + DII):

• Institutional Investors (FII + DII) as a % of Free Float has the highest stake in Divi’s Laboratories, collectively of 76.2% and hence it is rewarded with full points and first rank.
• FIIs and DIIs also hold around 73.1% stake in Sun Pharmaceutical Industries and hence it secures the 2^nd position in this criterion and scores 4 marks.
• Dr. Reddys Laboratories has the lowest stake of institutional investors of 60% in the Company’s shareholding pattern and hence is given 1 point only.

9. Operating Profit Margin (%):

• Higher the Operating Profit Margin (%) of a company, better the operational efficiency of a company and vice-versa.
• Divi’s Laboratories efficiently post the OPM of 40.1% and secures 1^st position, due to its right entry in the markets, strong operating leverage, and dominance in exports.
• With the lowest OPM of 17.4%, Cipla scores last rank among its peers.
• Key Drivers of Efficient OPM of Divi’s Labs:
• Global Leader in Manufacturing & Supply of APIs.
• The predominance in Exports.
• One of the two Manufacturing facilities of Divis is World’s Largest API Manufacturing Facility.
• Proactive Capacity Addition.
• Strong Operating Leverage.
• Technology Upgrades driving cost efficiency.
• Better Product Mix (API: CS 60:40) with higher growth in Custom Synthesis (CS), offer Margin Expansion.
• Robust Supply Chain Management.
• Reasons for higher growth of Divi’s Lab in Custom Synthesis:
• US Generic Players facing heat of Pricing Pressure.
• Rising Competitive Intensity.
• Pharma players resort to more outsourcing to control costs.
• Divis Lab’s Right-time Entry into the Custom Synthesis Business.
• Healthy Margins on the back of Strong Growth Prospects in Custom Synthesis.

10. R&D Investment as a % of Net Sales :

• It is defined as the total number of investments done by the company on its Research and Development segment which is calculated on the percentage of net sales.
• Here Dr. Reddys Laboratories spends most on the R&D front with 8.7% of the net sales and scores highest points and 1^st rank.
• Divi’s Laboratories spends the lowest with 0.7% among the peers and gets the last rank.

11. Revenue Mix – Export %  :

• It includes the share of revenue coming from the exports. The lower dependency of the exports, the better it is for the company.
• Cipla with the lowest revenue from exports 59.6% got the first rank and maximum points.
• Divi’s Laboratories with the highest revenue from exports 88% got the lowest points as well as last rank.
• The risk associated with Divi’s Laboratories:
• Higher Exports dependency.
• Higher Risk in the International Pharma Market.
• USFDA’s Stringent Regulatory Approvals Norms.
• Impact on New Product Launches.
• Higher Business Risk.
• Subdued Sales.

12. Sales and Net Profit Growth- 5 Year CAGR:

• In terms of Sales Growth, Divi’s Laboratories has posted the highest figures with a 13% rise in sales and a 12% rise in PAT. Hence, it gets the full points and 1^st rank.
• Sun Pharmaceutical Industries has registered the lowest Profit after Tax (PAT) growth on 5 years CAGR basis of 3.3% as well as the lowest sales growth of negative 10.1%, hence, got the 5^th position.

13. Sales & Net Profit Growth: 3 Year CAGR:

• In terms of Sales Growth, Divi’s Laboratories has posted the highest figures with a 21.4% rise in sales and a 31.1% rise in PAT. Hence, it gets the full points and 1^st rank.
• Here, Cipla has registered the lowest sales growth on 3 years CAGR basis of 8.1%, whereas, Sun Pharmaceutical Industries posted the lowest Profit after Tax (PAT) growth of 3.9%, hence, got the 5^th position.

14. Sales & Net Profit – TTM Growth (COVID year) :

• In terms of Sales Growth on a trailing 12 months basis, Divi’s Laboratories has again posted the highest figures with a 29.2% rise in sales and a 44.2% rise in PAT. Hence, it gets the full points and 1^st rank in Sales Growth on a TTM basis.
• Cadila Healthcare posted the highest figures with a rise in PAT at 81.3% and receives full points in PAT Growth in the category of Trailing Twelve Months.
• Here, Sun Pharmaceutical Industries has registered the lowest sales growth on a TTM basis of 2% and posted the lowest Profit after Tax (PAT) negative growth of 22.9%, hence, got the 5^th position.

15. Operating Performance Ratios- Inventory Turnover Ratio (Higher the Better):

• Inventory turnover signifies a parameter that measures how fast the inventory is sold or consumed in the given period, the higher the better.
• Here Sun Pharmaceutical Industries secured the 1^st rank with the highest Inventory turnover of 7.54 and get full 5 points.

Divi’s Laboratories again got the last rank due to a poor Inventory turnover ratio of 2.97, hence only 1 point given

16. Operating Performance Ratios- Cash Conversion Cycle (CCC):

• Again Sun Pharmaceutical Industries secured the highest rank among its peers with the lowest CCC of 41.3 days and get full 5 points.
• Here Divi’s Laboratories got the last rank due to the highest CCC of 155.4 days, hence only 1 point given.

17. Final Score:

• After analyzing and summing up all the marks scored by the Top 5 Pharma Companies, Divi’s Laboratories is a front runner thereby conquers the first position in our analysis. Divi’s Laboratories scores 73, the highest among all 5 companies.
• Cipla and Cadila Healthcare scored 64 points and 61 points respectively and hence secured 2^nd and 3^rd rank.
• Due to poor performance in the majority of parameters, Sun Pharmaceutical Industries and Dr. Reddys Laboratories get the lowest score of 54 points.
• On account of healthy scores, Divi’s Laboratories appear to be a strong Pharma Company.