Top 5 Pharma Stocks- Quantitative Analysis8 min read
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.
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.
- 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 1st position as well as 5 points.
- Sun Pharmaceutical Industries get the last position and 5th 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 1st position as well as 5 points.
- Sun Pharmaceutical Industries with the lowest RoE of 6.3% receives the last rank.
- 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 2nd.
- Cadila Healthcare has the highest D/E ratio of 0.28 and hence given 5th 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 5th 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 2nd 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 1st 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 1st 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 1st 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 5th 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 1st 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 5th 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 1st 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 5th 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 1st 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 2nd and 3rd 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.
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