Which is the best Pharma Stock? Here is the Detailed Quantitative Analysis of Top-5 Pharma companies based on their Q3FY22 performances.
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 comprises 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. The 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 Sector Companies Quantitative Analysis
Companies selected for Analysis:
We have selected the following five Pharma companies for our Quantitative Analysis.
Market Capitalization of Top 5 Pharma Sector Stocks (Rs. Cr):
- Sun Pharmaceutical Industries- 2,19,491
- Divi's Laboratories- 1,16,908
- Cipla- 82,174
- Dr. Reddys Laboratories- 71,653
- Gland Pharma- 53,173
The procedure of Analysis and its Interpretation
- These 5 Companies are analyzed on the following 16 parameters and ranked and scored accordingly. For example, a company with a higher PE ratio is provided with a lower rank and 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:
Top 5 Pharma Companies- PE Ratio
- PE of a company means 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 27.11, Dr. Reddy Labs gets the first position and 5 points. And Divi’s Laboratories with the highest PE of 45.53 among peers is awarded 1 point only.
2. EV/EBITDA:
Top 5 Pharma Companies- 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, Dr. Reddy’s Labs bags the first position among the Top 5 Companies with the lowest EV/EBITDA ratio of 15. Divi's Laboratories with the highest EV/EBITDA ratio of 32 receives the last position and one point only.
3. Return on Capital Employed (ROCE):
Top 5 Pharma Companies- ROCE
- ROCE signifies 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 32.1% 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 5.7%.
4) Return on Equity (ROE):
Top 5 Pharma Companies- 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 26.7% and hence obtains the 1st position as well as 5 points.
- Sun Pharma with the lowest RoE of 13.5% receives the last rank.
5. Debt-to-Equity Ratio:
Top 5 Pharma Companies- D/E 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 the debt, the better it is for the company and vice-versa.
- Divi's Laboratories and Gland Pharma is a debt-free company and hence rewarded with full points and given the first position.
- Dr. Reddy Labs has the highest D/E of 0.17 and hence it is ranked last and given 1 point only.
6. Interest Coverage Ratio:
Top 5 Pharma Companies- Interest Coverage Ratio
- The Interest Coverage ratio is in direct relation to the D/E ratio. It can be calculated by dividing EBIT by 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 1,270.5, the highest among peers, gets the first rank.
- Due to the lowest Interest Coverage Ratio of 20.8, Sun Pharma is ranked last and scored accordingly.
7. Institutional Holding (FII + DII):
Top 5 Companies- Institutional Holdings (FII + DII)
- Institutional Investors (FII + DII) as a % of Free Float have the highest stake in Divi's Laboratories, collectively of 77.1% and hence it is rewarded with full points and first rank.
- FIIs and DIIs also hold around 74.7% stake in Sun Pharma and hence it secures the 2nd position in this criterion and scores 4 marks.
- Gland Pharma has the lowest stake of institutional investors of 54.7% in the Company's shareholding pattern and hence is given 1 point only.
8. Operating Profit Margin (%):
Top 5 Pharma Companies- Operating Profit Margin (%)
- Operating Profit Margin can be calculated by dividing Operating Profit by Total Revenue. It is sometimes also called EBIT (Earnings before Interest and Tax) 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 44% and secures 1st position, due to its right entry into the markets, strong operating leverage, and dominance in exports.
- With the lowest OPM of 22.5%, Cipla scores the 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.
i) Proactive Capacity Addition.
ii) Strong Operating Leverage.
iii) Technology Upgrades driving cost efficiency.
iv) Better Product Mix (API: CS 60:40) with higher growth in Custom Synthesis (CS), offers Margin Expansion.
v) 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.
9. R&D Investment as a % of Net Sales:
Top 5 Pharma Companies- R&D Investment as a % of Net Sales
- It is defined as the total number of investments done by the company in 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 7.8% of the net sales and scores the highest points and 1st rank.
- Divi’s Laboratories spends the lowest with 0.8% among the peers and gets the last rank. The reason behind the low R&D expenditure of Divi’s Labs is:
- Divi’s Labs is majorly engaged in the business of API & Customer Synthesis Manufacturing
- It is among the top 3 API manufacturers in the world
- 12 out of the top 20 Big Pharma Companies across the US, EU, and Japan are associated with Divi’s for more than 10 years
- So, rather than developing new products, Divis Labs is more focused on reducing raw material costs through backward integration and Custom Synthesis Manufacturing (offering high Margins)
10. Revenue Mix – Export %:
Top 5 Pharma Companies- Revenue Mix – Export %
- It includes the share of revenue coming from the exports. The lower dependency on the exports, the better it is for the company.
- Cipla with the lowest revenue from exports 56% got the first rank and maximum points.
- Divi's Laboratories with the highest revenue from exports 87% 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.
11. Sales and Net Profit Growth- 5 Year CAGR:
Top 5 Pharma Companies- Sales & Net Profit Growth- 5 Years CAGR
- In terms of Sales Growth, Gland Pharma has posted the highest figures with a 20.6% rise in sales and a 26% rise in PAT. Hence, it gets the full points and 1st rank.
- Sun Pharmaceutical Industries has registered the Profit after Tax (PAT) de-growth on 5 years CAGR basis of 8.6%. In sales growth terms, Dr. Reddy has the lowest sales growth of 4.1% on a 5-years CAGR basis. Both the companies are ranked and scored accordingly.
12. Sales & Net Profit Growth: 3 Year CAGR:
Top 5 Pharma Companies- Sales & Net Profit- 3 Years CAGR
- In terms of Sales Growth, Gland Pharma has posted the highest figures with a 28.7% rise in sales and a 45.9% rise in PAT. Hence, it gets the full points and 1st rank.
- Here, Sun Pharma has registered the lowest sales growth on 3 years CAGR basis of 6.3%, whereas, Sun Pharmaceutical Industries has also posted the lowest Profit after Tax (PAT) growth of 11.5%, hence, got the 5th position.
13. Operating Performance Ratios- Inventory Turnover Ratio (Higher the Better):
Top 5 Companies- Operating Performance Ratios- Inventory Turnover Ratio
- 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 7.29 and get full 5 points.
- Gland Pharma got the last rank due to a poor Inventory turnover ratio of 3.41, hence only 1 point was given.
14. Operating Performance Ratios- Cash Conversion Cycle (CCC):
Top 5 Pharma Companies- Cash Conversion Cycle
- CCC refers to the no. of days a company takes to sell its inventories and collect its receivables.
- The shorter (even negative) the cash conversion cycle of a company is, the better it is considered and vice versa.
- Again Sun Pharmaceutical Industries secured the highest rank among its peers with the lowest CCC of negative 53.7 days and get full 5 points.
- Here Divi’s Labs got the last rank due to the highest CCC of 79 days, hence only 1 point was given.
15. Final Score:
Top 5 Pharma Companies- Final Score
- After analyzing and summing up all the marks scored by the Top 5 Pharma Companies, Gland Pharma is a front runner thereby conquering the first position in our analysis. Gland Pharma scores 55, the highest among all 5 companies.
- Divi’s Laboratories and Cipla scored 49 points each 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 43 and 45 points respectively.
- On account of healthy scores, Divi's Laboratories appear to be a strong Pharma Company.
Originally Published On:
https://blog.investyadnya.in/which-large-cap-pharma-sector-stocks-outperformed-in-q3fy22/
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