Analysis of Indian Economy

India's economy expanded 8.8% in the second quarter from a year earlier, compared to an 8.6% on-year expansion in the first, lifted by robust activity in manufacturing. Agricultural output along with strong development in the Industrial, Mining and banking sector have helped to boost the Indian economy. Agricultural output rose 2.8 per cent y-o-y thanks to improved harvests. Industrial production increased by 12% and in the mining sector by 9%. According to 2010 data the shares of banking sector value add in GDP has been increased 7.7% from 2.5%.The forecasters have assigned highest 29.6 per cent chance that it will fall in 6.0-6.9 per cent in 201011. They raised their forecasts slightly for agriculture growth to 4.0 percent from 3.5 percent, for industry to 9.0 percent from 8.1 percent and for services it was steady at 9.0 percent. The survey showed the economists expect GDP growth in the April-June quarter to be 8.1 percent up from 7.9 percent in the last survey. For the July-September quarter, GDP growth is placed at 8.3 percent. The Reserve Bank Of India has stated that it had seen an annual growth of 8.5% steadily. The main priority of the Reserve Bank is to curb the ongoing inflation, which peaked at 11% last month. Interest rates have been increased by the banks to contain the inflation, but it could slow down the growth of the Indian economy in the coming months. But even thought there has been a rise in the interest rates there hasnt been much change in the distribution of loans, the Indian customer is hardly affected with the hiked interest rates. The economy has emerged with remarkable rapidity from the slowdown caused by the global crisis, with growth of 8.6 percent (advance estimate) in 2010-11 and an expected 9 percent next year. This growth is also broader: agriculture is rebounding, manufacturing continues its momentum, and private services is picking up. Fundamentals are also stronger: savings and investment are up, exports are rising rapidly, and inflation is falling, after a prolonged hiatus. Inflation, especially of food was very high in February 2010 (at 20.22 percent), declined steadily, with a small spurt in November and December and now stands at 9.3 per cent. This is a vast improvement but still a matter of concern. A shift in the stance in macroeconomic management is underway. Now that growth is firmly in place, fiscal consolidation is progressing rapidly, and monetary policy has reverted to a stronger focus on moderating inflationary pressures, while ensuring adequate liquidity and credit growth.

Gross Domestic Product:

Gross domestic product (GDP) refers to the market value of all final goods and services produced in a country in a given period. GDP per capita is often considered an indicator of a country's standard of living. Therefore, it is treated as one measure of economic activity. If we follow the trend of Gross Domestic Product for over the last fifteen years we can easily see a rising linear trend. In the figure below the GDP at factor cost has been plotted over the span of last six financial year. Generally GDP has several components. A component analysis is helpful to investors, as other economic variables such as interest rate and exchange rates have different effects on different componenets of GDP. The major components of GDP are: Consumption expenditure: A buoyant market is often represented by a significant percentage of consumption spending in the total GDP. This is because an increase in consumption spending leads to an immediate increase in capacity utilisation, in turn increasing the profitability of companies. I India consumption expenditure accounts for 47.8% of total GDP. So India is a buoyant market.

GDP at Factor Cost

9000000 8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 GDP at Factor Cost

Sectoral Contribution of GDP:

GDP is has three main components which are : 1. Primary i.e. the raw material extraction for any industry 2. Secondary i.e. the manufacturing. 3. Tertiary i.e. the services sector. The contributions of these three broad sectors from the period 2001 to 2010 are as follows:
Primary Secondary Tertiary 1991-92 353665 976952 1872651 2001-02 259872 894328 2681565 2009-10 561036 2280019 6900379

The percentage contributions of these sectors for the same period of time are as follows:
Primary Secondary Tertiary 1991-92 30.11 22.12 47.77 2001-02 23.53 21.54 54.92 2009-10 16.35 23.41 60.24

From the contribution percentage table we can easily identify that the primary sector which is the raw material extraction and producing is gradually decreasing after globalization whereas secondary sector i.e. manufacturing has steady growth but the most surprising fact is that the growth of tertiary sector i.e. the services sector. It has shown tremendous growth in the past 10 yrs.

70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 1991-92 2001-02 2009-10 Primary Secondary Tertiary

Inflation:
Inflation can be defined as a rising trend of prices caused by demand exceeding supply. The economic effects of minor infaltionary effects can be positive and often can be taken as a sign as an expansionary phase of the economy. An increase in expected rate of inflation, will reduce the value of fixed income securities, increases interest rates and risk premiums. An inflation of more than 3-4% results in extracosts to business, thereby squeezing their profit margins and leading to real declines in profitability. The figure above shows an erratic movements in the inflation rate. At a glance it looks as if there is no relationship between inflation and stock prices, but correlation between them is found to positive in low degree of 0.28 only. Therefore, there is a constant inflationary pressure in the economy that acts as a positive influence on the investors. The inflation rates for the past 5yrs are as follows:
Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Avg. Inflation 6.585465164 4.742305077 8.09292952 3.855514009 9.573192466

Avg. Inflation
12 10 8 6 4 2 0 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 6.585465164 4.742305077 Avg. Inflation 3.855514009 8.09292952 9.573192466

Interest Rate:
Interest rate is the price of credit. It is the percentage fee received or paid by the companies when they lend or borrow money. When interest rate rises (denoted by lending rate), investors required rate of return on shares rises, leading to a fall in prices of securities and hence a fall in the capital market and vice-versa. In India, we can see that in the pre recession period both lending rate, GOI bond rate and share market has moved the same direction. During recession when there was collapse in the market, govt. kept lending rate constant and brought down bond rate so that cost of capital remains the same as earlier. But after 2008-09, when the economy started recovering, it increased bond rate and brought down lending rate to fuel quicker capital formation in the economy. This can be seen as a bullish factor to consider for the capital market.
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Lending Rate 10.25 10.25 12.25 12.25 12.25 11.75 GOI Bond Rate 6.63 7.46 8.73 7.52 7.26 7.89

14.00 12.00 10.00 8.00 lending rate 6.00 4.00 2.00 0.00 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 GOI Bond rate

Export, Import and Balance of Trade:

Export is to ship commodities to other places or countries for sale or exchange. In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Imports consist of transactions in goods and services (sales, barter, gifts or grants) from nonresidents residents to residents. The exact definition of imports in national accounts includes and excludes specific "borderline" cases. The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports. A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap. Trade surplus is obviously good for the economy, however, small trade deficits, where more money is flowing out of the country than coming in, and vice versa, are generally not considered to be harmful to either the importing or exporting economy. The Trade Balance Report can provide insight into the demand for the currency on the global markets. If the balance of trade shows a surplus or declining deficit, then there may be an increased demand for the currency if the report shows a growing deficit, then the increased supply of the currency could lead to

devaluation against other currencies. Therefore, a positive Trade Balance Report is generally seen as a healthy economic sign. In India, BOT deficit has increased substantially from 2.6% in 2006-07 to 4.1% of GDP during Q2 FY11. However there is trend of stabilisation in the growth of BOT deficit. India reported a trade deficit equivalent to 7659 Millions USD in June of 2011. So, India can be seen as a slightly bullish.

Export, Import, Balance of Trade

1500000 1000000 500000 0 2004-05 2005-06 2006-07 export import 2007-08 BOT 2008-09 2009-10

FII Movement:
Foreign Institutional Investment is considered to be the most volatile component of the stock market. Whenever return expectation fall or rises FIIs either flows in or goes out of the economy. Currently India, the second fastest growing economy after China, has recently seen positive foreign institutional investor (FII) inflows driven by the sound fundamentals and growth opportunities. The FIIs are major institutional investors in Indian capital markets. In the year 1998-99, the gross purchases and sales by the FIIs stood at Rs. 16,115 crores and Rs. 17,699 crores, respectively. The gross turnover on BSE and NSE for the same period is Rs. 3.11 lakh crores and Rs. 4.14 lakh crores. Thus as a proportion of total turnover on the exchanges, the FII figures do not appear to be substantial. However, since the FII trades are delivery based, the actual impact on the market is much higher. The figure above shows that the effect of FII on Nifty is positive and the co-efficient of correlation is high so the effect is also high. The standard error comes out to be 575.658 which are high. This does not mean the relation is false but we can say that the error in linear relation is high which is considered as bullish for an economy.

FII
140000 120000 100000 80000 60000 40000 20000 0 -20000 -40000 -60000 FII

MACRO-ECONOMIC VIEWS FOR 2011

Indian policy makers have been boosting growth at the cost of macro stability risks, reflected in high inflation, a widening current account deficit and tight inter-bank liquidity due to low deposit growth. WPI headline inflation and non-food inflation have moderated to 7.5 percent YoY and 7.9 percent YoY in November 2010 from the peaks of 11 percent YoY and 8.9 percent YoY (in April 2010) respectively. Monthly trade deficit narrowed to 7.1 percent of GDP, annualised in November, from the peak of 10.8 percent of GDP, annualised in August 2010. Inter-bank liquidity should also improve over the next three months as recent aggressive deposit rate hikes will help improve deposit growth. Private sector capex has been accelerating over the last 10 months and it will soon begin to reflect in the form of commissioned capacity. At the same time, monetary tightening as reflected in the 300 bps rise in short-term rates (91-day Tbill yields) over the last eight months is beginning to help reduce the above macro stability risks. Overall macro conditions will remain vulnerable over the next 4-5 months. Inflation, while moderating, will remain above the RBIs comfort zone; while we believe the current account deficit will also stay relatively high. Recent optimism in the developed world growth outlook has increased the risk of a potential rise in crude oil prices to $110-120/bbl. Similarly, there is additional risk of pass through of agricultural and commodity prices.

MARKET OUTLOOK FOR 2011

Relative valuations are on the richer side and hence we expect moderation in index returns for 2011 (in the 10- 15 percent zone from current levels). That said, we remain in a structural bull market so any dip will enhance returns and provide an opportunity to buy equities. The market is likely to consolidate in its current range in the near term and then a steady but not spectacular rise for the rest of 2011. We expect style rotation in 2011. Watch out for the beaten-down low ROE, high beta plays and stocks of less dividend-focused companies. Indias policy favours a change in mix of growth from consumption to capital spending. An improving global growth environment could be the trigger for higher-than anticipated capex. We favour capex proxies such as industrials, materials and property over consumption sectors.

Global Economy
The global economy is weakening. The GDP growth forecast for the US for 2011 have been revised downwards by 110bps from 2.8% to 1.7% by economists. The second quarter 2011 GDP growth for Germany at 0.1% and France at 0% against first quarter 2011 growth of 1.3% and 0.9% respectively suggest that Eurozone weakness is feeding into the largest economies in the Eurozone. The worries on sovereign debt in countries of Greece, Spain, Italy, Portugal and Ireland are forcing these countries to adopt austerity measures to bring down debt. The austerity measures adopted by these countries will bring down GDP growth in these countries leading to an overall weakness in Eurozone growth. The second half of 2011 may well see the Eurozone contracting if growth in Germany and France does not pick up.

On the data front, US job growth was flat in August leaving unemployment rate unchanged at 9.1%. US manufacturing growth slowed to its lowest level in two years in August while consumer confidence dropped to two year lows. The US is forced to adopt spending cuts to bring down its debt in the face of weak economic growth. The US president unveiled a USD 440 billion job plan that is expected to create jobs and bring down unemployment. The plan will be financed by higher taxes on the high earners. Government taking money away from the private sector to the public sector is not the best option given the inefficiencies of the public sector

Analysis of Indian Pharmaceutical Industry

The Indian Pharmaceutical Industry today is in the front rank of Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world.

Growth Scenario in 2011

India's pharmaceutical industry is now the third largest in the world in terms of volume. Its rank is 14th in terms of value. Between September 2008 and September 2009, the total turnover of India's pharmaceuticals industry was US$ 21.04 billion. The domestic market was worth US$ 12.26 billion. This was reported by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers. As per a report by IMS Health India, the Indian pharmaceutical market reached US$ 10.04 billion in size in July 2010. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually.

Leading Pharmaceutical Companies

In the domestic market, Cipla retained its leadership position with 5.27 per cent share. Ranbaxy followed next. The highest growth was for Mankind Pharma (37.2%). Other leading companies in the Indian pharma market in 2010 are: 1. Sun Pharma 2. Abbott 3. Zydus Cadila 4. Alkem Laboratories 5. Pfizer

10

6. GSK India 7. Piramal Healthcare 8.Lupin

Future Prospects
The Indian pharmaceuticals market is expected to reach US$ 55 billion in 2020 from US$ 12.6 billion in 2009. This was stated in a report title "India Pharma 2020: Propelling access and acceptance, realising true potential" by McKinsey & Company. In the same report, it was also mentioned that in an aggressive growth scenario, the pharma market has the further potential to reach US$ 70 billion by 2020 Due to increase in the population of high income group, there is every likelihood that they will open a potential US$ 8 billion market for multinational companies selling costly drugs by 2015. This was estimated in a report by Ernst & Young. The domestic pharma market is estimated to touch US$ 20 billion by 2015. The healthcare market in India to reach US$ 31.59 billion by 2020. The sale of all types of pharmaceutical drugs and medicines in the country stands at US$ 9.61 billion, which is expected to reach around US$ 19.22 billion by 2012. Thus India would really become a lucrative destination for clinical trials for global giants. There was another report by RNCOS titled "Booming Pharma Sector in India" in which it was projected that the pharmaceutical formulations industry is expected to prosper in the same manner as the pharmaceutical industry. The domestic formulations market will grow at an annual rate of around 17% in 2010-11, owing to increasing middle class population and rapid urbanisation. Read More in Future Prospects of Indian Pharma Industry.

Characteristics of Indian Pharmaceutical Industry

The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It is an extremely fragmented market with severe price competition and government price control. The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e., medicines ready for

11

consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations. Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the drugs and pharmaceutical products has been done away with. Manufacturers are free to produce any drug duly approved by the Drug Control Authority. Technologically strong and totally selfreliant, the pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpower, strength of national laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and research capabilities, supported by Intellectual Property Protection regime is well set to take on the international market.

Reasons for growth of pharmaceutical industry in India:

Competent workforce: India has a pool of personnel with high managerial and technical competence as also skilled workforce. It has an educated work force and English is commonly used. Professional services are easily available. Cost-effective chemical synthesis: Its track record of development, particularly in the area of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs. Legal & Financial Framework: India has a 53 year old democracyand hence has a solid legal framework and strong financial markets. There is already an established international industry and business community. Information & Technology: It has a good network of world-class educational institutions and established strengths in Information Technology. Globalisation: The country is committed to a free market economy and globalization. Above all, it has a 70 million middle class market, which is continuously growing. Consolidation: For the first time in many years, the international pharmaceutical industry is finding great opportunities in India. The process of consolidation, which has become a generalized phenomenon in the world pharmaceutical industry, has started taking place in India.

12

Porters five forces model on Pharmaceutical industry

Pharma industry is one of the most competitive industries in the country with as many as 10,000 different players fighting for the same pie. The rivalry in the industry can be gauged from the fact that the top player in the country has only 6% market share, and the top five players together have about 18% market share. Thus, the concentration ratio for this industry is very low. High growth prospects make it attractive for new players to enter in the industry. Another major factor that adds to the industry rivalry is the fact that the entry barriers to pharmacy industry are very low. The fixed cost requirement is low but the need for working capital is high.

Bargaining power of buyers

In pharmaceutical industry they have an unique feature that is other that firms buyers cannot control the price. The main reason behind this is we can not buy a medicine mostly without doctors advice and some time we are bound to buy that medicine so that can be from any company.

13

In Pharmaceutical industry though the buyers are scattered and a large no they dont have a positive active to control the price. The govt of india has different policies to the control the medicine price in the country they have an authority called national pharmaceutical pricing authority which controls prices

Bargaining power of suppliers

In the pharmaceutical industry the bargaining power of the suppliers is very less. The medicines which cost Rs 3 it may be manufactured by Re .50 or may be less than that but behind each and every medicine there are several no of research activities related. So the suppliers need to purchase according to the doctors order so they could not say anything to the manufacturers. According to the government authority also they are given such kind of rights to them to do like that.

Barriers to entry
Pharmaceutical industry as a where any can be easily entered. The initial capital requirement for this industry is very low and also making the supply and distribution channel is very convenient. For a new player in pharmacy sector the barrier may the the govt policies. Govt checks the brands the quality, side effects and authenticity of the product, as we know in a medical industry it is very important. Secondly after these huge players it may be difficult to make positioning in this industry. Going forward, the impending new patent regime will raise the barriers to entry. But it is unlikely to discourage new entrants, as market for generics will be as huge.

Threat of substitutes
This is one of the great advantages of the pharma industry. Whatever happens, demand for pharmacy products continues and the industry thrives. The main reason behind that is the key players of pharmacy sector have a ongoing process and they have infinite future plans and demands. However, in recent times, the improvement of biotech industry can be threat for a pharmaceutical industry.

14

SWOT Analysis Of Indian Pharmaceutical Industry:

SWOT Analysis, is a strategic planning tool used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective. The aim of any SWOT analysis is to identify the key internal and external factors that are important to achieving the objective. SWOT analysis groups key pieces of information into two main categories: Internal factors - The strengths and weaknesses internal to the organization. External factors - The opportunities and threats which are external to the organization.

India's pharmaceutical market currently stands ninth in the world market for pharmaceuticals with a 1.5% share. Here is the swot analysis of Indian Pharma Industry.

15

STRENGTH
1. Availability of Cheap raw material(most economical raw material in the world after China) 2. Availability of professional manpower with good technical expertise 3. Low cost of production. 4. Large pool of installed capacities 5. Efficient technologies for large number of Generics. 6. Large pool of skilled technical manpower. 7. Increasing liberalization of government policies.

WEAKNESS
1.

Bad brand image of Indian Pharmaceutical Products in USA, UK & other western countries which is hampering exports

2.

Lack of Research & Development (R&D) orientation of Indian Pharmaceutical Companies

3. 4. 5. 6. 7. 8.

Fragmentation of installed capacities. Low technology level of Capital Goods of this section. Non-availability of major intermediaries for bulk drugs. Lack of experience to exploit efficiently the new patent regime. Very low key R&D. Low share of India in World Pharmaceutical Production (1.2% of world production but having 16.1% of world''s population).

9. 10.

Very low level of Biotechnology in India and also for New Drug Discovery Systems. Lack of experience in International Trade.

16

OPPORTUNITY
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Very lucrative high profit making market with high chances of growth Increased awareness amongst people about Health Prodcuts Aging of the world population. Growing incomes. Growing attention for health. New diagnoses and new social diseases. Spreading prophylactic approaches. Saturation point of market is far away. New therapy approaches. New delivery systems. Spreading attitude for soft medication (OTC drugs). Spreading use of Generic Drugs. Globalization Easier international trading. New markets are opening.

THREAT
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Entry of other foreign competitors in the Indian market Other Business Risks Containment of rising health-care cost. High Cost of discovering new products and fewer discoveries. Stricter registration procedures. High entry cost in newer markets. High cost of sales and marketing. Competition, particularly from generic products. More potential new drugs and more efficient therapies. Switching over form process patent to product patent.

17

Industry Life Cycle Of Indian Pharmaceutical Industry

Industry life cycle mean to say how an industry is growing time by time. A concept relating to the different stages an industry will go through, from the first product entry to its eventual decline. There are typically five stages in the industry lifecycle. They are defined as: i. Early Stages Phase - alternative product design and positioning, establishing the range and boundaries of the industry itself. ii. Innovation Phase - Product innovation declines, process innovation begins and a "dominant design" will arrive. iii. Cost or Shakeout Phase - Companies settle on the "dominant design"; economies of scale are achieved, forcing smaller players to be acquired or exit altogether. Barriers to entry become very high, as large-scale consolidation occurs. iv. Maturity - Growth is no longer the main focus, market share and cash flow become the primary goals of the companies left in the space. v. Decline - Revenues declining; the industry as a whole may be supplanted by a new one. An important fact is that pharma is a stable market and its growth rate generally tracks the economic growth of the country with some multiple (1.2 times average in India). Though volume growth has been consistent over a period of time, value growth has not followed in tandem. As per the present growth rate, the Indian Pharma Industry is expected to be a US$ 20 billion industry by the year 2015 .It is also expected that the Indian pharma sector will also be in top 10 industries soon. The sales

18

of the Indian Pharma Industry would worth US$ 43 billion within the next decade. With increase of medical industry the health sector infrastructure will also increases and which can contribute to the pharmaceutical sector. As after liberalisation the no of MNCs in India are increasing so it will be easy to attract the foreign investors in this industry. The Pharmaceutical industry in India is one of the major foreign direct investments encouraging sectors. The product differentiation is one key factor, which gives competitive advantage to the firms in any industry. However, in pharma industry product differentiation is not possible since India has followed process patents till date, with laws favouring imitators. This picture is a negative growth till 2003. The Indian Pharmaceutical Industry today is in the front rank of Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranked very high in the third world among their technologies, quality of antibiotics, different anti oxides, etc. The domestic pharma sector continued its strong show in 2010 and recorded a 16.5% growth during January-December. While Cipla topped the list with the highest market share, cough medication Corex (Pfizer) was the largest-selling brand in the organized retail market.

19

Market Share Of Leading Companies In Indian Pharmaceutical Industry:

Torrent Pharma 2% Wockhardt Aventis 2% Piramal Pharma Health 2% Biocon 3% 3% Glenmark 4% Divis Labs 4% Cadila Health 7%

Market Cap

Pfizer 2%

Sun Pharma 22% Dr Reddys Labs 11% Cipla Lupin 10% 10%

GlaxoSmithKlin e 8% Ranbaxy Labs 10%

According to the pie chart the companies with highest market capitalization are Sun Pharma, Dr.Reddys Lab, Cipla, Lubin, Ranbaxy Lab and Glaxo Smith Kline.

Comparison According To Small, Mid And Large Cap:

20

Comparison
Large Cap Mid Cap Small Cap 282.91

107.02

108.93

109.55

22.30 11.65 1.77 Avg DPS

16.26

12.36

22.25

13.86

32.93

22.15

34.11

14.64

24.16 7.59 4.84 avg P/e

Avg PBIT

Avg ROCE

AVG DPR

Avg EPS

Interpretation: From the above charts we can easily identify that the mid cap pharmaceutical companies are doing the best in all parameters as compared to large cap and small cap companies. Whereas the small cap companies are doing the worst and large cap companies are in the middle. This sort of unusual pattern is seen because the mid companies are trying to penetrate into the large cap sector by introducing new products at lower price as compared to the large cap companies.

21

Analysis of Glaxo Smithkline Pharmaceuticals Limited India

Established in the year 1924 in India GlaxoSmithKline Pharmaceuticals Ltd. (GSK Rx India) is one of the oldest pharmaceuticals company and employs over 3500 people. Globally, we are a 28.4 billion, leading, research-based healthcare and pharmaceutical company. In India, we are one of the market leaders with a turnover of Rs. 2572 crore and a share of 4.3%*. At GSK, our mission is to improve the quality of life by enabling people to do more, feel better and live longer. This mission drives us to make a real difference to the lives of millions of people with our commitment to effective healthcare solutions. The GSK India product portfolio includes prescription medicines and vaccines. Our prescription medicines range across therapeutic areas such as anti-infectives, dermatology, gynaecology, diabetes, oncology, cardiovascular disease and respiratory diseases. The company is the market leader in most of the therapeutic categories in which it operates. GSK also offers a range of vaccines, for the prevention of hepatitis A, hepatitis B, invasive disease caused by H, influenzae, chickenpox, diphtheria, pertussis, tetanus, rotavirus, cervical cancer and others. With opportunities in India opening up, GSK India is aligning itself with the parent company in areas such as clinical trials, clinical data management, global pack management, sourcing raw material and support for business processes including analytics. GSK's best-in-class field force, backed by a nation-wide network of stockists, ensures that the Company's products are readily available across the nation. GSK has two manufacturing units in India, located at Nashik and Thane as well as a clinical development centre in Bangalore. The state of art plant at Nashik makes formulations while bulk drugs and the active pharmaceutical ingredients are manufactured at Thane. Being a leader brings responsibility towards the communities in which we operate. At GSK, we have a Corporate Social Responsibility program that works towards fulfilling basic healthcare, education and other developmental needs of the underserved population. With this dedication and commitment, we believe that the world will be better, healthier and happier. GSK is committed to developing new and effective healthcare solutions. The values on which the group was founded have always inspired growth and will continue to do so in times to come.

22

Share holding pattern of GSK India

Share Holding Pattern No. of Share holders Shares Percentage Domestic Companies 1694060.34 2% Mutual Funds 3388120.68 4% FII's,NRI's, OBC's 13552482.72 16% Insurrance Companies and Banks 10164362.04 12% Castleton investment Limited 3388120.68 4% BWI Limited UK 3388120.68 4% Eskaylab Limited UK 5929211.19 7% Glaxo Group Limited UK 30493086.12 36% Resident Individuals 12705452.55 15% Total No. of Shares 84703017
Domestic Companies 2% Resident Individuals 15%

Share holding pattern

Mutual Funds 4%

FII's,NRI's, OBC's 16% Insurrance Companies and Banks 12% Castleton investment BWI Limited UK Limited 4% 4%

Glaxo Group Limited UK 36% Eskaylab Limited UK 7%

23

Ratio Analysis Of GSK India

Ratio analysis is a tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis. There are many ratios that can be calculated from the financial statements pertaining to a company's performance, activity, financing and liquidity. Some common ratios include the priceearnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital. 1. Investment Valuation Ratios: These ratios are calculated to understand the worth of the investments made by the company whether they are giving proper returns or not. Some commonly used Investment Valuation Ratios are Dividend Per Share , Operating Profit Per Share ,
Bonus in Equity Capital, Free Reserves Per Share. All these ratios related to Glaxo Smithkline Pharmaceuticals India Limited are given below:

A. Dividend Per Share: The the sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued. DPS can be calculated by using the following formula:

D - Sum of dividends over a period (usually 1 year) SD - Special, one time dividends S - Shares outstanding for the period

24

DPS of GSK India: Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dividend Per Share 31.00 36.00 40.00 30.00 40.00

Dividend Per Share

Dividend Per Share

31.00

36.00

40.00 30.00

40.00

Dec '06

Dec '07

Dec '08

Dec '09

Dec '10

Interpretation: From the above graph we can easily identify the dividend payment of the company. In 2006 the company paid a dividend of Rs. 31 which increased to Rs.40 in 2008 as the profit margin of the company increased but then in 2009 the dividend fell to Rs.30 which was lesser then the dividend paid in 2006. This drastic fall was seen because there was huge fall in the sales of the company in the financial year 2008-09. But again in 2010 the dividend increased to Rs.40. B. Bonus Equity Capital: Bonus in equity capital is a kind of a premium which the company pays to its shareholders every year, this bonus is not mandatory for the company to pay. If the company makes a substantial profit in a financial year the company may or may not pay the bonus. If the company is paying the bonus it shows that it is doing a good business and is getting good profit margins. Bonus equity capital of GSK India:
Dec '06 Bonus in Equity Capital 48.03 Dec '07 48.03 Dec '08 48.03 Dec '09 48.03 Dec '10 48.03

Interpretation: Here the bonus equity is constant over all the 5yrs, which means the company is in a good position and is making good profit.

25

2. Profitability Ratios: A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Some examples of profitability ratios are Operating Profit Margin, Profit Before Interest And Tax
Margin, Gross Profit Margin, Net Profit Margin, Return On Capital Employed, Return On Net Worth, Return on Long Term Funds, etc.

A. Operating Profit Margin: The operating profit margin ratio indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. It is expressed as a percentage of sales and shows the efficiency of a company controlling the costs and expenses associated with business operations. Phrased more simply, it is the return achieved from standard operations and does not include unique or one time transactions. Terms used to describe operating profit margin ratios this include operating margin, operating income margin, operating profit margin or return on sales (ROS) The operating profit margin ratio formula is calculated simply using: Operating profit margin = Operating income Total revenue Or EBIT Total revenue Operating Profit Margin of GSK India:

Interpretation: From the above graph we can understand that the operating profit margin had steep rise in 2007 from 2006 and from then onwards it has steady growth but in 2010 it has a slight dip which may be due to increase in operating cost.

26

B. Net Profit Margin Ratio : The net profit margin ratio is a profitability ratio that is a margin ratio. It can be calculated by using numbers off the company's income statement. Net profit margin is the number of dollars of after-tax profit a firm generates per dollar of sales. If a firm generates Re.1.00 of sales revenue, for example and has a 5 percent net profit margin that means it generated Re.0.05 of profit. Net Profit Margin Ratio = Net Income/Net Sales or revenue

Net profit margin ratio of GSK India:

Interpretation: In the above graph it can be easily seen that the net profit margin ratio of the company is gradually decreasing every year this decline is mainly because of the increased competition which is making the company to lower their profit margins and increase in production cost. C. Return On Capital Employed: A ratio that indicates the efficiency and profitability of a company's capital investments. ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce shareholders' earnings.

27

ROCE of GSK India:

Interpretation: Here, in the above graph we can see that the ROCE of the company is continuously declining till 2009 and then slight increase in 2010. The main reason for this could be increase in liabilities and decrease in earnings. 3. Management Efficiency Ratios: Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery. Examples of management efficiency ratios are Inventory Turnover Ratio, Debtors Turnover Ratio, Investments Turnover Ratio, Fixed Assets Turnover Ratio, Total Assets Turnover Ratio, Selling Distribution Cost Composition, etc. A. Inventory Turnover Ratio: A ratio showing how many times a company's inventory is sold and
replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days".

Formula:

or,

28

Inventory Turnover ratio of GSK India:

Interpretation: This ratio shows how many times the inventory was replaced. Thus from the above graph we can say that the inventory has increased by about 20% in 2007 as compared to in 2006. But latter on it declined continuously till 2009 and again increased in 2010, this was mainly because of increased competition and declining sales. B. Debtors Turnover Ratio: An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

Formula:

29

Debtors Turnover Ratio of GSK India:

Interpretation: GSK India has posted a very good debtors turnover ratio over the past 5yrs it showed a regular growth in all the years except in 2009 where it fell by about 4% from its previous year. C. Total Assets Turnover Ratio: The amount of sales generated for every Rs's worth of assets. It is calculated by dividing sales in Rs by assets in Rs.

Formula:
Total assets turnover ratio of GSK India:

30

Interpretation: From the above graph we can see that the company has a very low assets turnover ratio which means the company is not using its assets properly or the company has more of Non Performing Assets. This also shows that the company has a very high profit margin because its a thumb rule of total assets turnover ratio that lower the margins higher the ratio and vice-versa.

4. Liquidity And Solvency Ratios: These ratios are mainly used to measure a company's ability to meet long-term obligations. The liquidity and solvency ratio measures the size of a company's after-tax income, excluding non-cash depreciation expenses, as compared to the firm's total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. Examples of liquidity ratios are Current Ratio, Quick Ratio, Earning Retention Ratio, Cash Earning Retention Ratio, Earnings Per Share, P/E ratio, etc.

A. Current Ratio: A liquidity ratio that measures a company's ability to pay short-term obligations. The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

Formula:

Current Ratio of GSK India:

31

Interpretation: The current ratio graph of GSK India shows that till 2008 the company had a very good current ratio but in latter yrs it fell below 1, which suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, which may be due to the financial downturn in 2008-09. B. Quick Ratio: An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.

The quick ratio is calculated as:

Quick Ratio of GSK India:

Interpretation: This ratio is more accurate than the current ratio because it deducts the inventory from the assets. As in current ratio the same pattern is followed here till 2008 it posted a good quick ratio but from 2009 onwards it went below 1 which is pretty bad and the reason is same as in current ratio. C. Earning Retention Ratio: The earnings retention ratio (ability to keep profits and pay to shareholders) is a way to calculate what the percentages of earnings are returned to shareholders.

32

To calculate earnings retention ratio = Earning Retention ratio of GSK India:

Interpretation: From this ratio we can see how much dividend the company is paying and how much profit it is retaining. According to the graph of the company it paid more dividends in the years 2006, 07 and 08 but latter on it started to retain its profit for expansion plans. D. Earnings per share: The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Calculated as: EPS of GSK India:

33

Interpretation: It is one of the most important ratio of the company it shows the exact condition of the company, the higher the EPS the better. In this company it is more or less in the same range thus it is quite good. E. P/E Ratio: A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

P/E ratio of GSK India:

34

Interpretation: It is another important ratio of a company. This shows how much the company is earning from each share. The higher the P/E ratio the more better is the condition of the company. From the above graph we can understand that it rising in each year thus the company is performing pretty well.

Risk and Return of GSK India:

Risk and return of any company is measured by the Standard Deviation, Beta(), Variance, Covariance and Correlation.

Risk and Return 0.00003194 Covariance 0.0001556 Variance 0.2052527 Beta 0.0124742 S.D 0.5658982 Correlation

35

Covariance: It is a measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely. Here in case of GSK India and Cnx Nifty the covariance is very low which means the stock is very less likely to move according to nifty. Variance: A measure of the dispersion of a set of data points around their mean value. Variance is a mathematical expectation of the average squared deviations from the mean. Variance measures the variability (volatility) from an average. Volatility is a measure of risk, so this statistic can help determine the risk an investor might take on when purchasing a specific security. Here in case of GSK India has a very low variance which indicates that it has a very low risk. Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. Also known as "beta coefficient". Here in case of GSK India Beta is much less than 1 which indicates that the stock is very much stable and is less volatile than the market. Standard Deviation: A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility. In case of GSK India standard deviation is also very low which also indicates that it has a very low volatility. Correlation: In the world of finance, a statistical measure of how two securities move in relation to each other is known as correlation. Correlations are used in advanced portfolio management. Here, in case of GSK India and CNX Nifty the correlation is very low around 50% that means the stock is less likely to move according to the market.

36

Intrinsic Value
The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.

Intrinsic Value value anchor 2104.619 upper 2209.85 lower 1894.157

Interpretation: According to the intrinsic value the price is likely to move in between Rs.2209 and Rs.1894. As on 30th September the closing price was Rs.2089. Thus the investors should buy and hold for maximum return.

Conclusion:
The Indian economy is in a booming state and the GDP is expected to grow at 8% thus it is very good time to invest in the market and the Indian pharmaceutical industry is the 3rd largest in the world thus it is obvious that investing in this sector will fetch high return. Among the pharmaceutical companies investing in the large cap and mid cap will be more profitable. Taking Glaxo Smith Kline in mind investing in this company will be very much profitable because the risk in this stock is very much low and its very little volatile. Moreover from the intrinsic value we can see that currently the stock is under priced that is it is more likely to move upwards and if the investor is willing to invest in this stock than it will be better for long term investment, looking into the fact that the stock has a very low risk and very much stable.

37

BIBLIOGRAPHY
http://www.rediff.com/money/2004/dec/07spec.htm http://pkpharmaguru.blogspot.com/2011/07/swot-analysis-of-indian-pharmaceutical.html http://www.businesswire.com/news/home/20110303006484/en/Research-MarketsIndian-Pharmaceutical-Industry http://www.researchandmarkets.com/research/d04ded/indian_pharmaceuti http://www.business-standard.com/stockpage/stock_details.php?stk_id=500660 http://economictimes.indiatimes.com/glaxosmithkline-pharmaceuticalsltd/shareholding/companyid-13715.cms http://www.rbi.org.in/home.aspx http://www.investopedia.com http://www.moneycontrol.com http://www.nseindia.com

38

39

40

41