Industry Analysis: Pharmaceutical Sector

Group -6 Arnav Das Harjot Singh Krishna Prem Sharma Naved Siraj Rohit Grover Sugandha Gupta

Flow of presentation
Overview of Pharmaceutical Sector Company Background Analysis: Short term Lending Analysis: Short term Investment Analysis: Long term Lending Analysis: Long term Investment Strategic Analysis: Operational Strategic Analysis: Financial

Overview of Pharmaceutical Sector

Highly fragmented with over 23,000 players but only 250 of them are in the organized sector. Fastest-growing markets in the world Currently valued at US$ 12 billion Sector expected to reach US$ 55 billion by 2020, growing at a compound annual growth rate (CAGR) of 10-11 percent Favorable Demogra phics

Strong quality and technical capabilitie s

Innovativ e product developm ent

It is the third-largest market in the world in terms of volume and 14th in terms of value.

Market Size (US bn $) 60 40

Indian Pharmaceutical Scenario

20
0
2005 2010 2020 (E)

Market Size (US bn $)

Governm ent support

Wide product portfolio

Company Background
CIPLA
Ranked No. 1 in terms of sales Exports to more than 185 countries in all corners of the world World's largest manufacturer of antiretroviral drugs (ARVs) to fight HIV/AIDS

Leading Indian Players by Sales Company Cipla Ranbaxy Laboratories Dr Reddy's Laboratoriess Sun Pharma Lupin Ltd Aurobindo Pharma Piramal Health Cadila health Sales (US$ mn) 1127.08 944.97 923.47 813.32 993.29 677.54 416.73 381.85

Dr. Reddys Laboratories Ltd.

Ranked No. 3 in terms of sales Major markets include India, USA, Russia and CIS, Germany, UK, Venezuela, S. Africa, Romania, and New Zealand

Short Term Lending Analysis

Analysis: Short Term Lending

1. Current Ratio: 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) Higher the current ratio, the more capable the company is of paying its obligations
Current Ratio Cipla Ltd Dr Reddys Laboratories Ltd Mar-11 2.84 1.61

2. Quick Ratio:

Ability to meet its short-term obligations with its most liquid assets DRL is in a better situation as compared to Cipla Ltd
Quick Ratio Cipla Ltd Dr Reddys Laboratories Ltd Mar-11 2.46 2.05

Analysis: Short Term Lending

3. Inventory Turnover Ratio:
Cipla 10 9 DRL Industry

Inventory turnover ratio

7
6

5
4 3 2 1 0 Mar 7 Mar 8 Mar 9 Mar 10 Mar 11

Cipla has a better inventory turnover which is close to Industry average Lower inventory turnover ratio may be an indication of overstocking A very high turnover may result in loss of sales due to inventory shortage

Analysis: Short Term Lending

4. Current Assets Turnover Ratio:
Cipla 1.40 DRL

Current asset turnover ratio

1.20 1.00 0.80

0.60
0.40 0.20 0.00 Mar 7 Mar 8 Mar 9 Mar 10 Mar 11

Current assets turnover ratio shows a firm ability to convert current assets to sales Cipla has a higher current assets turnover ratio Indicates Cipla has a higher productivity

Conclusion: Cipla is a better firm than Dr. Reddys Lab when compared from a point of view of a short term lender.

Short Term Investment Analysis

Analysis: Short Term Investment

1. Stock Valuation: Estimate the future movement of stock values Cipla and DRL has similar P/E ratio thus buying any share will be a good options
P/E ratio Cipla Ltd Dr Reddys Laboratories Ltd Mar-11 23.36 23.19

2. Beta Value: Shows the risk associate with the stocks- higher value of beta indicates a higher risk, higher return Cipla has a higher value of Beta as compared to DRL, thus it is a better buy
Mar-11 Cipla Ltd Dr Reddys Laboratories Ltd 0.651 0.5726

Conclusion: Cipla is a better company as compared to DRL for short term investment point of view

Long Term Investment Analysis

Analysis: Long Term Investment

1. Price /Book ratio: A high Price to book value ratio shows that the stock is not undervalued The companies have been earning a good price on its assets.
Cipla 3.9 Dr. Reddys Lab 4.6

DRL is in a better situation

Analysis: Long Term Investment

2. Debt equity ratio:

Indicates what proportion of equity and debt the company is using to finance its assets. This ratio also indicates DRL is in better situation.

Analysis: Long Term Investment

3. Interest coverage ratio:

This ratio says the company has capabilities to pay back long term loans. This ratio indicates Cipla is in better situation.

Analysis: Long Term Investment

4. Dividend payout ratio:

This ratio indicates DRL is in better situation.

Conclusion: DRL is a better company as compared to Cipla for Long term investment point of view

Long Term Lending Analysis

Analysis: Long Term Lending

1. Debt equity ratio:

Indicates what proportion of equity and debt the company is using to finance its assets. This ratio also indicates Cipla is in better situation.

Analysis: Long Term Lending

2. Interest coverage ratio:

This ratio says the company has capabilities to pay back long term loans. This ratio indicates Cipla is in better situation.

Conclusion: Cipla is a better company as compared to DRL for Long term Lending point of view

Short Term Strategy Analysis : Operational

Analysis: Short Term Strategy

Operational efficiency 1. Sales to cash flow ratio:

It shows firm's effectiveness in collecting cash for its sales. Cipla is in better situation as compared to DRL

Analysis: Short Term Strategy

2. Inventory Turnover Ratio:
Cipla 10 9 DRL Industry

Inventory turnover ratio

7
6

5
4 3 2 1 0 Mar 7 Mar 8 Mar 9 Mar 10 Mar 11

Cipla has a better inventory turnover which is close to Industry average Lower inventory turnover ratio may be an indication of overstocking A very high turnover may result in loss of sales due to inventory shortage

Analysis: Short Term Strategy

3. Account Receivable Turnover Ratio:

An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts A high Accounts Receivable turnover ratio for DRL shows that it manages its credit policies efficiently thus has a greater operational efficiency.

Conclusion: Cipla has a better operational efficiency as compared to DRL. Thus DRL requires to improve its operational efficiency

Long Term Strategy Analysis : Operational

Analysis: Long term Strategy

Operational Efficiency 1. Fixed asset Turnover Ratio:

It measures a company's ability to generate net sales from fixed-asset Cipla and DRL both are in a comparable situation

Conclusion: Both the companies are operationally efficient in long term and no restructuring is required

Short Term Strategy Analysis : Financial

Analysis: Short Term Strategy

Financial Efficiency 1. Current Ratio: 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) Higher the current ratio, the more capable the company is of paying its obligations
Current Ratio Cipla Ltd Dr Reddys Laboratories Ltd Mar-11 2.84 1.61

2. Quick Ratio: Ability to meet its short-term obligations with its most liquid assets Cipla is in a better situation as compared to DRL
Quick Ratio Cipla Ltd Dr Reddys Laboratories Ltd Mar-11 2.46 2.05

Conclusion: Cipla is a better situation as compared to DRL. Thus DRL requires a financial strategic change in short term

Long Term Strategy Analysis : Financial

Analysis: Long Term Strategy

1. Debt equity ratio:

Indicates what proportion of equity and debt the company is using to finance its assets. This ratio also indicates Cipla is in better situation.

Analysis: Long Term Strategy

2. Interest coverage ratio:

This ratio says the company has capabilities to pay back long term loans. This ratio indicates Cipla is in better situation.

Conclusion: Cipla is a better situation as compared to DRL. Thus DRL requires a financial strategic change in long term