Cipla vs Sun Pharma: Which Pharma Stock is Better?

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  • Apr 13, 2022 - Cipla vs Sun Pharma: Which Pharma Stock is Better?

Cipla vs Sun Pharma: Which Pharma Stock is Better?

Apr 13, 2022

Cipla vs Sun Pharma: Which Pharma Stock is Better?

The ability to produce and distribute low-cost medicines to the world has helped Indian pharmaceutical companies gain global recognition.

While government reforms have helped the industry flourish, the growing population and increasing spending on medicine have driven this industry's growth.

In this highly competitive industry, two Indian players have made their mark by offering affordable medicine to the world - Sun Pharma and Cipla.

This article looks at how these two companies fare against each other in terms of financials, fundamentals, and future prospects.

Business Overview

Cipla is the third-largest pharmaceutical company in India. It is actively engaged in the business of manufacturing and distributing medicines.

The company boasts a portfolio of more than 1,500 products in 65 therapeutic areas across active pharmaceutical ingredients (APIs), generics, and over the counter consumer products.

Sun Pharma is the largest pharmaceutical company in India, with a market share of 8.2 %.

It is also the fourth largest speciality generic pharmaceutical company globally with a diversified portfolio of over 2,000 products ranging across generics, branded generics, APIs, and intermediates.

Cipla vs Sun Pharma Business Overview

  Cipla Sun Pharma
Products APIs
Cipla generics
Cipla Diagnostics
Cipla Health - OTC
Speciality medications
Generic medications
Over-the-counter medications
APIs
Anti retro viral medications
Therapeutic areas Respiratory
HIV
Oncology
Urology
Cardio metabolism
Child health
Infectious Disease and critical care
Hepatitis
Women Health
Ophthalmology
Neuro-Psychiatry
Neuro-psychiatry
Cardiology
Gastroenterology
Anti-infectives
Diabetology
Oncology
Ophthalmology
Dermatology
Urology
Nephrology
Respiratory
Pain/analgesics
Gynaecology
Anti-infectives
Strengths Third largest pharma company in India
Largest Indian exporter to emerging markets
Leading player in several therapeutic segments
Geographical diversification across 170 countries
Largest pharma company in India
Geographically diversified revenue mix
Leadership in key therapeutic areas
Backward integration through API
Challenges Regulatory risks
Forex risks
High competition
Litigation risks
Regulatory risks
Forex risks
High competition
Data Source: Company Website and Annual Reports

Revenue growth

The revenue for Cipla has grown at a compound annual growth rate (CAGR) of 5.8% against 1.8% for Sun Pharma in the last five years.

The company's growth was driven by solid performance in its India, North America, and Africa markets, led by new product launches.

For Sun Pharma, strong performance in the Indian market and its speciality products in the US market contributed to the revenue growth.

Cipla vs Sun Pharma Revenue Growth (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Revenue (in bn)          
Cipla 146 155 168 175 194
Sun Pharma 323 273 301 335 344
Revenue Growth (%)          
Cipla   6.1% 8.5% 3.9% 11%
Sun Pharma   -15.5% 10.2% 11.2% 2.6%
Data Source: Ace Equity

Both Cipla and Sun Pharma have been facing pricing pressures in the US generics market, leading to slower growth in revenues.

However, they're trying to combat this problem by focusing on other segments. For example, Sun Pharma is strengthening its speciality products business globally. On the other hand, Cipla is increasing its investments in complex generics.

Profitability

We can assess a company's profitability by looking at two ratios, namely operating profit margin and net profit margin.

The operating profit margin is a measure of a company's operational efficiency. In contrast, the net profit margin measures the income generated from all operating and non-operating activities as a percentage of revenue.

The higher the profit margins, the better.

In terms of operating profit margin, Sun Pharma is leading with a five-year average of 17.5%, whereas for Cipla, it is 16.7%.

The five-year average net profit margin for Sun Pharma stands at 9.3% whereas it is 7.4% for Cipla.

Sun Pharma is again leading with a five-year average of 9.3% against a 7.4% of Cipla in terms of net profit margin.

A better product mix and cost optimisation measures drove the margins for Sun Pharma.

For Cipla, the margins were driven by new product launches, cost reimagination initiatives, and strong growth across key markets.

Cipla vs Sun Pharma Profit Margins (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
EBITDA margin (%)          
Cipla 18.5% 20.9% 14.9% 13.1% 16%
Sun Pharma 33.9% 12.6% 13% 12.8% 15.2%
Net Profit Margin (%)          
Cipla 7.1% 9.3% 6.3% 5.7% 8.5%
Sun Pharma 24.8% 5% 5.7% 7% 3.7%
Data Source: Ace Equity

Manufacturing facilities

Cipla has 46 manufacturing facilities across five countries that use state-of-the-art facilities to produce high-quality, affordable medicines.

The company uses both in-house and licensed facilities that support the manufacturing of simple and multi-chiral molecules.

On the other hand, Sun Pharma has 44 manufacturing facilities managed directly or through subsidiaries and joint ventures.

Of these, 30 plants manufacture formulations, and 14 are dedicated to APIs.

Distribution facilities

Both Cipla and Sun Pharma have a strong distribution network for their consumer health business.

Cipla has a diversified retail presence of more than 225 thousand chemists and 40 thousand groceries. Sun Pharma has a pan India presence across 400,000retail outlets.

Research & Development (R&D)

Cipla has 6 R&D facilities worldwide, supported by over 1,600 research scientists.

The company has launched 82 products and filed for 17 patents and 31 drug master files (DMFs) globally so far.

It also has 167 approved abbreviated new drug applications (ANDA), 18 ANDAs tentatively approved, and 72 under approval from the USFDA. It has around 267 patents to its name.

On the other hand, Sun Pharma is the first among Indian pharmaceutical companies to embrace the importance of R&D. It has six major research labs across India, Canada, the USA, and Israel. It employs around 2,600 scientists globally.

It has around 1,386 patents, 376 DMFs, 53 new drug applications (NDA), and 512 ANDAs under its name.

As of December 2021, the company had 88 ANDAs and 13 NDAs pending approval from the USFDA.

Apart from having higher patents to its name, Sun Pharma also spends a higher amount on its R&D than Cipla. In the last five years, it has spent an average of 7.1% of sales on R&D when compared to a 6.8% for Cipla.

Cipla vs Sun Pharma R&D Spent (% of Sales)

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Cipla 8% 7.1% 7.4% 6.9% 4.8%
Sun Pharma 7.6% 8.6% 6.9% 6.1% 6.5%
Data Source: Annual Reports

Inventory days

Inventory days measure the time taken to convert inventory into sales - the shorter the time, the better.

The five-year average inventory days of Cipla are much lower at 57 compared to 141 days of Sun Pharma.

The five-year average inventory days of the pharma industry stand at 104 days. This shows that Cipla is much more efficient at clearing off its inventory than its peers in the industry.

Cipla vs Sun Pharma Inventory Days

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Cipla 45 49 72 50 68
Sun Pharma 67 184 148 158 149
Source: Equitymaster

Debt to equity ratio

Both Sun Pharma and Cipla are deleveraging their balance sheets actively despite capex and R&D investments.

The debt-to-equity ratio for both companies stand at 0.1x for the financial year 2021. Improved operational performance has resulted in higher cash flows which helped both companies pay off their debt.

Cipla vs Sun Pharma Debt to Equity Ratio

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Cipla 0.3 0.3 0.3 0.2 0.1
Sun Pharma 0.3 0.3 0.3 0.2 0.1
Data Source: Ace Equity

Dividends

Companies distribute profits to their shareholders in the form of dividends. We can value the dividend-paying capacity of a company, by looking at two ratios, namely, dividend payout ratio and dividend yield.

Dividend payout measures how much dividend is paid on earnings. In contrast, dividend yield measures how much dividend income is earned against the market price of the share.

The higher the ratios, the better.

The five-year dividend payout ratio for Sun Pharma is higher at 29.5% against 17.3% for Cipla.

Again, in terms of dividend yield, Sun Pharma leads with a five-year average of 0.8% against 0.6% of Cipla.

Cipla vs Sun Pharma Dividend Ratios (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Dividend Payout          
Cipla 16% 17.1% 15.8% 20.9% 16.8%
Sun Pharma 12.1% 23% 24.8% 25.5% 62%
Dividend Yield          
Cipla 0.3% 0.6% 0.6% 0.9% 0.6%
Sun Pharma 0.5% 0.4% 0.6% 1.1% 1.3%
Data Source: Annual Report

Free cash flows

Free cash flow is the cash available to the company after catering to all internal and external obligations.

A high positive free cash flow is considered a good indicator. It shows a company's ability to pay the debt, grow business, and pay dividends to its shareholders.

The free cash flows for Sun Pharma are much higher at Rs 58 bn when compared to Rs 30 bn of Cipla in the financial year 2021.

Cipla vs Sun Pharma Free Cashflows

(in Rs bn) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Cipla 15 11 10 21 30
Sun Pharma 50 19 -9 56 58
Data Source: Ace Equity

Return on capital employed

Return on capital employed (ROCE) measures how efficiently the business employs capital to earn returns. The higher, the better.

The five-year average ROCE of Cipla is 12.2%, and Sun Pharma is 10.9%. This indicates that Cipla is efficiently using its capital to earn returns.

Cipla vs Sun Pharma Return on Capital Employed (2016-2021)

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Cipla 8.3% 10.2% 11.9% 12.5% 17.9%
Sun Pharma 21.5% 8.4% 8.7% 10.1% 5.7%
Data Source: Ace Equity

Return on equity

Return on equity (RoE) measures how much return the company can make out of the shareholder's capital . The higher, the better.

The five-year average RoE of Cipla and Sun Pharma is around 10.5%. However, Cipla's RoE has been improving in the last five years, whereas Sun Pharma's is declining.

This shows that Cipla uses investors' resources more efficiently than Sun Pharma.

Cipla vs Sun Pharma Return on Equity (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Cipla 8.7% 10.7% 10.4% 10.1% 14.1%
Sun Pharma 22.5% 6.9% 8.1% 9.7% 5%
Data Source: Ace Equity

Valuations

The Price to Earning (P/E) ratio and Price to Book Value (P/BV) are two common valuation ratios used to determine whether the shares are trading at a premium or discount.

A high ratio compared to the industry or peers indicates shares are trading at a premium and vice versa.

The P/E ratio indicates how much an investor is willing to pay for the earnings. In contrast, the P/BV ratio indicates how much the investor is willing to pay for the book value of assets.

The P/BV ratio of Cipla is higher at 3.6 when compared to Sun Pharma's 3.1 in the financial year 2021. This shows that Cipla's shares are trading at a premium to Sun Pharma in terms of book value.

Again, when compared with the five-year average, Cipla's shares are trading at a premium, whereas Sun Pharma's shares are trading at par.

  P/BV Ratio 5-year average P/BV P/E Ratio 5-year average P/E
Cipla 3.6 3.1 27.3 31.1
Sun Pharma 3.1 3.1 49.4 39.1
Data Source: Ace Equity

However, in terms of the P/E ratio, Sun Pharma's shares are trading at a premium. Its P/E ratio in the financial year 2021 is 49.4 compared to a P/E of 27.3 for Cipla.

Also, both the shares are trading at a premium compared to their five-year average P/E.

Impact of Covid-19

After the pandemic hit the world, almost all industries were affected by the lockdown.

Though the pharmaceutical industry stood firm during the pandemic, the companies saw some short-term stockpiling during the first phase of the lockdown.

Due to a lack of movement, there were supply chain disruptions, and demand for prescription-based medicines was reduced.

However, that didn't last long, and the entire industry worked relentlessly to ensure enough supply of medicines.

While there was a demand for existing medicines, a new demand for medicines treating Covid-19 emerged.

The regulatory authorities were fast-tracking approvals of Covid related products. However, non-Covid products were given high priority too.

Both Cipla and Sun Pharma have rolled out medicines to reduce the Covid-19 infection. They also adapted to the new normal and embarked on digital transformation in their entire value chain, including manufacturing, R&D, and customer outreach.

Sustainability efforts

Cipla and Sun Pharma have actively worked towards a greener environment and sustainable value creation.

Cipla aims to be a carbon-neutral, water neutral and zero waste company by 2025.

To work towards this goal, it has been shifting to renewable energy sources, decreasing its emissions, practicing water conservation techniques, and reducing waste generation.

On the other hand, Sun Pharma is concentrating on reducing its environmental footprint and contributing to global climate change efforts.

It has adopted a multi-pronged strategy to become responsive to environmental challenges by focusing on energy, water, waste, emission, and green chemistry management.

Future prospects

The healthcare and pharmaceutical industry prospects look bright for the medium and long term.

With Sun Pharma and Cipla having a significant market share in major therapeutic areas, both are set to benefit from this rising demand for healthcare and medicines.

However, innovation will be the key to capturing this growth. Companies should continuously work on new product launches, developments in the existing therapies, and innovation in new therapies to keep their position in the market.

Sun Pharma aims to ramp its production in speciality products, continue to focus on complex generics, expand rapidly in emerging markets, and maintain leadership in existing markets.

On the other hand, Cipla is focusing on increasing its penetration of respiratory products in key markets, promoting responsible antibiotic production through its supply chain, and focusing on digital transformation to move closer to its customers.

Which is better?

Though Sun Pharma generates almost twice the revenue of Cipla, its revenue growth is lower than Cipla.

However, it is leading in terms of profit margins, dividend payments, and R&D spending.

On the other hand, Cipla generates a higher return for its shareholders and employs capital more efficiently than Sun Pharma.

It is also managing its inventory productively. Moreover, in terms of P/E, the company's shares are available at a discount compared to Sun Pharma's shares.

However, in terms of book value, the shares are trading at a slight premium, with a small gap in valuation.

Still confused which is better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!

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You can also compare both the companies with their peers.

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Check out the Cipla factsheet and Sun Pharma factsheet for a detailed analysis.

You can also check out the latest quarterly results for Cipla and Sun Pharma.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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