Best Pharma Stock: Divis Laboratories vs Dr Reddy's vs Lupin

The Indian pharmaceutical industry has undergone a remarkable transformation from its nascent stages to being the pharmacy of the world.

Today, India caters to 60% of the world's demand for vaccines, 40% of the generic demand in the US, and 25% of the medicines in the UK.

India's cost competitiveness has given it the power to manufacture and sell medicines at a competitive rate.

To add to this, government boost to the sector, growing population, increasing awareness of health, and high ageing population across the globe are all the driving factors taking the industry to a staggering US$ 130 billion (bn) valuation by 2030 from US$ 40 bn in 2021.

In this high-growth industry, several Indian players have made their mark in the world.

In this editorial, we will compare three such companies - Divi's Laboratories, Dr Reddy's, and Lupin, to see how they compare against each other on various parameters.

Business Overview

#Divis Laboratories

Divis Laboratories is engaged in manufacturing and exporting active pharmaceutical ingredients (API), intermediaries, and nutraceutical ingredients.

It has an extensive product portfolio of 160 products covering various therapeutic areas, including antidepressants, anti-parkinson's, anti-viral, anti-inflammatory, and neuropathic pain.

The company has six state-of-the-art multipurpose manufacturing facilities and research and development (R&D) centres where it tests and manufactures all its products.

#Dr Reddy's Laboratories

Dr Reddy's Laboratories is a leading pharmaceutical company that manufactures APIs, generics, biosimilars and differentiated formulations.

The company also has one of the largest custom pharmaceutical services (CPS) businesses in India, offering end-to-end product and manufacturing services and solutions to innovators.

It has a portfolio of over 400 high-quality generic drugs across various therapeutic areas, including nervous system drugs, gastrointestinal, and anti-infective.

The company currently has 23 manufacturing facilities and 9 R&D facilities across the world.

#Lupin

Lupin develops, manufactures, and sells a wide range of branded and generic formulations, APIs, and biotechnology products.

It has a comprehensive product portfolio, and it manufactures in its 15 manufacturing facilities across the world.

The company also has 6 state-of-the-art API facilities and 7 R&D facilities located across the world.

Lupin's products are spread across various therapeutic areas including cardiovascular, diabetology, asthma, paediatrics and central nervous system.

Particulars	Divis Laboratories	Dr Reddy's Laboratories	Lupin
Market Cap (in Rs billion)*	1,281.20	1,135.60	869.6

Source: Equitymaster|*as of 6^th August 2024

If we compare the companies based on market capitalisation, then Divis Laboratories has the highest marketcap of Rs 1,281.2 billion (bn), followed by Dr Reddy's (Rs 1,135.6 bn) and Lupin (Rs 869.6 bn).

All three companies are equally competent when it comes to innovation.

During the year, Divi's Laboratories has a total of 41 drug master files (DMF) and 43 patents for generic products.

Dr Reddy's, on the other hand, has 133 DMFs and 17 ANDAs (Abbreviated New Drug Application).

Lupin received 55 approvals during the year.

If we compare the three companies with respect to their performance on the stock market, then Lupin is leading with a 76% return, followed by Divi's Laboratories at 23%, and Dr Reddy's at 20%.

However, if we compare them with Nifty, then Lupin and Divi's Laboratories has outperformed the market, whereas Dr Reddy's has underperformed the market.

#Revenue

In terms of revenue growth, Dr Reddy's is leading with a compound annual growth rate (CAGR) of 9.8% in the last five years driven by established presence in the formulations business, and volume growth driven by new product launches.

The next company in terms of revenue growth is Divi's Laboratories.

Its revenue grew by a CAGR of 7.8%. The primary reason behind this revenue growth is the high demand for COVID-19 drugs and the change in the company's product portfolio.

Lupin's revenue growth, on the other hand, grew by a CAGR of 5.4% on account of the company's well-diversified portfolio. Its leading position in several therapeutic areas also contributed to the revenue growth.

Revenue

Net Sales (in Rs m)	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024	5-Year CAGR
Divis Laboratories	53,944	69,694	89,598	77,670	78,450	7.80%
Dr Reddy's Laboratories	1,75,170	1,90,475	2,15,452	2,46,697	2,80,111	9.80%
Lupin	1,53,748	1,51,630	1,64,055	1,66,417	2,00,108	5.40%

Source: Equitymaster

#Profitability

To assess profitability, we must look at the company's earnings before interest tax depreciation and amortisation (EBITDA), net profit, and profit margins.

In terms of EBITDA and net profit growth, Dr Reddy's Laboratories has led with a 23.4% and 22.5% CAGR growth, respectively, in the last five years.

After Dr Reddy's, Lupin is leading in terms of EBITDA growth of 6.7% (CAGR), whereas its net profit turned positive from a negative Rs 15 bn three years ago.

Divis Laboratories, on the other hand, witnessed an EBITDA and net profit growth of 4.8% and 3.1%, respectively.

For Dr Reddy's, its backward integration helps in cost optimisation, which in turn aids profit growth. Moreover, the company is concentrating on further enhancing its backward integration.

In case of Lupin, the company's strong growth in sales, and cost optimisation measures have helped the profit growth and margins.

For Divi's Laboratories, sales growth and a decrease in raw material costs have aided the profit growth. The company is also leading in terms of profit margins, and has an averaged EBITDA margin and PAT margin of 38.2% and 26.1% respectively in the last five years.

Profitability

EBITDA (in Rs m)	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024	5-Year CAGR
Divis Laboratories	20,128	29,237	39,970	27,140	25,450	4.80%
Dr Reddy's Laboratories	30,910	41,613	42,521	74,045	88,274	23.40%
Lupin	28,386	27,032	4,289	18,715	39,307	6.70%

PAT (in Rs m)	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024	5-Year CAGR
Divis Laboratories	13,765	19,843	29,605	18,240	16,000	3.10%
Dr Reddy's Laboratories	20,260	19,516	21,825	45,073	55,779	22.50%
Lupin	-3,999	12,279	-15,094	4,477	19,356	NM

Gross Profit Margin (%)	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024
Divis Laboratories	37.30%	42.00%	44.60%	34.90%	32.40%
Dr Reddy's Laboratories	17.60%	21.80%	19.70%	30.00%	31.50%
Lupin	18.50%	17.80%	2.60%	11.20%	19.60%

Net Profit Margin	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024
Divis Laboratories	25.50%	28.50%	33.00%	23.50%	20.40%
Dr Reddy's Laboratories	11.60%	10.20%	10.10%	18.30%	19.90%
Lupin	-2.60%	8.10%	-9.20%	2.70%	9.70%

Source: Equitymaster

#Financial Efficiency

We can measure the financial efficiency of a business through two ratios, namely, return on equity (RoE) and return on capital employed (RoCE).

A high ratio is considered better.

Divis Laboratories is leading with a five-year average RoE and RoCE of 18.3% and 23.9% respectively.

After Divis, Dr Reddy's is leading with an average RoE and RoCE of 15% and 19.5% respectively.

Lupin stands last among the three companies with an average RoE and RoCE of 2.1% and 7.7%, respectively.

Financial Efficiency

Return on Equity (RoE)	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024
Divis Laboratories	18.80%	21.30%	25.20%	14.30%	11.80%
Dr Reddy's Laboratories	13.10%	11.10%	11.40%	19.50%	19.80%
Lupin	-3.20%	9.00%	-12.60%	3.60%	13.70%

Return on Capital Employed (RoCE)	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024
Divis Laboratories	25.00%	28.70%	31.40%	18.60%	16.00%
Dr Reddy's Laboratories	12.70%	16.40%	16.10%	26.60%	25.70%
Lupin	7.90%	13.30%	-10.10%	8.00%	19.30%

Source: Equitymaster

#Debt management

All three companies are debt-free companies and have sufficient liquidity. Despite actively investing in capex, they plan to remain debt-free in the future as well.

Divis Laboratories is setting up its third manufacturing plant in Kakinada with a capex of Rs 10 bn. It is also investing in new technologies such as vapor-phased chemistry, continuous flow chemistry, and photo chemistry to develop new products.

Dr Reddy's, on the other hand, is investing heavily in inorganic growth. It plans to invest Rs 15 bn in capex to acquire companies as a part of its brownfield expansion strategy. It recently acquired a portfolio of branded and generic injectables in a deal.

Lupin is focusing on launching complex generics in regulated markets by 2028 across various therapeutic areas. It is also planning to launch three biosimilar filings and ten novel complex pipeline products in India, which will take a sizable amount of capex.

All three companies plan to fund the capex through internal accruals.

#Dividend

Dividends are often essential parameters to measure when conducting a detailed financial analysis.

This is because a company paying regular dividends is considered more stable than a company that isn't, as the dividends are paid from profits earned.

Of the three companies, Divis is leading in terms of dividend per share growth, dividend yield, and dividend payout ratio.

The company's dividend per share grew by a CAGR of 13.4% in the last five years, and its dividend yield and dividend payout averaged 0.8% and 35.6%, respectively.

Dr Reddy's falls second in line, and its dividend per share grew by a CAGR of 9.9%. The average dividend yield and dividend payout stood at 0.7% and 18.3%, respectively.

Lupin's dividend per share grew by a CAGR of 6%, and its average dividend yield stood at 0.6%.

Dividend

Dividend Per Share (Rs)	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024	5-Year CAGR
Divis Laboratories	16	20	30	30	30	13.40%
Dr Reddy's Laboratories	24.9	24.9	30	39.9	40	9.90%
Lupin	6	6.5	4	4	8	6.00%

Dividend Yield	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024
Divis Laboratories	0.80%	0.60%	0.70%	1.10%	0.90%
Dr Reddy's Laboratories	0.80%	0.60%	0.70%	0.90%	0.60%
Lupin	1.00%	0.60%	0.50%	0.60%	0.50%

Dividend Payout Ratio	Mar-2020	Mar-2021	Mar-2022	Mar-2023	Mar-2024
Divis Laboratories	30.90%	26.80%	26.90%	43.70%	49.80%
Dr Reddy's Laboratories	20.50%	21.30%	22.90%	14.80%	12.00%
Lupin	-68.00%	24.00%	-12.00%	40.60%	18.80%

Source: Equitymaster

#Valuations

Valuation ratios help us estimate the actual worth of a company and also help us analyse whether a company's shares are overvalued or undervalued when compared to its peers.

The most used valuation ratios are price-to-earnings (P/E) and price-to-book value (P/B). A high ratio indicates the shares are overvalued; a low ratio indicates the shares are undervalued.

The P/E ratios of Divis, Dr Reddy's, and Lupin are 82.8x, 20.9x, and 46.2x, respectively.

In terms of P/E, Divi's Laboratories shares are highly overvalued compared to those of the other two companies.

Even in terms of P/B, Divis Laboratories shares are overvalued compared to those of its peers.

When compared to the industry average, then Divis and Lupin's shares are highly overvalued, whereas Dr Reddy's shares are undervalued.

Valuations	Divis Laboratories	Dr Reddy's Laboratories	Lupin
P/E (x)	82.8	20.9	46.2
P/B (x)	9.8	3.9	6.3

Source: Equitymaster

Which pharma stock is better: Divis Laboratories or, Dr Reddy's or Lupin?

In terms of revenue growth, profit growth, and valuations Dr Reddy's is leading among the three companies in comparison.

However, with respect to profit margins, financial efficiency, and dividends, Divis Laboratories has outperformed the others.

To meet the growing demand for pharmaceutical products, Divis Laboratories is concentrating on expanding its production capacity.

It is currently investing in setting up a greenfield manufacturing site, which is expected to be operational in the next two years.

Apart from this, it recently announced an investment of Rs 7 bn for capacity addition as it entered into a long-term supply agreement with an MNC.

The company is also investing in new technologies such as vapor-phased chemistry, continuous flow chemistry, photo chemistry, gadolinium compounds, and peptides to ensure it stays ahead of the competition.

Dr Reddy's, on the other hand, is taking the inorganic growth route through acquisitions. It has allocated Rs 15 bn for acquisitions for the year and has acquired several small and mid-sized businesses.

Apart from this, it focuses on niche products such as injectables and biosimilars to improve revenue and profit growth.

Lupin, being a globally recognised pharmaceutical company, has adopted a multi-pronged approach to growth.

It is investing in R&D to develop and launch new products. The company plans to build a strong portfolio of complex generics by 2028 in the areas of inhalation, injectables, and ophthalmics.

The company also plans to complete three biosimilar filings and launch ten novel complex pipeline products in India by 2028.

It is expanding its retail footprint by partnering with e-commerce, organised retail and institutional businesses.

Lupin is also open to any inorganic growth opportunities that come its way.

Overall, all three companies have laid out their plans towards the next leg of growth.

With the government supporting the pharma industry through policies such as product-linked incentive scheme (PLI) and medical tourism, the pharma industry is poised for growth, and these three companies could be primary beneficiaries.

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.