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Domestic Pharma: September quarter review

Nov 18, 2003

The stock markets have made impressive gains since the beginning of 2003. Despite being a broad based rally, pharma stocks have been able to remain in the limelight and attract buying interest. This is evident from the following chart, which compares the BSE-Sensex with BSE-Healthcare index. As can be seen from the chart, Rs 100 invested in the above two indices on 1st January '03 would have yielded Rs 145 in case of the SENSEX, the same would have yielded Rs 163 in case of BSE-Healthcare index.

In this article, we shall see the performance of the key pharma companies in terms of the latest declared quarterly results. For our analysis, we have considered six major domestic pharma companies (Ranbaxy, Dr Reddy's, Cipla, Wockhardt, Nicholas Piramal and Sun Pharma). Take a look at the following table.

Quarter at a glance…
(Rs m) July '02-Sep '02 July '03-Sep '03 Change
Net Sales 25,453 29,183 14.7%
Operating Profit (EBDIT) 6,109 6,356 14.7%
Operating Profit Margin (%) 24.0% 21.8%  
Profit after Tax/(Loss) 4,372.2 5,224.6 19.5%
Net profit margin (%) 17.2% 17.9%  
P/E (x) 25.6 21.4  

After the weak showing during the first five months of 2003, the domestic pharma market saw a revival in demand. Apart from the high value lifestyle segments, even the traditional therapeutic segments like anti-infectives recorded impressive growth. It is to be noted here that anti-infectives segment had a dismal performance during April '03 – May '03, wherein this segment had recorded de-growth. During the September '03 quarter, revival in demand for traditional therapeutic segments coupled with high growth registered by lifestyle segments helped the companies under review post an impressive 13.8% growth in domestic market. The top performers in the domestic market were Cipla, Ranbaxy and Nicholas Piramal. Wockhardt and Sun Pharma on the other hand, reported disappointing domestic growth.

On the exports front, the companies under review as a group grew by 15.6%. This was primarily due to higher bulk drug exports by Sun Pharma, Cipla and Nicholas Piramal (inorganic). Sun Pharma also recorded impressive growth in formulations export.

On the operations front, higher investments on R&D as well advertising and promotion expenses have taken their toll on the operating margins of the group. However, it is to be noted here that with product patents coming into effect in India from 2005, Indian companies will have to increasingly focus on research and development. The increase in R&D expenditure to this extent is thus a positive for the industry as a whole. However, decline in operating profit margins was offset by a drop in interest expenses due to the debt restructuring exercise undertaken by some of the companies and a strong growth in other income.

The domestic pharma industry (i.e., companies under review) is trading at a P/E of 21x its annualized September quarter earnings. After the slump witnessed in the early part of the year, domestic pharma market is once again recording double-digit growth. This apart, the export thrust (for generic drugs) of the Indian pharma companies is also translating into higher growth from the international markets. Given the low cost manufacturing operations of Indian pharma companies, they are also likely to benefit from manufacturing contracts likely to be outsourced by the global pharma giants.

However, post 2005, with the implementation of product patents, Indian companies might struggle to achieve the current growth rates in the domestic market. This apart, the risks involved in R&D initiatives could also put pressure on the margins of the company going forward. Investors need to hence exercise caution and invest only in companies that have strong business models and a management that has a track record of successfully executing its plans.

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