FINANCIAL ANALYSIS OF INDIAN

PHARMA INDUSTRY
MANAGEMENT ACCOUNTING PROJECT

Submitted by:
AMANDEEP SINGH (IPMX12004)
AMAR KANT (IPMX12005)
ARVINDH RAJU (IPMX12009)
DILIP BALASUBRAMANIAN (IPMX12014)
RASHMI RANI (IPMX12034)
VARUN PANDEY (IPMX12052)
Contents
Introduction ......................................................................................................................................................... 3
Choice of Industry ............................................................................................................................................ 3
Choice of Players.............................................................................................................................................. 4
Macro-economic factors affecting the Pharma Industry ..................................................................................... 5
Industry Characteristics ....................................................................................................................................... 6
Major Players in the Pharma Industry.............................................................................................................. 6
Generic Business Model................................................................................................................................... 8
Cost Structure .................................................................................................................................................. 9
Michael Porter’s 5 Forces Model ................................................................................................................... 10
Recent Industry News ........................................................................................................................................ 11
Major Accounting Policies in Pharma industry................................................................................................... 12
International Financial Reporting Standards(IFRS)............................................................................................. 14
Common Size Statement ................................................................................................................................... 15
Financial ratio Analysis ....................................................................................................................................... 19
Liquidity ratios ............................................................................................................................................... 19
Solvency ratios ............................................................................................................................................... 21
Turnover ratios .............................................................................................................................................. 22
Profitability ratios .......................................................................................................................................... 24

2
Introduction
Choice of Industry
Indian pharmaceutical industry has contributed immensely towards Indian and global healthcare
outcomes. Thus, Indian pharmaceutical industry is chosen for our study due to its unique and truly
global nature.
The below points elaborated the industry further based on a few key facts.
1) India is among the top six global pharmaceutical producers in the world with 10,500
manufacturing units and over 3,000 pharma companies.
2) India’s domestic pharmaceutical market turnover reached Rs. 129,015 crores (US$ 18.12
billion) in 2018, growing at 9.4 per cent year-on-year.
3) Indian drugs are exported to more than 200 countries in the world, with values at US$ 17.28
billion in FY18
4) The ‘Pharma Vision 2020’ by the government’s Department of Pharmaceuticals aims to
make India a major hub for end-to-end drug discovery
As the next step, as the industry is divided into multiple types, full year sales of companies with a
reported quarterly sales figure for 2019-03 is taken as the initial point of reference. These details
are summarized in the Fig1. Hence the largest industry type, “Bulk Drugs & Formln Lrg” is chosen
for further analysis.

3
Choice of Players
Once the segment is chosen, the 19 companies in this segment are analysed on the following
parameters. Based on the below two criteria’s, three major companies are identified for the
detailed analysis.
a) Top 5 companies by Sales share

b) Top 5 players by market capitalization

CIPLA
Cipla Ltd, established in 1935, is one of the leading pharmaceutical companies in India. The
company focuses on development of new formulations and has a wide range of pharmaceutical
products. The product portfolio includes over 1,500 products across wide range of therapeutic
categories.
Sun Pharma
Sun Pharmaceutical Industries Ltd. is the fifth largest speciality generic pharmaceutical company in
the world. The company manufactures and markets a large basket of pharmaceutical formulations
covering a broad spectrum of chronic and acute therapies.
Dr. Reddy’s Laboratories
Dr Reddy's Laboratories Ltd (DRL) is an integrated global pharmaceutical company. Its three
businesses are Pharmaceutical Services &Active Ingredients, Global Generics and Proprietary
Products.

4
Macro-economic factors affecting the Pharma Industry
Political
On July 1, 2017 Goods and Services Tax was implemented in India. The implementation led to
reduction in channel inventory and the drugs that were not in the national List of Essential
Medicines had to absorb higher taxes. Across all major geography, corporate tax reforms, price
controls, and instability in some regions impact pharma industry negatively. Government policies
for affordable medicine also neutralize some of the gains in the pharma industry. Government
expenditure on Pharma Industry in India has seen an upward trend.

Economical
Pharma industry is not untouched by the economic cycles of Booms and Recession. It’s a challenge
to maintain a constant profitable growth in the volatile, uncertain, complex and ambiguous market.
India’s GDP has grown around 7% for the past 5 years. Enhanced infrastructure and increasing
income levels has shaped the growth trajectory of pharma industry in India. The pharma industry is
expected to grow to USD55 billion by 2020 in India. Rural market in India have outperformed the
market in India. Total market share of Rural market is expected to grow to 25% from current 20%.

5
Social
The unplanned urbanization in emerging markets have created conditions that lead to
epidemiological and communicable diseases. Unhealthy eating habits, inadequate sleep, and less
exercise have led to lifestyle diseases that were not there three to four decades ago. These diseases
have created an increased demand positively affecting the top line of the pharma industry.

Technological
Digital health technologies have created opportunities for new gene therapies. The use of Artificial
Intelligence and Big Data has increased the basket size of personalized medicine, which is expected
to grow at a CAGR of 12% till 2022.

Legal
The Drug Price Control Order has muted the revenue across selected products in the pharma
industry. Regulators in developed as well as emerging markets are actively keeping a tab on the
medicine prices. The legal pressures from FDA and other regulatory bodies is one of the biggest
challenges before the pharma companies. Also, the strict compliance, anti-corruption, cyber-
security, and anti-trust issues needs to be taken care of by the pharma industry.

Environmental
Rising water and air pollution has led to an increase in the number of diseases, resulting in higher
pharmaceutical consumption.

Industry Characteristics
Major Players in the Pharma Industry
1.) Sun pharma, founded by Mr. Dilip Sanghvi in year 1983, is an Indian multinational company.
The company was started with 5 products specifically made to treat the psychiatry ailments.
Since then the company has introduced products related to various other ailments. The
company went public in 1994 by listing on the Indian Stock Exchange.

Sun Pharmaceuticals acquired Ranbaxy – a big player in this industry- in year 2014 and with
this acquisition it became India’s largest pharmaceutical company.

At present, it manufactures and sells pharmaceutical formulations and active

pharmaceutical ingredients (API). They have about 40 manufacturing plants spread across 6
continents, selling products to patients across 150 countries. The primary market is India
and the United States. The U.S. alone accounts for the 50 % of the company’s turnover.

Launched 1983, Vapi Gujarat, India

Headquarters Mumbai, Maharashtra, India
Founders Dilip Sanghvi
M.D. Dilip Sanghvi

6
 CFO C.S. Muralidharan
Revenue Rs. 27097.52 Cr.
Net income

2.) Dr. Reddy, founded by Mr. Anji Reddy in year 1984, is an Indian Multinational
Pharmaceutical Company. The company started their business as a supplier to the drug
manufacturers and later stepped into the manufacturing by acquiring Cheminor Drugs –
bulk drug manufacturing company. It went public by launching its US IPO in year 2001 and
got listed on New York Stock Exchange.

The company became one of the major API manufacturer and bulk drug supplier by year
1997 and by the same time it transited itself as generic medicine producer. The success led
Dr. Reddy to become third largest pharmaceutical company after acquiring American
Remedies Ltd. in year 1999.

At present, generics is its largest business with 80% of the net revenues in year 2018.
Pharmaceutical services and active ingredients accounted for 16 % of the net revenues and
proprietary products and others accounted for 4 % of the net revenue.

Launched 1984, Hyderabad, Telangana, India

Headquarters Hyderabad, Telangana, India
Founders DR. K. Anji Reddy
CEO G.V. Prasad
CFO Saumen Chakraborty
Revenue Rs. 14477.70 Cr.
Net income

3.) Cipla, founded by Mr. Khwaja Abdul Hamied in year 1935, is an Indian multinational
pharmaceutical company. It has grown from an API manufacturer to an innovator in the
respiratory products. It has world’s largest portfolio of the inhalation products to suit needs
of different individuals. It is listed on both Bombay Stock Exchange and New York Stock
Exchange.

Cipla has gone through various mergers and acquisitions. One of the recent major
acquisition was of a South African company called as Medpro.

At present, Cipla has about 34 manufacturing units spread across locations in India, serving
more than 100 countries worldwide.

Launched 1935
Headquarters Mumbai, Maharashtra, India

7
 Founders Dr. Y.K. Hamied
CEO Mr. Umang Vohra
CFO Mr. Kedar Upadhye
Revenue Rs. 15746.30 Cr.
Net income

Generic Business Model

Based on the type of business, the Indian Pharmaceutical Industry is broadly categorised into
following five types:
1.) API – Active Pharmaceutical Ingredients
2.) Formulations
3.) Contract Research and Manufacturing (CRAMS)
4.) Export/import
5.) Biosimilars – Biotech Industry
To further classify the above types, the industry is categorised into two models – Traditional and
Emerging. Please see figure below:

Business Model

Traditional Emerging Export/Import

In House R &D In House Manufacturing Contract Research Contract Manufacturing

API & Formulations API & Formulations

Fig. 1
As shown in figure, traditional model is the in-house capability of a company to research and
manufacture the drug. The drug type could be an API and formulated one. For brief, API is the main
ingredient, produced either by one chemical or by the combinations of chemicals, used for the
treatment of varied diseases. Formulations are basically the mixture of active drug and other
different chemical substances to ensure the correct proportion of a single tablet is consumed and
delivered to the required body part.
The emerging model is where the companies are outsourcing their research and development
activities to the third parties. These could be another pharmaceutical company or an academic
research body. The third party organisations are called as the Contract research organisations

8
(CRO). The main idea behind outsourcing is to meet the ever expanding demand of customers
within the expected price bracket to maintain the competitive edge. With year on year inflation and
increase in the prices of different components of a manufacturing industry, the fixed costs are
increasing. To minimize these fixed costs, the pharmaceutical industries are leaning more and more
towards outsourcing their activities.

Cost Structure
Pharmaceutical is a huge industry worldwide and is very research intensive. With ever increasing
ailments, the need for the cure of them is rising exponentially. For a new medicine to be made from
its pre-discovery stage to the final production, it takes on an average of 10-15 years. Therefore, a
complete cost structure has various elements attached to it. Here is a list of some of the major
factors contributing to the cost structure:

1. Research and Development – As mentioned, for a medicine to be produced, it takes years of

work processes. There is no denial that the cost associated with it is huge and therefore makes
the R&D as a major inhaler of the company’s revenue. As profits are dependent on the success
of a medicine, the long duration of the development makes this industry extremely complex.
The returns are not fixed. It is different for different drug.
Manufacturing cost however is low compared to the development cost. It generally costs
millions of dollars to develop a particular and as low as few cents to manufacture it.

2. Infrastructure – To compliment the wide research and development, a world class facility is
required. The expenditure is huge. As medicines these days are becoming part of daily
consumables with increase of diseases, it requires a mass production. With this requirement,
drug production facility requires huge amount of money. As this is a sensitive industry and is
related directly to the living being’s health, more and more emphasis is made to make their
facility as sterilized as possible. This attracts extra costs.

3. Marketing – Marketing plays major role in creating the awareness of the medicines India is
producing and more specifically a company is producing. As a proof, today India is a major
exporter of the medicines and marketing is one of the major creditor for it. Medicines have
been penetrated to the each and every corner of the world. Which medicine is essential, which
is good, which does not have any side effect etc., all this information have to be communicated
properly and systematically. Marketing here plays a major role by spreading the knowledge
about the product.

4. Distribution – In brief, it would be right to say that Indian Pharmaceutical distribution network
is not a level 1 network. As the products have to be made available at each and every corner, a
large and multi-level distribution network is required. This engages a large amount of
company’s expenditure.

5. Employee benefits – A major player in pharmaceutical industry has thousands of workers

working for it. As explained earlier, this is a research intensive industry, highly intellectual
chemists and pharmacists are required to develop the medicines in need and demand. A
company has to incur huge costs to hire best intellectuals and to sustain them. Similarly, a wide

9
 distribution network requires hundreds and thousands of staff and to retain them for
streamline flow, company has to incur higher costs.

Michael Porter’s 5 Forces Model

A general view of Porter’s 5 forces in the Indian Pharmaceutical Industry is shown in fig. 2 below.

Threat of
New Entrants
(Low to
Moderate)

Industry
Supplier Buyer Power
Power (Low) Rivalry (moderate)
(High)

Threat of
Substitutes
(Moderate to
High)

Fig.2

Threat of New Entrant (Low to Moderate):

 The pharmaceutical Industry is capital intensive and require huge amount of initial
investment.
 Developing distribution network on a wide scale matching the current players’ network.
 Tough process for the approval of new drug from the government bodies.
 Emerging business model on the other hand raises the threat level from low to moderate as
all the R&D and manufacturing is contracted. This gives new entrants some opportunity,
though all other factors remain same.

Threat of Substitutes (Moderate to High):

 Increase in the demand of generic drugs, thus affecting the branded drugs due to its higher
cost.
 Threat from other medicine types - ayurvedic and homeopathic.

10
Power of Buyers (Moderate):

 Role of influencer – doctor is an influencer for a customer. A medicine of a particular brand

recommended by a doctor creates impact. This somehow restricts the buyer’s power to a
certain extent.
 Availability of different brands for a same drug type. This on the other hand increases the
buyer’s power.

Bargaining Power of Suppliers (Low):

 Availability of large pool of ingredients (chemical) suppliers.

 Dependency on several organic chemicals.
 Switching possible in low cost.

Industry Rivalry (High):

 Already existence of major players in this industry

 Pressure on all the major players to produce high quality drugs.
 Due to low to moderate threat from new entrants, it further enhances the competition
between the established players.

Recent Industry News

Aurobindo Pharma plunges 8% on USFDA warning
Shares of Aurobindo Pharma plunged nearly 8 per cent to Rs. 578.75 in morning trade on Friday
after it said it received a warning letter from the USFDA. This action follows the earlier inspection of
the site by the USFDA in February 2019. The company said that its existing business from this
facility will not be impacted and it will be engaging with the regulator and are fully committed to
resolving this issue at the earliest.
Council for Healthcare and Pharma set to bridge advocacy gap with US
Industry veteran - Gurpreet Sandhu - is attempting to build an organization that can bridge the
advocacy gap between India and the US. Delhi based Sandhu, the managing director of privately
held Reva Pharma, has taken the lead in setting up a global not for profit think tank - Council for
Healthcare and Pharma (CHP). The Delhi headquartered think tank plans to open offices in the US,
Japan and other countries. Though CHP members include domestic and global pharmaceutical
companies, Providers of Diagnostics, Medical device Manufacturers, Hospitals and adjunct services,
the focus of the council will be advocacy for the development of sustainable health systems around
the world.

Indian e-pharmacies in consolidation mode

Chennai based Netmeds.com, one of the largest e-pharmacies with claims of more than 3.7 million
customers in over 610 cities and towns, on Monday acquired health-tech start-up KiViHealth, a
clinic management platform providing cloud-based AI-powered tools for doctor-patient interaction,
in a cash and stock deal. Netmeds will invest $10 million to grow the acquired business.

11
Reportedly, ride-hailing unicorn Ola, which recently entered into the food business, is eyeing to
acquire Myra, another leading online pharmacy with operations mainly in Bangalore and Mumbai.

Sun Pharma launches Infugem injection for treatment of cancer in the US

Drug major Sun Pharmaceutical Industries Monday announced launch of INFUGEM injection, used
for treatment of cancer, in the US market. Sun Pharma said INFUGEM uses its proprietary
technology which allows cytotoxic oncology products to be premixed in a sterile environment and
supplied to the prescribers in ready-to-infuse final dosage bags.

US drug makers want greater emphasis on IP protection in India

US based drug makers lobby group Pharmaceutical Research and Manufacturers of America
(PhRMA) has complained that the positive signals given by India in terms of greater intellectual
property protection and market access opportunities are yet to translate into real policy actions
and practical changes.
In its annual submission to the United States Trade Representative (USTR), PhRMA highlighted
unpredictable patent environment, regulatory data protection failures, high tariffs and taxes on
medicines, discriminatory and non-transparent market access policies, and unpredictable
environment for clinical research as the key challenges before US companies that operate or wish
to tap the Indian market.

Major Accounting Policies in Pharma industry

The following policies have been identified as significant ones after analysing the financial
statements of the concerned pharma companies.

Accounting policy Cipla Dr.Reddy’s Sun Pharma

Revenue a) Sale of Goods a) Sale of Goods a) Sale of Goods
Recognition Revenue from sale of Revenue from sale of Revenue from sale of
goods is recognised goods is recognized goods is recognised
when the significant when the significant when the significant
risks and rewards of risks and rewards of risks and rewards of
ownership have been ownership have been ownership have been
transferred to the transferred to the transferred to the
buyer and when the buyer and when the buyer and when the
amount of revenue can amount of revenue can amount of revenue can
be measured reliably. be measured reliably. be measured reliably.

b) Sales Returns b) Sales Returns b) Sales Returns

The Company accounts The Company accounts The Company accounts
for sales returns accrual for sales returns accrual for sales returns accrual
by recording an by recording an by recording an
allowance that is based allowance that is based allowance that is based
on the Company's on the Company's on the Company's
estimate of expected estimate of expected estimate of expected
sales returns. The sales returns. The sales returns. The
estimate of sales estimate of sales estimate of sales

12
 returns is determined returns is determined returns is determined
primarily by its primarily by its primarily by its
historical experience in historical experience in historical experience in
the market. the market. the market.

c) Interest Income c) Interest Income c) Interest Income

Interest income from a Interest income from a Interest income from a
financial asset is financial asset is financial asset is
recognised when it is recognised when it is recognised when it is
probable that the probable that the probable that the
economic benefits will economic benefits will economic benefits will
flow to the Company flow to the Company flow to the Company
and the amount of and the amount of and the amount of
income can be income can be income can be
measured reliably. measured reliably. measured reliably.

Property, Plant and The items of property, The items of property, The items of property,
Equipment plant and equipment plant and equipment plant and equipment
are measured at cost are measured at cost are measured at cost
less accumulated less accumulated less accumulated
depreciation. depreciation. depreciation.
An item of property, An item of property, An item of property,
plant and equipment, is plant and equipment, is plant and equipment, is
derecognised upon derecognised upon derecognised upon
disposal or when no disposal or when no disposal or when no
future economic future economic future economic
benefits are expected benefits are expected benefits are expected
from its use or disposal. from its use or disposal. from its use or disposal.
Intangible Assets Intangible assets such Intangible assets such Intangible assets such
as computer software as computer software as computer software
are measured on initial are measured on initial are measured on initial
recognition at cost. recognition at cost. recognition at cost.
Following initial Following initial Following initial
recognition, Intangible recognition, Intangible recognition, Intangible
assets that have finite assets that have finite assets that have finite
useful lives are useful lives are useful lives are
measured at cost less measured at cost less measured at cost less
accumulated accumulated accumulated
amortisation. amortisation. amortisation.
Research & The expenditure on The expenditure on The expenditure on
Development costs research activities research activities research activities
undertaken with the undertaken with the undertaken with the
prospect of gaining prospect of gaining prospect of gaining
new scientific or new scientific or new scientific or
technical knowledge technical knowledge technical knowledge
are recognized as are recognized as are recognized as

13
 expense when expense when expense when
incurred. incurred. incurred.
Development Development Development
expenditures are expenditures are expenditures are
capitalised only if capitalised only if capitalised only if
development costs can development costs can development costs can
be measured reliably be measured reliably be measured reliably
and the product is and the product is and the product is
technically feasible. technically feasible. technically feasible.

Income Tax Income tax expenses Income tax expenses Income tax expenses
are recognized in the are recognized in the are recognized in the
statement of profit & statement of profit & statement of profit &
loss except when they loss except when they loss except when they
relate to items that are relate to items that are relate to items that are
recognized directly in recognized directly in recognized directly in
equity, in which case it equity, in which case it equity, in which case it
is recognized in equity. is recognized in equity. is recognized in equity.

a) Current income tax: a) Current income tax: a) Current income tax:

Current income tax is Current income tax is Current income tax is
the amount of tax the amount of tax the amount of tax
payable on the taxable payable on the taxable payable on the taxable
income for the year. income for the year. income for the year.
The current tax is The current tax is The current tax is
calculated using tax calculated using tax calculated using tax
rates that have been rates that have been rates that have been
enacted at the enacted at the enacted at the
reporting date. reporting date. reporting date.

b) Deferred tax: b) Deferred tax: b) Deferred tax:

Deferred tax is Deferred tax is Deferred tax is
recognised using the on recognised using the on recognised using the on
temporary differences temporary differences temporary differences
arising between the tax arising between the tax arising between the tax
bases of assets & bases of assets & bases of assets &
liabilities and their liabilities and their liabilities and their
carrying amounts. carrying amounts. carrying amounts.

International Financial Reporting Standards(IFRS)

The Indian pharmaceutical companies that are being analysed in this report were earlier following
Indian Generally Acceptable Accounting Principle (IGAAP) standards. They have started following
Indian Accounting Standards (Ind-AS) from financial year 2017. Internationally, the US
pharmaceutical companies follow US GAAP while European companies follow IFRS.

14
In general, the principles of Ind-AS are closely related to IFRS and there are no major differences.
The following table shows how well the major accounting policies of Indian pharmaceutical
companies that use Ind-AS compare with IFRS.

Accounting policies
1. Revenue Recognition: Ind-AS 115 is similar to IFRS 15.
2. Property, Plant and Equipment: Ind-AS 16 is similar to IFRS standard IAS 16.
3. Intangible Assets: Ind-AS 38 is similar to IFRS standard IAS 38
4. Income Tax: Ind-AS 12 is similar to IFRS standard IAS 12

Common Size Statement

Common Size Profit & Loss Statement
Details

Income  Sun Pharma increased total income by 70% in 2015 and sustained around
that level in the coming years. This is attributed to the merger of Ranbaxy
Laboratories Ltd with Sun Pharma
 Total income of Dr. Reddy’s Laboratories reduced in 2018 and 2017. The
important factors attributed by the company include USFDA observations,
GST and price effects.
 Income categorized under “other income” is very minimal for the three
companies
 Stock Adjustments variations seen in CIPLA and Sun Pharma in comparison
to Dr.Reddy’s Laboratories
Expenditure  Raw material usage is high for CIPLA
 Employee Costs are high for Dr. Reddy’s Laboratories. However, under this
head a major portion of expenses is towards R&D.
 Dr. Reddy’s Laboratories, Sun Pharma and CIPLA has reported R&D
expenses of 15%, 12% and 8% respectively in 2018.
 Miscellaneous expenses reported by Sun pharma is on the higher side.
Profit  Sun Pharma reported relatively higher profit in four of the five years.
 CIPLA reported loss of associate company in all the 5 years

15
 Comp
any : Dr Reddys Laboratories Ltd (DRR) || Sun Pharmaceuticals Industries Ltd (SUN) || Cipla Ltd (CIP)
Industry : Pharmaceuticals – Indian – Bulk Drugs & Formln Lrg
Profit & Loss Consolidated (COMMON SIZE)
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
Year 18 18 18 17 17 17 16 16 16 15 15 15 14 14 14
DRR SUN CIP DRR SUN CIP DRR SUN CIP DRR SUN CIP DRR SUN CIP
INCOME :
Sales Turnover 100 100 100.48 100 100 101.91 100 100 100 100.55 101 100.96 100.61 101.21 101.15
Excise Duty 0 0 0.48 0 0 1.91 0 0 0 0.55 1 0.96 0.61 1.21 1.15
Net Sales 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Other Income 1.09 3.17 2.94 1.21 1.97 1.21 1.89 2.31 2.31 1.82 2 1.46 1.26 3.43 2.61
Stock
Adjustments 0.29 -0.87 1.86 0.87 0.86 -0.52 0.61 1.38 -1.88 0.37 -0.42 3.03 2.38 0.48 0.63

Total Income 101.38 102.3 104.8 102.08 102.83 100.68 102.51 103.69 100.43 102.2 101.58 104.49 103.65 103.91 103.24

EXPENDITURE
:
Raw Materials 28.58 27.16 38.35 26.91 26.61 37.94 24.76 23.6 38.55 25.57 24.18 39.96 26.69 17.76 38.72
Power & Fuel
Cost 2.31 2.11 2.1 2.33 1.66 1.92 2.02 1.91 1.71 2.26 2.05 2.01 2.38 1.45 2.15
Employee Cost 22.51 20.26 15.68 21.88 15.52 16.06 20.02 16.75 14.68 19.6 16.44 17.34 18.45 12.9 15.17
Other
Manufacturing
Expenses 6.38 6.9 7.47 6 6.25 7.43 6.6 6.35 7.71 6.91 5.21 6.22 7.66 5.06 5.29
Selling and
Administration
Expenses 20.6 17.84 15.68 23.15 16.54 15.59 19.31 18.32 15.42 20.69 18.73 14.17 20.88 14.76 14.1
Miscellaneous
Expenses 3.46 7.27 3.99 3.18 2.32 5.73 4.86 8.21 3.1 2.08 5.12 4.27 2.08 20.68 4.24
Less: Pre-
operative
Expenses
Capitalised 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total
Expenditure 83.83 81.55 83.27 83.45 68.91 84.65 77.59 75.15 81.17 77.12 71.73 83.98 78.15 72.6 79.66

Operating
Profit 17.55 20.75 21.54 18.62 33.92 16.03 24.92 28.54 19.26 25.08 29.85 20.51 25.5 31.31 23.58
Interest 0.55 1.95 0.1 0.45 1.27 0.36 0.53 1.84 1.21 0.72 2.11 1.48 0.94 0.27 1.43
Gross Profit 17 18.8 21.43 18.18 32.66 15.67 24.39 26.71 18.05 24.36 27.74 19.03 24.55 31.03 22.14
Depreciation 7.54 5.66 4.65 7.23 4.01 4.64 6.03 3.64 3.65 5.06 4.36 4.45 4.83 2.54 3.66
Minority
Interest
(before tax) 0 0 16.78 0 0 11.02 0 0 14.39 0 0 0 0 0 0
Profit Before
Tax 9.46 13.13 3.79 10.94 28.65 2.89 18.36 23.07 2.94 19.3 23.38 14.58 19.73 28.49 18.48
Tax 1.23 2.5 0 2.18 1.28 0 4.77 4.2 0 4.15 6.02 3.56 4.9 5.02 4.3
Fringe Benefit
Tax 0 0 0.1 0 0 -0.92 0 0 -0.62 0 0 0 0 0 0
Deferred Tax 1.84 0.69 12.89 -0.09 2.56 9.05 0.05 -0.99 12.07 -0.41 -2.68 -0.03 0.2 -0.66 0.26
Net Profit 6.39 9.94 0.1 8.86 24.82 0.19 13.54 19.86 0.58 15.55 20.04 11.05 14.63 24.12 13.93
Minority
Interest (after
tax) 0 1.69 12.79 0 2.79 8.86 0 3.91 11.49 0 3.42 0.42 0 4.59 0.16
Profit/Loss of
Associate
Company 0.24 -0.1 100.48 0.25 0.03 101.91 0.15 0.01 100 0 -0.05 -0.22 0 0 -0.12
Net Profit
after Minority
Interest & P/L
Asso.Co. 6.63 8.16 0.48 9.1 22.05 1.91 13.69 15.96 0 15.55 16.57 10.41 14.63 19.54 13.65
Extraordinary
Items 0.38 -2.71 100 0.28 0.1 100 0.38 -1.69 100 0.3 -0.15 0.32 0.13 -11.43 -0.04
Adjusted Net
Profit 6.25 10.87 2.94 8.82 21.95 1.21 13.31 17.65 2.31 15.25 16.73 9.99 14.5 30.96 13.69
EPS before
Minority
Interest (Adj)
(Unit Curr.) 0.38 0.04 1.86 0.53 0.1 -0.52 0.79 0.08 -1.88 0.89 0.09 0.13 0.84 0.11 0.17

16
Common Size Balance Sheet

Company : Dr Reddys Laboratories Ltd (DRR) || Sun Pharmaceuticals Industries Ltd (SUN) || Cipla Ltd (CIP)
Industry : Pharmaceuticals - Indian - Bulk Drugs & Formln Lrg
Balance Sheet Consolidated (COMMON SIZE)
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
18 18 18 17 17 17 16 16 16 15 15 15 14 14 Mar 14
DRR SUN CIP DRR SUN CIP DRR SUN CIP DRR SUN CIP DRR SUN CIP
SOURCES OF FUNDS :
Share Capital 0.46 0.45 0.85 0.47 0.46 0.93 0.52 0.5 0.93 0.59 0.52 1.25 0.68 0.81 1.4
Reserves Total 69.31 71.66 74.2 69.17 70.54 71.27 76.75 68.68 65.43 67.28 63.13 82.4 62.16 71.5 86.31
Equity Share
Warrants 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Equity
Application
Money 0 0 0 0 0 0 0 0 0 0 0.12 0.09 0 0 0
Total
Shareholders
Funds 69.77 72.12 75.04 69.64 71 72.2 77.27 69.19 66.35 67.87 63.77 83.74 62.84 72.31 87.72
Minority
Interest 0 7.35 1.86 0 7.35 2.52 0 8.57 2.02 0 7.09 1.4 0 7.5 0.43
Secured Loans 0.38 2.96 0 0.4 1.51 0 0.53 0.6 1.25 0.59 0.85 2.23 0.84 0.29 3.06
Unsecured
Loans 27.76 16.7 21.61 27.53 17.54 23.67 20.08 17.23 28.72 29.12 21.53 10.97 34.93 9.7 7.83
Total Debt 28.15 19.66 21.61 27.93 19.05 23.67 20.61 17.82 29.97 29.71 22.38 13.21 35.77 10 10.89
Policy Holders
Fund 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Other Liabilities 2.08 0.88 1.48 2.43 2.6 1.61 2.12 4.42 1.66 2.42 6.76 1.65 1.39 10.19 0.96

Total Liabilities 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

APPLICATION OF FUNDS :
Gross Block 96.77 51.01 68.79 90.48 47.41 65.35 92.34 46.53 58.58 86.6 50.76 74.13 95.21 40.93 75.72
Less:
Accumulated
Depreciation 58.1 15.32 16.31 51.12 13.16 10.72 51.99 13.23 4.61 49.57 19.21 21.18 58.14 14.32 19.02
Less:
Impairment of
Assets 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net Block 38.67 35.68 52.48 39.36 34.25 54.63 40.35 33.3 53.98 37.04 31.55 52.95 37.08 26.61 56.7
Lease
Adjustment 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Capital Work in
Progress 19.26 4.67 5.18 18.88 5.43 9.69 4.75 4.56 11.87 3.64 5.07 4.5 5.1 3.28 3.86
Producing
Properties 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Investments 12.76 13.52 6.64 11.98 2.31 5.6 23.56 3.84 4.37 15.48 6.76 4.96 8.52 10.88 6.18
Current Assets, Loans & Advances
Inventories 16.14 13.02 21.33 16.2 13.24 20.06 15.73 13.47 21.94 17.7 14.1 29.31 19.32 12.19 25.27
Sundry Debtors 22.49 14.79 16.36 21.57 13.96 14.75 25.36 14.21 13.58 28.25 12.7 15.49 26.57 8.59 14.3
Cash and Bank 1.46 18.79 5.09 2.2 29.34 3.59 3.03 27.65 5.02 12.9 27.36 4.37 18.38 29.63 1.53
Loans and
Advances 7.99 5.53 8.43 6.92 6.87 7.05 6.86 5.97 7.05 8.48 12.5 6.66 9.7 14.73 5.5
Total Current
Assets 48.09 52.14 51.22 46.89 63.41 45.46 50.97 61.31 47.58 67.32 66.66 55.83 73.98 65.14 46.61
Less : Current
Liabilities and
Provisions
Current
Liabilities 20.75 11.37 14.59 19.23 10.33 14.27 20.32 9.52 14.24 19.25 10.36 16.32 20.56 5.92 11.94
Provisions 3.28 9.92 3.32 3.75 8.07 2.45 4.67 6.76 1.87 7.88 10.83 2.96 6.52 7.65 2.31
Total Current
Liabilities 24.04 21.3 17.91 22.98 18.39 16.73 24.98 16.27 16.11 27.13 21.19 19.28 27.08 13.57 14.26
Net Current
Assets 24.05 30.84 33.31 23.91 45.02 28.73 25.98 45.04 31.47 40.2 45.47 36.55 46.9 51.57 32.35
Miscellaneous
Expenses not
written off 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Deferred Tax
Assets 3 5.45 0.99 3.85 5.8 0.97 3.63 7.47 3.47 1.79 5.59 0.8 1.53 4.68 0.89
Deferred Tax
Liability 1.08 1.72 2.65 0.92 1.58 4.36 0.33 1.08 8.64 1.08 1.23 3 0.99 1.13 3.58
Net Deferred
Tax 1.92 3.74 -1.66 2.93 4.22 -3.39 3.3 6.39 -5.17 0.72 4.36 -2.21 0.54 3.56 -2.7
Other Assets 3.34 11.55 4.06 2.93 8.77 4.74 2.06 6.87 3.47 2.92 6.8 3.25 1.86 4.1 3.6
Total Assets 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

17
Analysis of Balance Sheet

Sun Pharma Cipla Dr. Reddy’s

Reserves and Surplus Maximum in the year Constant addition of Maximum during
2018 when it is profits every year to 2016, Has increased
71.66%. Has remained the reserves with a YOY from around 60%
stable around 70% in cumulative growth of to 70%.
the past 5 years 66%
except in 2015 when
it was 63.13%.
Share Capital Decreased to around Remained fairly Decreased from
0.45% in 2018 from constant with very around 1.3% to
0.81% in 2014. minor fluctuations around 0.45%.
Long term Minimum of 10% in A 200% increase Minimum of 20%
debts/Loans 2014. Has increased debts reported in during 2016.
from 10% in 2014 to March 2016. The Decreased from 35%
19.66% in 2018. majority is covered to 28%.
through short term
borrowing and later
switched to Term
loans
Other liabilities Minimum of 0.88% in 100% increase seen in Minimum of 1.39%
2018. Has decreased Mar 2015 and then during 2014.
from 10.19% in 2014 remained stable.
to 0.88% in 2018.
Depreciation Minimum of 13.16% Depreciation value Depreciation suddenly
in 2017. Has remained of Plant and Machinery decreased from 58%
around 15% in the increased by 23% in in 2014 to 49% in
past 5 years. 2015 and decreased by 2015 and then rose
82% in 2016.
back to 58%.
Financing Investments Highest of around A shift towards Highest 24% 2016,
13.5% in 2018. Has “Unquoted Units” in lowest of 8% in 2014.
increased from 2.3% 2015 and placement 12% in 2018.
in 2017 to 13.5% in in “Other
2018. Investments” in 2016
are noticed as
exceptions
Inventories Generally, in the Overall increase seen Generally, in the
range of 12% to 14% with an increase of range of 16% – 19%.
without any 69% seen with raw 15.7he3% in 2016
deviations. Materials in tune with
the sales increase
Current Assets Has gradually reduced Maintained an It has decreased from
to 52.14% in 2018 increasing trend with 74% in 2014 to
from around 65% in Mar 2017 as an around 47% in 2017.
2014. exception. Here, an And is around that
“investment as Stock in level.

18
 Trade” is an exception
noticed in 2016.

Current Liabilities Has increased to An increase of 48% Has been constant

21.3% in 2018 from seen in Mar 2016 around 20% since
around 18% in 2017. under Sundry Creditors 2014.
and there remained
Cash in Hand and in Has gradually reduced Varied during the Has decreased from
bank to 18.79% in 2018 period with a max around 18% to 1.46%
from around 28% in increase seen in Mar
2014. 15 and subsequent
decrease in Mar 2017
Total assets and Has decreased to Maintained an Has increased YOY
liabilities around 27000Cr in average increase of from around 12000Cr
2018 from a high of ~10%. The exceptions to 18000Cr.
around 32000Cr in are in 2016 with an
2015. increase of ~30% and
~1% in 2017

Details

Assets  All the companies have shown an increasing trend in total assets. However
due to the merger with Ranbaxy, Sun Pharma has seen the maximum
growth.
Liabilities  Provision for Sun Pharma is the highest and primarily tagged under the
head “Other Provisions”
 Cipla has converted its short term borrowings into a term loan from banks.
Howver both Sun Pharma and Dr.Reddy’s Laboratories continue to
leverage short term borrowings.
Shareholder’s  The maximum growth in shareholder’s funds is for Sun Pharma due to its
Equity merger with Ranbaxy

Financial ratio Analysis

Liquidity ratios
Liquidity ratios are calculated to measure the short-term solvency of the business or the firm’s
ability to meet its current obligations. These are analysed by looking at the amounts of the current
assents and current liabilities. Current and Acid test or Quick ratios are two liquidity ratios.
1. Current ratio

Current ratio = Current Assets / Current Liabilities

It provides a measure of degree to which current assets cover current liabilities.
Theoretically it may seem that higher the current ratio, higher is the ability of the firm to
pay its liabilities; but its value depends of the nature of operations in a company. For

19
 example, a manufacturing company may have a lower ratio because of less cash flow from
operations due to the nature of industry.

Current Ratio Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18
Sun Pharmaceuticals Industries Ltd 2.66 2.89 2.45 1.35 0.67 0.58 0.67 0.63
Cipla Ltd 2.71 2.67 2.27 1.81 1.66 1.72 1.96 2.18
Dr Reddys Laboratories Ltd 1.44 1.44 1.53 1.69 1.78 1.64 1.62 1.61
Industry Average 2.28 2.63 2.56 2.43 2.33 2.63 2.98 3.03

Current Ratio
4
3 2.98 3.03
2.63 2.56 2.43 2.63
2.28 2.33
2
1
0
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

All the three companies have lower current ratios than the industry average in the last five years.
Sun pharma has the lowest value among all. There has been a sudden decline in current ratio of Sun
Pharma post 2014 which can be attribute to the fact that it acquired Ranbaxy in 2014 which led to
relatively more increase in current liabilities that the current assets and hence reduced the ratio.

2. Acid Test or Quick Ratio

The quick assets are defined as those assets which are quickly convertible into cash such as
cash, marketable securities, accounts receivable etc. While calculating quick assets we
exclude the inventories at the end and other current assets such as prepaid expenses,
advance tax, etc., from the current assets.

Quick ratio = (Current Assets – Inventories – prepaid expenses) / Current Liabilities

Quick Ratio Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18
Sun Pharmaceuticals Industries Ltd 2.89 2.68 2.83 3.90 2.48 2.94 2.73 1.84
Cipla Ltd 2.02 1.63 1.74 1.50 1.38 1.59 1.52 1.67
Dr Reddys Laboratories Ltd 1.35 1.62 1.90 2.02 1.83 1.41 1.34 1.33
Industry Average 1.76 1.46 1.69 1.54 1.53 1.72 1.62 1.67

20
 Quick Ratio
4.00

3.00

2.00
1.76 1.69 1.72 1.62 1.67
1.46 1.54 1.53
1.00
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

Quick ratio of Cipla is slightly below the industry average, whereas the ratio for Sun pharma is
unsteady and on higher side among all companies in last five years. In Sun pharma, the proportion
of inventories in total current assets has increased post 2014 leading to decrease in quick ratio.

Solvency ratios
Solvency ratios are calculated to determine the ability of the business to service its debt in the long
run. Debt equity ratio and Debt service Coverage ratio are two of the solvency ratios.
1. Debt Equity Ratio
DE ratio is used to evaluate a company's financial leverage. It is a measure of the degree to
which a company is financing its operations through debt versus wholly owned funds. More
specifically, it reflects the ability of shareholder equity to cover all outstanding debts in the
event of a business downturn.

Debt to Equity Ratio = Total Liabilities / Owners Equity

Debt Equity Ratio Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18
Sun Pharmaceuticals Industries Ltd 0.01 0.01 0.01 0.16 0.31 0.28 0.28 0.32
Cipla Ltd 0.04 0.03 0.06 0.1 0.11 0.11 0.06 0.02
Dr Reddys Laboratories Ltd 0.18 0.24 0.25 0.28 0.29 0.27 0.23 0.21
Industry Average 0.37 0.36 0.43 0.61 0.49 0.38 0.39 0.37

Debt Equity Ratio

0.6 0.61
0.49
0.4 0.43 0.39
0.37 0.36 0.38 0.37
0.2

0
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

21
Industry average for DE ratio has a decreasing trend in last five years and it is above the individual
ratios of the three companies chosen. Cipla has the lowest DE ratio among all which can be
attributed to the fact that

Turnover ratios
These ratios indicate the speed at which, activities of the business are being performed. A turnover
ratio represents the amount of assets or liabilities that a company replaces in relation to
its sales.

1. Asset turnover
Measures the fixed asset investment needed to maintain a given amount of sales. It can
be impacted by the use of throughput analysis, manufacturing outsourcing, capacity
management, and other factors.
Asset Turnover = Sales revenue / Total Fixed Assets

Asset turnover Ratio Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18
Sun Pharmaceuticals Industries Ltd 2.6 2.97 1.57 1.58 2.05 1.56 1.71 1.46
Cipla Ltd 1.88 1.72 1.79 1.84 1.81 2.38 2.33 2.1
Dr Reddys Laboratories Ltd 1.96 2.08 2.2 2.15 1.88 1.54 1.2 1.05
Industry Average 1.91 1.88 1.71 1.94 1.77 1.71 1.73 1.49

Asset Turnover Ratio

3
2.5
2 1.91 1.88 1.94
1.71 1.77 1.71 1.73
1.5 1.49
1
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

The sharp increase in asset turnover ratio of Sun pharma in 2015 is due to relatively more increase
in sales compared to assets; whereas in 2018 the ratio decreased because the sales decreased and
fixed assets increased, both contributing to the decrease in ratio. The ratio for Sun pharma is
almost equal to the industry average, whereas for Cipla it is higher and for Dr Reddy it is lower than
the industry average.

2. Inventory turnover (Inventory Holding Period)

Measures the amount of inventory that must be maintained to support a given amount
of sales. It can be impacted by the type of production process flow system used, the
presence of obsolete inventory, management's policy for filling orders, inventory record
accuracy, the use of manufacturing outsourcing, and so on.

22
 Inventory Turnover = COGS / Average Inventory

Inventory Turnover Ratio Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18
Sun Pharmaceuticals Industries Ltd 5.32 6.49 3.34 3.28 5.26 3.64 3.51 3.58
Cipla Ltd 3.77 3.82 3.98 3.94 3.53 3.9 3.94 4.02
Dr Reddys Laboratories Ltd 5.45 5.67 5.96 6.29 6.09 6.01 5.54 5.11
Industry Average 4.91 4.83 4.55 5.15 4.79 5.1 4.73 4.46

Inventory Turnover ratio

7
6
5 4.91 5.15 5.1
4.83 4.55 4.79 4.73 4.46
4
3
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

3. Debtors turnover ratio (Average collection period)

The liquidity position of the firm depends upon the speed with which trade receivables are
realised. This ratio indicates the number of times the receivables are turned over and
converted into cash in an accounting period.

Debtors Turnover Ration = Net Credit Sales / Average Accounts Receivable

Debtors turnover Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18
Sun Pharmaceuticals Industries Ltd 5.77 6.5 3.47 3.41 5.87 4.14 3.31 2.86
Cipla Ltd 4.2 4.69 5.24 5.67 5.41 6.14 5.72 5.35
Dr Reddys Laboratories Ltd 3.77 3.65 3.47 2.61 2.18 2.39 2.34 2.17
Industry Average 4.03 4.19 4.27 4.19 3.63 3.87 3.39 3.2

Debtors Turnover Ratio

7
6
5
4 4.03 4.19 4.27 4.19
3.63 3.87
3.39 3.2
3
2
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

23
Debtor turnover ratio of Cipla is above industry average and that of Dr Reddy is below industry
average consistently. Higher values of this ratio for Cipla indicates that Cipla is able to collect its
debts in shortest period of time compared to other players.

Profitability ratios
Profitability ratios are calculated to analyse the earning capacity of the business which is the
outcome of utilisation of resources employed in the business. There is a close relationship between
the profit and the efficiency with which the resources employed in the business are utilised.
1. Gross Profit Margin
Gross profit ratio indicates gross margin on products sold. It also indicates the margin
available to cover operating expenses, non-operating expenses, etc.

Gross Profit margin = (Gross Profit / Revenue from Operation) * 100

Gross Profit margin Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18
Sun Pharmaceuticals Industries Ltd 48.04 44.16 29.75 3.95 -4.25 -3.91 4.86 14.03
Cipla Ltd 22.07 24.46 28.31 23.75 20.63 19.26 15.73 21.43
Dr Reddys Laboratories Ltd 24.53 24.03 25.01 29.7 25.9 23.22 24.04 16.39
Industry Average 22.89 24.26 22.71 22.06 24.82 24.24 26.08 20.01

Gross Profit Margin

50

30 26.08
22.89 24.26 22.71 22.06 24.82 24.24 20.01
10

-10
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

Gross profit of all 3 players are lower than the industry average in past four years in general. In
2018, Cipla has managed to increase the ratio above industry average. Change in gross profit ratio
may be due to change in selling price or cost of revenue from operations or a combination of both.

2. Net Profit Margin

It is a measure of net profit margin in relation to revenue from operations. Besides revealing
profitability, it is the main variable in computation of Return on Investment. It reflects the
overall efficiency of the business, assumes great significance from the point of view of
investors.
Net Profit margin = (Net Profit / Revenue from Operation) * 100

Net Profit margin Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18
Sun Pharmaceuticals Industries Ltd 43.79 41.60 20.51 -96.59 -18.05 -13.93 -0.29 -6.22

24
 Cipla Ltd 15.01 15.89 18.17 14.53 11.55 12.07 8.88 12.83
Dr Reddys Laboratories Ltd 16.73 13.45 14.88 19.71 16.64 13.35 14.24 6.06
Industry Average 36.86 13.72 14.12 6.26 11.70 14.54 14.27 14.66

Net Profit Margin

50.00
36.86
13.72 14.12 6.26 11.70 14.54 14.27 14.66
0.00

-50.00

-100.00
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

Net profit margin of Sun pharma is negative since past five years. Cipla and Dr Reddy have Net
profit margin lower than the industry average consistently.

3. Return on Assets (ROA)

Return on Assets = Net Income / Total Assets

ROA Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd 20.96 20.72 6.20 -23.21 -4.25 0.00 -0.07 -1.65
Cipla Ltd 13.60 14.94 15.40 12.23 9.52 10.65 7.34 10.18
Dr Reddys Laboratories Ltd 11.60 11.20 12.49 15.92 12.21 9.20 10.07 4.07
Industry Average 24.16 9.22 9.20 4.17 6.73 8.11 7.37 6.69

ROA
24.16
15.00
9.22 9.20 6.73 8.11 7.37 6.69
4.17
-5.00

-25.00
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

ROA of Sun Pharma is consistently lower than the industry average and the other two players in
past few years. It means that Sun Pharma has not been able to translate its investments into profits
compared to other players. ROA of Dr Reddy has decreased in 2018, whereas that of Cipla has
increased. ROA can be improved by using a tight credit policy to reduce the amount of accounts
receivable, a just-in-time production system to reduce inventory, and by selling off fixed assets

25
that are rarely used. The result varies by industry, since some industries require far more
assets than others.

4. Return on Equity (ROE)

Return on Equity = Net Income / Shareholder’s Equity

ROE Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd 22.32 23.32 6.59 -0.78 -9.76 -6.04 -1.24 1.55
Cipla Ltd 15.36 15.89 18.38 14.66 11.16 12.68 7.87 10.91
Dr Reddys Laboratories Ltd 14.97 14.33 17.45 22.59 16.83 12.1 11.69 4.84
Industry Average 33.06 12.55 13.81 7.15 9.07 11.47 10.01 9.25

ROE
33.06
30
20
12.55 13.81 11.47
10 9.07 10.01 9.25
7.15
0
-10
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd Industry Average

ROE of Sun Pharma is consistently lower than the industry average and the other two players in
past few years. ROE of Dr Reddy has decreased in 2018, whereas that of Cipla has increased. ROE
can be improved by funding a larger share of operations with debt, and by using debt to buy
back shares, thereby minimizing the use of equity. Doing so can be risky, if a business does not
experience sufficiently consistent cash flows to pay off the debt.

5. Earnings per share (EPS)

EPS serves as an indicator of a company's profitability. It shows how much money a
company makes for each share of its stock. A higher EPS indicates more value because
investors will pay more for a company with higher profits.

Earnings per share = (Net Income – Dividends on preferred stock) / Average Outstanding shares

EPS Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd 8.49 12.48 13.98 14.91 21.21 18.89 29.03 9.01
Cipla Ltd 11.87 13.93 18.90 16.95 14.30 16.93 12.51 17.52
Dr Reddys Laboratories Ltd 57.21 74.48 87.37 112.29 133.04 124.89 77.93 57.04

26
 EPS
150.00
133.04 124.89
112.29
100.00
87.37
74.48 77.93
50.00 57.21 57.04

0.00
Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sun Pharmaceuticals Industries Ltd Cipla Ltd Dr Reddys Laboratories Ltd

EPS of Dr Reddy is more than the EPS of Cipla and Sun Pharma consistently. Expect in 2018, EPS of
Sun Pharma was more than that of Cipla in past few years. Sun Pharma’s EPS decline in 2018 is
because of the losses in second quarter of 2018. High values of EPS of Dr Reddy indicate that
investors are more inclined in investing in Dr Reddy rather than in Sun Pharma and Cipla.

Current valuation of the shares of the companies

Dr Reddys Sun Pharma Cipla

Current Market Price (in Rs) 2551.55 382.80 551.55
Outstanding Shares 16,58,80,000 2,39,93,10,000 80,46,90,000
Current Valuation of Shares (in Rs) 4,23,25,11,14,000 9,18,45,58,68,000 4,43,82,67,69,500

Valuation Ratios (TTM)

Dr Reddys Sun Pharma Cipla Advantage

Year (Ending) Mar 19 Mar 19 Mar 19
Price Earning (P/E) 36.07 68.19 22.58 Cipla
Price to Book Value ( P/BV) 3.63 5.03 2.7 Cipla
EV/EBIDTA 19.16 83.33 13.91 Cipla
Market Cap/Sales 4.36 12.27 3.56 Cipla

As we can see from the Valuation Ratios CIPLA has clear advantage over Sun pharma and Dr
Reddy’s. CIPLA seems undervalued in the current growing pharma industry and one should look
forward to invest in CIPLA.

27
References
News:
1. https://www.businesstoday.in/sectors/pharma/chp-set-to-bridge-advocacy-gap-with
us/story/341762.html
2. https://www.businesstoday.in/sectors/pharma/indian-e-pharmacies-on-consolidation-
mode/story/331366.html
3. https://www.businesstoday.in/sectors/pharma/sun-pharma-launches-infugem-injection-for-
treatment-of-cancer-in-the-us/story/335076.html
4. https://www.businesstoday.in/sectors/pharma/us-drug-makers-ip-protection-india-
pharmaceuticals/story/270545.html
5. https://www.ibef.org/industry/indian-pharmaceuticals-industry-analysis-presentation
6. https://www2.deloitte.com/content/dam/Deloitte/in/Documents/audit/in-audit-indian-gaap-ifrs-
and-indas-a-comparison-noexp.pdf

Image:
https://industryreports24.com/77619/pharmaceutical-logistics-market-demands-competitive-insights-and-
precise-outlook-2019-2025/

28