Vous êtes sur la page 1sur 49

Analysis of Financial Statements of Pharma Sector

(Cipla and Torrent Pharmaceuticals)

By Group 8(Section C): Ankit Mangla(11P123) Anurag Saxena(11P127) Amit Kumar Devraj Garg(11P138) Vineel Julapalli(11P142) Rohan Garg(11P160) Tamandeep Singh Bajaj(11P172)

INDEX
Topic
Industry Overview Company Overview Analysis of Cipla from strategy point of view Analysis of Torrent from strategy point of view Analysis from Long Term Investment perspective Analysis from long term lending perspective Analysis from short term Investment perspective Analysis from Short term lending perspective References and Acknowledgement Annexure(Financial Statements)

Page No.
3 8 11 22 33 37 41 44 47

2|P a ge

Industry Overview
The pharmaceutical industry in India is valued at US$ 12 billion with an annual compound annual growth rate (CAGR) of 10-11 per cent. The industry spends around 18 per cent of its revenue on research and development (R&D). In India, the clinical research industry is estimated to be a US$ 2.2 billion with a healthy CAGR of 23 per cent. India is ranked as the third largest emerging market and is growing fastest in conducting number of trials. Moreover, India is expected to join the league of top 10 global pharmaceuticals markets in terms of sales by 2020 with the total value reaching US$ 50 billion, according to a report by PricewaterhouseCoopers (PwC). Sector Structure and Market Size The Indian pharmaceutical market is poised to grow to US$ 55 billion by 2020 from the 2009 levels of US$ 12.6 billion, as per a McKinsey & Company report titled India Pharma 2020: Propelling access and acceptance realising true potential. The industry further hol ds potential to reach US$ 70 billion, at a CAGR of 17 per cent. The pharma industry constitutes around 8 per cent of the worlds pharmaceutical production. Over the last couple of years, Indian pharma companies have been increasingly targeted by multinationals for both collaborative agreements and acquisition, as per an Espicom report titled, The Pharmaceutical Market: India Opportunities and Challenges. The report further echoes the sentiments and the trends of the industry in totality. Exports Indias exports of drugs, pharmaceutical & fine chemicals stood at US$ 9.26 billion during April 2010Feb 2011, up 16.15 per cent as compared to US$ 7.97 billion in the same period during the previous year. Indias exports has recorded a growth rate of over 20.07 per cent, during the period of the two financial years in the study and the exports to rest of the world has grown by 9 per cent, according to DGCIS data from Pharmexcil Research. Growth The drugs and pharmaceuticals sector attracted foreign direct investments (FDI) worth US$ 4.84 billion between April 2000 and May 2011, according to data published by Department of Industrial Policy and Promotion (DIPP) upto May 2011. Indian pharmaceutical market is predicted to grow to US$ 55 billion by 2020 from US$ 12.6 billion in 2009, as per a McKinsey report. The Indian pharma industry is estimated to grow manifolds, on back of a high middle-class population base, improvements in medical infrastructure and the establishment of intellectual property rights. The Indian pharmaceutical sector has registered an outstanding growth during the last few years and has become the hub of pharmaceutical companies owing to low cost manufacturing, large 3|P a ge

population, and high demand, as per a research report - Global Contract Manufacturing Market Analysis. Investments

Dr Reddy's Laboratories Ltd has entered into a memorandum of understanding (MoU) with a Tokyo-based Fujifilm Corporation to form a joint venture (JV) in Japan. The venture would develop, manufacture and promote generic drugs in Japan Cadila Healthcare Ltd has entered into a share purchase agreement with ICICI Venture to acquire 100 per cent shareholding of Finest Procuring Solutions Ltd. The deal, signed through Cadila's 100 per cent subsidiary, Zydus Animal Health Ltd, includes the transfer of all key assets, people, brands and export contracts of Bremer Daiichi Sankyo Company Ltd and Ranbaxy Laboratories Ltd have announced expansion of their business in Mexico, to maximise their hybrid business model. As part of the plan, the two companies will launch Olmesartan Medoxomil, used to treat high blood pressure, in Mexico before the year-end Information technology (IT) major HCL Technologies Ltd has announced the opening of a coinnovation laboratory in Singapore with American pharmaceutical firm Eli Lilly and Company, to develop new technologies and solutions specifically for the drug-maker Drug-majors Ranbaxy Laboratories Ltd and Pfizer Inc have formalised an alliance with fast moving consumer goods (FMCG) company ITC Ltd to tap the rural markets for their over-thecounter (OTC) products. The distribution reach of an FMCG company into rural areas in India is much wider than that of a pharmaceutical company, observed Ranjit Shahani, President of the Organisation of Pharmaceutical Producers of India (OPPI), a platform of largely multinational drug-makers, and Head of Novartis (India) Jubilant Discovery Services Inc, the US-based subsidiary of Jubilant Life Sciences Company, has entered into a drug discovery alliance with Janssen Pharmaceutica NV. The alliance will span an initial period of three years and will mainly focus on multiple targets in the area of neuroscience Manappuram Health Care Ltd, a venture of the Manappuram Group of companies, has forayed into the healthcare sector and plans to invest US$ 222.25 million over the next five years to set up a chain of medical, dental clinics and diagnostics centres across South India. The Group has set a target to expand to over a 100 outlets by 2015 Zydus Cadila has signed an asset purchase agreement with a US-based pharma company for a cash deal of US$ 60 million. The deal also includes purchase of two generic drugs - Micro-K and Potassium Chloride ER capsule products

4|P a ge

Quarterly Revenue Trend (Y-o-Y) Growth Torrent Pharmaceuticals:

Cipla:

5|P a ge

6|P a ge

7|P a ge

Company Overview
Cipla:
Cipla was founded by Khwaja Abdul Hamied as The Chemical, Industrial & Pharmaceutical Laboratories in 1935. It is today the largest single supplier of HIV and anti-malarial drugs in the world in terms of volume. Cipla's products include: Pharmaceuticals: Cipla manufactures anabolic steroids, analgesics/antipyretics, antacids, anthelmintics, anti-arthritis, anti-inflammatory drugs, anti-TB drugs, antiallergic drugs, anticancer drugs, antifungal, antimalarials, antispasmodics, antiulcerants, immunosuppressants etc, Animal Health Care Products: These include: aqua products, equine products, poultry products, products for companion animals, and products for livestock animals. OTC: These include: child care products, eye care products, food supplements, health drinks, life style products, nutraceuticals & tonics, skin care products, and oral hygiene products.

8|P a ge

Flavour & Fragrance: Cipla manufactures a wide range of flavours, which are used in foods and beverages, fruit juices, baked goods, and oral hygiene products. Cipla fragrances have wide ranging applications such as in personal care products, laundry detergents and room fresheners. All Cipla Manufacturing facilities are approved by US FDA. The company has a sales turnover of Rs. 6,123.84 Cr. (FY11) which makes it the largest Indian Pharmaceutical company by revenue. The market capitalization of the company as on 31st August is Rs 22,538 Cr which is third to Sun Pharma and Dr.Reddys Lab.It has a market share of 5.29% in the domestic Pharma Sector.

Domestic Sales vs Exports

Exports 37%

Domestic Sales 63%

Exports contributed 545 of the total revenues of Cipla.Cipla exports to around 170 countries. The breakup of exports are shown below .As you can see Africa constitutes a huge market for cipla.

Exports
Europe 14% Africa 42% North , Central and South America 23%

Middle East 9%

Australasia 12%

9|P a ge

Torrent Pharma:
Torrent Pharmaceuticals Ltd. is the flagship company of the Torrent Group. Based in Ahmedabad, it was promoted by U. N. Mehta initially as Trinity Laboratories Ltd. and was later renamed to its current name Torrent Pharmaceuticals Ltd. Torrent Pharma is a dominant player in the therapeutic areas of cardiovascular (CV) and central nervous system (CNS) and has achieved significant presence in gastro-intestinal, diabetology, antiinfective and pain management segments.

10 | P a g e

Domestic Sales vs Exports

Exports 37% Domestic Sales 63%

Torrent at present exports to around 50 countries. Domestic sales make up 63% of the revenue. Analysis of the export reveals that Brazil constitutes a big international market for Torrent.

RCIS 6% USA 10% Europe 13% RoW 12%

Exports

Brazil 32%

Germany 27%

Analysis of Cipla from Strategy point of view


Financial Strategy Long Term

Net Sales growth % Net Sales Growth % YOY FY08 FY09 FY10 FY11

11 | P a g e

Cipla Industry

16.28 26

24.08 10.9

8.04 14.4

14.47 14.8

30.00 26

Sales growth %
24.08

25.00
20.00 16.28 15.00

14.4 10.9

14.8 14.47

10.00 5.00 0.00 Cipla Industry

8.04

FY08 16.28 26

FY09 24.08 10.9

FY10 8.04 14.4

FY11 14.47 14.8

Cipla has been underperforming the industry in terms of sales growth rate. However in FY 09 its growth rate was well above the industry average of 10.9%.A possible reason for this could be the sale of TamiFlu by Cipla , due to the Swine flu virus in 2009.

12 | P a g e

7000

Domestic Sales Vs Exports

6000

5000 2773.71 2458.92 2217.91

4000

3000 1657.76 2000

1896.16

3361.49 2742.69 1000 1780.44 2101.74 2900.58

0 Domestic Sales Exports

1 1657.76 1780.44

2 1896.16 2101.74

3 2217.91 2742.69

4 2458.92 2900.58

5 2773.71 3361.49

Ciplas s exports have been rising continuously .As Cipla is reaching its maturity stage in India it should be looking for new markets Blue Ocean Strategy. This can be verified by looking at the growth rates of export vs. domestic sales. Exports now form more than 50% of the total sales by revenue

Export vs. Domestic Sales growth: 13 | P a g e

Growth % Export Domestic Sales

FY08 18.05 14.38

FY09 30.50 16.97

FY10 5.76 10.87

FY11 15.89 12.80

Export to various countries


45 40 35 30 Axis Title 25 20 21 33 28 25 22 17 11 7 34 35 29 26 23 17 14 9 14 12 9 North ,Central and South America Middle East Europe 34 Australasia 42 Africa

15 10
5 0 Fy07 FY08

10 9

10 9

Fy09

Fy10

FY11

Exports% Africa Australasia North ,Central and South America Middle East Europe

Fy07 28 11 33 7 21

FY08 34 9 25 10 22

Fy09 35 10 29 9 17

Fy10 34 14 26 9 17

FY11 42 12 23 9 14

As can be seen above, Africa is a now emerging as a big market for Cipla. The proportion of exports to Africa has risen from 28% of total exports to 42% of total exports. This has also contributed to the increase in growth rate for Cipla.

Long term Debt/Equity Ratio: 14 | P a g e

FY07 FY08 FY09 FY10 FY11 Cipla 0.0023 0.0038 0.0006 0.0001 0.0005 Industry 0.29 0.32 0.37 0.31 0.2

Long Term Debt/Equity


0.4000 0.3500 debt/equity 0.3000 0.2500 0.2000 0.1500 0.1000 0.2 0.29 0.32 0.37 0.31

0.0500
0.0000 Industry Cipla 0.0023 1 0.29 0.0023 0.0038 2 0.32 0.0038 0.0006 3 0.37 0.0006 0.0001 4 0.31 0.0001 0.0005 5 0.2 0.0005

As you can see that Cipla is underleveraged with very little long term debt compared to industry standards. The company has sufficient financial leverage if it wants to go for Expansion. FY07 FY08 FY09 FY10 FY11 SHARE CAPITAL 155.5 155.5 155.5 160.6 160.6 RESERVES & SURPLUS 3080.8 3600.4 4195.3 5753.5 6452.4 The company can use its huge reserves and surpluses to go for expansion. Year FY07 FY08 FY09 FY10 FY11 Cipla 0.31 1.85 7.14 3.15 0.47 Industry 10.87 17.24 16.95 15.87 8.15

15 | P a g e

Interest/OPBDIT %
30.00 25.00 20.00 15.00 10.00 5.00 10.87 7.14 0.31 FY07 10.87 0.31 1.85 FY08 17.24 1.85 FY09 16.95 7.14 3.15 FY10 15.87 3.15 4.08 0.47 FY11 4.08 0.47 % 17.24 16.95 15.87

0.00
Industry Cipla

This shows that Cipla is paying very little of its profit as interest payment compared to the industry. So it can use long term loans to finance its expansion Plans. However in the current environment of high interest rates Cipla might want to use some part of its reserves and surplus for expansion.

Operational Efficiency Long term


Fixed Assets Turnover: F.A Turnover FY07 FY08 FY09 FY10 FY11 Cipla 2.82 2.89 2.33 2.13 2.11 industry 2 2 1.5 1.9 1.8

Fixed Asset Turnover Ratio


3.00 2.50 2.00 1.50 1.00 0.50 0.00 Sales/Fixed Asset

Cipla Industry FY07 2.82 2 FY08 2.59 2 FY09 2.33 1.5 FY10 2.12 1.9 FY11 2.11 1.8

Cipla Industry

16 | P a g e

Cipla is utilizing its fixed assets efficiently .However to need to look at capacity utilization to get a clearer picture utilization of its installed capacity Year FY07 FY08 FY09 FY10 FY11 Capacity Utilization % 79.06 91.21 76.51 70.51 53.13

Capacity Utilization %
100 80 79.06

91.21
76.51 70.51 53.13

60
% 40 20 0 FY07 79.06 FY08 91.21 FY09 76.51

FY10 70.51

FY11 53.13

Utilization

Ciplas installed capacity utilization is just 53% and it is on a declining trend.

Capacity Utilization
0% 1% 1% 11% 2% 0% Others Bulk Drugs Tablets & Capsules Liquids Creams Aerosols/Inhalation Devices Injections/Sterile Solutions

85%

17 | P a g e

FY10 Product Tablets & Capsules Bulk Drugs Injections/Sterile Solutions Aerosols/Inhalation Devices Liquids Others Creams

sales (Units) 17909.8 1930 2511.6 59137.4 13689.5 0 1525.2

Sales (Rs.Millions) 3202.23 669.97 525.85 475.4 306.3 118.16 113.77

Sales (Units)
Others 0% Creams 2% Liquids 14% Tablets & Capsules 18% Injections/Steril e Solutions Bulk Drugs 3% 2%

Aerosols/Inhala tion Devices 61%

Others 2%

Sales (Rs.Millions)
Liquids 6%

Creams 2%

Aerosols/Inhala tion Devices 9% Injections/Steril e Solutions 10%

Bulk Drugs 12%

Tablets & Capsules 59%

18 | P a g e

FY 11
Product Name Others Bulk Drugs Tablets & Capsules Liquids Creams Aerosols/Inhalation Devices Injections/Sterile Solutions Installed 0 1492.9 17496.1 3191.5 689 143452.5 1739 Production 2061.7 1601.2 17935.3 9009.8 898.9 55256.9 2525.9 Utilised % 0 107.254337 102.510274 282.306126 130.464441 38.5193008 145.250144

As you can see Aerosols/Inhalation Devices which Form almost 60% of the sales in volume contribute only 9% to total revenue, which indicates that it is a low margin business. The company has increased the installed capacity of aerosols by 50% but its production has increased by only 3.5%, which has driven down capacity utilization. Capacity Utilization of tablets which contribute 59% to the revenue has reached 102% .Bulk Drugs has contributing 12% of revenue has reached 107% capacity utilization. Capacity Utilization of all products except Aerosols is now greater than 100% indicating that company needs to expand its installed capacity even though overall utilization is just 53% or if feasible shift some resources to other products

Short term Operational and Financial Strategy


Inventory Turnover Ratio: Year Cipla Industry FY 07 3.61 5.02 FY 08 3.65 5.00 FY 09 3.59 4.87 FY10 3.58 4.59 FY 11 3.28 4.63

19 | P a g e

Inventory TurnOver Ratio


10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Industry Cipla FY07 5.02 3.61 FY08 5.00 3.65 FY09 4.87 3.59 FY10 4.59 3.58 FY11 4.63 3.28 3.61 3.65 3.59 3.58 3.28 5.02 5.00 4.87 4.59

4.63

The inventory turnover ratio of Cipla is declining as well as it is much below the industry average. This shows that inventory is not effectively utilized and Cipla is keeping too much inventory as compared to other companies in the sector. Having high inventory is a cause for concern as it increases the storage expenses. Cipla should reduce its inventory. Working Capital: FY07 FY08 FY09 FY10 FY11 Working Capital 1893.4 2456.2 3015 3137.8 3575.4

Working capital Turnover


2.50 2.00 1.50 1.00 0.50 0.00 Cipla FY07 FY08 FY09 FY10 FY11 2.10 1.82 2.15 2.12 1.65

1.63

2.11 1.71

1.72 1.45

1.82
2.10

1.63
2.15

1.65
2.12

1.71
2.11

1.72
1.45

Industry

20 | P a g e

Current Assets should be used to fund current liabilities. The working capital is positive which shows current assets are greater than current liabilities. However the Working Capital Turnover which shows effective utilization of working capital has generally been below average for Cipla. Cash/Current Assets: Cash/Current Assets Cipla Industry FY07 FY08 Fy09 FY10 FY11 0.05 0.02 0.01 0.01 0.02 0.18 0.16 0.15 0.11 0.15

0.2 0.18 0.16 0.18

Cash/Current Assets
0.16 0.15 0.11 0.15

0.14
0.12 0.1 0.08 0.06 0.04 0.02 0.05 0.02 FY07 0.05 0.18 FY08 0.02 0.16

0
Cipla Industry

0.01 Fy09 0.01 0.15

0.01 FY10 0.01 0.11

0.02 FY11 0.02 0.15

The cash component of current assets is very low compared to industry average. This shows that the company doesnt have enough cash to fund its operational cycle and lot of current assets are stuck in inventory and receivables. Therefore the company has to rely on unsecured short term loans . Receivable Days-Payable Days: FY07 Receivable Days 98.4 payable Days 50.9 difference 49.1 FY08 108.1 47.7 46 67.3 64.5 2.8 FY09 117.4 59 32.5 FY10 114.3 69.5 28.7 FY11 90 57.4 42.8 75 67.8 7.2

CIPLA

Difference Receivable Days 66.8 payable Days 60.8 difference 6

116.8 73.7 120.1 70.3 -3.3 3.4

21 | P a g e

Recievable Days-Payable Days


70 60 50 difference 40 30 20 10 0 -10 FY07 6 2.8 FY08 -3.3 FY09 3.4 FY10 7.2 FY11 47.5 60.4 58.4 44.8 32.6 Cipla Industry

The difference between Ciplas Receivable days and Payable days is extremely high compared to industry standards. The payable days of Cipla are inline with the industry average. However the receivable days are very high. This implies that Cipla is not able to collect its payment from its debtors. In the short run Cipla should manage its operational cycle more efficiently by reducing the number of receivable days. This would also increase the cash component of current assets and would lead to effective utilization of working capital

22 | P a g e

Analysis of Torrent from strategy point of view


FY07 Sales(Net) Torrent Industry
882.90 63546.30

FY08
995.90 78443.50

FY09
1184.90 96984.50

FY10
1449.00 91432.90

FY11
1778.20 54872.50

2006-07 Torrent Industry 12.80 23.44

2007-08 18.98 23.64

2008-09 22.29 -5.72

2009-10 22.72 -39.99

Sales Growth Rate

Sales Growth
Sales Growth Rate Torrent 23.64 Sales Growth Rate Industry

23.44
18.98 12.80 FY08 FY09

22.29 -5.72

22.72

FY10

FY11 -39.99

23 | P a g e

FY07

FY08 15.00 17828.90 264.00 21613.80

FY09 5.00 19122.20 336.60 24937.00

FY10 163.80 15140.30 318.30 18478.60

FY11 157.80 8384.60 364.60 12618.90

Unsecured Loans Secured Loans Secured Loans/Unsecured Loans


80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00

Torrent Industry Torrent Industry Torrent Industry

157.80 16241.50 244.10 11729.50

1.55 0.72

17.60 1.21

67.32 1.30

1.94 1.22

2.31 1.51

Torrent Industry

0.00
FY07 FY08 FY09 FY10 FY11

Operational Strategy Inventory Turnover Ratio FY07 Inventory Gross Sales Inventory Turnover Ratio Inventory Gross Sales Inventory Turnover Ratio Industry Industry Industry Torrent Torrent Torrent
13138.5 66001.7

FY08
16187.3 80862

FY09
20294.1 98901.6

FY10
20166.6 92652.5

FY11
12023.3 55719.8

5.02
163.4 744.3

4.99
185.9 895.2

4.87
166.5 1001.9

4.59
191.8 1188.7

4.63
227.9 1451.6

4.55

4.81

6.01

6.19

6.36

24 | P a g e

Inventory Turnover Ratio


7 6 5 4 3 2 1 0 FY07 FY08 FY09 FY10 FY11

Industry 5.023533889 4.995397627 4.873416412 4.594354031 4.634318365 Torrent 4.555079559 4.8154922 6.017417417 6.197601668 6.36946029

A higher Inventory Turnover Ratio for Torrent post FY08 depicts higher Sales, whereas on comparison with industry average, the negative growth in sales of the same period makes the Inventory Turnover Ratio make a negative growth for the subsequent period.

Fixed Asset Turnover

Net Sales

FY07 FY08 FY09 FY10 FY11 Torrent 882.90 995.90 1184.90 1449.00 1778.20 Industry 63546.30 78443.50 96984.50 91432.90 54872.50

Net Block Torrent Industry

FY07
403.10 24693.10

FY08
403.10 31428.30

FY09
447.50 39057.40

FY10
487.20 35321.60

FY11
525.60 21739.70

Fixed Asset Turnover Torrent Industry

FY07 2.19 2.57

FY08 2.47 2.49

FY09 2.64 2.48

FY10 2.97 2.58

FY11 3.38 2.52

25 | P a g e

Fixed Asset Turnover


4 3.5 3 2.5 2 1.5 1 0.5 0 FY07 FY08 FY09 FY10 FY11

Torrent 2.190275366 2.470602828 2.647821229 2.974137931 3.383181126 Industry 2.573443594 2.495951101 2.483127397 2.58858319 2.524068869

Torrent overtook Industry average in FY09 riding strong on Sales during FY09.

Payable Days FY11 114 69.51 86.92 FY10 101 89.74 79.97 FY09 97 69.58 179.81 FY08 97 70.74 155.22 FY07 100 53.71 169.53

Pharmaceuticals & Drugs Cipla Ltd. Torrent Pharmaceuticals Ltd.

Payable Days
179.81 86.92 69.51 114 155.22 169.53

79.97
89.74 101 69.58 97

70.74
97

53.71 100

FY11

FY10 Pharmaceuticals & Drugs

FY09

FY08 Cipla Ltd.

FY07

Torrent Pharmaceuticals Ltd.

High Payable days for Torrent reflect the credit condition of the firm which on observation with Receivable days gives the cash position of the firm. Receivable days reflect the cash amount that has to be received by Torrent from its debtors and a lower value represents the cash position of Torrent which is quite better than the industry average.

26 | P a g e

Receivable Days FY11 114.32 62.94 FY10 117.43 67.44 FY09 108.14 66.32 FY08 98.39 56.41 FY07 88.44 41.9

Cipla Ltd. Torrent Pharmaceuticals Ltd.

Receivable Days
62.94 114.32 67.44 117.43 66.32 108.14 56.41 98.39

41.9 88.44

-13 FY11

-23 FY10 Pharmaceuticals & Drugs

-23 FY09

-22 FY08 Cipla Ltd.

-18 FY07

Torrent Pharmaceuticals Ltd.

EBITDA Growth(%) FY11 36 28.79 57.54 FY10 20.97 11.98 25.57 FY09 -5.39 7 25.63 FY08 41.37 14.44 41.52 FY07 36.17 38.67 49.12

Pharmaceuticals & Drugs Cipla Ltd. Torrent Pharmaceuticals Ltd.

27 | P a g e

EBITDA Growth (%)


57.54 41.52 28.79 36 38.67 25.57 11.98 20.97 FY10 Pharmaceuticals & Drugs Torrent Pharmaceuticals Ltd. 25.63 7 -5.39 FY09 FY08 Cipla Ltd. 14.44 41.37 36.17 49.12

FY11

FY07

A reasonably high EBITDA Growth of Torrent Pharmaceuticals Ltd. reflects the potential growth of the company which is lucrative for investments; hence Torrent has good prospects for generating funds through external investments. Its also very good indicator for future profitability as compared to the industry average. A high EBITDA growth along with high Interest Coverage also tells how favourably Leveraged Buyouts Firms view the firm.

Working Capital Turnover FY11 FY10 FY09 FY08 FY07 1.45 2.11 2.12 2.15 2.1 1.72 1.71 1.65 1.63 1.82 2.94 2.86 3.79 3.70 3.96

Pharmaceuticals & Drugs Cipla Ltd. Torrent Pharmaceuticals Ltd.

Working Capital Turnover


4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 FY11 FY10 FY09 Cipla Ltd. FY08 FY07 Pharmaceuticals & Drugs Torrent Pharmaceuticals Ltd.

28 | P a g e

A very high Working Capital Turnover compared to the industry average tells how Torrent Pharmaceuticals is generating Sales with far less funds attributed to generate it.

Inventory Days FY11 FY10 FY09 FY08 FY07 73.7 116.8 67.3 66.8 69.8 52.8 55 64.2 71.2 75.6

Pharmaceuticals & Drugs Torrent Pharmaceuticals Ltd.

Inventory Days
Pharmaceuticals & Drugs 116.8 Torrent Pharmaceuticals Ltd.

73.7

52.8

55

67.3 64.2

66.8 71.2

69.8

75.6

FY11

FY10

FY09

FY08

FY07

From FY09 Torrent Pharmaceuticals has managed to keep its Inventory Days lower than the industry average. It shows Torrent has learned to manage its inventory well thus increasing its efficiency.

Return On Assets (ROA) (%) FY11 FY10 FY09 FY08 FY07 11.9 6.7 9.9 14.4 12.3 15.8 17.4 18.6 16.5 12.5

Pharmaceuticals & Drugs Torrent Pharmaceuticals Ltd.

29 | P a g e

ROA (%)
15.8 17.4 14.4 9.9 6.7 18.6 16.5 12.5

11.9

12.3

FY11

FY10 Pharmaceuticals & Drugs

FY09

FY08

FY07

Torrent Pharmaceuticals Ltd.

A consistent high Return on Assets (ROA) of Torrent Pharmaceuticals relative to the industry average shows how efficiently the firm is using its Assets to generate income.

30 | P a g e

Financial Strategy Interest Coverage (OBDIT/Interest) FY07 FY08 FY09 FY10 FY11 18.18 16.51 18.46 31.09 38.41 1.21 1.8 4.72 1.99 0.78 9.49 13.75 15.43 13.23 8.14

Torrent Pharmaceuticals Ltd. Cipla Ltd. Pharmaceuticals Industry

Interest Coverage (OPBDIT/Interest)


13.23 15.43 9.49 13.75 1.8 16.51 4.72 18.46 1.99 31.09 8.14

0.78 38.41

1.21 18.18

FY07

FY08

FY09

FY10 Cipla Ltd.

FY11

Torrent Pharmaceuticals Ltd. Pharmaceuticals Industry

A very high Interest Coverage ratio for Torrent Pharmaceuticals Ltd. shows its relative ease in paying its debt expenses. Also it is one of the indicators of how this firm can go for LBO.

31 | P a g e

ROCE (%) FY11 16.64 24.18 26.17 FY10 14.46 19.81 21.42 FY09 13.07 22.26 22.36 FY08 17.88 28.19 21.09 FY07 15.52 34.75 16.94

Pharmaceuticals & Drugs Cipla Ltd. Torrent Pharmaceuticals Ltd.

ROCE (%)
26.17 21.42 24.18 16.64 FY11 19.81 14.46 FY10 Pharmaceuticals & Drugs Torrent Pharmaceuticals Ltd. 22.36 28.19 22.26 21.09 16.94 34.75

13.07
FY09

17.88

15.52 FY07

FY08 Cipla Ltd.

Torrents return on capital employed has remained consistently higher than the industry average. Also since Torrents borrowings are lower the efficiency and profitability of torrent is high.

Tax Rate (%) FY11 19.82 18.38 33.9 FY10 20.93 13.81 2.32 FY09 15.05 16.33 6.22 FY08 19.56 17.32 8.98 FY07 20.46 14.4 18.78

Pharmaceuticals & Drugs Cipla Ltd. Torrent Pharmaceuticals Ltd.

32 | P a g e

Tax Rate (%)


33.9 18.78 18.38 19.82 2.32 13.81 20.93 6.22 16.33 15.05 FY09 8.98 17.32 19.56 14.4

20.46

FY11

FY10 Pharmaceuticals & Drugs

FY08 Cipla Ltd.

FY07

Torrent Pharmaceuticals Ltd.

Long Term Debt/Equity FY11 0.6 0.52 FY10 0.3 0.59 FY09 0.7 0.66 FY08 0.7 0.58 FY07 0.8 0.6

Pharmaceuticals & Drugs Torrent Pharmaceuticals Ltd.

Long Term Debt/Equity


0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
Pharmaceuticals & Drugs Torrent Pharmaceuticals Ltd.

FY11 0.6 0.52

FY10 0.3 0.59

FY09 0.7 0.66

FY08 0.7 0.58

FY07 0.8 0.6

33 | P a g e

Analysis from Long Term Investment perspective


The primary factors that drive long term investments are risk the investment will exposed to and the expected returns. An investor may opt for low risk and low to moderate returns in the form of regular dividends or for high risk and and high returns on investment in the form of growth in value. Risk and returns on investments can be evaluated using trend analysis and comparative analysis by means of financial ratios. The companies to be evaluated for investment opportunities are the pharmaceutical giant Cipla which is used as the industry bench mark and another player in the pharmaceutical industry Torrent pharmaceuticals. P/B Ratio: It is observed that both the P/B ratios of both companies takes a nosedive from FY2007 to FY2009 the most plausible reason for this might be recession and fall in stock prices of most companies. The steep decline continues from FY2008 to FY2009 in case of Torrent but is salvaged in the corresponding period for Cipla. This may be attributed to massive sales of the drug TamiFlu manufactured by Cipla in FY2009, which was meant for the treatment of swine flu when it broke out. Increase in the P/B value in the next two years is a sign of recovery for both companies. The increase is larger for Torrent than Cipla since it is in its growth phase, therefore its shares are overvalued.

P/B Ratio
12 10 8 P/B 6 4 2 0 P/B Ratio Cipla P/B Ratio Torrent 2007 11.3 4.51 2008 4.35 2.85 2009 3.63 1.86 2010 3.78 3.27 2011 3.92 4.37

High P/B ratios in most cases are indicators of overvalued shares and therefore investment opportunities. As stated above the one that attracts investor is a subjective matter and takes into account various factors including investors perspective. The top priority of an investor is to ensure the safety of his/her investment, lest it becomes non-recoverable or a dead asset. The debt-equity and interest cover ratios among other factors present a fair picture as the level of risk the investment might be exposed to.

34 | P a g e

Debt/Equity Ratio:

Long term Debt/ Equity Ratio


0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 Torrent Cipla Industry Long Term Debt\Equity

FY07 0.57 0.0023 0.29

FY08 0.58 0.0038 0.32

FY09 0.43 0.0006 0.37

FY10 0.41 0.0001 0.31

FY11 0.39 0.0005 0.2

The debt-equity ratio for Cipla is much less than that of Torrent and the industry bench mark indicating that it is less leveraged. Torrents debt-equity ratio hovers around the industry standard with its value exceeding the industry benchmark in FY2011 although it shows a declining trend barring recession years. The notable fall in the debt-equity ratio in FY2010 might be an attempt by Cipla and Torrent to expedite their recovery by regaining confidence of the investors confidence by lowering their debt accumulated during recession. The reserves in the corresponding period have also increased in both companies. Overall the debt equity ratio suggests that Torrent is a relatively risky investment. There is a marginal increase in the D/E ratio (which is still much less than the industry) this is because Cipla needs cash to run its operations.

Interest Cover:

Interest Cover
250.00 OPBDIT/Interest 200.00 150.00 100.00 50.00 0.00 Torrent Cipla Industry FY07 18.18 98.9568 FY08 16.51 55.1720 FY09 18.46 22.1864 FY10 31.09 39.1817 FY11 38.41 211.41

10.54

7.27

6.48

7.55

12.27

35 | P a g e

The interest cover for Cipla is much higher than that of the industry, it does however takes a beating during recession yet it remains at sustainable levels due to Ciplas enormous market share. Torrents interest cover presents a growth story, its interest is on the higher side due to high debt but its borrowings are justified by the large increase in its operating income (and therefore reserves) the interest cover is moderately hit by recession for Torrent.

Dividend Per Share:


9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

Dividend Per Share


Dividend per share Cipla Dividend per share Torrent 2007 2.00 3 2008 2.00 3.5 2009 2.00 4 2010 2.00 6 2011 2.00 8

Dividend (Rs)

Dividend per share Cipla


Dividend per share Torrent

Torrent pays a higher dividend per share than Cipla as any small player would to attract investors which increases over the years on account of increase in both sales volumes and operating income. Cipla being an established company in its maturity phase pays regular but fixed dividends.

Dividend Payout Ratio:

Dividend Payout Ratio


30 Dividend Payout Ratio 25 20 15 10 5 0 Dividend payout Cipla Dividend payout Torrent 2007 23 22 2008 22 19 2009 20 18 2010 16 24 2011 17 23

Both Ciplas and Torrents dividend payout more or less consistently decreases (this might be because the demand in pharmaceutical sector remains shielded and therefore earnings are less 36 | P a g e

affected) with minor increase after FY2009 as it is on its road to recovery, however there is an abrupt increase in Torrents dividend payout on account of higher dividends which maybe a strategy employed to entice the investors after recession.

Return on Equity
Return on Equity(%) 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Return on equity Cipla(%) Return on equity Torrent(%)

2007 20.64 24.32

2008 18.68 26.57

2009 17.85 25.49

2010 18.29 23.54

2011 14.52 26.61

The return on equity brings forth the kind of returns that can be expected on investments in the given companies which is higher than industry (even during recession) in case of Torrent which is a growing company and lower than industry benchmark in case of Cipla as it is a maturing company.

Analysis: After a thorough analysis of the companies and industry trends, it can be concluded that Cipla presents a safe low return investment opportunity with constant dividends, whereas Torrent provides a moderately high risk investment with attractive returns. This is reinforced by the respective market shares of the companies which clearly reflect that Cipla is the dominant market player which has been in the industry for a long time and is in its maturity stage whereas Torrent is a relatively new entrant on the growth path with a presently low market share.

37 | P a g e

Analysis from Long Term Lending Perspective


If we go to a bank for loan, the question that a banker will think is what are the Risk and Return (in terms of interest) in giving the loan and Why company need the money. The possible reasons could be Expansion Plans (Red Ocean Strategy) Entering New Market (Blue Ocean Strategy) To Pay off old Debt

We will evaluate which company is better for lending Long term loan by analysing there Financial statements over the last five financial years. Long term Debt/ Equity Ratio: This ratio defines the risk of the firm the higher the value higher is the risk of company in market as higher debt in comparison to equity increases the interest burden of the company there by reducing net profit.

Long term Debt/ Equity Ratio


0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 Torrent Cipla Industry Long Term Debt\Equity

FY07 0.57 0.0023 0.29

FY08 0.58 0.0038 0.32

FY09 0.43 0.0006 0.37

FY10 0.41 0.0001 0.31

FY11 0.39 0.0005 0.2

Here we observe that for Cipla the Debt Equity ratio is well below average for all the years in consideration but for Torrent its in see-saw shape showing Cipla is less leveraged compare to industry but Torrent is also almost on par with industry so Torrent is riskier compare to Cipla but at average risk when compared with industry terms.

Interest Cover (PBDIT/Interest): Interest cover defines the multiple times which a company earns in terms of its interest expense. It shows the ability or the ease with which the firm is able to pay its interest, the higher the value the better it is.

38 | P a g e

Interest Cover
250.00 OPBDIT/Interest 200.00 150.00 100.00 50.00 0.00 Torrent Cipla Industry FY07 18.18 98.9568 10.54 FY08 16.51 55.1720 7.27 FY09 18.46 22.1864 6.48 FY10 31.09 39.1817 7.55 FY11 38.41 211.41 12.27

As it is evident here also that Cipla is clearly way ahead of industry standards in terms of interest cover ratio which is sign of a healthy company. But its value has decreased during the period of 2008-09, during which industry average interest cover has also dipped (can be attributed to recession). When we look at Torrent its Interest cover has increased over the years consistently and above industry average even in period when industry average dipped this show strong financial base of company. So we can say both company have strong financial base but Torrent is more consistent then Cipla here

Fixed Asset growth: Increase in Fixed Assets of the company is an indicator of growth plans of the company. As a growing company or company with possible plans of expansion go for increasing the production capacity by acquiring new assets so that they can increase production as per market demand.

Fixed Asset Growth


35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Torrent Cipla Fixed Asset Growth %

FY07 14.89 27.77

FY08 18.79 29.65

FY09 1.30 24.51

FY10 18.40 14.27

FY11 3.87 15.79

39 | P a g e

As observer in the chart above the fixed Asset growth for both the company has been positive over the years (even through greater for Cipla) indicative of expansion plans for both the companies.

Fixed Asset Turnover Ratio: It is an Indicative of the efficiency of company it determines how efficiently company is utilizing its asset for realizing its annual sale.

Fixed Asset Turnover Ratio


3.00 2.50 Sales/Fixed Asset 2.00 1.50 1.00 0.50 0.00 Torrent FY07 FY08 FY09 FY10 FY11

Torrent Cipla Industry

2.13
2.82 2

2.06
2.59 2

2.17
2.33 1.5

2.39
2.12 1.9

2.62
2.11 1.8

Cipla
Industry

As seen here the Fixed Asset Turnover ratio of Cipla has been decreasing over the years, as we saw above the asset Growth rate for Cipla is high so Fixed asset are increasing every year but the revenue or sales is not increasing in the same proportion showing some inefficiency in its operations over the year. But in case of Torrent the asset turnover is increasing consistently over the year which shows company sales are increasing year on year with increasing Assets. So Torrent operations are more efficient then Cipla and Industry over the past five years in terms of fixed asset utilization. This can be justified by the small size of torrent which results in efficient utilization of resources.

Other Factors Considered: Besides these core ratios some other factors were also considered for this comparative analysis as the credibility of the company in market, which is determined by proportion of unsecured loans (Loans without collateral) compared to total loans of the company. It is an indicator of risk of loan default, the higher the credibility lower is the risk. Here market credibility of Cipla is very high compared to Torrent which is quite evident seeing the size of Cipla and its long existence in market.

40 | P a g e

This also has a disadvantage in terms of return as a company with high credibility will negotiate for lower rate of interest.

Analysis Looking at all the financial ratios and some other factor it can be concluded that long term lending is a trade off between Risk (of Default) and Return (in terms of interest). When comparing Cipla and Torrent here it is observed that both companies have growth plans, secure when compare to industry standards and can give good returns. Cipla being low in debt equity ratio and high interest cover will have less risk while lending but it will have high negotiation power in terms of interest rate so the returns will be considerably lower. On the other hand when we look at Torrent financials the Loan is comparatively more risky so bank can negotiate for higher interest rate hence higher returns. Considering the industry standards I would recommend the long term lending to Torrent as it has got efficient operations and it is also safer comparing industry standards and returns will be considerably higher in this case.

41 | P a g e

Analysis from Short Term Investment Perspective


For an investor to invest in a company for short term there are two parameters of interest Risk Return

In evaluating the Risk in short term investment the following ratios are considered.

Beta:
This ratio denotes systematic risk compared with the industry. The Beta value for the industry is taken to be 1. The below analysis of beta shows that Torrent has almost been constant while Cipla has shown a fluctuating trend. In the past year Ciplas value has decreased considerably from 0.69 to 0.46. This means the risk in Cipla has decreased. As seen from the trend Cipla is less risky than Torrent.

Beta
0.8 0.7 0.6 Axis Title 0.5 0.4 0.3 0.2 0.1 0 2011 2010 2009 0.74 0.7 0.69 0.7

0.46

0.51 Torrent Cipla

P/E: This ratio denotes whether the Stock is undervalued or overvalued. P/E reflects the expectations of investors. If P/E is increasing with decreasing or constant Earnings per share, the stock is overvalued. If P/E is decreasing with increasing or constant Earnings per share, the stock is undervalued. Looking at the trend of Cipla in the graph below, in the last year the earnings per share decreased while the P/E ratio should a sharp increase. This implies that the shares of cipla are overvalued .

42 | P a g e

Cipla
35.00 30.00 25.00 Axis Title 22.73 20.00 15.00 10.00 11.96 13.69 9.99 9.02 22.47 30.28 24.03 Earning per share P/E 33.17

8.61

5.00
0.00 2011 2010 2009 2008 2007

Looking at the graph below, Torrent P/E and the Earnings per share have shown a similar increasing trend indicating that the stock is fairly priced.

Torrent
40
35 30 Axis Title 25 20 15 10 5 0 2011 2010 2009 2008 2007 7.29 16.43 13.49 10.72 24.51 22.07 18.38 18.53 13.35 Earnings per share P/E 34.38

In evaluating the Return in Short term investment the following ratios are considered

Share Price: In the last one year Torrent stock has shown a steep increase relative to cipla. Considering that the Torrent stock is fairly priced and Ciplas is overvalued as per our analysis, it shows that in the short run Torrent might yield better returns.

43 | P a g e

Share Price
600.00 500.00 400.00 Axis Title 300.00 200.00 100.00 0.00 2011 2010 2009 2008 2007 362.16 565.00

340.53 311.14
224.47 160.93 216.77 197.08

285.57 247.40

Torrent Cipla

ROA ROA shows how efficiently a company utilizes its fixed assets. In the graph below, it can be seen that Torrent has been utilizing its assets in a better way than Cipla.

ROA Comparison
0.18 0.16

0.16
0.15 0.13 0.11 0.14 0.12 0.14 0.12 0.13 0.12 Torrent Cipla

0.14
0.12 Axis Title 0.10 0.08 0.06 0.04 0.02 0.00 2011

2010

2009

2008

2007

Analysis: Based on the analysis on Risk and Return, it can be said that Torrent is better company to invest in short term (FY2011-12). Though Cipla has less Beta, considering the other ratios torrent seems to be the better choice.

44 | P a g e

Analysis from Short Term Lending Perspective


For a Banker to lend to a company for short term there are two parameters of interest Why the company requires loan? Whether the company will be able to pay it back?

This is checked by looking at the operating cycle, if the company has its cash stuck in the Inventory and receivables then the company has less cash to run its daily operations. So the company might be looking for short term funding for more liquidity. Current Ratio- Current assets/ Current liabilities: The below given graph shows that Cipla has relatively better current ratio than Torrent which indicates better liquidity but we must also consider whether the Current Assets comprise more of Inventory and Receivables or Cash.

Current ratio comparison


5.00 4.00 Axis Title 3.00 3.69 2.30 1.58 4.10 3.14 3.27 2.52 3.02 2.31 2.71 Torrent Cipla

2.00
1.00 0.00

2011

2010

2009

2008

2007

Inventory Days: Looking at the trend given below it can be observed that the Inventory of Cipla is stuck for more days relative to Torrent as well the Industry on the whole. This shows that the operating cycle of Cipla is slower than that of Torrent.

Inventory days
140 120 100 Axis Title 80 60 40 20 0 2011 2010 2009 2008 2007 100.2 75 58.5 98.2 73.7 52.8 55 116.8 91.5 93.7 67.3 64.2 100 Torrent 71.2 66.8 Cipla Industry

45 | P a g e

Payable-Receivable days This parameter tells us about the credibility as well as the liquidity of the company. The trend shown below tells us that Torrent has more liquid days as compared to Cipla and has more credibilty in the market as more credit days are available to them.

Payable-Receivable days
-47.5 -61.4 -58.4 -44.8 -32.6 -80 -60 -40 -20 2007 2008 2009 2010 2011 0 20 10.7 10.9 12.6 24 19.9 40 Cipla Torrent

Inventory Turnover and Receivable Turnover: Both the turnover trends show that the Receivable and Inventory ratio in the sales is more for Cipla relative to Torrent, which shows more cash in hand percentage for Torrent and hence greater liquidity.

Receivable T/O Comparison


6.00 5.00 4.00 Axis Title 3.00 2.00 1.00 5.34 4.94 4.10 3.45 2.70 2.87 3.34 Torrent Cipla 4.75 4.88 5.33

0.00
2011 2010 2009 2008 2007

46 | P a g e

Inventory T/O comparison


7.00

6.00
5.00

6.08 4.90 3.26 3.54

5.97

5.82 4.75

Axis Title

4.00 3.00

3.55

3.57

3.51

Torrent
Cipla

2.00
1.00 0.00 2011 2010 2009 2008 2007

Analysis: Both the comapanies want to have more liquid cash to run their daily operations. Torrent has shorter operating cycle. This means that Torrent will be able to return the loan in less time than Cipla.

47 | P a g e

References:
www.aceanalyzer.com http://www.cipla.com http://www.torrentpharma.com www.moneycontrol.com www.investopedia.com

48 | P a g e

Acknowledgement
We would like to thank Prof. Dr. Shailendra Kumar Rai for the invaluable guidance. We would also like to acknowledge the staff and infrastructure at the MDI library which has proved most useful to us for this project.

49 | P a g e