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Best Pharma Stocks in India

Created on 28 Mar 2022

Wraps up in 6 Min

Read by 3.7k people

Updated on 31 Aug 2022

Sectors, be it banking, auto, agriculture, airlines, defence, paints, steel, textile, the list goes on. Whatever the sector is it has separate importance in the economy. Moreover, each industry has an economy and workings of its own such as each sector has its own segments, each company in the sector has a different business model and whatnot. 

Today, we bring to you one such sector, Pharmaceutical. We will look into the industry, segments, factors to consider while selecting the stocks in the industry and some top stocks based on TTM profit. So, let’s get started with the industry overview. 

Industry Overview

In this section, we will talk about the Indian pharmaceutical industry. As of 2021, the Indian pharmaceutical industry has a global rank of 3rd in terms of production by volume & 14th in terms of production by value. Also, India exports to over 200+ countries. 

These are some factors that make the pharmaceutical industry in India a great deal! 

For analysing the industry, it is essential to understand what are the segments that form that industry, and for pharma, we have specific segments to look forward to, such as Generic,  Branded Generic, API, Contract research & manufacturing. 

When a new drug is innovated, it is usually patented by the company for some years and once the patent expires, that drug becomes a Generic. Thus, the pharma companies that make generics are the ones that produce off-patent drugs. These companies usually work on low margins and it is important that the production is on a large scale. And the competition is huge in this segment. Next comes the Branded Generics these are nothing but generic drugs that have been given a proprietary name or a brand name. Thus, these are off-patent generic drugs sold under a brand name.

Next is the API, which stands for active pharmaceutical ingredients; these are the active ingredients that are included in the main drug. There are various companies that specialise in making API. Lastly, we have got Contract research & manufacturing, which refers to outsourcing manufacturing & research activities. Contract manufacturing can be done for patented products, generics and more. 

Now that we know in a nutshell what segments are involved in the industry let us now understand what are the factors that you should consider while selecting the best stocks from these segments.

Factors to consider while selecting the Pharma Stocks

Below is the list of factors you should keep in mind while selecting pharma stocks.

Management & Market Leadership

Management is an internal affair that largely affects the workings of the company. A good management team will not only grow the business but will also create a good reputation for itself. Thus, while selecting any stock in any sector, one should look for a successful Management team

The stock which is the market leader in the segment should be given due attention and much importance. For eg., companies operating under API space in India are Cipla Ltd, Lupin Ltd, Aurobindo Pharma, Dr. Reddy’s Laboratories Ltd. and more. Thus, one should look for companies that have the largest market share and is the market leader.

Pipeline

A pipeline is the set of drugs that are still under the research & development stage at a given point in time. Developing the drug and bringing it to the market can take 10 to 15 years. 
Thus, knowing the kind of projects the company has in the pipeline is really important to evaluate the overall performance of the company.  

Return on Research Capital

This ratio tells us how much profit or return is generated by the R&D process of the company. This ratio signifies the productivity & growth of the company. For example, if a company made R&D expenses last year then this ratio will tell you how much revenue was generated from that research process. 

Operating margin & Net profit margin

The operating margin tells us how efficiently the company is managing its costs. The formula to calculate this is Operating Income/Revenue. On the other hand, the Net profit margin will tell you how much profit a company is generating. The formula to calculate this is (Revenue-Cost) / Revenue. 

ROE

Return on equity will tell you how much profit a company is generating for its shareholders. The formula to calculate this is Annual Net income/Shareholders' equity. 

Sustainability

It is extremely important for a company to be sustainable. If a company cannot sustain its business, then no analysis is of use. Now that you know what are the factors you should consider while selecting a pharma stock. Take a look at how and where you can begin your analysis process. 

How to find the best Pharma Stock

Kick start your stock screening process with Ticker by Finology where you can find details about company essentials, important charts relating to performance, information related to peers, important ratios, company results, financial statements and more. 

In the Sector section of the website you can search for Pharmaceuticals & Drugs to get the list of companies in the sector. 

Also, with the help of a stock Screener, you can filter out fundamentally weaker stocks over the stronger ones. 

Moving forward let us take a look at some established pharma stocks in the industry.

Top 5 Pharma stocks in India

Below is a list of the top-performing pharma companies based on Trailing Twelve Months (TTM) profits. Trailing twelve months is the data from the past 12 consecutive months in terms of financial performance. 

Divi’s Labs

Established in 1990 as Divi’s research centre today the company is engaged in manufacturing API’s intermediates and nutraceutical ingredients. Also, it exports to over 95 countries while the company is headquartered in Hyderabad. 

It is one of the most valuable pharmaceutical companies in terms of market capitalization. The company has shown good profit growth and revenue growth of 31% & 21.23% respectively for the past 3 years. 

The ROE & ROCE of the company for the last 3 years is 21.13% & 28.31%. 

Below is the chart depicting the 5-year CAGR return rate. 

Glenmark Pharma

The company was incorporated in the year 1977. It is a global research-led pharmaceutical company with a presence across Generics, speciality, & OTC businesses. The company has shown a good profit growth of a CAGR of 17.59% for the past 3 years. The company also has a healthy interest coverage ratio of 8.31. 

On the flip side, the company has shown poor revenue growth of CAGR of 5.70% for the past 3 years. 

Alkem Laboratories

One of the largest generic & speciality pharma companies in India. Alkem Laboratories has consistently been ranked as the top 10 pharmaceutical companies in the country. The company is engaged in the development, manufacture and marketing of pharmaceuticals with operational footprints across countries. 

The profit growth of the company remained 33.03% over the last 3 years. The company also has a high promoter holding of 57.13%. The ROE & ROCE data for the last 3 years are 20.41%, 20.31%. 

Below is the chart depicting 5-year CAGR return rate. 

Cipla

Cipla is responsible for the growth of complex generics. The company manufactures, develops, and markets a wide range of branded & generic formulations and API’s.

The profit has shown a growth of 18.90% for the past 3 years. The debt has significantly decreased by 6.60 Cr. the company has an efficient cash coverage cycle of 17.75 days. On the flip side, the company has shown poor revenue growth of 6.87% over the past 3 years. 

Below is the chart depicting the 5-year CAGR return rate. 

Sun Pharma

Sun Pharma was established in 1983 and it is the fifth-largest speciality generic pharma company globally. Along with this, the company is the market leader in India. 

The company has shown a good profit growth of 91.30% over the past 3 years. Also maintains a healthy interest coverage ratio of 9.38. On the flip side, the company has shown poor revenue growth of 12.54% over the past 3 years. Along with it it's trading at a high PE of 104.94.

Below is the chart depicting the 5-year CAGR return rate.

Conclusion

There is no doubt that India is one of the largest pharmaceutical producers in the world. The contribution has been huge at the time of the pandemic thus, India enjoys an important position in the global pharmaceutical industry. We hope that we were able to contribute to your sectorial knowledge in this space.

Also, Is there any topic you want a blog on or do you have any queries related to this blog? 

Then write us at support@finology.in 

We love it when you communicate with us. Do write in the comment section if you liked the blog.. :) Until then, Happy Investing.

*Disclaimer - the stocks discussed above are solely based on TTM. We are not recommending these stocks or claiming their good/bad fundaments. These stocks are here only to make you understand the concept.  

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A Keen Learner. Tiny, brainy, and studious, this quiet one stays in her zone until she pops. And once she does, boy, are her comebacks snappy! There is no financial question that she can't answer through her magical blog-writing. 

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