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Overall ROEs for the Pharma sector have held up well over the last
eight years, moving within a narrow 21–25% range. However,
change in capital structure has weakened the return to some extent
in recent years.
Pharma companies have successfully retained their profitability over
the years. EBITDA margins held up remarkably well in the 20-25%
range in almost every year, and have been rising of late. This has
been achieved despite significant changes in the business mix and
major margin-dilutive acquisitions in the sector. Revenue
contribution from high-gross-margin domestic branded-generics
business has declined over the years, as the companies expanded
rapidly in overseas markets organically as well as inorganically.
However, they have been able to maintain profitability through
better operating leverage and stable asset turnover.
Impact of non-operating items and tax rate has remained broadly
unchanged, despite the changes in capital structure and tax
regulations. Pharma companies have made the most of a variety of
tax exemptions to keep their effective tax rates low.
Most companies have significantly de-leveraged over the last 7-8
years, leading to a slight deterioration in ROE—equity multiplier
(assets / equity) has dropped from the 2-2.5x seen during 2004-07
to 1.6-1.9x now. Several companies (among them, Sun Pharma,
Glaxo Pharma and Biocon) are sitting on significant amounts of cash
and are finding it difficult to deploy it profitably for growth
organically or inorganically. Several others (such as Dr Reddy’s and
Lupin) have brought down debt through operating cash flows.
Others, among them Cipla and Opto Circuits, have brought down
debt through equity dilution.
Individual companies’ ROEs show substantial swings year-to-year,
from changes in business mix (mostly from large one-off exclusivity
opportunities in US and large licence fee payments), impact of forex
rates and related hedging losses, change in capital structure from
raising of equity capital and large write-offs of intangibles.
Dr Reddy’s and Cadila are two companies that have achieved
significant improvement in ROE through operational improvements
over the period we have analysed. Dr Reddy’s has improved ROE
through better margins, lower tax rate and better asset turnover,
while Cadila did it through a combination of better margins and lower
interest and tax rates. Write-off of goodwill and intangible assets
from Betapharm acquisition helped Dr Reddy’s in improving asset
turnover.
Looking ahead, there could be some softening in the sector’s ROE as
we cross the patent cliff in the US in 2012 and 2013. However, we
do not expect any sustained weakness, as base business growth in
the US, continued strength in the domestic market, major
momentum in the emerging markets and accretive acquisitions will
help companies maintain high ROE in the medium term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Overall ROEs for the Pharma sector have held up well over the last
eight years, moving within a narrow 21–25% range. However,
change in capital structure has weakened the return to some extent
in recent years.
Pharma companies have successfully retained their profitability over
the years. EBITDA margins held up remarkably well in the 20-25%
range in almost every year, and have been rising of late. This has
been achieved despite significant changes in the business mix and
major margin-dilutive acquisitions in the sector. Revenue
contribution from high-gross-margin domestic branded-generics
business has declined over the years, as the companies expanded
rapidly in overseas markets organically as well as inorganically.
However, they have been able to maintain profitability through
better operating leverage and stable asset turnover.
Impact of non-operating items and tax rate has remained broadly
unchanged, despite the changes in capital structure and tax
regulations. Pharma companies have made the most of a variety of
tax exemptions to keep their effective tax rates low.
Most companies have significantly de-leveraged over the last 7-8
years, leading to a slight deterioration in ROE—equity multiplier
(assets / equity) has dropped from the 2-2.5x seen during 2004-07
to 1.6-1.9x now. Several companies (among them, Sun Pharma,
Glaxo Pharma and Biocon) are sitting on significant amounts of cash
and are finding it difficult to deploy it profitably for growth
organically or inorganically. Several others (such as Dr Reddy’s and
Lupin) have brought down debt through operating cash flows.
Others, among them Cipla and Opto Circuits, have brought down
debt through equity dilution.
Individual companies’ ROEs show substantial swings year-to-year,
from changes in business mix (mostly from large one-off exclusivity
opportunities in US and large licence fee payments), impact of forex
rates and related hedging losses, change in capital structure from
raising of equity capital and large write-offs of intangibles.
Dr Reddy’s and Cadila are two companies that have achieved
significant improvement in ROE through operational improvements
over the period we have analysed. Dr Reddy’s has improved ROE
through better margins, lower tax rate and better asset turnover,
while Cadila did it through a combination of better margins and lower
interest and tax rates. Write-off of goodwill and intangible assets
from Betapharm acquisition helped Dr Reddy’s in improving asset
turnover.
Looking ahead, there could be some softening in the sector’s ROE as
we cross the patent cliff in the US in 2012 and 2013. However, we
do not expect any sustained weakness, as base business growth in
the US, continued strength in the domestic market, major
momentum in the emerging markets and accretive acquisitions will
help companies maintain high ROE in the medium term.
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