Skip to main content

Fundamental Analysis - Here’s How To Evaluate Pharmaceutical companies

Pharmaceutical companies are seen as defensive stocks. During uncertain markets, there is a flight towards pharmaceutical stocks as they are considered more stable than other sectors. However, one needs to be careful in selecting which stocks to buy, even in a'safe' sector.

The first thing that most investors look at is the price-to-earnings(P/E) ratio, to determine whether they should buy a stock.

P/E RATIO

Although P/E ratios should never be taken as the sole indicator of value, there is a strong reason why investors look at them very closely. It tells you how much are investors willing to pay for every Re 1 of earnings that a company generates. Lower the P/E, lower is the investor willing to pay and vice versa. Some stocks such as Cipla, GlaxoSmithKline Pharmaceuticals and Sun Pharmaceuticals command high P/E ratios primarily because of the confidence investors place in these companies.

But the P/E ratio should not be looked at in isolation. A high P/E ratio also means that a stock is expensive, but many companies have given good returns despite having higher P/E. You should look at a company's earnings growth prospects over the next several quarters, the quality of management, execution capability, new business opportunities, business cycles and several other fundamental parameters.

Fundamental analysis deals with aspects like cash flows, the balance sheet, profit and loss statement, book value, debt-to-equity ratio, sales, profits and so on. However, every investor must understand a few basic things.

What kind of products do the pharmaceutical companies have? Some pharmaceutical companies could have diversified into meaningless consumer products and may not add much value. For instance, the GlaxoSmithKline group has two listed companies, GSK Consumer Healthcare and GSK Pharmaceuticals, which demarcate its businesses.

Is this company making profits? How much? There are parameters such as the growth in earning per share (EPS) and sales growth that need to be looked at. A robust sales growth that translates into profit growth is a strong indicator of a stable company. Additionally, look for companies that have net profit margins in excess of 15 per cent.

Projections of a company's financials can be a good tool of evaluation. But you must look at the historical growth and see if there is a disconnect between projections and past performance.

What is the debt-to-equity ratio of the company? A high ratio should set off alarm bells. Wockhardt is one of the best examples of a highly leveraged company. At the same time, low debt and free cash flows are positive signs. Most multinational pharmaceutical companies, like GSK Pharma and Novartis have zero debt-to-equity ratios, but only a few Indian companies, such as, Cipla and Sun Pharma among others, fall in this category.

How has the company fared in terms of innovation and technology? The pharmaceutical business is becoming increasingly innovation-driven. Foreign drug makers are coming to India to form alliances for research. Suven Lifesciences is a good example. Companies such as Glenmark Pharmaceuticals have raked in revenues by selling potential drugs to foreign drug makers.

Finally, the most important aspect to look at is management. You should explore how transparent the company is and how strictly it adheres to corporate governance. Quality and integrity of promoters and management are far more important than other parameters.

Apart from a look at the financial parameters, some legwork will help in making an investment decision. Basics, like, the medicines that your doctor prescribes can tell you a lot about the marketing efficiency of companies. Talk to the chemists about companies that have better presence in the market. A quick check in some areas of Mumbai reveals that Cipla and GlaxoSmithKline are the two companies that druggist and doctors recommend. Talking to friends in the medical profession can reveal many details about companies. Doctors have an understanding of nuances like the current and future demand for a drug, new discoveries, medicines that could be blockbusters, the quality of drugs, and so on.

At the end of the day, a pharmaceutical company which generates profits, has good cash flows, has a strong research and development wing, and a top-notch management with integrity is likely to deliver better results. Stock prices are slaves of earnings growth and you will see the result of a company's earnings growth in its stock price at some point of time. Even if a good stock does not deliver results today, it will deliver at some point if the fundamentals remain sound.


Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now