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

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Mutual Fund Exit Load Changes

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 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Avoid NFOs

  Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.   For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs . While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter. Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock...
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