Too many pharma stocks have a communication issue
Chandigarh-based Surya Pharmaceutical is regarded as a star performer in the Indian drug industry, which is growing at close to 20 per cent every year. Surya’s own sales have grown from near Rs 240 crore four years earlier to Rs 1,130 crore in 2009-10, a consistent 30-40 per cent growth every year. Net profit also grew to Rs 74 crore during the period, from just over Rs 20 crore four years earlier. Despite this performance, investors are not impressed and its market capitalisation remains low, at about Rs 370 crore.
So, too, with another star performer, Ankur Drugs, which grew from a Rs 136 crore sales turnover four years earlier to a little over Rs 1,000 crore last year. Net profit was about Rs 90 crore in 2009-10, growth of 141 per cent over the previous year. Its market capitalisation — Rs 170 crore.
The theory says pharmaceutical stocks are among the most sought scrips, as they give steady returns. Safe bets, since drugs have demand irrespective of a bull or bear run, recession or crash, goes the belief.
Mostly out of sight
Not true, if one look at the market capitalisation of about 165 pharmaceutical companies listed on the Bombay Stock Exchange (BSE). That of 70 of these are less than Rs 50 crore each. Only 34 companies have a market cap of over Rs 1,000 crore. In many cases, turnover is much higher than the market capitalisation. Only seven — Sun Pharma, Dr Reddy’s Laboratories, Cipla, Ranbaxy, Lupin, GlaxoSmithKline Pharmaceutical and Zydus Cadila have a market capitalisation of above Rs 10,000 crore.
“Size of business matters and, normally, leading fund houses and foreign institutional investors are interested in investing only in large companies. Still, I think Lupin’s market capitalisation should be higher to justify our consistent growth and performance in the past few years,” says Ramesh Swaminathan, president, finance and planning, of Lupin.
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Investors look at companies on a case to case basis and investment decisions are made on various parametres like sales and growth prospects, net profit and margins, debts and liabalities. The promoter’s shareholding in most Indian drug firms is high and, thereby, free-floating shares are less, another reason for less crowd at their counters, note analysts.
“Many pharmaceutical companies are not benefited from listing, since they don’t catch the eye of the decisive investors. It is a fragmented industry and only those with an exciting growth story to tell will catch the attention of investors,” says Murlidharan Nair, partner-business advisory services, Ernst & Young. Not quite, as we have seen.
“Most small-cap and mid-cap firms are suffering from issues like availability of working capital, heavy debts and loans at higher interest rates, narrow profit growths and receivable cycles, despite their decent sales growth,” says Ranjit Kapadia, vice president of institutional research at HDFC Securities.
“The radars of both sector analysts and investors are normally confined only to the top 50 companies,” he concedes.
“There are some companies that are very investor-friendly and we are also confident of reaching that level. I agree that we need to interact more with investors on a regular basis to convey our performance to them,” says Alok Saxena, whole time director, Elder Pharma, a Rs 700-crore company with a market capitalisation of Rs 774 crore. Elder’s turnover was only Rs 354 crore four years earlier.
How to attract
“Drug stocks in demand are of companies having a proven record, with heavy investments in technology, manufacturing and other systems on a global scale. Companies having a robust pipeline of products and technology that will create value in future have always attracted the attention of long-term investors,” says R B Smarta, managing director of Interlink, an exclusive drug marketing consultancy.
| PERFORMANCE CHART | |||
| Drug makers with over Rs 10,000-crore market capitalisation (Rs crore) | Number of listed drug companies and their m-cap | ||
| Sun Pharma | 46,238.73 | Above Rs 1,000 cr | -34 |
| Dr Reddy’s Labs | 30,597.14 | Rs 200 cr to Rs 1,000 cr | -27 |
| Cipla | 28,640.20 | Rs 150 cr to Rs 200 cr | -8 |
| Ranbaxy Labs | 23,169.87 | Rs 100 cr to Rs 150 cr | -8 |
| Lupin | 20,065.59 | Rs 50 cr to Rs 100 cr | -17 |
| GlaxoSmithKline | 18,677.02 | Rs 10 cr to Rs 50 cr | -36 |
| Cadila Health | 15,561.91 | Less than Rs 10 cr | -34 |
| (Data based on m-cap on Dec 16) | Total | -164 | |
Me-too drug makers and those producing common formulations would get less demand, while technology-driven speciality and niche drug makers would always elicit the interest of investors, he adds.
“Pharmaceuticals is a highly complex, technology-driven, industry. The public relations’ skills of many pharmaceutical firms are very low and this is another reason for their failure to convey excellent performance to the common man and retail investors,” said Smarta.
It is not true in the case of Sun Pharmaceutical Industries, the largest Indian drug company in terms of market capitalisation, with Rs 46,238 crore. It does not even have an external public relations agency to handle its public affairs and the management always prefers to keep a low profile.
“I think the reason for the investor confidence in us is our consistent performance and confidence of of investors in future performances,” says Uday Baldota, head of investor and media relations with Sun Pharma.