Security Analysis & Portfolio Management Professor Charmi Shah

EIC Analysis of Torrent Pharmaceutical

(07) Jay Dave (14) Rinku Chhatbar (21) Rushabh Kothari
RK

(09) Rishi Kanjani (20) Vishesh Pandya (93) Dhaval Patel

Sem 3-A

Table of Contents
Sr. No 1 2 3 4 5 Particulars Preface & Acknowledgement Executive Summary Overview of Indian Economy Pharmaceuticals Industry Porter Five Force Model applied on the Pharmaceutical sector SWOT Analysis of Pharmaceutical Sector History of Torrent Pharmaceutical Background of Torrent Pharmaceutical Financial Highlights Key Financial Ratios for Investors Conclusion & Learning Page No. 2 3 4 6 9

6 7 8 9 10 11

10 12 13 14 17 19
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12

Value Bibliography

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Preface & Acknowledgement

The field of management is all about being able to handle the organization all together in an effective & efficient manner. Aspiring managers like us always need to have a combination of practical as well as theoretical outlook about management.

This report is absolutely everything about our learning in the outer world by matching the concepts that we have learnt in the classroom with the practices of corporate bodies in the real world. It goes without saying that this practical study of facts about real organizations will help us manoeuvre management skills in the right direction helping our careers the perfect flight towards success.

We are all very much humbled and appreciate the direction & guidance given to us by our Mentor-cum-Professor Ms Charmi Shah. It goes without saying that it wouldnt have been possible for us to carry on this practical project & enlighten our minds.

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Executive Summary

This report is prepared with a view to have a practical insight about the practical assignment prescribed as per the Gujarat technological university. This exercise will help us gain in our curriculum as well as in the corporate world with respect to the legal aspects of business.

The pharmaceutical & healthcare industry is one of the widest sectors around the world including India. It is poised to grow at a boundless rate in the coming years as we move towards the future of humanity. The sector is heavily spending on research & development of newer methods to cure and /or prevent diseases like cancer, AIDS, Diabetes & the likes.

With much speculation about the demand for life saving & generic drugs in the future, there are ample opportunities for the investors to park their funds into such companies which are going to be the future of humanity. The investors can earn a decent surplus when such companies have a good scope to succeed with their management, techniques of developing a drug, favourable external situations and the likes.

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Overview of Indian Economy

India economy, the third largest economy in the world, in terms of purchasing power, is going to touch new heights in coming years. As predicted by Goldman Sachs, the Global Investment Bank, by 2035 India would be the third largest economy of the world just after US and China. It will grow to 60% of size of the US economy. This booming economy of today has to pass through many phases before it can achieve the current milestone of 10% GDP.

Challenges before Indian economy:

y

Population explosion: This monster is eating up into the success of India. According to 2001 census of India, population of India in 2001 was 1,028,610,328, growing at a rate of 2.11% approx. Such a vast population puts lots of stress on economic infrastructure of the nation. Thus India has to control its burgeoning population. Poverty: As per records of National Planning Commission, 36% of the Indian population was living Below Poverty Line in 1993-94. Though this figure has decreased in recent times but some major steps are needed to be taken to eliminate poverty from India. Unemployment: The increasing population is pressing hard on economic resources as well as job opportunities. Indian government has started various schemes such as Jawahar Rozgar Yojna, and Self Employment Scheme for Educated Unemployed Youth (SEEUY). But these are proving to be a drop in an ocean. Rural urban divide: It is said that India lies in villages, even today when there is lots of talk going about migration to cities, 70% of the Indian population still lives in villages. There is a very stark difference in pace of rural and urban growth. Unless there isn't a balanced development Indian economy cannot grow.

These challenges can be overcome by the sustained and planned economic reforms. These include:
y

Maintaining fiscal discipline

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y y y y

Orientation of public expenditure towards sectors in which India is faring badly such as health and education. Introduction of reforms in labour laws to generate more employment opportunities for the growing population of India. Reorganization of agricultural sector, introduction of new technology, reducing agriculture's dependence on monsoon by developing means of irrigation. Introduction of financial reforms including privatization of some public sector banks.

Important highlights of Economic Outlook 2011-12

            

Agriculture grew at 6.6% in 2010-11. This years monsoon is projected to be in the range of 90 to 96 per cent, based on which Agriculture sector is pegged to grow at 3.0% in 2011-12! Industry grew at 7.9% in 2010-11. Projected to grow at 7.1% in 2011-12 Services grew at 9.4% in 2009-10. Projected to grow at 10.0% in 2011-12 Investment rate projected at 36.4% in 2010-11 and 36.7% in 2011-12 Domestic savings rate as ratio of GDP projected at 33.8% in 2010-11 & 34.0% in 2011-12 Current Account deficit is $44.3 billion (2.6% of GDP) in 2010-11 and projected at $54.0 billion (2.7% of GDP) in 2011-12 Merchandise trade deficit is $ 130.5 billion or 7.59% of the GDP in 2010-11 and projected at $154.0 billion or 7.7% of GDP in 2011-12 Invisibles trade surplus is $ 86.2 billion or 5.0% of the GDP in 2010-11 and projected at $100.0 billion or 5.0% in 2011-12 Capital flows at $61.9 billion in 2010-11 and projected at $72.0 billion in 2011-12 FDI inflows projected at $35 billion in 2011/12 against the level of $23.4 billion in 2010-11 FII inflows projected to be $14 billion which is less than half that of the last year i.e $30.3 billion Accretion to reserves was $15.2 billion in 2010-11. Projected at $18.0 billion in 2011-12 Inflation rate would continue to be at 9 per cent in the month of July-October 2011. There will be some relief starting from November and will decline to 6.5% in March 2012.

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Pharmaceuticals Industry
The pharmaceutical industry in India is valued at US$ 12 billion with an annual compound annual growth rate (CAGR) of 10-11 per cent. The industry spends around 18 per cent of its revenue on research and development (R&D). In India, the clinical research industry is estimated to be a US$ 2.2 billion with a healthy CAGR of 23 per cent. India is ranked as the third largest emerging market and is growing fastest in conducting number of trials. Moreover, India is expected to join the league of top 10 global pharmaceuticals markets in terms of sales by 2020 with the total value reaching US$ 50 billion, according to a report by PricewaterhouseCoopers (PwC). Sector Structure/ Market Size The Indian pharmaceutical market is poised to grow to US$ 55 billion by 2020 from the 2009 levels of US$ 12.6 billion, as per a McKinsey & Company report titled India Pharma 2020: Propelling access and acceptance realising true potential. The industry further holds potential to reach US$ 70 billion, at a CAGR of 17 per cent. The pharma industry constitutes around 8 per cent of the worlds pharmaceutical production. Over the last couple of years, Indian pharma companies have been increasingly targeted by multinationals for both collaborative agreements and acquisition, as per an Espicom report titled, The Pharmaceutical Market: India Opportunities and Challenges. The report further echoes the sentiments and the trends of the industry in totality. Exports Indias exports of drugs, pharmaceutical & fine chemicals stood at US$ 9.26 billion during April 2010Feb 2011, up 16.15 per cent as compared to US$ 7.97 billion in the same period during the previous year. Indias exports has recorded a growth rate of over 20.07 per cent, during the

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period of the two financial years in the study and the exports to rest of the world has grown by 9 per cent, according to DGCIS data from Pharmexcil Research. Growth The drugs and pharmaceuticals sector attracted foreign direct investments (FDI) worth US$ 4.84 billion between April 2000 and May 2011, according to data published by Department of Industrial Policy and Promotion (DIPP) upto May 2011. Indian pharmaceutical market is predicted to grow to US$ 55 billion by 2020 from US$ 12.6 billion in 2009, as per a McKinsey report. The Indian pharma industry is estimated to grow manifolds, on back of a high middle-class population base, improvements in medical infrastructure and the establishment of intellectual property rights. The Indian pharmaceutical sector has registered an outstanding growth during the last few years and has become the hub of pharmaceutical companies owing to low cost manufacturing, large population, and high demand, as per a research report - Global Contract Manufacturing Market Analysis. Generics India tops the world in exporting generic medicines worth US$ 11 billion and currently, the Indian pharmaceutical industry is one of the world's largest and most developed, according to Mr Srikant Kumar Jena, Union Minister of State for Chemicals and Fertilisers. The Indian generic drug market is expected to grow at a CAGR of around 17 per cent between 2010-11 and 2012-13. Generics will continue to dominate the market while patent-protected products are likely to constitute 10 per cent of the pie till 2015, according to McKinsey report India Pharma 2015 Unlocking the potential of Indian Pharmaceuticals market. Moreover, as per a press release by research firm RNCOS, the report titled Booming Generics Drug Market in India' projects the Indian generic drug market to grow at a CAGR of around 17 per cent between 2010-11 and 2012-13. Government Initiative Marking a new trend of investments from foreign players in the Indian pharma sector, the need for overseas investors to get a no-objection from their JV partner before venturing out on their own or roping in another local firm has been removed by the Pharmaceuticals Export Promotion Council. It is expected that this measure will promote the competitiveness of India as an

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investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country. 100 per cent FDI is allowed under the automatic route in the drugs and pharmaceuticals sector including those involving use of recombinant technology. The Union Minister of Commerce and Industry and Minister of Trade and Industry, Singapore, have signed a Special Scheme for Registration of Generic Medicinal Products from India, which seeks to fast-track the registration process for Indian Generic medicines in Singapore. The Department of Pharmaceuticals has prepared a "Pharma Vision 2020" for making India one of the leading destinations for end-to-end drug discovery and innovation and for that purpose provides requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain and such other measures. Road Ahead On back of aggressive marketing initiatives, the pharma companies witnessed rural market sales doubling. India's rural drug market grew by 18.8 per cent in the 12 months period ended April 2011 as compared with 10.9 per cent in the previous year. Interestingly, in order to increase their share in the globally important market - in India, the international drug-makers have introduced generic or low-priced version of popular medicines and have also decreased prices of their existing products. Global firms who traditionally banked on sales of their original high-priced medicines have now come into direct competition with Indian drug-makers. The Indian-makers business model is built around selling large volume of cheap generic medicines at lower margins in the country, to add to twin purpose of affordability and popularity. "The industry posting healthy growth consecutively for the second year reflects the inherent strengths of the industry and improving healthcare standards in the country... demand for drugs and pharmaceuticals is on the rise, and is likely to continue next year as well. The nutraceutical segment will continue to have better-than-average growth with people getting more conscious of their general health and well-being," as per Ganesh Nayak, Executive Director, Zydus Cadila.

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STRUCTURAL INDUSTRY ANALYSIS PORTERS FIVE FORCES

This section provides a summary positional analysis of the pharmaceutical industry using Porters Five Forces model.

Barrier to entry: High (Pharmaceuticals). Cost of R&D and patent limitations. Industry Competition: High. Advantages gained by first mover advantage (patents). Suppliers: supplier power is low. Buyers: buyer power is low.
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 Substitutes: low (with patents) medium (after patent expiry). Overall, the pharmaceutical industry shows an upward trend in its core markets. The industry remains highly valued has a favorable market position with strong financial make-up and strong earnings growth. Its future potential demand trend is positive and despite increased competition the industry still shows a continuing upward growth momentum.

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SWOT ANALYIS OF THE INDIAN PHARMACEUTICAL INDUSTRY

It is often said that the pharma sector has no cyclical factor attached to it. Irrespective of whether the economy is in a downturn or in an upturn, the general belief is that demand for drugs is likely to grow steadily over the long-term. It is true in some sense. But are there risks? The following gives a perspective of the Indian pharma industry by carrying out a SWOT analysis (Strength, Weakness, Opportunity, and Threat). STRENGTHS: India with a population of over a billion is a largely untapped market. In fact the penetration of modern medicine is less than 30 per cent in India. To put things in perspective, per capita expenditure on health care in India is $93, while the same for countries like Brazil is $453 and Malaysia $189. The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centers. This opens a huge market for lifestyle drugs, which has a very low contribution in the Indian markets. Indian manufacturers are one of the lowest cost producers of drugs in the world. With a scalable labor force, Indian manufactures can produce drugs at 40 per cent to 50 per cent of the cost to the rest of the world. In some cases, this cost is as low as 90 per cent. Indian pharmaceutical industry has excellent chemistry and process reengineering skills. This adds to the competitive advantage of the Indian companies. The strength in chemistry skill helps Indian companies to develop processes, which are cost effective. WEAKNESS: The Indian pharma companies are marred by the price regulation. Over a period of time, this regulation has reduced the pricing ability of companies. The NPPA (National Pharma Pricing Authority), which is the authority to decide the various pricing parameters, sets prices of different drugs, which leads to lower profitability for the companies. The companies, which are lowest cost producers, are at advantage while those who cannot produce have either to stop production or bear losses. Indian pharma sector has been marred by lack of product patent, which prevents global pharma companies to introduce new drugs in the country and discourages innovation and drug discovery, but this has provided an upper hand to the Indian pharma companies. Indian pharma market is one of the least penetrated in the world. However, growth has been slow to come by. As a result, Indian majors are relying on exports for growth. To put things in to perspective, India accounts for almost 16 per cent of the world population while the total size of industry is just 1 per cent of the global pharma industry. Indian pharma industry is highly fragmented with about 300 large manufacturing units and about 18,000 small units spread
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across the country. This makes Indian pharma market increasingly competitive. The industry witnesses price competition, which reduces the growth of the industry in value term. OPPORTUNITIES: The migration into a product patent based regime is likely to transform industry fortunes in the long term. The new patent product regime will bring with it new innovative drugs. This will increase the profitability of MNC pharma companies and will force domestic pharma companies to focus more on R&D. This migration could result in consolidation as well. Very small players may not be able to cope up with the challenging environment and may succumb to giants. Large number of drugs going off-patent in Europe and in the US during the period 2005 to 2009 offers a big opportunity for the Indian companies to capture this market. Since generic drugs are commodities by nature, Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world. Opening up of health insurance sector and the expected growth in per capita income are key growth drivers from a long-term perspective. This leads to the expansion of healthcare industry of which pharma industry is an integral part. Being the lowest cost producer combined with FDA approved plants; Indian companies can become a global outsourcing hub for pharmaceutical products.

THREATS: There are certain concerns over the patent regime regarding its current structure. It might be possible that the new government may change certain provisions of the Patent Act formulated by the preceding government. Threats from other low cost countries like China and Israel exist. However, on the quality front, India is better placed relative to China. So, differentiation in the contract manufacturing side may wane. The short-term threat for the pharma industry is the uncertainty regarding the implementation of VAT. Though this is likely to have a negative impact in the short-term, the implications over the long-term are positive for the industry.

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HISTORY

It all began with the toil of one enterprising individual, Shri. U N Mehta, when he ventured on his own to create history in the Indian pharmaceutical industry by implementing successfully the concept of niche marketing. His journey, characterized by ups and downs, reached a milestone in 1970, with the launch of Trinicalm Plus, an effective tranquilizer in the niche segment, central nervous system (CNS). The foundations for Torrent were laid when 'Trinity Laboratories' began operations under the able guidance of Shri Mehta whose efforts are worthy of emulation. 'Trinity' was renamed 'Torrent' in 1971 and with this not only did the company get a new name, it also focused on establishing its own manufacturing facilities in the early 80s. Torrent Pharmaceuticals Limited recorded a quantum leap in the year 1994. It has also been rated India's ninth best company among capital intensive companies in terms of ROCE in a study by ETIG-BCG in 2001.

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The Company Background

Torrent Pharmas core philosophy lies in providing life-supporting medications at affordable cost. Its R&D Center and the manufacturing facilities conform to world-class standards. Torrent Pharmaceuticals operates in more than 50 countries with over 1000 product registrations globally and over 200 products in the pipeline. Torrent Pharmaceuticals is a leading pharma player based in India having a strong presence in various therapeutic areas including cardiovascular, diabetology, central nervous system and pain management segments. The facility has the capacity to manufacture 3.2 billion tablets, 300 million capsules and 17 million Oral Liquid bottles, per annum. It has set up a world-class R&D facility at an investment of USD 40 million that employs more than 560 scientists dedicated to drug discovery and development. TPL is ranked 17th in India on the basis of sales turnover while it is No.2 in the cardiovascular segment and No.3 in the neuro-psychiatry segment. Its 6 pharmaceutical brands are in the top 300 brands and 37 of its other brands enjoy leadership positions in their respective molecule segments. TPL provides CRAMS (Contract Research and Manufacturing Sales) services for global pharma majors such as Novo Nordisk and Astra Zeneca.

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Financial Highlights
Balance Sheet of Torrent Pharmaceuticals
Mar '11

------------------- in Rs. Cr. ------------------Mar '10 Mar '09 Mar '08 Mar '07

12 mths

12 mths

12 mths

12 mths

12 mths

Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 42.31 42.31 0.00 0.00 1,050.74 0.00 1,093.05 428.47 143.59 572.06 1,665.11 Mar '11 42.31 42.31 0.00 0.00 838.54 0.00 880.85 364.64 157.75 522.39 1,403.24 Mar '10 42.31 42.31 0.00 0.00 690.37 0.00 732.68 318.27 163.79 482.06 1,214.74 Mar '09 42.31 42.31 0.00 0.00 542.94 0.00 585.25 336.65 4.96 341.61 926.86 Mar '08 42.31 42.31 0.00 0.00 422.07 0.00 464.38 263.98 15.00 278.98 743.36 Mar '07

12 mths

12 mths

12 mths

12 mths

12 mths

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments 884.93 297.32 587.61 67.83 430.52 771.79 246.16 525.63 105.38 231.48 680.78 193.55 487.23 45.73 244.96 612.30 164.78 447.52 78.60 158.05 543.31 140.20 403.11 39.78 94.97

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Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets

342.83 340.01 22.79 705.63 200.53 242.53 1,148.69 0.00 464.44 105.12 569.56 579.13 0.00 1,665.09

227.88 259.78 11.62 499.28 164.05 335.17 998.50 0.00 375.18 82.55 457.73 540.77 0.00 1,403.26

191.84 240.81 12.26 444.91 231.58 171.05 847.54 0.00 353.17 57.54 410.71 436.83 0.00 1,214.75

166.53 198.48 10.63 375.64 95.83 87.04 558.51 0.00 265.91 49.90 315.81 242.70 0.00 926.87

185.89 165.61 10.20 361.70 70.07 0.05 431.82 0.00 210.91 15.42 226.33 205.49 0.00 743.35

Contingent Liabilities Book Value (Rs)

49.76 129.18

72.91 104.11

35.80 86.59

44.03 69.17

31.86 54.88

Key Financial Ratios of Torrent Pharmaceuticals

Mar '11

Mar '10

Mar '09

Mar '08

Mar '07

Investment Valuation Ratios Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) 5.00 8.00 46.92 206.80 5.00 6.00 47.68 169.84 5.00 4.00 31.50 139.99 5.00 3.50 26.72 117.74 5.00 3.00 20.08 104.75

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Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) Return on Long Term Funds(%) Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Earnings Per Share Book Value

123.65 83.88

98.57 83.88

81.05 83.88

63.67 83.88

49.38 83.88

23.78 20.42 20.51 16.39 22.36 26.61 23.21

28.07 24.08 24.28 14.30 25.74 23.54 28.26

22.50 19.04 19.34 15.51 20.43 25.48 21.77

22.68 19.35 19.40 15.56 21.14 26.57 22.05

19.16 15.62 17.55 12.63 19.77 24.32 20.26

1.53 1.39 0.52 0.52

1.51 1.65 0.59 0.45

1.66 1.57 0.66 0.56

1.42 1.22 0.58 0.53

1.65 1.06 0.60 0.59

26.28 0.52

12.51 0.59

6.49 0.66

9.39 0.58

7.23 0.60

5.20 5.92 5.43 2.01 1.07 2.02 34.38 129.18

6.77 5.74 6.77 1.89 1.03 1.89 24.51 104.11

6.66 5.39 6.66 1.77 0.98 1.77 22.07 86.59

6.45 5.47 6.45 1.65 1.08 1.65 18.38 69.17

4.81 6.41 5.22 2.18 1.20 1.65 13.35 54.88

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Key Ratio Analysis for Investors

1) DEBT EQUITY RATIO = The ratio is almost constant for all the years except March 2008,there is a slight change which indicates that some amount of the debentures must have been redeemed as equity is constant for all the years. We can also say that the company using leverage is confident about its profitability and so it issuing debt. 2) CURRENT RATIO = The ratio is increasing year after year which shows a positive sign for the company s growth. The company has good amount of current assets which shows that they are successful in maintaining liquidity and are using the assets at optimal level. They are maintaining sufficient amount of cash balance which helps them to meet their sudden and unexpected liabilities or expenses. They can also easily pay off their suppliers to avail a discount and increase their profitability. 3) FIXED ASSETS RATIO = The ratio is increasing gradually which shows that the amount of the fixed assets have increased. It is due to the expansion of its operations in various locations and also torrent may have increased their production capacity by upgrading its assets. 4) INVENTORY RATIO = The increase in ratio shows that large bulk of inventory is maintained by torrent due to its increase in operations. It also indicates that the production process is a bit slow and the time to convert raw materials in finished goods is gradually increasing. 5) DEBTORS RATIO = This ratio is decreasing which indicates that the company is efficient enough in its collection and it has a proper credit period. Torrent is efficient in realizing its credit sales efficiently. 6) QUICK RATIO = The ratio is increasing which shows that the company is becoming highly liquid compared to the previous years. The company is efficient enough in meeting its current obligations. 7) GROSS PROFIT MARGIN = The margin is gradually increasing which shows that the manufacturing ability of torrent pharmaceutical is getting better as it is possible that the resources are efficiently used by the company and new assets & technologies may have be employed by them.

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8) NET PROFIT MARGIN = The ratio has significantly increased in the year 2007 but has seen a nominal decrease in the year 2010. It shows that over all the company s profitability is good and is efficient in its operations. 9) DIVIDEND PER SHARE = The DPS of the company has increased which shows that the company is profitable & is increasing its pay-out which will lead to a good image in the minds of the investor. In future the company can easily raise money from the market.

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Conclusion
Economy
The Indian economy is at its development stage & it has a lot of potential to grow as predicted by many. But it is facing some serious setbacks such as corruption & inflation. But overall it is a stable economy as compared to others.

Industry
The industry is growing at a good pace & government is taking initiatives for giving boost to this industry. The country is having good laws for research & development, patent laws & up to 100% FDI in this industry that will lead to global exposure to Indian pharmaceutical industry.

Company
Company is having a relatively strong financial position. From the above ratios we can analyse that the company is efficient in its economic operations & can be said that it would prove to be a good investment avenue for the domestic as well as international investor.

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Bibliography
1. 2. 3. 4. 5. Search partner: www.google.com Official Website: www.torrentpharma.com www.ibef.org www.trak.in www.moneycontrol.com

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