Manuscript Technical and Fundamental Analysis For Risk Management

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FUNDAMENTAL AND TECHNICAL ANALYSIS OF INDIAN PHARMACEUTICAL

COMPANIES: CIPLA, SUNPHARMA, AUROPHARMA, RANBAXY AND LUPIN
Article · January 2017
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Manna Reshmi and PathakSaurav (2017). Fundamental and technical analysis of Indian pharmaceutical companies: Cipla, Sunpharma,
Auropharma, Ranbaxy and Lupin. Unnayan, 3 (1), ISSN:23496754.

Reshmi Mannaa and Saurav Pathakb

IBS-Gurgaona and Transparent Value Pvt. Ltd.b
ABSTRACT
The Indian pharmaceutical industry was estimated to grow at 20 per cent compound
annual growth rate (CAGR) over the coming five years, as per India Ratings, a Fitch Group
company. Thus NSE companies exceeding daily trade volume of 2 lakhs such as Cipla,
Lupin, Auropharma, Sunpharma and Ranbaxy. To find out of long term investment savvy
and stock giving short term returns. Fundamental and technical analysis of the secondary data
collected from company website and NSE website. Lupin, Sunpharma and Cipla emerged
with strong fundamentals with operating efficiency, cash conversion cycle, profitability and
optimal capital structure which was indicated by their financial ratios analysis. These
companies were good options for long term investment prospect. Technical analysis with
help of candlestick pattern and pattern indicators (RSI, MACD, SMA etc.) gave strong buy
signal for Sunpharma and Lupin for short term investment of 1-month period and cut gains
at resistance levels. Sunpharma and Cipla emerge with most buying signal with investor
psychology; mathematical functions; financial statement and ratio analysis.
Keywords: Risk Management, Fundamental Analysis, Technical Analysis and
Pharmaceutical Companies
Fundamental and technical analysis of Indian pharmaceutical companies

1. INTRODUCTION
An indispensable part for business management would be to construct systems that enhance
competitive advantage. While there could be different approaches to achieving those, for
instance, on one had management seeks efficiency and effectiveness in business processes and
on other hand it looks to minimize and control risk. One of the most important feature in risk
management would be to evaluate changing context within the business process model (Adis,
2007). The risk complexities and its volume affecting businesses had been on incessant rise
with globalization and dynamic changes in business environment (Ghosh, 2013). Risk
management comprises of managing risk (uncertainty in returns) which could be systematic
(not diversifiable because of various macroeconomic and microeconomic factors involved) and
other was unsystematic which could be subdued by diversification (which means investing in
lesser riskier assets and stocks and various other financial instruments) through various tools
like:
• Hedging involves locking in price of underlying assets at a level which was thought of
as a viable to given markets volatility to counter risk using short and buy features in
stock markets according to β for hedging β while same could be other financial
instruments and currencies also. Derivative instrument was rigorously used for
hedging.
• Fundamental and technical analysis were tools for risk management as they consider
as art form which tells about entry and exit point for an investment using sound
financial indicators like financial statement analysis, calculation of intrinsic value
using dividend valuation model for dividend giving companies while corporate
valuation with free cash flow, discounted at cost of capital giving intrinsic value.
Technical analysis uses candlestick patterns, technical indicators like RSI, MACD and
SMA etc. to deals with buyers and sellers psychology.
• Arbitrage involves taking advantage of pricing discrepancies that exist in derivative
and cash market. Some times in stock market, same could be done for other financial
instruments.
An overview of literature would help in understanding whether risk management had
any value for entrepreneurship realigning their businesses in a fairly significant way in tune
with the emerging market realities (Ghosh, 2013). Researcher had been arguing that risk
management had proved as irrelevant for value creation if markets were perfect and complete,
as investors would be able to replicate company’s risk management activities by adjusting
their portfolio exposures without any costs or with minimal costs (Modigliani-Mille’s
irrelevance hypothesis 1959)1. If one holds that argument of incurring costs for managing
risks, then it would reduce company value. But in actuality, markets were never perfect due
to various features like information asymmetry, taxes, underinvestment, costs of financial
1
Modigliani Franco and Miller Merton (1959). Economic Review, 30.
2
distress (Schroeck, 2002) etc. Those arguments had found empirical support with a number
of studies finding use of derivatives for hedging risks to be associated with increase in
company value (Dionne & Garand 2003; Graham & Rogers 2002; Adam & Chitru 2006).
That literature had focus on traditional risk management where risks such as credit risk,
interest rate risks, foreign exchange risks, liquidity risks etc. were managed independently,
in a disaggregated manner. Therefore, in practice, risk management could create value by
minimizing costs associated with imperfect markets (Smith & Stulz, 1985). However, studies
like Schrand & Unal (1998) and Sinkey & Carter (2000) found evidence in line with
coordinated risk management.
Risk management also caters to choose of risks for a given investment proposal which
depend upon the type of company and type of investment to do. For instance, Reliance moving
to retail sector might prove to be risky proposition as they had no experience in underlying
sector; but since they had strong and stable corpus from their profitable gas business they
could afford that risk. In contrary insurance companies had less risk propensity due to IRDA
regulations and also cannot afford to be had higher risk on their investments. Thus those
companies prefer to invest in every type of assets including bonds, equity and many other
financial instruments. After considering investment tools; choices companies would require
to access viability of their investment through fundamental and technical analysis to measure
risk and its intensity.
This paper deals with stock markets, so Capital Assets Pricing Model considers an
approach in which a risk free rate of return was minimum expectation and risk premium
depending upon all market securities portfolio and β was decided.
1.1 Why to study risk management for pharma companies?

With liberalization and globalization, Indian companies had been expanding their
operations globally and preferred getting themselves listed in foreign exchanges. Thus, those
companies had been exposed to risk arising from different economic, political, cultural, and
other global uncertainties. India's pharmaceutical industry had been growing at record levels in
contemporary but now has unparalleled chances to expand in a number of fields. This is
because the patents on a number of blockbuster drugs, scheduled to expire over the next few
years at domestic pharmaceutical market, which had been holding time-honored position as
world leader in production of high-quality generic medicines. In addition, governments of
different countries worldwide had been trying to restraint their rising prescription medicine
costs through greater use of generics. Those opportunities were prevailing with India's
traditional clients such as the U.S. and European Union nations and certain countries with
emerging economies and vast populations such as Africa, South America, Asia, and Eastern
and Central Europe had been willing to join hands. Indian companies were also enjoying
foreign direct investments or earning of foreign currency through outsource services to off-
3
shore companies. That made foreign investors and foreign buyers of outsourcing services
exposed to various risks, which they need to be informed about. Such developments had made
important for pharmaceutical company to understand risk and manage those risk which would
be very critical for the success and growth.
The increase in growth of Indian domestic market will be on fact to consumer spending
capacity, rapid urbanization, raising healthcare insurance and so on. Sunpharma, Cipla, Lupin,
Auropharma and Ranbaxy are specifically chosen because of their daily trade volume, which
is mostly above 2 lakhs. These companies are able to make a portfolio which is appropriate
mix of Indian and global companies with strong fundamentals (barring Ranbaxy) in underlying
industry. NSE is chosen for investing in stocks because of high volume of trading that means
less price manipulation by market movers.
1.2 Overview of Indian pharmaceutical industry
The Indian pharmaceuticals market gained third largest share in terms of volume and
thirteen largest in terms of value, as per a pharmaceuticals sector analysis report by equity
master2. The market had been dominated by branded generics which constitute nearly 70 to 80
per cent of the market demand for bulk drugs, drug intermediates, pharmaceutical formulations,
chemicals, tablets, capsules, orals, and injectable. There were approximately 250 large units
and about 8000 small scale units, which from the core of the pharmaceutical industry in India
(including 5 Central Public Sector Units). Reckoned to be a highly fragmented industry,
consolidation had increasingly become an important feature of the Indian pharmaceutical
market, with more than 20,000 registered units. It had expanded drastically in the last two
decades. The pharmaceutical and chemical industry in India had been extremely fragmented
market with severe price competition and government price control3.
Now India had able to gain it place among top five pharmaceutical emerging markets. The
Indian Pharmaceutical Industry is estimated to grow at 20 % compound annual growth rate
(CAGR) over the next five years, as per Fitch Group Company. There will be new drug
launches, new drug fillings, and Phase II clinic trials throughout the year. Anti- inflective drugs
command the largest share (16 %) in the Indian Pharma Market (refer Graph I)
2
Pharmaceuticals Sector Analysis Report, (2016, February 3th), Equitymaster.com, 31.
3
Annavarapu Sridivya (2015, December 31st). The Indian government has started to encourage the growth of drug manufacturing
by Indian, Slideshare.net, 4.
4
Graph I: Segment wise division of Indian pharmaceutical industry4
The UN-backed Medicines Patents Pool had sign six sub-licenses with Aurobindo, Cipla,
Desano, Emcure, Hetero Labs and Laurus Labs, allowing them to make generic anti-AIDS
medicine Tenofovir Alafenamide (TAF) for 112 developing countries. Growth of Exports
Export data of Indian Pharma Industry. In terms of value, exports of Indian Pharmaceutical
Products increased at a CAGR of 26.1 percent to touch US $ 10.1 billion during FY 06-13 13
(refer Graph II).
Graph II: Export data of Indian pharmaceutical industry5
Indian pharmaceutical manufacturing facilities registered with US Food and Drug

Administration (FDA) as on March 2014 was the highest at 523 for any country outside the
US. Also, growing at a rate of about 20 per cent, India's biotechnology industry comprising of
bio-pharmaceuticals, bio-services, bio-agriculture, bio-industry and bioinformatics may reach
US$ 7 billion mark by the end of FY15. Biopharma is the largest sector contributing about 62
per cent of the total revenue, with revenue generation to the amount of over Rs. 12,600 crore
4
5
5
(US$ 2.03 billion). The bio-pharma sector comprises vaccines, therapeutics and diagnostics.
The Indian pharma market size is expected to surge to US$ 85 billion business by 20206.
2. RESEARCH METHODOLOGY:
2.1 Statement of purpose:
Pharmaceutical industry in India need to explore, as it has achieved an eminent global
position and expected to grow at 20% compounded annual growth rate as per Fitch Group
company. With BCG matrix showing both market share and growth are good to invest, this
intended to identify the scope of long term and short term investments.
2.2 Objectives:
• To analyze investment risk for pharmaceutical companies in India.
• To find long term investment savvy stocks in pharmaceutical industry.
• To find stocks that are giving returns in short term.
2.3 Fundamental Analysis
Fundamental analysis was a stock valuation method that uses financial and economic
analysis to predict the movement of stock prices. The fundamental information that was
analyzed could include a company's financial reports, and non-financial information such as
estimates of the growth of demand for products sold by the company, industry comparisons,
and economy-wide changes, changes in government policies etc.
2.3.1 Financial Analysis
Financial Analysis includes evaluating company’s financial statements i.e.
income statement, balance sheet and cash flow statement. Tools like ratio analysis were used
to calculate company’s financial strength. Ratio analysis could be done for industry wise ratio
comparison and also for previous five-year comparison of company’s ratios. These ratios
include different aspects of company’s performance as follows:
• Liquidity ratio: - Liquidity ratios measure the adequacy of current and liquid assets
and help evaluate the ability of the business to pay its short-term debts.
• Profitability ratios: - Profitability ratios measure the efficiency of management in the
employment of business resources to earn profits. These ratios indicate the success or
failure of a business enterprise for a particular period of time.
• Activity ratios: - Activity ratios (also known as turnover ratios) measure the efficiency
of a firm or company in generating revenues by converting its production into cash or
sales. Generally, a fast conversion increases revenues and profits.
• Solvency ratios: - Solvency ratios (also known as long-term solvency ratios) measure
the ability of a business to survive for a long period of time. These ratios were very
important for stockholders and creditors.
Also very imperative to financial analysis was ‘intrinsic value’ which was
discounted present value of all future cash flows generated by company given inflation rate,
gradual and perpetual growth rate of company. Warren Buffet, greatest investor of all time
gives primeval importance to calculating intrinsic value of company.
2.3.2 Economic Analysis
6
Indian Pharmaceutical Industry (2016, July), India Brand Equity Foundation, 24.
6
The economic analysis assesses the short to medium-term determinants of price

movements. The focus was on real activity and financial conditions relevant to the economy.
The economic analysis takes account of the fact that price developments over those horizons
which were influenced prominently by the interplay of supply and demand in the goods,
services and factor markets.
• developments in overall output,
• demand and labour market conditions,
• a broad range of price and cost indicators,
• fiscal policy, and
• the balance of payments
Economic analysis keeping a keen eye on macroeconomic and microeconomic variable
effecting a particular stock.
2.4 Technical Analysis
Technical analysis mainly seeks to predict the short term price travels. It was
important criteria for selecting the company to invest. It also provides the base for decision-
making in investment. The one of the most frequently used yardstick to check & analyze
underlying price progress. For that matter a verity of tools was consider. The focus of technical
analysis was mainly on the internal market data, i.e. prices & volume data. It appeals mainly
to short term traders. It was the oldest approach to equity investment dating back to the late
19th century.
Tools employed in technical analysis were as follows:
2.4.1 Simple Moving Average
A simple, or arithmetic, moving average that was calculated by adding the closing price
of the security for a number of time periods and then dividing that total by the number of time
periods. Short-term averages respond quickly to changes in the price of the underlying, while
long-term averages were slow to react. Predictions using simple moving average:
• If simple moving average cuts the underlying stock from above then chances were for stock
price to hit support levels.
• If simple moving average cut from below the underlying stock then chances were it will hit
resistance levels.
2.4.2 Relative Strength Index
A technical momentum indicator that compares the magnitude of recent gains to recent
losses in an attempt to determine overbought and oversold conditions of an asset. It was
calculated using the following formula:
RSI = 100 - 100/ (1 + RS*)
*Where RS = Average of x days' up closes / Average of x days' down closes.
Predictions from RSI:
• If it was soaring above the middle level for an extended period that means it was overbought
and odds were in favor of it plummeting.
• If it was moving below middle level for extended period of time then it was oversold and
about to be bought and rise in prices were expected.
7
2.4.3 Moving Average Convergence Divergence (MACD)

A trend-following momentum indicator that shows the relationship between two
moving averages of prices. The MACD was calculated by subtracting the 26-day exponential
moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the
"signal line", there were three common methods used to interpret the MACD:
2.2.3.1. Crossovers - When the MACD falls below the signal line, it was a bearish signal,
which indicate that it may be time to sell. Conversely, when the MACD rises above the signal
line, the indicator gives a bullish signal, which suggests that the price of the asset was likely to
experience upward momentum. Many traders wait for a confirmed cross above the signal line
before entering into a position to avoid getting "faked out" or entering into a position too early,
as shown by the first arrow.
2.4.3.2. Divergence - When the security price diverges from the MACD. It signals the end of
the current trend.
2.4.3.3. Dramatic rise - When the MACD rises dramatically - that was, the shorter moving
average pulls away from the longer-term moving average - it was a signal that the security was
overbought and will soon return to normal levels.
2.4.4. Bollinger Bands
Developed by John Bollinger, Bollinger Bands were volatility bands placed above and
below a moving average. Volatility was based on the standard deviation, which changes as
volatility increases and decreases. The bands automatically widen when volatility increases and
narrow when volatility decreases. That dynamic nature of Bollinger Bands also means they
could be used on different securities with the standard settings. For signals, Bollinger Bands
could be used to identify M-Tops and W-Bottoms or to determine the strength of the trend.
Signals derived from narrowing bandwidth were discussed in the chart school article on
Bandwidth.
* Middle Band = 20-day simple moving average (SMA)
* Upper Band = 20-day SMA + (20-day standard deviation of price x 2)
* Lower Band = 20-day SMA - (20-day standard deviation of price x 2)
2.4.5. Volume Moving Average
A Volume Moving Average (VMA) was like any simple moving average, except that
it was applied it to volume rather than to price data. By smoothing out individual surges in the
volume activity of an index, VMAs allow you to see the general trends and volume patterns of
an index.
2.4.6 Candlestick Patterns
One must be had a data set that contains open, high, low and close values for each time
period you want to display. The hollow or filled portion of the candlestick was called ‘the body’
(also referred to as ‘the real body’). The long thin lines above and below the body represent the
high/low range and were called shadows (also referred to as wicks and tails). The high was
marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the
stock closes higher than its opening price, a hollow candlestick was drawn with the bottom of
the body representing the opening price and the top of the body representing the closing price.
If the stock closes lower than its opening price, a filled candlestick was drawn with the top of
the body representing the opening price and the bottom of the body representing the closing
price.
8
Graph III: Candlestick Pattern Formation
Source: Stockcharts.com
Compared to traditional bar charts, many traders consider candlestick charts more visually
appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of price
action. Immediately a trader could compare the relationship between the open and close as well
as the high and low. The relationship between the open and close was considered vital
information and forms the essence of candlesticks. Hollow candlesticks, where the close was
greater than the open, indicate buying pressure. Filled candlesticks, where the close was less
than the open, indicate selling pressure.
Generally speaking, the longer the body was, the more intense the buying or selling
pressure. Conversely, short candlesticks indicate little price movement and represent
consolidation.
Graph IV: Candlestick pattern with large vs. short bodies
Long white candlesticks show strong buying pressure. The longer the white candlestick
was, the further the close was above the open. That indicates that prices advanced significantly
from open too close and buyers were aggressive. While long white candlesticks were generally
bullish, much depends on their position within the broader technical picture. After extended
9
declines, long white candlesticks could mark a potential turning point or support level. If
buying gets too aggressive after a long advance, it could lead to excessive bullishness.
Long black candlesticks show strong selling pressure. The longer the black candlestick
was, the further the close was below the open. That indicated that prices declined significantly
from the open and sellers were aggressive. After a long advance, a long black candlestick could
foreshadow a turning point or mark a future resistance level. After a long decline a long black
candlestick could indicate panic or capitulation.
2.4.7 Doji
Doji were important candlesticks that provide information on their own and as
components of in a number of important patterns. Doji form when a security's open and close
were virtually equal. The length of the upper and lower shadows could vary and the resulting
candlestick looks like a cross, inverted cross or plus sign. Alone, doji were neutral patterns.
Any bullish or bearish bias was based on preceding price action and future confirmation. The
word “Doji” refers to both the singular and plural form.
Graph V: Doji candlestick pattern
2.4.8 The J-hook pattern
The following figure shows a Candlestick J-hook pattern formation.
Graph VI: J-hook pattern
The pattern was a very common pattern, especially in up-trending markets. It was
easy to notice on a chart and could lead to good profits. The pattern starts out with an above
average rise in the stock compared to the market. The rise could be sometimes described as
‘dramatic’. This was followed by candlestick sell signals. Profit taking gets underway. The
price pulls back and soon starts displaying indecisive signals. That should trigger an alert for
the candlestick trader. As the indecisiveness gives way to bullish candles, the candlestick trader
10
anticipates the price will try to test the recent highs. Those should be considering as the first
target. If the price breaks those high, then the stock was free and clear to start a new uptrend.
If bearish or indecisiveness candles were noticed as the stock approaches its previous
high, then the probabilities were that the J-Hook pattern had failed. That would warrant
immediately getting out of the position. Failure of the J-hook pattern at the previous highs
could lead to a Double Top formation, a classic western chart pattern.
2.5 Sources used for analysis:
• Moneycontrol.com, Google finance, CNBC, NSE’ website and Cipla, Lupin,
Sunpharma, Auropharma and Ranbaxy’s individual websites were used to provide
appropriate tools and data.
• Trading software such as NSE sponsored NOW were also used during intraday trading.
3. FINDINGS OF FUNDAMENTAL AND TECHNICAL ANALYSIS OF INDIAN

PHARMACEUTICAL COMPANIES (CIPLA, SUNPHARMA, AUROPHARMA,
LUPIN AND RANBAXY):
3.1 Fundamental analysis of Indian pharmaceutical companies (Cipla, Sunpharma,
Auropharma, Lupin and Ranbaxy):
3.1.1 Financial Analysis:
3.1.1.1 Ratio Analysis:
Given below was the chart employing peer comparison of major five pharmaceutical
companies with respect to ratios implying Investment Valuation Ratios, Profitability
Ratios, Liquidity and Solvency Ratios, Debt Coverage Ratios, Management Efficiency
Ratios, Profit and Loss Ratios and Cash Flow Indicator Ratios. These were provided as of
March 2014 and were taken consolidate:
Table 1: Cipla, Ranbaxy, Sunpharma, Lupin and Auropharma ratios chart
Ratios
Cipla Sunpharma Auropharma Lupin Ranbaxy
Investment Valuation
Ratios
Dividend Per Share -- -- -- -- --
Operating Profit Per Share 26.57 33.81 73.15 66.97 -7.66
(Rs)
Net Operating Profit Per 125.80 77.64 277.91 251.72 161.99
Share (Rs)
Free Reserves Per Share (Rs) -- -- -- -- --
Bonus in Equity Capital 94.44 89.01 59.52 44.77 69.37
Profitability Ratios
Operating Profit Margin (%) 21.11 43.54 26.32 26.60 -4.72
Profit Before Interest and 16.98 39.63 22.39 24.04 -7.9
Tax Margin (%)
Gross Profit Margin (%) 17.42 40.99 22.46 24.29 -8.8
Cash Profit Margin (%) 17.26 40.92 18.23 18.68 -1.53
Adjusted Cash Margin (%) 17.26 40.92 18.23 18.68 -1.53
11
Net Profit Margin (%) 13.39 18.88 14.43 16.1 -11.49

Adjusted Net Profit Margin 13.39 18.88 14.43 16.1 -11.49
(%)
Return On Capital Employed 17.88 33.99 24.95 38.18 2.54
(%)
Return On Net Worth (%) 13.74 16.95 31.27 26.49 -80.16
Adjusted Return on Net 14.03 34.53 31.17 26.97 -36.24
Worth (%)
Return on Assets Excluding 125.68 89.44 128.67 154.59 25.87
Revaluations
Return on Assets Including 125.79 89.44 128.67 154.59 25.87
Revaluations
Return on Long Term Funds 19.46 38.46 36.63 40.35 5.04
(%)
Liquidity and Solvency
Ratios
Current Ratio 1.91 2.12 1.11 2.03 0.68
Quick Ratio 1.38 2.27 1.96 1.57 0.85
Debt Equity Ratio 0.12 0.13 0.97 0.08 5.46
Long Term Debt Equity 0.03 -- 0.34 0.02 2.25
Ratio
Debt Coverage Ratios
Interest Cover 13.90 161.68 5.94 107.52 0.33
Total Debt to Owners Fund 0.12 0.13 0.97 0.08 5.46
Financial Charges Coverage 16.46 170.94 6.95 117.05 0.84
Ratio
Financial Charges Coverage 13.08 81.35 5.79 79.7 -0.09
Ratio Post Tax
Management Efficiency
Ratios
Inventory Turnover Ratio 3.49 5.15 3.42 5.3 4.05
Debtors Turnover Ratio 6.11 6.55 3.83 4.85 5.14
Investments Turnover Ratio 3.49 5.15 3.42 5.3 4.05
Fixed Assets Turnover Ratio 1.64 2.52 2.16 2.73 2.1
Total Assets Turnover Ratio 1.14 0.82 1.13 1.66 0.98
Asset Turnover Ratio 0.95 0.81 1.21 1.64 1.0
Average Raw Material -- -- -- -- --
Holding
Average Finished Goods -- -- -- -- --
Held
Number of Days in Working 138.85 205.39 201.59 118.33 3.03
Capital
12
Profit & Loss Account

Ratios
Material Cost Composition 39.90 19.87 46.75 38.06 46.35
Imported Composition of -- -- -- -- 57.34
Raw Materials Consumed
Selling Distribution Cost -- -- -- -- --
Composition
Expenses as Composition of -- -- -- -- 74.2
Total Sales
Cash Flow Indicator Ratios
Dividend Payout Ratio Net 13.53 11.57 8.71 15.99 --
Profit
Dividend Payout Ratio Cash 10.66 10.23 6.88 14.0 --
Profit
Earning Retention Ratio 86.74 94.32 91.26 84.29 --
Cash Earning Retention 89.51 94.67 93.1 86.22 --
Ratio
Adjusted Cash Flow Times 0.69 0.37 2.45 --
Based on Table I following assumption for companies were made:

i. Investment valuation ratios analysis:
• These ratios simply implicate to value investor, to understand what company was offering
in terms of per share or value in terms of profitability, reserves and bonus in equity capital.
• Peer comparison tells that any of these companies were quite reluctant to pay dividend so
that’s why dividend per share was zero.
• In terms of operating earnings per share among the company Auropharma, Lupin,
Sunpharma, Cipla, Ranbaxy, only Auropharma and Lupin were more capable of dividing
their profit to share holders
• Free reserves per share was nil for these companies implying an industry wise norm that
free reserves were not kept.
ii. Profitability Ratios:
• Sunpharma had more operating profit margin, gross profit margin, cash profit margin and
adjusted cash profit margin. Indicator such return on net worth were more for Auropharma
and Lupin; while it plummets for Sunpharma. Thus these indicators go in favour of
Auropharma and Lupin while at the same time they may seem high for Sunpharma.
• Sunpharma shows adjustment net return on worth higher than return on net worth; which
implicate involvement of extraordinary and exceptional items.
• Return on long term funds was high for Sunpharma, Aurobindopharma and Lupin which
in turn corresponds to fact that they were earning on long term funds.
• Return on assets was highest for Lupin and somewhat close for Cipla and Auropharma.
• Thus profitability ratios were indicating strongly towards Auropharma, Lupin and
Sunpharma.
13
• Though Ranbaxy appear dull on all fronts, but acquisition by Sunpharma might support to
thrive.
iii. Liquidity and solvency ratios:
• These ratios indicate ability of company to meet its short term debt.
• Current ratio was high for Cipla, Sunpharma and Lupin while Auropharma had 1.11 which
indicate current assets were less, means less working capital.
• Quick ratio was high for Sunpharma, Lupin and Auropharma that means Auropharma had
cash equivalent in large numbers, which means it was keeping its cash and spending less
on working capital.
• Debt equity ratio were low industry wise that means per unit debt available was less. But
Auropharma again scores in this ratio too with it being near to 1 which high as compare to
industry wise norms.
• Long term debt equity ratio was very high for Ranbaxy which further indicates its plight.
iv. Debt coverage ratios:
• Total debt to owner funds ratio was highest for Ranbaxy because of its poor financial
position and Auropharma was also in higher side with score near to 1, which means debt
was as equal to owner’s funds and also it had quite low current ratio; so it might be
involved in long term fund but still it was not a strong indicator for Auropharma.
• Total debt to owner funds ratio was marginal for Cipla~0.12, Sunpharma~0.13 and lowest
for lupin~0.08.
• Interest coverage ratio was indicating strong financial position for Sunpharma and Lupin
while it indicates a bankruptcy for Ranbaxy and Auropharma also had low interest
coverage ratio~5.96 which indicate it was not as financially stable.
• Financial charge coverage ratios were highest for Sunpharma and Lupin. Again
Auropharma lack as industry wise norms dictate. So Sunpharma and Lupin were
financially sound for their financial spending.
v. Management efficiency ratios:
• Inventory turnover ratio was highest for Sunpharma and Lupin which was nearest to 5
which further implies that inventory turns into sales five times in a year.
• Auropharma and Cipla had a low debtor’s turnover ratio as compared to industry and since
Auropharma also had low working capital, less in debt to owner ratio all implying financial
weakness of company.
• Investment turnover ratio was lowest for Cipla and Auropharma.
• Fixed asset turnover ratio industry wise was same, but it was lowest for Cipla and highest
for Sunpharma which means fixed assets were not income for Cipla easily.
• On the other hand, total assets turnover was lowest for Sunpharma that means they had
more assets than required or current assets were more, which turns this ratio low for
Sunpharma.
• Number of days in working capital was highest for Sunpharma and then for Auropharma.
And mediocre for Cipla and Lupin.
vi. Profit and loss account ratios:
• Material cost composition ratio was highest for Auropharma and Ranbaxy which means
material cost was most for both of them.
14
vii. Cash flow indicator ratio:

• Dividend payout ratio was highest for Lupin, nil for Ranbaxy and Auropharma was at score
of 8, which was way below industry norms.
• Earning retention ratio highest for Sunpharma, which means for this year they had retained
their earnings.
• Adjusted cash flow times was highest for Auropharma, which means cash could pay off
debt 2.45 times.
3.1.1.2 Peer Comparison Based On Revenue:
Table II: Peer comparison
Cipla Sunpharma Auropharma Lupin Ranbaxy
Market 56,299.57 231,918.58 39,204.46 88,288.5 36598.55
Capitalization
(Rs.cr)
Sales Turnover 9,380.29 2,762.56 7,110.71 8,939.38 6864.94
Net Profit 1,388.34 300.84 1172.09 2,324.22 -879.0
Total Assets 10,968.98 9,816.89 6827.25 7,118.44 7088.06
• Based on Table II Sunpharma and Lupin were having highest market capital while
Auropharma and Ranbaxy were nearly same in market capital.
• Sunpharma with highest market capital had lowest sales turnover.
• Sales turnover was highest for Cipla
• Net profit was highest for Lupin and second highest was Cipla.
• Total assets were highest for Cipla and Sunpharma was second in line.
3.1.1.3 Cipla Financial Analysis

Cipla being highest for maximum sales turnover, we can do financial analysis of the
company for last 5 years.
Table III: Cipla last 5 years ratios
Ratios March14 March13 March12 March11 March10
Investment Valuation
Ratios
Dividend Per Share -- -- -- -- --
Operating Profit Per Share 26.57
27.37 20.66 17.05 17.43
(Rs)
Net Operating Profit Per 125.80
103.12 87.44 78.76 70.06
Share (Rs)
Free Reserves Per Share (Rs) -- -- -- -- 71.50
Bonus in Equity Capital 94.44 94.44 94.44 94.44 94.44
Profitability Ratios
Operating Profit Margin (%) 21.11 26.54 23.62 21.65 24.88
Profit Before Interest and Tax 16.98
21.96 18.80 17.08 21.62
Margin (%)
15
Gross Profit Margin (%) 17.42 22.55 19.18 17.32 21.91

Cash Profit Margin (%) 17.26 21.66 20.29 19.33 21.10
Adjusted Cash Margin (%) 17.26 21.66 20.29 19.33 21.10
Net Profit Margin (%) 13.39 18.17 15.98 15.42 18.99
Adjusted Net Profit Margin 13.39
18.17 15.98 15.42 18.99
(%)
Return On Capital Employed 17.88
20.92 19.42 16.47 22.13
(%)
Return On Net Worth (%) 13.74 17.12 14.97 14.84 18.34
Adjusted Return on Net 14.03
16.75 14.95 14.52 17.54
Worth (%)
Return on Assets Excluding 125.68
112.32 95.03 82.91 73.50
Revaluations
Return on Assets Including 125.79
112.32 95.14 83.02 73.61
Revaluations
Return on Long Term Funds 19.46
23.16 19.47 17.79 22.13
(%)
Liquidity and Solvency
Ratios
Current Ratio 1.91 1.94 2.61 2.42 3.13
Quick Ratio 1.38 1.64 1.56 1.96 2.05
Debt Equity Ratio 0.12 0.11 -- 0.08 --
Long Term Debt Equity Ratio 0.03 -- -- -- --
Debt Coverage Ratios
Interest Cover 13.90 61.62 38.76 47.31 56.97
Total Debt to Owners Fund 0.12 0.11 0.00 0.08 0.00
Financial Charges Coverage 16.46
71.37 46.91 58.20 52.11
Ratio
Financial Charges Coverage 13.08
56.30 38.99 51.31 45.16
Ratio Post Tax
Management Efficiency
Ratios
Inventory Turnover Ratio 3.49 3.47 3.79 3.32 3.75
Debtors Turnover Ratio 6.11 5.14 4.61 4.14 3.29
Investments Turnover Ratio 3.49 3.47 3.79 3.32 3.75
Fixed Assets Turnover Ratio 1.64 1.56 1.52 1.49 1.94
Total Assets Turnover Ratio 1.14 0.83 0.92 0.88 0.92
Asset Turnover Ratio 0.95 0.94 0.94 0.96 1.94
Average Raw Material --
-- -- -- 129.93
Holding
Average Finished Goods --
-- -- -- 53.84
Held
16
Number of Days in Working 138.85

150.68 154.43 193.89 190.33
Capital
Profit & Loss Account
Ratios
Material Cost Composition 39.90 40.28 40.32 47.90 47.77
Imported Composition of --
-- -- -- --
Raw Materials Consumed
Selling Dwastribution Cost --
-- -- -- 5.80
Composition
Expenses as Composition of --
-- -- -- --
Total Sales
Cash Flow Indicator Ratios
Dividend Payout Ratio Net 13.53
12.16 16.31 26.42 17.29
Profit
Dividend Payout Ratio Cash 10.66
10.01 12.81 20.70 14.98
Profit
Earning Retention Ratio 86.74 87.57 83.65 72.96 81.93
Cash Earning Retention Ratio 89.51 89.80 87.17 78.92 84.44
Adjusted Cash Flow Times 0.69 0.53 0.01 0.44 0.00
Book value per share 125.69 110.47 94.04 82.36 73.55
Earnings Per share 17.29 18.77 14.0 11.96 13.47
Table III gives the following assumption for Cipla:

• Cipla was performing stands tall in terms of investment valuation ratio over last five
years. As it had constant growth over five-year span indicating its potential, prospective
and current investors a strong suggestion of valued investment.
• Cipla had free reserves in March 10 but since then it had utilized its reserves.
• Cipla’s return on net assets ratio saw a cumulative rise of 10% per year in its value
which gives a strong investment indication to investors.
• In terms of other profitability ratios year 2014 had downsized as compared to other
years but still not indicative of what could had transpired.
• Return on long term funds had plummeted for Cipla for financial year 2014 but it was
still strong over a longer haul.
• In terms of liquidity and solvency ratios current ratio was higher for previous years but
had plummeted for 2014 and Cipla had started keeping its quick ratio low too that
means less cash in hands and liquidity increased.
• Debt to equity ratio was generally quite low for Cipla for every 1 unit of equity raised
it was getting only 0.12 debt.
• Interest coverage ratio had plummeted for march14 as it may be due to the fact that
interest had increased or EBIT had dwindled but still it was far greater than 1 so it was
stable.
17
• Inventory turnover was less for Cipla as it turns over three times only. But as far as
debtor’s coverage ratio was concern Cipla had done quite well in last two financial
years.
• Earnings per share had increased for last two financial years for Cipla.
3.1 Technical analysis
3.2.1 Lupin Technical Analysis:
Graph VI: Lupin technical indicators (RSI, Volume spurt, Candlestick pattern
(daily), MACD, Simple moving average)
• Simple moving average (SMA) gave a sell signal in April by cutting the candle from
above. SMA was below that candles for two months February and March and also RSI
was giving oversold signal for these two months. MACD saw 12 days cutting, SMA
26-day average from above with it diverging below mid-level, which was further
indicative signal of sell.
• As market was surging technical indicators, implying Lupin price touching resistance
R1=1770, R2=1830, R3=1910 in upcoming weeks and taking support of S1=1690 if
market moves in other direction but mostly stock was bullish for upcoming weeks.
• RSI though not giving overbought signal for May and April, it was giving overbought
for previous months. MACD gave an indication which was not definitive and as far as
SMA was concern it gives a buy signal which marks bullish nature.
• As one could infer from candlestick pattern of Lupin that price movement for this stock
was rather gradual, as stock do not saw any long body candle from January to March,
then it saw a gradual rise.
18
• Derivative’s price movement was good indicator of future trend. Currently it was
trading higher than spot price giving a bullish signal.
3.2.2 Auropharma
Graph VIII: Auropharma technical indicators (RSI, Volume spurt, Candlestick pattern
• Daily candlestick pattern and simple moving average indicates that Auropharma had
remained above its simple moving average for March and April. By May beginning
simple moving average did cut it from above giving a sell signal and for now in most
of May it was trading above its simple moving average for quite a while as one could
see the last two candles were long bearish signal and a Doji candle which signals a sell
or bearish signal even though its 30 min candlestick pattern indicate a buy for a given
simple moving average but that was just for upcoming week or day or two.
• In MACD 9 day and 26 day averages were moving closely, but neither of them
diverging. Partially converging observed, which was not definite. RSI had given
oversold signal for most of March and April and it was not giving overbought signal
since February so further correction was expected and it was likely for Auropharma’s
price to fall.
• If comparative analysis was done then Cipla, Lupin and Sunpharma were seeing a surge
in their share prices so it’s competitor gaining more ground than it.
19
• In news lately, technical analyst and industry experts were giving a buy signal for
resistance 1430 for Auropharma but as general notion runs it was always the opposite
that happens. So definitively a sell signal.
3.2.3 Sunpharma
Graph IX: Sunpharma technical indicators (RSI, Volume spurt, Candlestick
pattern(daily), MACD, Simple moving average)
• March month saw a rather bullish surge due to Sunpharma acquiring Ranbaxy and other
endeavor of Sunpharma making it a rage stock among investors.
• MACD, SMA were both giving a bullish signal for Sunpharma with MACD converging
and SMA cutting candlestick pattern from below so a bullish buy signal. But RSI was
giving it an oversold signal after a long dip of overbought and for most of March and
April it had given an oversold signal.
• A keen look at 30 min candlestick pattern would give a sell signal for all indicators such
as MACD, RSI and SMA. But those hold true for next week only and not for longer
haul. Daichi a Japanese company selling its stake of Sunpharma, may be reason for
short term price fall. This trend was further ascertained by its future price being less
than spot price.
• Lots of Doji candle formation in April end and may indicate a rather volatile price
movement of Sunpharma. With market to take correction after May month Sunpharma
price will surge further taking a resistance R1=1020 and R2=1040 in coming month.
20
3.2.4 Cipla
Cipla had been a global pharmaceutical company, whose goal was ensuring no patient
shall be denied access to high quality & affordable medicine and support. Cipla primarily
develops medicines to treat cardiovascular disease, arthritis, diabetes, weight control and
depression; other medical conditions. As of 17 September 2014, its market capitalization
was INR 517 billion (US$8.1 billion), making it India's 42nd largest publicly traded
company by market value.
Graph X: Cipla technical indicators (RSI, Volume spurt, Candlestick pattern
Graph XI: Cipla price movement with SMA (Simple Moving Average) indicator
• Indicators such as RSI, MACD and SMA indicate multiple sell and buy signal
across last few month indicative of this stock’s high volatility which was further
21
substantiated by fact that stock price touched as high as 750 and as low as 620 from
March to May.
• As per observation Cipla had β=1.073893 and R-square=0.26889 (calculated using
one-year data) with NSE, as it hit quite high recently when market was surging and
it hit low when market was plummeting.
• Cipla had average daily volume traded in NSE about near about INR 16 lakhs share
per day barring few days, where it sticks to daily volume of INR 6 lakhs only.
• Cipla also high correlation with CNX Pharma.
• After giving multiple selling signal during March and April MACD diverging and
RSI indicating an overbought signal. Now Cipla’s technical indicators were giving
a sell signal like MACD likely to diverge and RSI giving overbought and stock
price was well above SMA for last few weeks. But a strong beta could counter it.
• Cipla was quite volatile scrip, as it had some or other rumors spreading around its
merger and acquisition policies. Recently it had given clarification regarding the
same to SEBI.
• Cipla ‘s future price for June’s future contract saw a fall from 700 to 680 indicative
of its future price movement in June it was giving a sell signal too (refer Table IV).
Table IV: Cipla June’s future contract price movement.

Settle Turnover (in
Date Open High Low Close Contracts OI
Price lacs)
22-May-
682.00 685.00 673.25 680.15 680.15 1272 4316.87 1203000
2015
21-May-
692.00 692.00 676.00 680.55 680.55 910 3097.94 958500
2015
20-May-
690.00 697.00 688.70 694.50 694.50 482 1669.19 794000
2015
19-May-
692.50 699.00 682.60 689.05 689.05 148 512.82 732000
2015
18-May-
695.00 695.00 685.05 692.65 692.65 200 690.57 727000
2015
15-May-
688.45 693.15 679.50 690.00 690.00 385 1321.38 676000
2015
14-May-
685.00 700.10 685.00 691.75 691.75 186 644.03 639500
2015
22
3.3 VOLATILITY CALCULATION OF RETURN ON CIPLA USING EGARCH (1, 1)

MODEL:
3.3.1 Methodology and result:
• Data is taken from NSE website from September 9th, 2014 to April 1st, 2015. (Data
contain details on Nifty closed, Cipla closed, percentage return in Nifty, percentage
return in Cipla and returns)
• MS excel with NUMXL add in had been used for calculating returns with logarithmic
returns.
• E GARCH (1, 1) is used because of its sensitivity to both negative and positive returns.
• Volatility calculation is done using solver for given parameters.
• For forecasting volatility over next 30 days forecaster of NUMXL add in with
exponential weighted moving average (EWMA) as volatility indicator is used. Data
indicate maximum EWMA is 2%.
Table V: EGARCH Calculations using solver of MS Excel
EGARCH (1,1) Goodness-of-fit

Parameters Value LLF AIC CHECK
-
µ 0.00 1505.48 3000.97 1.00
α0 -8.34
α1 0.05
γ1 -0.11
β1 -0.01
The Table V indicate α parameter, which represents 0.05 magnitude effect or the
symmetric effect of the model, the “GARCH” effect. β -0.01 measures the persistence in
conditional volatility irrespective of anything happening in the market. In this case β indicate
relatively small measure, but if the situation would have been vice versa, then volatility takes
a long time to die out following a crisis in the market (Alexander, 2009). The table indicate γ
parameter measures negative asymmetry or the leverage effect (-0.11), the parameter of
importance so that the EGARCH model allows for testing of asymmetries.
Table VI: Residuals (standardized) Analysis

AVG STDEV SKEW KURTOSIS Noise? Normal? ARCH?
-0.01 1.00 0.08 1.97 TRUE FALSE FALSE
Target 0.00 1.00 0.00 0.00
SIG? FALSE FALSE FALSE TRUE
23
Table VII: Volatility forecast for next 30 days (Volatility = 2%)
Step Mean STD TS UL LL

1 0% 2% 2% 3% -3%
2 0% 2% 2% 3% -3%
3 0% 2% 2% 3% -3%
4 0% 2% 2% 3% -3%
5 0% 2% 2% 3% -3%
6 0% 2% 2% 3% -3%
7 0% 2% 2% 3% -3%
8 0% 2% 2% 3% -3%
9 0% 2% 2% 3% -3%
10 0% 2% 2% 3% -3%
11 0% 2% 2% 3% -3%
12 0% 2% 2% 3% -3%
13 0% 2% 2% 3% -3%
14 0% 2% 2% 3% -3%
15 0% 2% 2% 3% -3%
16 0% 2% 2% 3% -3%
17 0% 2% 2% 3% -3%
18 0% 2% 2% 3% -3%
19 0% 2% 2% 3% -3%
20 0% 2% 2% 3% -3%
21 0% 2% 2% 3% -3%
22 0% 2% 2% 3% -3%
23 0% 2% 2% 3% -3%
24 0% 2% 2% 3% -3%
25 0% 2% 2% 3% -3%
26 0% 2% 2% 3% -3%
27 0% 2% 2% 3% -3%
28 0% 2% 2% 3% -3%
29 0% 2% 2% 3% -3%
30 0% 2% 2% 3% -3%
24
Graph XII: Graphical presentation of volatility of Cipla
Volatility Forecast
2%
2%
1%
1%
1%
1%
1%
0%
0%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Series1 Series2
The volatility Table VII and Graph XII successfully captured asymmetric
response in the conditional variance and forecast that next 30 days period daily stock market
returns as a function to explain the variation of the conditional mean would be stable.
4. CONCLUSIONS
• Fundamental comparative analysis of ratios of Sunpharma, Auropharma, Ranbaxy,
Lupin and Cipla were as follows:
▪ EPS (Earning per share) = Auropharma>Lupin>Sunpharma>Cipla>Ranbaxy
▪ Profitability ratios were indicative that return on net worth was good for
Auropharma, Lupin and Sunpharma.
▪ Liquidity and solvency ratios: Current were high for Cipla Sunpharma and
Lupin while Auropharma had high quick ratio that means short-term
investments or keeping cash for other purposes. Auropharma had debt
equity ratio~1 implying its capital structure.
▪ Debt to owner fund ratio was again 1 for Auropharma implying risky capital
structure.
▪ Interest coverage ratios indicating strong hold of Sunpharma, Lupin while
weak financial position of Ranbaxy and Auropharma.
▪ Management efficiency ratios: Inventory turnover ratio was highest for
Sunpharma and Lupin. Auropharma and Cipla had a low debtor’s turnover
ratio and low invertor ratio.
▪ Inventory turnover ratio highest for Sunpharma and Lupin.
▪ Auropharma and Cipla had lower debtors’ turnover ratio and investment
turnover ratio.
▪ Number of days of working capital was high for Sunpharma and
Auropharma.
• Fundamental analysis gives strong fundamentals for Lupin, Sunpharma and Cipla. As
per observation financial bankruptcy of Ranbaxy and lack of strong hold of
Auropharma was noticed.
25
•
Technical analysis indicated sell signal for Cipla for next few weeks, buy signal for
Sunpharma for next month, sell signal for Auropharma for next month, strong buy
signal for Lupin.
• Fundamental analysis of Cipla gave a result that Cipla’s return on net assets ratio saw
a cumulative rise of 10% per year in its value, which gives a strong investment
indication to investors.
• Earnings per share had increased for last two financial years for Cipla.
• In July Cipla was well below its 200 day SMA so it was expected to have price rise.
5. Practical implication:
The speed and volatility of business means that downside risks (threats), which last
longer than upside risks (opportunities). Threats problems could be rankled and delay for a
relatively extended period of time, whereas opportunities could come and go quickly. The
risk management approaches enable management to effectively deal with uncertainty,
associated threats and opportunities, thereby enhancing the capacity to build value leading
to benefits indicated below:
• Reduced Operational Surprises and Expenses: Minimizing business distraction
and implementing business continuity measures, by abating ineffective
resources and activities (particularly those with high risk and/or low return)
• Improved Capital Management: Measuring and allocating financial capital on a
risk-adjusted basis to protect liquidity, enhance return on investment and
promote and reward desirable risk behaviour
• Improved Opportunity Management: Proactively identifying and analyzing the
full range of strategic options and their upside and downside impact to promptly
and confidently take advantage of opportunities.
• Increased Transparency and Traceability: Understanding risk management tools
would help with risk accountability, responsibility and performance
management, which ensure proper compliance, audit and analysis
• Enhanced Risk Decision Making: Ensuring that the best risk decisions adoption,
when selecting risk management options, by integrating risk considerations into
all key business decisions7.
6. Future study:
These types research could be use full for any investors to decide for investing into
market in any other industry. Fundamental analysis gives strong fundamental financial
indicators for different peer competition. So as far investment on long term is concerned
one can refer to these research. Technical analysis gives short term investment perception
(for a month) on buying signal. Since these study does not involve hedging or arbitrage so
potential risk is there in investment. For assessing the inherent relationships between risks
and their interdependence, would enable more predictive identification of threats and
opportunities, which would ensure management for considering organization’s risk appetite
in evaluating strategic alternatives, setting objectives and managing risk. For instance,
7
Risk Management Benefits, Blackhallandpearl.com, 35.
26
during economic boom debt instruments are more preferable mode of investment and
during recession all equity funds are cheap so they are preferable mode of investment.
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FUNDAMENTAL AND TECHNICAL ANALYSIS OF INDIAN PHARMACEUTICAL

Article · January 2017

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FUNDAMENTAL AND TECHNICAL ANALYSIS OF INDIAN PHARMACEUTICAL

Reshmi Mannaa and Saurav Pathakb

FUNDAMENTAL AND TECHNICAL ANALYSIS OF INDIAN PHARMACEUTICAL

1.1 Why to study risk management for pharma companies?

Graph I: Segment wise division of Indian pharmaceutical industry4

Indian pharmaceutical manufacturing facilities registered with US Food and Drug

The economic analysis assesses the short to medium-term determinants of price

2.4.3 Moving Average Convergence Divergence (MACD)

Graph III: Candlestick Pattern Formation

3. FINDINGS OF FUNDAMENTAL AND TECHNICAL ANALYSIS OF INDIAN

Net Profit Margin (%) 13.39 18.88 14.43 16.1 -11.49

Profit & Loss Account

Based on Table I following assumption for companies were made:

vii. Cash flow indicator ratio:

3.1.1.3 Cipla Financial Analysis

Gross Profit Margin (%) 17.42 22.55 19.18 17.32 21.91

Number of Days in Working 138.85

Table III gives the following assumption for Cipla:

Table IV: Cipla June’s future contract price movement.

3.3 VOLATILITY CALCULATION OF RETURN ON CIPLA USING EGARCH (1, 1)

EGARCH (1,1) Goodness-of-fit

Table VI: Residuals (standardized) Analysis

Table VII: Volatility forecast for next 30 days (Volatility = 2%)

Step Mean STD TS UL LL

Graph XII: Graphical presentation of volatility of Cipla

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