Best Pharma Stock: Sun Pharma vs Cipla

India's pharmaceutical industry is a medical marvel, dispensing life-saving medicines to over 200 countries.

India has emerged as the pharmacy of the world, offering low-cost, high-quality treatments that keep people healthy. Not only that, but the country is also a booming medical tourism hub, attracting patients seeking affordable healthcare.

What's fueling this growth?

Rising domestic demand, cost-effective and low-cost manufacturing capabilities, rising healthcare awareness, government schemes such as the product-linked incentive scheme for manufacturing and research and development (R&D), and a high ageing population across the globe.

All these factors are propelling the Indian pharma industry towards a staggering US$ 130 billion bn valuation by 2030.

But within this powerhouse, two titans stand out: Sun Pharma and Cipla. Let's put them head-to-head and see which is better.

Business Overview

#Sun Pharma

Sun Pharma is the largest pharma company in India. It is engaged in manufacturing, developing, and marketing a wide range of branded and generic formulations and active pharmaceutical ingredients (API).

The company has a wide product portfolio, including generics, branded generics, and speciality products.

It offers medicines in all forms of dosage, including injectables, sprays, ointments, tablets, capsules, and liquids across various therapeutic areas such as cardiology, neuropsychiatry, gastroenterology, dermatology, ophthalmology, and onco-dermatology.

Sun Pharma has around 43 manufacturing facilities across India, America, Asia, Africa, Australia, and Europe.

It also has six major state-of-the-art research and development (R&D) labs in India, Israel, Canada, and the USA, with capabilities across generics, finished dosage development, biological support, and new drug development.

Sun Pharma has a strong domestic and international presence, making it one of the largest pharmaceutical companies in the country.

#Cipla

Cipla is the third-largest pharmaceutical company in India.

It has a diversified product portfolio of over 1,500 products across 65 therapeutic areas. It also has market leadership across various product categories.

Some of the most popular brands of the company are Nicotex, Cofsils, and ORS. It has 47 state-of-the-art manufacturing facilities where it manufactures generics and APIs.

The company also has five R&D facilities across India and the USA, with a team of over 1,600 scientists.

It has a strong domestic presence with a wide distribution network covering retailers, grocers, modern trade, and e-commerce.

Particulars	Sun Pharma	Cipla
Market Cap (in Rs billion)*	3,615.7	1,208.9
Market Share **	8.3%	5.2%

Source: Equitymaster|*as of June 10,2024| **as of December 2023

In terms of marketcap, Sun Pharma is ahead of Cipla. Sun Pharma has a marketcap of Rs 3,615.7 bn as against Rs 1,208.9 bn for Cipla.

It is also leading in terms of the domestic market share of 8.3%, as against 5.2% for Cipla.

In terms of their performance on the stock market, Cipla is slightly ahead of Sun Pharma with a 59% return in the last year, as against 53% of Sun Pharma.

However, when compared to the market index (Nifty 50), both companies have outperformed the benchmark.

#Revenue

In terms of revenue, Sun Pharma is leading with a compound annual growth rate (CAGR) of 8.6%, as against 6.8% of Cipla.

Sun Pharma majorly earns its revenue from Indian branded generics, US business and emerging markets. All the three segments have witnessed positive growth on account of healthy demand.

For Cipla, the revenue growth was driven by respiratory, anti-infectives, and cardiac product categories.

Going forward both the companies are expected to witness high revenue growth on account of growing demand in developed and emerging markets.

Revenue

Net Sales (in Rs m)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
Sun Pharma	290,659	328,375	334,981	386,545	438,857	8.6%
Cipla	163,624	171,320	191,596	217,633	227,531	6.8%

Source: Equitymaster

#Profitability

We can assess the profitability of a company by looking at its earnings before interest tax depreciation and amortisation (EBITDA) growth, net profit growth, and expansion in profit margins.

In the last five years, Sun Pharma's EBITDA grew by a CAGR of 17.4%, and the net profit grew by a CAGR of 21.7%.

For Cipla, the EBITDA and net profit grew by a CAGR of 9.2% and 13.4%, respectively.

The primary reason behind the strong growth in Sun Pharma's profits is the ramp-up in the global speciality business, a strong presence in the regulated generics market, and an expanding share in the rest-of-the-world markets.

For Cipla, a growing share in high-value products and strong growth in API business in emerging markets such as India and South Africa have supported profit growth. The EBITDA and net profit margins of both companies have also significantly improved in the last five years.

However, Sun Pharma is clearly leading with respect to profit growth and profit margins.

Profitability

EBITDA (in Rs m)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
Sun Pharma	50,593	67,135	41,616	53,150	112,900	17.4%
Cipla	30,973	31,808	42,487	43,298	48,079	9.2%
PAT (in Rs m)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
Sun Pharma	32,093	41,868	22,847	34,058	85,608	21.7%
Cipla	15,096	15,470	24,013	25,595	28,355	13.4%
Gross Profit Margin	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Sun Pharma	17.4%	20.4%	12.4%	13.7%	25.7%
Cipla	18.9%	18.6%	22.2%	19.9%	21.1%
Net Profit Margin	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Sun Pharma	11.0%	12.8%	6.8%	8.8%	19.5%
Cipla	9.2%	9.0%	12.5%	11.8%	12.5%

Source: Equitymaster

#Debt Management

Both Sun Pharma and Cipla are debt-free companies.

Sun Pharma has been debt-free for a long time now. However, Cipla joined the club just a couple of years back.

Being pharma companies, both invest heavily in R&D and capex. Despite this, both have managed to remain debt-free primarily due to high cash flows.

Sun Pharma plans to incur around Rs 20 bn in capex as a routine maintenance capex. Apart from this, it plans to focus on expanding its product portfolio and entering key critical mass markets.

Cipla, on the other hand, invested Rs 11.8 bn in 2023 and plans to invest the same in 2024 to develop new products. At present, it has a pipeline of 30 products in different therapeutic areas.

Going forward, both companies plan to remain debt-free and fund all their capex requirements through internal cash flows.

Debt Management

Debt to Equity Ratio (x)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Sun Pharma	0.0	0.0	0.0	0.0	0.0
Cipla	0.3	0.2	0.1	0.0	0.0

Source: Equitymaster

#Research and Development (R&D)

For a pharmaceutical company, R&D is its bloodline, as it is through R&D that it can discover and develop new drugs.

Sun Pharma is among the first Indian pharmaceutical companies to embrace the importance of R&D. Ever since its establishment, the company has actively invested in R&D to develop new products.

Over the last five years, the company has invested over 5.5% of its revenue in R&D.

As of December 2023, the company has over 529 approved abbreviated new drug applications (ANDA), 54 new drug applications (NDA), 386 drug master files (DMF), and 2,252 patents on its name.

Sun Pharma is also investing in developing its specialty/complex product portfolio which could help the company improve its profit margins as these are high value products.

Cipla, on the other hand, has 164 approved ANDAs and NDAs, 1,470 patents, and 458 DMFs as of March 2024.

The company is continuously investing over 6% of its revenue in R&D and plans to continue to do the same going forward with a focus on new innovations. In the last year, the company has launched 30 new brands, indicating the efficiency of its R&D team.

At present, over three product categories are under clinical trials, and the company plans to commercialise these products soon.

#Financial Efficiency

To measure how effectively a company is running its business, we must look at the return ratios. The two important return ratios are return on capital employed (RoCE) and return on equity (RoE).

In the last five years, the RoCE and RoE of Sun Pharma averaged 10.9% and 8.9%, respectively, whereas for Cipla, the ratios averaged 15.5% and 11.5%, respectively.

Clearly, Cipla has the upper hand with respect to financial efficiency. However, Sun Pharma isn't far behind, as its return ratios have consistently improved in the last few years.

Financial Efficiency

ROCE	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Sun Pharma	10.2%	11.2%	6.2%	9.6%	17.1%
Cipla	12.0%	13.1%	17.7%	17.0%	17.8%
ROE	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Sun Pharma	7.8%	9.2%	4.9%	7.1%	15.3%
Cipla	10.1%	9.8%	13.1%	12.3%	12.1%

Source: Equitymaster

#Dividend

A company shares its profits in the form of dividends. A company paying regular dividends is considered more stable than a company that doesn't.

In terms of dividend payment, Sun Pharma is clearly leading. The company's dividend per share grew by a CAGR of 33.1% in the last five years, and its dividend yield and dividend payout ratio averaged 1.1% and 45%, respectively.

For Cipla, the dividend per share grew by a CAGR of 23.2%, and the dividend yield and dividend payout ratio averaged 0.7% and 18.7%, respectively.

Although both companies aren't dividend paymasters, they have rewarded their shareholders well.

Dividend

Dividend Per Share (Rs)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
Sun Pharma	2.8	4.0	7.5	10.0	11.5	33.1%
Cipla	3.0	4.0	5.0	5.0	8.5	23.2%
Dividend Yield	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Sun Pharma	0.5%	1.0%	1.5%	1.3%	1.2%
Cipla	0.5%	0.8%	0.8%	0.5%	0.8%
Dividend Payout Ratio	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Sun Pharma	20.6%	22.9%	78.8%	70.4%	32.2%
Cipla	16.0%	20.8%	16.8%	15.8%	24.2%

Source: Equitymaster

#Valuations

To know the actual worth of a company, we must look at its valuation ratios. The two popular valuation ratios are price to earnings (PE) and price to book value (PB).

Both the ratios help us analyse whether a company is overvalued or undervalued. A company is considered overvalued if the PE and PB ratio is higher than its peers and undervalued if the ratio is below the peers.

In terms of PE ratio and PB ratio, Sun Pharma is overvalued when compared to Cipla. The PE ratio of Sun Pharma is 37.5x as against 29.1x of Cipla, whereas the PB ratio of Sun Pharma is 5.7x as against 3.1x of Cipla.

When compared to the five-year averages, Sun Pharma is slightly undervalued in terms of PE but overvalued in terms of PB. For Cipla, the current valuation ratios are higher than its five-year average, indicating it is overvalued than five years ago.

Valuations	Sun Pharma	5-Year Average	Cipla	5-Year Average
PE (x)	37.5	38.8	29.1	27.2
PB (x)	5.7	3.1	4.5	3.1

Source: Equitymaster

Which Pharma Stock is Better: Sun Pharma or Cipla?

In terms of revenue growth, profit growth, and dividends, Sun Pharma is ahead of Cipla. However, in terms of return ratios and valuation, Cipla is leading against Sun Pharma.

Cipla is currently the third-largest pharmaceutical company in India and plans to become second in the near future.

For this, it has adopted a multi-pronged strategy. First, it's focusing on new product development. It launched 30 new products last years and is currently working on new products in three new categories.

Second, it entered into a strategic partnership with Sanofi India to distribute Sanofi India's Central Nervous System (CNS) product range.

Third is the acquisition route, which has already proved successful for the company in the past.

Finally, to expand its market reach, it's following the point-of-contact (POC) model, leveraging its network of doctors, clinics, and nursing homes to improve its sales.

Sun Pharma, on the other hand, plans to focus on four key areas.

For its US business, it's planning to enhance its share of branded products and ensure broad product offerings to customers across multiple categories.

For the India's business, the focus is on productivity enhancement and innovation. It also plans to enhance its speciality product basket for its emerging market business, maintain leadership, and enhance its presence in a high-growth market in its global consumer business.

Overall, both companies are well prepared to cater to the high surge in demand for medicines driven by the growing population and government initiatives to boost exports in pharmaceuticals.

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