Monday, November 30, 2009

Is large cap pharma entering bubble?

The most useful way to analyze a company is by its net profits. But another way of looking at the company is through its cash flow statement. Even though, the valuations of some of the large cap pharma stocks appear little bit stretched, looking at the cash flow statements make them look like they are in bubble territory. Here is the table:







CompanyMarket Cap (INR Crore)OCF(FY09)OCF(5 year average)Market Cap/OCFMarket Cap/5 year average OCF
Cipla26K3753157082.5
Ranbaxy19K-600185NA103
Dr Reddy's19K4804504042.5
Glaxo14K32028843.7548.5


Even the ones that look cheap like Sun Pharma and Lupin are trading at more than 25 times their operating cash flow of FY2009. And since these companies have grown at a rapid pace in the last five years, the P/OCF of average will be much higher. The last five years were quite tough for many of the above companies and may not be the same in the future. But aren't investors paying too much for future?
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4 comments:

rajamani said...

hi sir,

could give us an article how to analyse a company fundamentally

what are the aspects that should taken into consuderation

regards
rajamani

anilrich said...

You are truly amazing. I was wondering how I missed your blog despite a techie guy.

one small doubt. operating cash flow only tells the cash position in that year. If more money leaves for investing activity then your calculations are wrong. The best measure is operating profit which buffet uses very frequently. Am I missing something here?

Thnaks
Anil

Chinmay said...

@anil

Operating cash flow is taken from moneycontrol. See for Cipla here
http://www.moneycontrol.com/financials/cipla/cash-flow/C

Basically the net current assets of Cipla increased a lot between 2004 and 2009 due to inventory and sundry debtors as can be seen here.

http://www.moneycontrol.com/financials/cipla/balance-sheet/C

Increase in working capital is a negative for operating cash flow and that's why ocf is very low for all the companies. But in 2010, the operating cash flow was as much as net profit.

Buffett uses owner earnings or something like (net profit - maintenance expenses + depreciation).

Chinmay

Maulik Suthar said...

There is no bubble in Large cap Pharma.

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