1. Financial Reporting Analysis
Comparing Financial Performance of
Cipla & Lupin
Project team: Group 10
Nitin Gupta 1014031
Piyush Deogirikar 1014035
Priti Raj 1014038
Yogesh Kumar Singh 1014070
Ramamurthy Prakash 1014071
Date of submission: 17th May, 2010

2. Financial Reporting Analysis Group 10
Table of Contents
Executive Summary ................................................................................................................................. 3
Industry Overview ................................................................................................................................... 4
Firms identified for the study .................................................................................................................. 5
Cipla .................................................................................................................................................... 5
Lupin ................................................................................................................................................... 5
Period of Study ........................................................................................................................................ 5
Data Sources ........................................................................................................................................... 5
Revenues................................................................................................................................................. 6
Sales growth ........................................................................................................................................ 6
Profitability ............................................................................................................................................. 7
Net Profit............................................................................................................................................. 7
DuPont Analysis ................................................................................................................................... 8
Cost Structure...................................................................................................................................... 9
Liquidity ................................................................................................................................................ 10
Inventory Turnover ............................................................................................................................ 10
Current ratio...................................................................................................................................... 10
Quick ratio ......................................................................................................................................... 11
Overall debt level .............................................................................................................................. 11
Capital market performance .................................................................................................................. 12
P/E ratio analysis ............................................................................................................................... 12
Stock Valuation.................................................................................................................................. 13
Dividend Yield.................................................................................................................................... 13
Cash Flow .............................................................................................................................................. 13
Accounting Methods ............................................................................................................................. 15
Analysis of Director’s Reports ................................................................................................................ 15
Conclusion............................................................................................................................................. 16
Appendix ............................................................................................................................................... 17
Comparing Financial Performance of Cipla & Lupin Page | 2

3. Financial Reporting Analysis Group 10
Executive Summary
The pharmaceutical industry is one of the sunrise sectors in India. It has been growing at
approximately 10% every year. Indian companies hold just around 7% share in the global
pharmaceutical market but they are expected to become major players soon with the help of their
innovatively-engineered generic drugs and active pharmaceutical ingredients (API). There are
74 U.S. FDA-approved manufacturing
facilities in India, more than in any other
country outside the U.S. Indian pharma
companies are also believed to be filing
upto 20% of all Abbreviated New Drug
Applications (ANDA) to the FDA. London
research company Global Insight estimates
that India’s share of the global generics
market will have risen 33% in the next five
years.
At this juncture, we wanted to take a closer look at some of the promising companies in the
Indian pharma sector and identify possible investment opportunities within these companies.
With that aim this report attempts to study the financial reports of Cipla & Lupin and highlight
the following aspects that are crucial for the investment decision -
1. Revenues
2. Profitability
3. Liquidity
4. Capital market performance
5. Cash flow
The findings have been interesting. We now know that though these two companies have posted
healthy growth numbers for past so many years, they have reached a consolidation phase due to
which the growth rate has slowed down a bit in the recent years. Quality of earnings has been
good with minimum dependence on “other income”. On a long term both the companies can be
good investment opportunities. If one wants to get into a slightly a defensive pharma play with
good returns, Cipla seems to be the better bet, since it did well during recession too. For a high
return of investment, Lupin could be the right option.
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4. Financial Reporting Analysis Group 10
Industry Overview
The Indian Pharmaceutical Industry today is in the front rank of India’s science-based industries
with wide ranging capabilities in the complex field of drug manufacture and technology. A
highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion,
growing at about 8 to 9 percent annually. It ranks very high in the third world, in terms of
technology, quality and range of medicines manufactured.
The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It
has expanded drastically in the last two decades. The leading 250 pharmaceutical companies
control 70% of the market with market leader holding nearly 7% of the market share. It is an
extremely fragmented market with severe price competition and government price control.
Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the
drugs and pharmaceutical products has been done away with. Manufacturers are free to produce
any drug duly approved by the Drug Control Authority. Technologically strong and totally self-
reliant, the pharmaceutical industry in India has low costs of production, low R&D costs,
innovative scientific manpower, strength of national laboratories and an increasing balance of
trade. The Pharmaceutical Industry, with its rich scientific talents and research capabilities,
supported by Intellectual Property Protection regime is well set to take on the international
market.
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5. Financial Reporting Analysis Group 10
Firms identified for the study
Cipla
Cipla is one of the oldest pharmaceutical companies of India, founded and public-listed way
back in pre-independence era in 1935. Since the time of inception, it has been steadily on the rise
and is one of the wide ranging pharmaceutical products companies in India. Its products are
distributed in more than 180 countries worldwide. Outside India Cipla is best-known for
manufacturing low-cost anti-AIDS drugs for HIV-positive patients in developing countries.
Recently, Cipla sold the manufacturing rights of its high-end emergency contraceptive pill, I-pill,
to its pharma field counterpart Nicholas Piramal (Piramal Healthcare) for Rs. 95 million.
Lupin
Lupin Pharmaceuticals offers a perfect contrast to Cipla. Lupin is a relatively newly founded
Indian pharmaceutical company which has risen the ranks briskly and has become one of the top
top six pharmaceutical companies in India. The Company today has significant market share in
key markets in the Cardiovascular (prils and statins), Diabetology, Asthma, Pediatrics, CNS, GI,
Anti-Infectives and NSAIDs therapy segments, not to mention global leadership positions in the
Anti-TB and Cephalosporins segments. Lupin has the unique distinction of being the fastest
growing top 10 Generics players in the two largest pharmaceutical markets of the world – The
U.S (ranked 9th by prescriptions & growing at 92 %) and Japan (ranked 7th and growing at
23%). The company is also the fastest growing, top 5 pharmaceutical players in India (ORG IMS
- March 2009) and the fastest growing Generic player in South Africa (ranked 6th and growing at
over 30 % annually - IMS March 2009).
Period of Study
We have studied and compared the financial performance of both companies for a period of 5
years, between 2004-05 and 2008-09.
Data Sources
 Annual reports, 2004-05 till 2008-09
 Company web sites - http://www.cipla.com/ http://www.lupinworld.com/
 Wikipedia - http://wikipedia.org
 ICRA report on Indian pharmaceutical Industry -
http://www.icra.in/files/PDF/SpecialComments/2010-February-%20Pharma.pdf
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6. Financial Reporting Analysis Group 10
Revenues
Sales growth
Net Sales 2009 2008 2007 2006 2005
Cipla 4960.60 3997.90 3438.24 2897.41 2181.26
Lupin 2898.56 2543.69 1970.93 1606.10 1161.13
* sales data in Rs crore
Sales Growth(%) 2009 2008 2007 2006 2005
Cipla 24.08 16.28 18.67 32.83 18.40
Lupin 13.95 29.06 22.72 38.32 23.10
Sales
6000.00
5000.00
4000.00
(Rs Crore)
3000.00 Cipla
2000.00 Lupin
1000.00
0.00
2005 2006 2007 2008 2009
- Both the companies have shown healthy growth rate when compared to industry’s growth
rate.
- Sales growth shows a declining trend for both the companies. There is no specific reference
for this in the annual report. But this can be attributed to the fact that sales growth for the
whole pharmaceutical sector is showing the same consolidation trend in the past years.
- Both companies have been expanding operations in India as well as abroad. For both the
companies around 50% sales come from the domestic market and 50% from exports.
- Both have been regularly launching new products in the domestic as well as the outside
market.
Inference
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7. Financial Reporting Analysis Group 10
Both Lupin and Cipla have shown consistent increase in sales over the 5 year period and there is
nothing much to choose between the two. Sales growth trend is declining, which probably can be
attributed to the general trend in the industry.
Profitability
Net Profit
Net Profit 2009 2008 2007 2006 2005
Lupin 416.97 443.38 302.06 182.72 84.36
Cipla 776.81 701.43 668.03 607.64 409.62
* profit data in Rs crore
Net profit
900.00
800.00
700.00
600.00
Rs (crore)
500.00
Cipla
400.00
300.00 Lupin
200.00
100.00
0.00
2005 2006 2007 2008 2009
- In the case of Cipla, there has been a healthy increase in profit from 409.62 in 2005 to 776.81
in 2009.
- The profit has steadily increased for Lupin as well from 2005 to 2009. There has been up to 5
times increase in profits.
- In India, and globally too, the pharmaceutical sector had had a good growth in recent years.
This has accounted for the growth of the two premier pharmaceutical companies of India.
Also, as argued by the director of Lupin in its annual report, the income of people in India
has increased, and also many people have moved from the lower income bracket into
moderate and high income brackets, which have made more people resort to quality
healthcare and medicines. Hence we see a consistent growth in the net profits of the two
companies.
- Both the companies have shown very good quality of earnings. “Other Income” factor is very
low most of the times for both the companies (less than 10%). This shows that both the
companies have extracted income / profit from their normal operations.
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8. Financial Reporting Analysis Group 10
- There has been a decline in profit between 2008 and 2009 for Lupin. A study of Lupin’s
annual report for the year 2008-09 gives us a vital clue – The Schedule 12 (Schedule forming
part of the Profit and Loss Statement, page 116) from the report indicates that in the year
2008, Lupin sold patent applications garnering income of 112.7 crore rupees. This amounted
to a surge in income in the year which can be attributed to “other income”. Hence when we
move on to view the report for the year 2009, we find a decline in the net profit. Hence this
decline is not attributable to any slack performance by Lupin in this period.
Inference
Both Cipla and Lupin have shown strong growth in the net profit growth over the 5 year period.
This can definitely be attributed to high general growth in the industry and quality healthcare
spending as seen in India. Quality of earnings has been good as well for both of them.
DuPont Analysis
Lupin
Ratio 2008-09 2007-08 2006-07 2005-06 2004-05
Profit Margin = Net Profit/Net Sales 14.39% 17.43% 15.33% 11.38% 7.27%
Asset Turnover = Net Sales/ATA 0.92 0.97 0.92 0.96 0.93
- Profit margin of Lupin has increased in the first 2 years and is relatively constant in the last 3
years (after accounting for the proceeds for from the patent sale).
- Asset Turnover is between 92% and 97 which is good.
- The data suggests that the company derives its revenues chiefly by resorting to the economies
of scale, i.e. mass production of medicines.
- Lupin primarily produces general purpose medicines for respiratory, gastrointestinal,
dermatological, diabetic, allergic, cardiac, gynaecological, and other such general ailments
on a massive scale. Also, the director’s statement in the financial report suggests that the
firm’s prime source of income is from the manufacturing of generics; a cost player making
unpatented medicines. Hence, volume (and not margin) is Lupin’s relative strength.
- There is an increase in net sales as well as assets for Lupin. Lupin’s assets have increased due
to increase in fixed assets and investing (as well as acquisition) activities.
Cipla
Ratio 2008-9 2007-8 2006-7 2005-6 2004-5
Profit Margin = Net Profit/Net Sales 15.66% 17.54% 19.43% 20.97% 18.78%
Asset Turnover = Net Sales/ATA 0.79 0.79 0.87 0.95 0.90
- Cipla’s net profit margin is also around 15%, but shows a declining trend during these years.
This can be attributed to high competition, appreciating rupee and rise in the cost of raw
materials.
- Cipla’s asset turnover is hovering around 0.9 – 0.8 and has remained relatively constant.
- Data indicates that Cipla too, like Lupin is a mass market company.
- In case of Cipla as well, assets have increased due to increase in fixed assets and investing
activities.
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9. Financial Reporting Analysis Group 10
Inference
There is again not much to choose between the two companies. Both Lupin and Cipla are mass
market companies and hence have low profit margins. Both show a slight declining trend in the
last years. As indicated by director’s report of both the companies, this can be due to increased
raw material cost, economic slowdown during 2007-08 and appreciating rupee (both the
companies have high %age of exports). Since the two companies have a low profit margin,
should they scale up their operations they run the risk of diminishing their profits and hence their
risk profile is moderate. Both of these companies can look forward to increasing their profit
margins with passing economic slowdown.
Cost Structure
Cost structure details of Lupin and Cipla for the periods 2008-09 and 2007-08 is given below.
These 2 years are also typical of expenditure details for the previous three years.
Expenses Cipla Lupin
Expenditure 2009 2008 2009 2008
Material Cost 2347.4 2042.71 1241.8 1096.2
Employee Cost 271.33 214.01 334.5 241.8
Manufacturing & Other Expenses 1386.5 1105.03 815.4 754.9
Interest - Fixed period 32.53 10.7 41.5 34.4
Total Operating Expenses 4425.46 3499.85 2499.58 2183.47
Operating Expenses/Net Sales 85.49% 83.98% 82.51% 82.28%
Depreciation/Net Sales 3.06% 3.27% 2.29% 2.21%
- Operating expenses of both Lupin and Cipla are more than 80% of their total sales. Hence
both of them have high operating expenses.
- The variable costs, i.e material cost, employee cost & manufacturing costs make up for more
than 90% of the total operating expenses for both Lupin and Cipla.
- Both of them are having very low depreciation as compared to the net sales.
- R&D expenses for Lupin is around 7.2 % of net sales and for Cipla it is around 5% of net
sales.
Inference
Both the companies incur a major part of their expenses from material purchases, employee cost
and manufacturing. Their fixed costs are quite low compared to the variable cost. Hence there is
no preponderance of fixed costs.
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10. Financial Reporting Analysis Group 10
Liquidity
Inventory Turnover
Inventory Turn over 2009 2008 2007 2006 2005
Cipla 3.49 3.32 2.95 2.81 2.76
Lupin 3.66 4.18 4.84 5.08 4.61
Cipla Lupin
7000 4000
6000
5000 3000
4000
2000
3000 Inventories Inventories
2000 1000
1000 Net Sales Net Sales
0 0
- The inventory turnover is around 3.5 times for both firms. This is a good sign in terms of
liquidity.
- There is no inventory pile up, which means greater cash is available for operating needs and
lesser money to be spent on storage costs. On the other hand, Cipla’s inventory turnover is
marginally increasing year on year to accommodate for increasing sales.
Inference
The increase in inventories at both Cipla and Lupin are inline with the increase in sales.
Current ratio
Current Ratio 2009 2008 2007 2006 2005
Cipla 3.15 3.00 3.01 2.52 2.25
Lupin 1.97 3.16 3.50 3.62 2.43
- As a rule of thumb, current ratio is expected to be atleast 2:1. Cipla’s current ratio is 3.1:1,
which is a healthy indicator of Cipla’s liquidity scenario.
- Lupin’s current ratio is at 1.97:1 which is very close to the normal. It is interesting to note
that Lupin’s liabilities drastically increased from Rs. 546 million during 2008 to Rs 914
million in 2009. This change is attributed to the following transactions –
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11. Financial Reporting Analysis Group 10
1) Forward and currency option contracts worth Rs. 2959 million.
2) Increased outstanding dues from creditors upto Rs. 1000 million
Quick ratio
Quick Ratio 2009 2008 2007 2006 2005
Cipla 2.15 2.10 1.97 1.47 1.29
Lupin 1.19 2.02 2.54 2.79 1.53
- The quick ratio for both the companies is good (>1).
- The quick ratio is going down for Lupin, which is not a favorable trend.
- On the other hand, Cipla’s quick ratio has been increasing which is good.
Debtor Turnover 2009 2008 2007 2006 2005
Cipla 3.07 3.30 3.61 3.96 4.02
Lupin 4.32 4.58 4.76 5.50 5.15
- Debtor turn over ratio is very healthy for both the companies. There is a decreasing trend in
debtor turnover.
- However this is not a matter of concern since incremental sales growth usually come in the
from credit sales.
Overall debt level
- Cipla seems to be under leveraged. It has apparently a conservative debt / liability position.
This is may be attributed to the fact that Cipla is older & bigger than Lupin, and hence more
conservative.
- Lupin is sufficiently leveraged.
- Both the companies have sufficiently expanded their equity base.
- Both the companies also seem to maintain sufficient interest cover. Based on the Debt equity
ratio and interest cover, we can conclude that Lupin and Cipla maintain a good solvency
position. (In contrast other pharma majors have been struggling at the same time to pay off
huge debts. See below reference).
Cipla
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12. Financial Reporting Analysis Group 10
Debt > 6 months 2009 2008 2007 2006 2005
Good debts 464.46 282.42 248.30 115.12 79.92
Doubtful debts 45.06 10.86 0.31 6.43 0.18
Lupin
Debt > 6 months 2009 2008 2007 2006 2005
Good debts 25.70 6.50 5.67 2.75 10.40
Doubtful debts 5.35 3.00 1.70 1.70 1.55
- The doubtful debt position (debts greater than 6 months) for both the companies is
significantly low. This is an encouraging sign for both the companies.
Inference
Both Cipla and Lupin are doing good in terms of liquidity. Cipla is a little under leveraged as
compared to Lupin. This is may be attributed to the fact that Cipla is older & bigger than Lupin,
and hence more conservative. There is no concern for any of the company in terms of bad debts.
Capital market performance
P/E ratio analysis
Price-Earnings Ratio 2009 2008 2007 2006 2005
Lupin 13.53 9.18 16.34 22.74 26.69
Cipla 22.03 24.39 27.50 32.69 18.73
Stock Movements
7000
6000
5000
4000
3000
2000
1000
0
31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09
Lupin Cipla NSE Nifty
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13. Financial Reporting Analysis Group 10
- P/E ratio for Cipla is higher than that of Lupin. Cipla’s P/E ratio has been consistent over the
period of study but Lupin shows some variance. This might convey that the market has more
confidence in Cipla’s future earnings growth.
- In the year 2006-2007, Lupin issued bonus share 1:1 and Cipla issued bonus share 3:2,
because of that the P/E ratio declined for both.
- Lupin seems to have a lower PE (which shows a little less confidence from market on Lupin)
and hence have much more potential for growth.
- The movement of both the stocks is fairly similar
Stock Valuation
Price to book ratio of both the companies are in the range of 3-6 for the last 3 years , on
comparing with the industry average of 2.47, this appears to be a little overvalued.
Dividend Yield
Lupin 2009 2008 2007 2006 2005
Face Value 10.00 10.00 10.00 10.00 10.00
Divident/Year 125% 100% 50% 65% 65%
Cipla 2009 2008 2007 2006 2005
Face Value 2.00 2.00 2.00 2.00 2.00
Divident/Year 100% 100% 100% 100% 175%
Both the companies have been investor friendly and paid regular dividend to the shareholders.
Inference
Based on the analysis of various ratios – both the companies look promising from long term
equity investors perspective. Both have given bonus issue to shareholders and have paid regular
dividends. However, in the latest financial year, Lupin outperformed Cipla in terms of returns on
investment.
Cash Flow
2008-09 2007-08 2006-07 2005-06 2004-05
Cash generated from operating 413.82 260 161.22 113.67 97.22
activities (Lupin)
Cash generated from operating 373.27 380.2 334.42 277.16 200
activities (Cipla)
Net Profit (Lupin) 416.97 443.38 302.06 182.72 84.36
Net Profit (Cipla) 776.81 701.43 668.03 607.64 409.62
Net Cash used in Investing Activities -492.23 -498.53 -151.11 -76.7 -128.56
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14. Financial Reporting Analysis Group 10
(Lupin)
Net Cash used in Investing Activities -578.47 -687.25 -485.97 -389.23 -62.77
(Cipla)
Net Cash Generated from Financing -124.54 100.83 -113.13 401.05 34.08
Activities (Lupin)
Net Cash Generated from Financing 178.92 254.84 238.56 145.35 -124.6
Activities (Cipla)
Cash and equivalents at end of year 12.13 215.08 352.78 455.8 17.78
(Lupin)
Cash and equivalents at end of year 53 79.28 131.49 44.48 15.38
(Cipla)
- Cash for both the companies is majorly coming from operating activities and from financing
activities.
- In Lupin’s case following is the case in the point about the financing activities:
2006-07: Money raised from issue of FCCBs (446 crores)
In most of the other cases, the cash from investing activities is coming from proceeds from
borrowing and cash is going out for repayment for borrowings.
- As can be seen that for both the companies, cash that is being generated from operating
activities is steadily increasing every year. It is majorly following the trend of net profit. But
out of the two companies Lupin’s net profit is more closely following net profit trends.
Cipla’s net profit seem to be heavily depending both on operating activities and financing
activities which can be a little cause of concern.
- Outflow of cash is primarily due to investing activities. In Lupin’s case the outflow in
investing activities have increased in the last 2 years. The reason is not only the addition of
fixed assets, but also the various acquisitions that Lupin made, an account of which is being
provided here:
2007-08: Kyowa, Japan
2008-09: Hormosa Pharma, Germany, Pharma Dynamics, South Africa
Generic Health, Australia, Multicare Pharma, Philipines
- In Cipla’s case, the outflow in investing activities is primarily due to the purchase of fixed
assets / capital work in progress.
- In terms of net cash equivalents, over the period of 5 years both the companies are mostly at
the same position.
- The dividend payout for Lupin is ranging from 15-25% of the net operating cash flows for
the 5 years which seems to acceptable trend. For Cipla, the dividend payout is around 35-
45% of the net operating cash flows for the 5 years which seems to a little on the higher side.
Inference
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15. Financial Reporting Analysis Group 10
The cash that has come from operating and financing activities over the years has been used for
expansion by both the companies (expanding fixed assets or acquisition). Lupin has also made
acquisitions. At the end of 2008-09, both the companies are looking short on cash equivalents
and hence might need to raise more cash through some investing activities for expansion.
Accounting Methods
Cipla Lupin
Basis of Accounting The financial statements are The financial statements are
prepared under the historical cost prepared under the historical
convention and in accordance cost convention and in
with generally accepted accordance with generally
accounting principles in India accepted accounting principles
in India
Fixed Assets Fixed Assets are stated at cost of Fixed Assets are stated at net of
acquisition or construction or modvat / centvat, less
other amounts substituted for accumulated depreciation /
historical costs accumulated impairment losses
Depreciation Depreciation on fixed assets is Depreciation on fixed assets is
provided on the Straight Line provided on the Straight Line
Method Method
Inventories Cost of inventories is computed Cost of inventories is computed
on weighted average basis on weighted average basis
Research and Revenue expenditure on Research Revenue expenditure on
Development and development is charged Research and development is
against profit of the year in which charged against profit of the year
it is incurred. Capital expenditure in which it is incurred. Capital
on Research and Development is expenditure on Research and
shown as addition to Fixed Development is shown as
Assets. addition to Fixed Assets.
For the period of study, both the companies have maintained same accounting standards and
policies. No adverse findings were reported in any auditor’s reports.
Analysis of Director’s Reports
An analysis of director’s statements reveals the following:
- There is more focus on overall earnings and net profit.
- There is specific mention about economic 2007-2008 slowdown by both companies
- There is a heavy dependence on macroeconomic factors. It is acknowledged by both
companies.
- Otherwise, there is not much to differentiate between Cipla & Lupin as far as their
presentation approach is concerned.
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16. Financial Reporting Analysis Group 10
Conclusion
Parameter Cipla Lupin
Sales growth Shown strong increase in sales Shown strong increase in sales but
but growth rate has come down growth rate has come down
Profitability Shown consistent increase in Shown consistent increase in profit
profit but growth rate and profit but growth rate has come down
margins has come down
Liquidity Good liquidity. Little under Shown consistent liquidity
leveraged.
Capital market Shown consistent performance, Shown consistent performance, but
performance but didn’t outperform the didn’t outperform the indices.
indices. Consistent P/E despite Fluctuating P/E, but on the upward
down turns in the market swing
Cash flow Cash inflow is basically from Cash inflow is basically from
operating and financing operating and financing activities.
activities. Outflow on investing Outflow on investing and
activities. Short on cash now. acquisition activities. Short on cash
now.
The period of study coincided with boom time (2004 – 2007) and period of recession (2007 –
2008). The recession is passing off starting early 2009. Both the companies have shown
consistent growth in sales and net profit. Quality of earnings has been good with minimum
dependence on “other income”. Both have shown good dividend history and have rewarded
shareholders with bonus issue in the study period. Lupin is spending around 7% of its sales as
R&D expenditure as compared to 5% of Cipla. On a long term both the companies can be looked
at as good investment opportunities. But due to lesser PE of Lupin and its projected aggressive
growth strategy, it seems that it might give better returns in future. On contrary, Cipla offers a
steady & risk-free investment opportunity
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17. Financial Reporting Analysis Group 10
Appendix
Cipla data calculation sheet
cipla_financial_state
ment_analysis_worksheet_2004_09.xls
Lupin data calculation sheet
lupin_financial_state
ment_analysis1_worksheet_2004_09.xls
Comparing Financial Performance of Cipla & Lupin Page | 17