The Return on Investment (RoI) of leading Indian pharma companies dropped to 8.8 per cent during 2005-06 from 10 per cent in the previous year. However, the RoI of multinational companies (MNCs) in India improved during the same period to 23.9 per cent from 20.8 per cent. This shows that the MNCs are effectively using their assets to generate higher profit as compared to Indian companies. This is one of the important reasons for the better growth in market capitalization of MNC stocks.

The drop in RoI of Indian companies is mainly on account of significant investment in R&D, mergers & acquisition, legal expenses, product launch and expansion. The MNCs are getting assistance from their parent companies and last few years they sold their assets at very high price. Further, the Indian companies are borrowings funds to finance their expansion programmes and their interest burden is very high as compared to MNCs. Despite low returns, Indian companies have created strong reserves and surplus position.

Top Indian Pharma companies are investing huge funds for expansion to create strong gross fixed assets position. Every player is spending huge amounts for getting approval for its cGMP manufacturing facility from international regulatory authorities and launching their product in profitable foreign markets. This investment strategy will play crucial roll in long run to overcome stiff competition and enhance contract-manufacturing revenues.

The leading 10 Indian pharma companies viz., Ranbaxy Laboratories, Cipla, Dr Reddy's Laboratories, Lupin, Nicholas Piramal, Wockhardt, Orchid Chemicals, IPCA Laboratories, Biocon and Torrent Pharma earned a net profit of Rs 1969 crore during 2005-06 as compared to Rs 1803 crore in the previous year, a growth of 9.2 per cent. However, the net profit growth of ten MNCs viz GlaxoSmithKline Pharma, Aventis Pharma, Pfizer India, Novartis India, AstraZeneca Pharma, Solvay Pharma India, Merck Ltd, Fulford (India), Wyeth Ltd and Abbott India jumped by 27.7 per cent to Rs 1105 crore from Rs 866 crore in the previous year.

The total assets (Net fixed assets, work-in-progress, investments, inventories, sundry debtors, cash & bank balance, loans & advances and other assets) of Indian companies increased significantly by 23.5 per cent to Rs 22,349 crore from Rs 18,092 crore in the 2004-05. However, the growth in total assets of MNCs was only 10.7 per cent at Rs 4,619 crore as against Rs 4171 crore in the preceding year. Thus, the lower growth in assets and much higher growth in net profit pushed the RoI of MNCs as compared to Indian companies during 2005-06.

The gross fixed assets of 10 Indian companies increased by 23.6 per cent to Rs 8,925 crore from Rs 7,220 crore, but that of 10 MNCs declined by 9.6 per cent to Rs 1,069 crore from Rs 1,83 crore. This is mainly due to selling of assets by Novartis India and Wyeth Ltd during 2005-06. Novartis' gross fixed assets came down to Rs 22.41 crore from Rs 152.76 crore and that of Wyeth declined to Rs 76.54 crore from Rs 89.63 crore. Further, other MNCs stepped up their gross fixed assets marginally.

The Indian companies stepping up their investment in plant and machinery as well as in expansion of other activities. Their capital work-in-progress worked out to Rs 1,854 crore during 2005-06 as compared to Rs 1,517 crore in the last year. However, the capital work-in-progress for MNCs is very meagre at Rs 23.09 crore.

To meet the challenges in domestic as well as international markets, Indian companies are investing large amounts in joint ventures and subsidiaries in both the markets. The investment of 10 Indian companies increased by 24.2 per cent to Rs 2,205 crore from Rs 1,776 crore. However, investment of MNCs increased only by around 10 per cent to Rs 1,284 crore, which include investment of Rs 913 crore by GSK, basically in the mutual funds schemes, bonds, banks and government securities.

The borrowings of leading 10 Indian companies went up to Rs 5,912 crore from Rs 3706 crore in the 2004-05, a growth of 59.5 per cent. However, the borrowings of 10 MNCs declined by 43.2 per cent to negligible of Rs 16.33 crore from Rs 28.75 crore. Several MNCs are enjoying zero interest status, as they are not dependent on external funds. Ranbaxy's borrowings touched to Rs 1030 crore from Rs 136 crore and its interest cost went up to Rs 26.41 crore from Rs 10.98 crore. Similarly, borrowings of Cipla, Dr Reddy's and Lupin increased by 145 per cent, 238 per cent and 107 per cent to Rs 469 crore, Rs 924 crore and Rs 913 crore respectively. Nicholas managed to reduce its borrowings from Rs 354 crore to Rs 193 crore.

The current assets i.e. inventories, sundry debtors, cash and bank balance, loans and advances of Indian companies increased by 22.6 per cent to Rs 11,825 crore from Rs 9649 crore in the 2004-05. For MNCs the growth in current assets was 17 per cent at Rs 2695 crore. The inventories of Indian companies went up by 15.7 per cent to Rs 3,862 crore, but that of MNCs increased by 7.8 per cent to Rs 693 crore. The sundry debtors for Indian companies increased by almost 30 per cent to Rs 3,765 crore. However, the MNCs sundry debtors declined by 3.8 per cent to Rs 389 crore during 2005-06.

Both Indian and MNCs have built up strong reserves position. As against the equity capital of Rs 603 crore, the reserves for 10 Indian companies stood at Rs 10,741 crore during the year 2005-06. The 10 MNCs equity capital slightly lower during the year 2005-06 to Rs 221.66 crore but their reserves moved up to Rs 2958 crore from Rs 2601 crore.

Thus, the return on investments of Indian companies is lower as compared to MNCs mainly due to investments on expansion of activities and R&D. However, Indian companies are going ahead strongly to meet future challenges. Once the projects in pipeline will start operations the returns may improve. Expansion, approvals from regulatory authorities and clinical trials will strengthen contract research and manufacturing activities of Indian companies, as more and more MNCs will try to tie-up with Indian pharma companies.
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