October 6, 2020

Dynamics Of Every Business Has Changed & How!! Series 1 – Analysis Of Banking & Pharma Industry

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Well, it goes without saying that by now all of us have got used to the phenomenon – Pre Corona Days & Post Corona Days. This is not just a fiction created in the minds of a common man but an untapped truth that has equally created scare amongst the elite businesses & capitalists. Business ventures are no longer a proposition that are on relatively predictable lines as there are huge unmonitored social dispensation both in terms of people & across all sectors of the economy. Let’s look at some fundamentals of certain businesses & how it is looking at this point in time.

Banking Industry:

Fundamentals: As we all know the fundamentals of any banking business lies with the fact with their capacity to borrow money at a lower rate & lend to people how are in need of money at a higher rate. In other words, it’s the net interest margins which derives cash flow on the balance sheets of all the banks. Banks will have a portfolio with a right mix of secured loans & unsecured loans, to drive their net interest margins higher. Secured loans attract lower interest rates, while unsecured loans are given out at higher interest rates.

Post Corona: As per research by premiere institutes – Banks have seen deposits grow by around 12%, while the credit or the loan growth is still hovering at around 3-4% (adjusted for loan moratorium). This leaves us with a simple thought to interpret that banks are sitting on a pile of cash with either no loan borrowers or eligibility of borrowers have significantly reduced due to job loss & business contractions.

On a broader basis – Secured loans are given out by banks against either secured jobs or collaterals as an asset and hence they attract lower interest rates. While unsecured loans are given primarily out against businesses, personal loans, credit cards & many other forms and these loans attract very high interest rates. Poor collection of direct taxes reveals the extent of job losses that we have had post the pandemic & massive fall in GST collection is clear indication of how business incomes have contracted. With these fundamentals I would leave it to your interpretation, to asses the possible credit growth of banks given the present times.

Pharma Industry:

Fundamentals: As we all know ‘disease’ & its ‘interpretive fear around the disease’ is the cash cow that generates money on the balance sheets of all Pharma companies. India is the largest provider of generic drugs globally. Indian pharmaceutical sector supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicine in the UK. Pharma companies primarily relies heavily on hospitals, clinics & ‘over the counter’ drugs sold by Druggists/Medical stores to fulfil their sales.

Post Corona: All kids of new unidentified virus & the fear psychosis around it – is always a boon for Pharma sector in general. A virus like Corona certainly acts like a booster dose to most Pharma companies who are involved in creation of vaccine to contain the virus. Well, this may be the picture on one side. Looking at the other side of the story, this fear around the contagion factor of this virus has lead to more people relying on home remedies & self medication and thus totally avoiding going to the doctor unless necessary. Also to add to the fact – benefits of home remedies was totally an unexplored factor to most of the urban consumers living in metropolitan cities in India. So now stretched times spent within family has upped their chances of experimenting with home remedies next time to cure their basic general illness before going to the doctor. So this change of habits – directly hints at possible fall in revenues of Pharma companies.

It’s already an evident fact that most hospitals have reported a drop in footfall to the tune of 60-80%.This certainly seems a disastrous proposition for most Pharma companies who are extremely reliant on their sales that happen through hospitals & doctor clinics. Generally hospitals & clinics are primary channels for sale of medicines & in metropolitan cities – it is more of an organised trade. Every hospitals will have tie ups with Pharma companies & thus all doctors will have prescribing certain standards as to which medicine they will suggest to patients to cure their illness. So drop in patient footfall is certainly a proportional to dip in sales of Pharma companies who are into non Covid medication. 

Initial days of Corona scare with all lock downs prompted many people to pile up basic & essential medication kits ahead of time, which resulted in boosting sales of Pharma companies. End of the day we must remember, medicines don’t account to repeat purchase unlike groceries. Medicines which were bought provisioning for future need, are all consumables in a timely manner as per prescribed dosages. That is to say – if one were to buy medicines for the next 4 months, one can consume them only as per prescribed dosage & the need to replenish the medicine will occur only after 4 months. So such sales are purely one-off & can’t account to significant increase in sales of Pharma companies.

Upcoming US elections is one certain potential determinant – as Indian Pharma companies cater to 40% of generic drugs supply in the US. Change in US Presidential candidature will lead to a change in approach to policy making. Most Indian Pharma companies who count on fresh US FDA approvals for their patented drugs, US elections is certainly most closely tracked event which decides their fate. All Pharma companies who have higher exposure to exports to foreign countries will also have a close watch on depreciating dollar against a rupee. These can directly impact the margins of the companies with their net realisation on trades. These are a few pointers that could potential impact the sector in the short term.

–    Article by Suman Adithya Rao (SEBI Certified Research Analyst, Management Graduate in Entrepreneurship & Small Business Management)
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