The Pharmaceutical industry is a component of the bigger healthcare sector of a country and is majorly related to medications. It deals with various aspects related to medications like their research and development, manufacturing and their marketing. These different aspects are interrelated to each other’s and comprises of different players like drug makers, drug marketers and also entities like biotechnology corporations.
The Global Pharma Industry is around $1.2 Trillion in Size (According to Global Use of Medicines report from the IQVIA Institute for Human Data Science). Whereas Indian Market Size is roughly around $17.50 Billion (Domestic Market Size).
The core objective of the industry is to make available the drugs that provide safety from infections, maintain health, and also help cure diseases. Since, the industry has a direct impact on the global population, it comes under the regulatory ambit of various organisations like World Health Organisation, US Food and Drug Administration and Medicines and Healthcare Products Regulatory Agency. The regulations are in the area of drug safety, their pricing and quality and also extend to patenting of drugs produced.
The Past and the Present
Through the course of last ten years, the industry has seen a lot of progress. There is more emphasis on research, especially in the domain of bio-science. Continuous improvement in technology along with improved infrastructure has helped arresting the growth of various major infections like HIV and different forms of cancer.
Some of the major players in the industry globally are Johnson & Johnson, Novartis, Pfizer, Sanofi, GlaxoSmithKline, etc. Certain Biotech companies like Gilead Sciences, Amgen Inc, Celgene Corporations have also made a name for themselves.
Components of the Industry
The pharma industry is very similar to other industries but yet very different. It has raw materials manufacturers, finished goods producers, Research & Development entities, marketing companies and consumers. But the industry has a lot more regulations and require more capital than other industries.
Aging Population - The average human life span has improved globally with the course of time. With increased longevity, come infections and diseases and this has prompted more research on aging population to ensure proper health and avoid infections.
Changing lifestyles – The people have a very hectic schedules nowadays, and consequently have unhealthy eating habits, no time to exercise and have a proper sleep. It has caused problems like high obesity, poor digestion, and various other issues. This has opened a big door of opportunity for the industry to produce drugs and supplements to mitigate the impact of these problems.
Increased income – On average, the middle class has been growing in number in both the developing and developed nations. People now have relatively high disposable income and also have started to become more health conscious, with expectations of better healthcare solutions.
There have been various challenges for the industry like political uncertainty, pricing pressures, higher pressures on payers to reduce costs, consolidation, less approvals by USFDA, strict regulations. To tackle these, the industry has put some emphasis on some structural changes like inorganic capability building, leveraging technologies, foraying into unexplored fields of science. IQVIA, a healthcare consulting firm forecasted in its January 2019 report, that the global pharmaceutical industry will exceed US$ 1.5 trillion by 2023, with a CAGR of somewhere between 3%-6%. India in this market is the biggest supplier of generic drugs globally. It meets 50% of the global demand for various vaccines, 40% of generic demand in US and 25% of all medicines in UK. It is anticipated to grow at a CAGR of 22.4% over the five years ending in 2020.
Talking in terms of Indian market, the export growth is expected to improve from 2019 to 2024 as the various industry players have substantially invested in R&D to improve their offerings. The expenditure has seen a rise with a CAGR of roughly about 20%. Certain regulations like more stringent measures by USFDA for the maintenance of facility, cleanliness and enhanced manufacturing systems are a cause of concern for the pharma players. Things like rising per capita income, more penetration in healthcare and increasing incidents of chronic diseases, Ayushman Bharat would give an impetus to the industry. Another positive for the Indian industry comes in the form of Bulk Drugs, whose exports are likely to grow on the back of disruption in the Chinese supply Chain like the shutdown of factories due to regulations pertaining to pollution, explosions and API quality issues.
Some of the things which will define the sector in the times ahead include:
Despite representing nearly 18% of the world Population the size of Pharma Industry is a mere 1.5%. This shows the kind of untapped market that exists in India. This figure maybe an understatement because of availability of Ayurvedic Medicines which is hard to take into account if we talk about the remote sections of the society. Apart from it, a very low Income per capita which a lot of analyst predicts will be go up in the near future is a positive sign in this domain. Nevertheless, there are various challenges that the sector faces like Price Control which leads to various MNC’s preferring neighboring countries from where high earning populace get themselves treated. Trying to remove the price cap from locally sourced API is a good move but its trickle down effects will depend on whether the locally sourced APIs are comparable in quality to those of foreign market and the costing of these APIs (Given the price sensitive market that India is).
Indian Aviation, said to be in its golden age since the past decade is the fastest growing Aviation Markets in the world. According to Invest India, the National Investment Promotion and Facilitation Agency of the Indian Government, the market is the third largest domestic Civil Aviation market in the world with an annual passenger traffic growth of 11%, and the sector supporting a whopping 8 million jobs. Although the year 2019 was a turbulent one for the sector, we are only behind USA and China in terms of domestic passenger traffic and as China looks to play catch up game with USA, we are expected to follow the path of China in terms of our growth in this space. This overall rosy picture can be attributed to the very large and fast-growing middle-class population, by and large one of the fastest growing economy, higher disposable incomes and relatively lower penetration levels of the aviation industry.
India currently has connectivity with 59 countries in the world through 344 routes supported by 5 Indian Carriers and 6 Foreign Carriers. According to data from IBEF, there are 103 Operational airports currently, and the number is set to increase to 200 by FY2040.
The General Competitive Landscape of the Indian Airline Industry
With increasing capacity being added regularly, there is intense competition in the market. The major carriers attracting share are Indigo, SpiceJet, Go Air and Vistara while those on whom the competition is seeming to take a toll are Air India which is marred by inefficiencies and AirAsia India, which seems to have a decelerating growth.
Key Cost Drivers:
Fuel: Air turbine fuel forms the largest component of cost. Fuel is an external factor that affects the profitability of airline. In case of Indian aviation industry, it stays upward of 50 percent thus operation efficiency becomes very important.
Labour cost: Labour cost include wages of pilots, ground staff, maintenance staff and cabin crew. On an average the number of pilots per aircraft is 15.
Operational Cost: Airlines need to pay for aircraft parking, slots, terminal space etc.
Maintenance, Repair and Overhauling (MRO) challenge: Indian aviation industry suffer from lack of dedicated hangers at airports. Many a times, aircrafts have to be sent to foreign countries like Singapore which further increases the cost of MRO. GST is 18% which is very high for an industry which is burdened by taxes. The spare parts are imported from other countries which further increases the cost.
A consolidated view of the break-up of costs of the airline industry according to Data from DGCA India can be seen as follows: (The Flight Operation expense % values are shown in the right vertical axis)
Key Revenue Drivers:
Capacity: Revenue will be a direct relation to the capacity of the airlines i.e. the number of seats with the airline. Higher capacity can result in higher revenue for the airlines. Capacity addition can be done by expanding the fleet of airlines. Indian aviation industry has exploded over the last decade and government focus on regional connectivity may provide further opportunity for capacity expansion.
Passenger Load Factor: This is the most important factor as it impacts the profitability of airline as well. As the load factor increases Airlines increase the ticket prices resulting in higher revenues. Depending upon the load factor airlines also decide their expansion of fleets.
A Comparison of the Passenger Load Factor for major airlines is given as follows:
Passenger Yield: Passenger yield is passenger revenue for every mile flown. Higher yield is indicative of higher revenue for the airlines.
Fee/Other services: Charges for luggage, Seat selection, on-board meals, Cancellation charges, rescheduling charges, inflight entertainment, in flight sales and other fees adds to the revenue streams.
Why was 2019 turbulent for Indian Aviation and what lies Ahead?
2019 was a rough year for many Indian Airlines, with the major hit coming from Jet Airways losing share and finally discontinuing operations in July. This led to a lot of market share being up for grabs for the major players like Indigo, GoAir, Spice Jet and Vistara. Even parking slots of Jet Airways became vacant for the other companies, especially those looking to make headwinds in International routes. It was assumed that on the pricing front, there would be changes owing to the demand-supply mismatch, but that could not really materialise over time. With the increase in parking slots and an opportunity to benefit from with one player opting out, the major airlines like Spice Jet and Indigo started leasing more and more aircrafts. This led to any seat capacity constraint that was expected to crop up to be overcome with ease. No real gap between supply and demand ended up, leading to no significant hike in prices. Not only this, the economy overall was in a bad shape, further adding to downward pressure on tariffs since yield started reducing. There was a possibility that seats would’ve gone empty had prices seen a jump.
It was finally in November that tariffs started increasing by around 10% which was important to bring viability back, but then operators faced another setback. IndiGo faced a debacle because of the requirement to replace the Pratt & Whitney Engines on its fleet, leading to a number of cancellations and reduced capacity in the last two quarters. Similarly, for SpiceJet, the suspension of Boeing’s 737 Max Planes Production brought a stall into capacity expansion plans.
A rise in demand from the festive end-of-year season is all that brought respite to the sector, even though not greatly.
Entering 2020, a key parameter to be monitored by the airlines would be yields. With expansion happening, though slowly, the airlines are expected to be incentivised to offer discounts to passengers, which is expected to transform into increased profitability in the longer run. Another key event to watch out for will be the proposed privatisation of Air India. The airline’s estimated losses for the last financial year have increased owing to over 26 of its aircrafts being grounded without any maintenance checks. The government has agreed to halve its debt followed by completely exiting the carrier and what remains to be seen is who buys it. Ideally, the decision would depend on the price that the bidders would be offered by the government and the framework which would be negotiated as a part of the deal including dealings with past dues, potential disruptions etc.
What is it?
According to Investopedia: “The telecommunication sector is made up of companies that make communication possible on a global scale, whether it is through the phone or the Internet, through airwaves or cables, through wires or wireless.”
The industry is divided into following subcategories:
According to Maximize Market Research Pvt Ltd, Global telecommunication industry was valued at US$2.4 Trillion in 2019. In India the size of the telecom industry is approximately USD 8.45 Billion as per report released by TRAI. A few facts about the telecom industry in India:
It is the second largest industry in terms of subscribers with a total of 1,195.24 Million Subscribers as on 30th September 2019. This figure grew by 0.73% in comparison to the previous quarters. Teledensity i.e. no of telecom connection per 100 individuals stood at 90.52 nationwide, at 160.63 for Urban and 57.79 for rural. The high density in Urban landscape shows the recent trend of having multiple connections by a single user.
As we can see from the above graph that almost 89% of the market share is owned by Private players and PSU enjoys only 11% share that too diminishing YOY. The fig stands at mere 7.88% if we talk about Revenue Market Share.
Private Player shebang:
In terms of RMS, the market leader is Jio with a share of 32%, followed by Airtel at 30 and Voda-Idea at 28% market share if we look at Q1 of FY20. Jio as we can see led the sector by being the largest Telco player in terms of revenue. The penetrating pricing done by Jio proved to be very fruitful for them and disrupted the whole sector.
But the question that troubled the industry stewards was how Jio was profitable despite such low pricing. Was it so efficient operationally that it could undercut other competitors by hefty margins?
The answer lied in the very basic fundamental analysis in Financial Accounting that was the common size statement analysis of all these players.
The above fig compares the various line expense items of Income Statement for the Year ended 2019, for all the three players. As we can see from the above and from the below table as well that Jio was charging very low depreciation in comparison to other players. Another insight was the lower financing cost for Jio and very high Network Operating expense for Voda Idea.
Coming back to the main argument of charging very low depreciation. A US based agency called Bernstein found that if Jio used the straight-line depreciation method as used by other players instead of the present “Units Produced Method” amid other normalization such as brokerage. They will be at a loss of nearly, 15,000 Crore. This embezzlement shows company intention to state that it is profitable to fool others and not attract anti-competitive agency due to predatory pricing.
Further, using the above financials and a simple click of Goal Seek button, we found out the increase in revenue that would be needed for the other two players to be operationally profitable. The percentage increase stood at 49.695% for Voda-Idea and 4.49% for Airtel. But the industry decided to increase the price by nearly 40%. Assuming perfectly inelastic demand, we could say that the situation is win-win for Airtel but for Voda-Idea they need to increase their operational efficiency to remain relevant.
Now adding in factors like the Fine Imposed by Department of Telecom and the price sensitivity of the Indian landscape the picture seems to be grave for Voda-Idea. Keep in mind, we have not yet taken into consideration the non-operating expenses. But there might still be a little scope, maybe the consumer has become so used to being online that they are willing to spend almost twice to keep on consuming data. If past is any thing to bank upon, when minimum recharge commitment was introduced there was a dip in the number of subscribers.
White Space Spectrum: An opportunity for Rural Connectivity
According to a study by IIT Bombay, in India 12 out of 15 i.e. nearly 80% of the channels are available as Television White Space. A lot of players such as Microsoft, Google BHEL and prestigious institutes such as IIT Delhi, Hyderabad & Bangalore, were conducting research in this field. But government in the year 2017 rejected Microsoft’s license and subsequently banned players entering this field. The main advantage of having a white space spectrum based broadband connection is its low cost, low infrastructure requirement in comparison to let’s say optic fibre while providing the same level of service.
Trends in Telecom Industry
Telecommunication Industry is going through a lot the consolidation, the whole spectrum sales fiasco and the 100-pound gorilla in the room Jio slowly disrupting the whole industry. A lot is yet to come, we have entered a decade where hopefully India will be able to witness the true sense of what 5G is and get a glimpse of connected world we call future.
References: TRAI, Crisil, BCG Insights, Invest India, Airtel Annual Report, Jio Annual Report and Voda-Idea Annual Report, Government of Singapore.
Source: BSE India
Equity benchmark Sensex has been hitting fresh record highs on a monthly basis even as high-frequency macro-economic data continued to show acute pain in the economy. The Sensex hit a lifetime high of 41,000 recently while Nifty soared past 12,100. But, the economy is in a state of slowdown with the GDP growth rate at a 6-year low of 4.5 per cent. The collapse of the automobile sector or the rising number of non-performing assets (NPAs), sluggish consumer demand or failing manufacturing sector; all have a hand in this deceleration of growth rate. The RBI slashed policy rates a record 5 times in 2019 to support a struggling economy as the shadow banking crisis caused a liquidity crunch in the financial sector.
This appears to be counter-intuitive prima facie since the stock market is supposed to be an indicator of the state of the economy. Many believe that the stock market has a positive correlation with the GDP growth rate. But is this really so? Several studies have compared GDP growth rate and stock market indices over different time periods and geographical locations, and have observed that there is either no correlation between the two, or there is a very low degree of correlation, while some observations suggest a negative correlation between the two.
Ideally, markets and the economy should move together as price of shares of a company should be correlated with its future earnings. Expectations of future earnings are formed from past and present earnings. Thus, during a slowdown markets should correct to reflect the current level of earnings. But several other factors influence the pricing of shares. Fresh availability of surplus liquidity at cheap rates, along with speculation of future earnings being better than today, can lead to such divergence. The convenient argument during a bull run has been “this time it is different"—however, it never is.
Reasons for Current Boom:
Optimistic future outlook: Reforms such as the goods and services tax, insolvency and bankruptcy code and the recently announced corporate tax cuts suggest a positive mid-term outlook for India’s growth once banking and financial sector stress is resolved. The other equally important factor is low interest rates in developed economies that have led to fresh inflows into India. All this, coupled with expectations that the direct tax code will be enforced in the next budget, has improved market sentiment.
Recent government intervention: After the budget for the FY’20, it was expected that the government will slash down the Corporate tax levied on the companies. However, no such decision was taken and hence, the equity market experienced major crunch as foreign investors withdrew their money from the Indian market In response to the high corporate tax. However, with the crashing economy and stock prices, the Modi Government acted by taking restrictive measures to stable the falling financial market. Modi himself has been taking steps to revive growth from a six-year low. In September, the cabinet slashed the corporate tax rate to 22% from 30% for existing companies and to 15% from 25% for new manufacturing companies. He’s also eased foreign investment rules in retail, manufacturing and coal mining. Also, 10 state-run banks were merged to create four big lenders. An amount of $1.4 billion funds were announced to salvage stalled real estate projects.
Ease of Tensions between China & US: The global equity market got a boost up after reports about the end of the trade war between Trump administration and China. The two nations are close to finalizing a modest trade agreement that would suspend tariffs. Trump took to Twitter by tweeting “Getting VERY close to a BIG DEAL with China. They want it, and so do we!”
UK Elections: After the landslide win of Boris Johnson in the UK, the clouds finally cleared on Brexit. As per the speculated reports, Boris might take the UK out of the European Union by the end of next month. As a result, domestic companies that earn significant revenues from the UK market hogged the limelight in Friday’s trade. Shares of Tata Motors, which earns around 16.30 percent revenue from the UK, were up nearly 3 percent on BSE.
Lack of correlation:
Traders and investors are hopeful that the government will take stronger steps in the next few months. They expect a cut in personal income rate, GST rate cut, labour and land reforms among others. These decisions will take time to impact the economy, but investors are nevertheless optimistic about the prospects. Even as the economy has taken a huge hit, stock market sentiment runs high. Hence, the stock market has factored in future expectations into its prices. All said and done, there might not be a correlation between the stock market and the economy. It is futile to defend the current political leadership and the economic slowdown using the stock market indices.