(1/11) Watched an interesting Pharma webinar Mr. Varinder Bansal and Mr. Madhusudan Kela today. What caught my attention was a point raised by one of the panelists - Why not value Indian pharma like Reliance Industries? SOTP method.

(2/11) After all, Indian Pharma companies have different businesses such as domestic formulations, APIs, US exports etc. If you strip the US business, the Indian business will look far closer to a FMCG company. He is right.

(3/11) Although I respectfully disagree with that approach. Here's why - SOTP is for conglomerates that run entirely different businesses and not for divisions.

(4/11) From a Pharma point of view, it is quite tempting to value Indian pharma on SOTP basis. After all, pure play domestic formulation businesses like Abbott and Sanofi get 60 and 38 PE respectively. Far higher than Indian players.

(5/11) Abbott is the Ferrari of domestic formulation space in India. Whether the Ferrari is worth 4 Crores or 6 Crores is a different debate altogether. But with a 3 year avg ROCE of 37% and asset light outsourced model, Abbott's metrics are comparable to many FMCG players.

(6/11) Another comparable MNC like Sanofi generates far lower return ratios (27%) than Abbott. Therefore, it is unrealistic to expect Abbott or Sanofi like valuations for the domestic piece of many Indian generic pharma companies how much ever mouth watering it may sound.

(7/11) Data suggests that having a high percentage of revenues in Indian domestic formulation space is no panacea for higher return ratios.

(8/11) Check this out: Alkem which generates 65% of its revenues from Domestic has a far lower ROCE than Ajanta which generates just 1/3rd from Domestic. Cadila with 27% domestic generates higher ROCE than Torrent with 42% in domestic.

(9/11) Moreover, is it ok to value the cooker business of Butterfly Gandhimathi separately? Afterall, Hawkins - a single product cooker company gets 30 pe as against 15 pe for Butterfly. Can Dabur's Hair Oil division be valued separately vis-a-vis Marico?

(10/11) Why not for products? YiPPee Noodles valued like Maggi Noodles? (ITC fans will be more than happy)

(11/11) In conclusion, it is better to value cos on a consolidated basis for similar businesses whereas SOTP reserved for completely different businesses. Ultimately, valuation depends on consolidated ROCE and growth. Agree or disagree? Views welcome.

Disclosure: No recos