Description
A firm is required to maintain a balance between liquidity and profitability while conducting its day to day operations. Liquidity is a precondition to ensure that firms are able to meet its short-term obligations and its continued flow can be guaranteed from a profitable venture.
Project Report
On
STUDY OF WORKING CAPITAL
MANAGEMENT OF RANBAXY LAB LTD
A Comparative Analysis
Submitted to:
PREFACE
Businesses face ever increasing pressure on costs and growing Financing
requirements as a result of intensive competition in globalize markets. Many of
them are therefore considering ways of making themselves more efficient. In
identifying possible options it is important not to focus exclusively on income
and expense items but also to take the balance sheet into account.
Improvements to the existing capital structure can free up valuable resources
and bring increased efficiency. !ctive working capital management is an
extremely effective way to increase enterprise value. "ptimizing working
capital results in a rapid release of liquid resources and contributes to an
improvement in free cash flow and to a permanent reduction in inventory and
capital costs.
My pro#ect on ~Analysis of Working Capital Management in Ranbaxy
Laboratories Ltd.$
%he attempt is aimed to analyze the various aspects of working capital
management of &anbaxy and compare it with that of 'r &eddy(s and with
industry standards.
By adopting various calculation and analysis and then making interpretation
with the solution of specific problem best efforts on giving appropriate
suggestion to the company have been made.
%o this context various methods and techniques like ratio analysis 'u)ont
analysis statistical tool *orrelation analysis and working towards the optimal
level of working capital estimation of working capital and various ratios have
been used to draw an exact picture of company.
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TABLE OF CONTENTS
!bstract +,
Introduction +-
Industry )rofile +.
&esearch and 'evelopment //
"rganizational profile /0
1orking capital 23
'efining the problem 24
5iterature review 0/
Methodology 02
Financial performance of Ranbaxy
5iquidity &atios 0.
)rofitability &atios 6/
5iquidity !nalysis 62
&atio !nalysis ,2
5iquidity &anking -,
*redit !nalysis 7 )olicies ./
Conclusion
5imitations .4
8ummary of findings 4+
&ecommendations and 8uggestions 43
&eferences 46
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ABSTRACT
! pro#ect work is a mandatory requirement for the Business Management
)rogramme. %his type of study aims at exposing the young prospective
executive to the actual business world.
%his pro#ect gives me knowledge about the working capital of the company.
1orking capital refers to the funds required for day to day operations of the
organization. It is very effective way to #udge a company(s cash flow prospects
as cash is like blood life for any company.
%he report initially begins with the company profile followed by the detailed
analysis of company like businesses of the company products offered by the
company financials of the company etc
%he report involves a lot of research to understand what exactly working capital
is why companies require working capital what are the ideal ratios for
1orking *apital a *ompany should maintain etc. The purpose is to develop
an action plan that creates such a working capital that will upgrades and
standardize the quality of business analysis.
9arious tools including financial tools are used in this pro#ect to calculate and
compare the financial position of the company e.g. ratio analysis 'u)ont
analysis 81"% analysis etc.
INTRODUCTION
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! firm is required to maintain a balance between liquidity and profitability
while conducting its day to day operations. 5iquidity is a precondition to ensure
that firms are able to meet its short:term obligations and its continued flow can
be guaranteed from a profitable venture.
%he importance of cash as an indicator of continuing financial health should not
be surprising in view of its crucial role within the business. %his requires that
business must be run both efficiently and profitably. In the process an asset:
liability mismatch may occur which may increase firm(s profitability in the
short run but at a risk of its insolvency.
%he purpose of this pro#ect is to examine the trends in working capital and its
impact on firm(s performance. %he trend in working capital needs and
profitability of firm is examined to identify the causes for any significant
differences.
%he rest of the report is organized as follows; It starts with the Industry profile
7 then a detailed introduction of the company. %he following section of the
report looks briefly at the theoretical underpinnings and the relevant literature
which attempts to explain the link between poor performance and working
capital management.
!fter that the analysis part covers in depth analysis of working capital of
&anbaxy. Finally the conclusion is made 7 it has been observed that the overall
structure of working capital of the co. is good and it is a growing concern. %he
company uses various techniques to maintain its working capital. 8ome
suggestions have been given on the basis of the conclusion.
INDUSTRY PROFILE
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Industry Definition
“The Indian pharmaceutical industry is a success story providing employment for millions
and ensuring that essential drugs at affordable prices are available to the vast population of
this sub-continent.”
Richard Gerster
%he 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.
Facts about the &ole of )harmaceutical Industry in Indian ;
• Indian )harmaceutical Industry ranks fourth in the world pertaining to the volume of
sales.
• %he estimated worth of the Indian )harmaceutical Industry is US$ 6 billion.
• %he growth rate of the industry is about 13º per year.
• !lmost most 70º of the domestic demand for bulk drugs is catered by the Indian
)harma Industry.
• %he )harma Industry in India produces around 20º to 24º of the global in the international arena.
• %he Indian )harma sector leads the science:based industries in the country.
• !round 40º of the total pharmaceutical produce is exported.
• 55º of the total exports constitute of formulations and the other 45º comprises of
bulk drugs.
• %he Indian )harma Industry includes small scaled medium scaled large scaled
players which totals nearly 300 different companies.
• !s per the present growth rate the Indian )harma Industry is expected to be a US$ 20
billion industry by the year 3+/6.
• %he Indian )harmaceutical sector is also expected to be among the Top Ten Pharma
based markets in the world in the next ten years
• %he sales of the Indian )harma Industry would worth US$ 43 billion within the next
decade.
• %he multinational companies investing in research and development in India may
save up to 30º to 50º of the expenses incurred
• %he cost of hiring a research chemist in the ?8 is five times higher than its Indian
counterpart.
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• %he manufacturing cost of pharmaceutical products in India is nearly half of the cost
incurred in ?8.
• %he cost of performing clinical trials in India is one tenth of the cost incurred in ?8.
• %he cost of performing research in India is one eighth of the cost incurred in ?8.
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 'rug *ontrol !uthority. %echnologically strong and
totally self:reliant the pharmaceutical industry in India has low costs of production low
&7' costs innovative scientific manpower strength of national laboratories and an
increasing balance of trade. %he )harmaceutical Industry with its rich scientific talents and
research capabilities supported by Intellectual )roperty )rotection regime is well set to take
on the international market.
ADVANTAGE IN INDIA
Competent workforce: India has a pool of personnel with high managerial and technical
competence as also skilled workforce. It has an educated work force and @nglish is
commonly used. )rofessional services are easily available.
Cost-effective chemical synthesis: Its track record of development particularly in the area
of improved cost:beneficial chemical synthesis for various drug molecules is excellent. It
provides a wide variety of bulk drugs and exports sophisticated bulk drugs.
Legal & Financial Framework: India has a 62 year old democracy and hence has a solid
legal framework and strong financial markets. %here is already an established international
industry and business community.
Information & Technology: It has a good network of world:class educational institutions
and established strengths in Information %echnology.
Globalization: %he country is committed to a free market economy and globalization. !bove
all it has a -+ million middle class market which is continuously growing.
Consolidation: For the first time in many years the international pharmaceutical industry is
finding great opportunities in India. %he process of consolidation which has become a
generalized phenomenon in the world pharmaceutical industry has started taking place in
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India.
THE GROWTH SCENARIO
IndiaAs ?8B 2./ billion pharmaceutical industry is growing at the rate of /0 percent per year.
It is one of the largest and most advanced among the developing countries.
"ver 3++++ registered pharmaceutical manufacturers exist in the country. %he domestic
pharmaceuticals industry output is expected to exceed &s3,+ billion in the financial year
3++3 which accounts for merely /.2C of the global pharmaceutical sector. "f this bulk
drugs will account for &s 60 bn =3/C> and formulations the remaining &s 3/+ bn =-4C>. In
financial year 3++/ imports were &s 3+ bn while exports were &s.- bn.
%he above graph shows the percentage of pharmaceutical products export by various
countries.
=8"?&*@ *ompetitiveness of the Indian pharmaceutical industry in the new product patent
regime a report by FI**I>
Page 8 of 93
RESEARCH AND DEVELOPMENT
Drug discovery is the process by which
potential drugs are discovered or
designed. In the past most drugs have
been discovered either by isolating the
active ingredient from traditional
remedies or by serendipitous discovery.
Modern biotechnology often focuses on understanding the
metabolic pathways related to a disease state or pathogen,
and manipulating these pathways using molecular biology or
Biochemistry. A great deal of early-stage drug discovery has
traditionally been carried out by universities and research
institutions.
Drug development refers to activities undertaken after a compound is identified as a
potential drug in order to establish its suitability as a medication. "b#ectives of drug
development are to determine appropriate Formulation and 'osing as well as to establish
safety. &esearch in these areas generally includes a combination of in vitro studies in vivo
studies and clinical trials. %he amount of capital required for late stage development has
made it a historical strength of the larger pharmaceutical companies
"ften large multinational corporations exhibit vertical integration participating in a broad
range of drug discovery and development manufacturing and quality control marketing
sales and distribution. 8maller organizations on the other hand often focus on a specific
aspect such as discovering drug candidates or developing formulations. "ften collaborative
agreements between research organizations and large pharmaceutical companies are to
explore the potential of new drug substances formed
The cost of innovation
'rug discovery and development is very expensiveD of all compounds investigated for use in
humans only a small fraction are eventually approved in most nations by government
appointed medical institutions or boards who have to approve new drugs before they can be
marketed in those countries. @ach year only about 36 truly novel drugs =Eew chemical
entities> are approved for marketing. %his approval comes only after heavy investment in pre:
clinical development and clinical trials as well as a commitment to ongoing safety
monitoring. 'rugs which fail part:way through this process often incur large costs while
generating no revenue in return. If the cost of these failed drugs is taken into account the
cost of developing a successful new drug =Eew chemical entity or E*@> has been estimated
at about / billion ?8'.
! study by the consulting firm Bain 7 *ompany reported that the cost for discovering
developing and launching =which factored in marketing and other business expenses> a new
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drug =along with the prospective drugs that fail> rose over a five year period to nearly B/.-
billion in 3++2.
%hese estimates also take into account the opportunity cost of investing capital many years
before revenues are realized =see %ime:value of money>. Because of the very long time
needed for discovery development and approval of pharmaceuticals these costs can
accumulate to nearly half the total expense. 8ome approved drugs such as those based on re:
formulation of an existing active ingredient =also referred to as 5ine:extensions> are much
less expensive to develop. %he consumer advocacy group )ublic *itizen suggests on its web
site that the actual cost is under B3++ million about 34C of which is spent on F'!:required
clinical trials. For me:too:drugs and for generics the cost are even less.
*alculations and claims in this area are controversial because of the implications for
regulation and subsidization of the industry through federally funded research grants.
Controversy about drug development and testing
%here have been increasing accusations and findings that clinical trials conducted or funded
by pharmaceutical companies are much more likely to report positive results for the preferred
medication.
In response to public outcry about specific cases in which unfavorable data from
pharmaceutical company:sponsored research was suppressed the )harmaceutical &esearch
and Manufacturers of !merica have published new guidelines urging companies to report all
findings and limit the financial involvement in drug companies of researchers. !s a result of
this public outcry and )harma response the ?8 congress signed into law a bill which requires
phase II and phase III clinical trials to be registered by the sponsor on the EIF website
'rug researchers not directly employed by pharmaceutical companies often look to
companies for grants and companies often look to researchers for studies that will make their
products look favorable. 8ponsored researchers are rewarded by drug companies for
example with support for their conferenceGsymposium costs. 5ecture scripts and even #ournal
articles presented by academic researchers may actually be Aghost:writtenA by pharmaceutical
companies. 8ome researchers who have tried to reveal ethical issues with clinical trials or
who tried to publish papers that show harmful effects of new drugs or cheaper alternatives
have been threatened by drug companies with lawsuits.
Product approval in the US
In the ?nited 8tates new pharmaceutical products must be approved by the F'! as being
both safe and effective. %his process generally involves submission of an Investigational new
drug filing with sufficient pre:clinical data to support proceeding with human trials.
Following IE' approval three phases of progressively larger human clinical trials may be
conducted. )hase I generally studies toxicity using healthy volunteers. )hase II can include
)harmacokinetics and 'osing in patients and )hase III is a very large study of efficacy in the
intended patient population.
! fourth phase of post:approval surveillance is also often required due to the fact that even
the largest clinical trials cannot effectively predict the prevalence of rare side:effects. )ost:
marketing surveillance ensures that after marketing the safety of a drug is monitored closely.
In certain instances its indication may need to be limited to particular patient groups and in
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others the substance is withdrawn from the market completely. Huestions continue to be
raised regarding the standard of both the initial approval process and subsequent changes to
product labeling =it may take many months for a change identified in post:approval
surveillance to be reflected in product labeling> and this is an area where congress is active.
%he F'! provides information about approved drugs at the "range Book site.
I
In the ?J the
British Eational Formulary is the core guide for pharmacists and clinicians.
Orphan drugs
%here are special rules for certain rare diseases =Korphan
diseasesK> involving fewer than 3+++++ patients in the ?nited
8tates or larger populations in certain circumstances. Because
medical research and development of drugs to treat such diseases is financially
disadvantageous companies that do so are rewarded with tax reductions fee waivers and
market exclusivity on that drug for a limited time =seven years> regardless of whether the
drug is protected by patents.
Indutr! revenue
For the first time ever in 3++, global spending on prescription drugs topped B,02 billion
even as growth slowed somewhat in @urope and Eorth !merica. %he ?nited 8tates accounts
for almost half of the global pharmaceutical market with B3.4 billion in annual sales
followed by the @? and Lapan. @merging markets such as *hina &ussia 8outh Jorea and
Mexico outpaced that market growing a huge ./ percent. ?8 profit growth was maintained
even whilst other top industries saw slowed or no growth. 'espite this K..the pharmaceutical
industry is M and has been for years M the most profitable of all businesses in the ?.8. In
the annual Fortune 6++ survey the pharmaceutical industry topped the list of the most
profitable industries with a return of /-C on revenue.K
)fizerAs cholesterol pill 5ipitor remains the best:selling drug in the world for the fifth year in
a row. Its annual sales were B/3.4 billion more than twice as much as its closest competitors;
)lavix the blood thinner from Bristol:Myers 8quibb and 8anofi:!ventisD Eexium the
heartburn pill from !straNenecaD and !dvair the asthma inhaler from . %he company has entered into strategic
business arrangements with companies such as Bayer !< . %he )lant is divided into two plant areas !.
and !4
THE VARIOUS DEPARTMENTS
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Human Resource Department
%he basic function of the human resource department in the modern corporate
world is knowledge management. %he F& department strives to maintain
cohesiveness among employees. It also ensures interdepartmental cooperation
in achieving targets. %he appraisal system is also taken care by this department.
%he F& department delves deep into the employee(s psyche to analyze the
positives and negatives of each employee so that a proper system of delegation
and G or empowerment can be evolved.
Finance Department
%he finance department takes care of the regular financial needs of the company
it ensures proper allocation of funds and takes care of the working capital
requirements. It verifies capital raised by different departments and sends them
for approval to the higher authorities.
Stores Department
%he function of this department is to provide adequate and proper storage and
preservation of various items to meet the demand of various other departments
by proper issues and maintaining accounts of consumption. It also keeps a track
of stock accumulation and abnormal consumption.
Erection and Fabrication Department
!s the name suggests this department identifies new pro#ects and helps in
erecting them. %his department also undertakes ma#or modifications of
equipment.
ERP Department
@&) department helps to integrate the entire enterprise starting from the
supplier to the customer covering financial and human resources. %his will
enable the enterprise to increase productivity by reducing costs. It also ensures a
single solution to the information needs of the whole organization.
Production Department
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!s a part of their on going commitment to produce hi:tech quality drugs and
pharmaceuticals that take care of the specific needs of markets around the
world &anbaxy 5aboratories 5imited has increased the investment in the
production department. It is the most important department of the company and
has the following ob#ectives;
/. Improving volume of production.
3. &educing re#ection rate.
2. Maintaining rework rate.
Engineering Department
%his department undertakes building construction and maintenance.
Maintaining service facilities such as water gas heating ventilation air
conditioning painting and plumbing are some of the other areas dealt by this
department. %his department also helps in maintaining electrical equipments
such as generators transformers telephone system and electrical installation.
Purchase Department
%he purchase department provides material to the factory without which the
wheels of machines cannot move. %he various functions performed by this
department include; 8ecuring good vendor performance including prompt
deliveries of supplies of acceptable qualities.
/. %o develop satisfactory sources of supply and maintaining good
relationships with the suppliers.
3. %o pay reasonably low prices.
Quality Control/Quality Assurance Department
%he purpose of H* 7 H! departments is to ensure that the desired quality
standard is achieved. It also ensures that the processing or fabrication of
material conforms to the specific characteristics selected to assure that the
resulting product will in fact perform its intended function.
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PRODUCT REVIEW
&anbaxy(s therapeutic width covers five of the top six categories including
!nti:infective is the market leader in the cholesterol reducer
segment. !nother leading brand in this category is 8torvas =!torvastatin>.
8torvas has been one of the fastest:ever to enter the top:2++ brands list of the
Indian pharma industry. "ther global cardiovascular brands are *ovance
=5osartan> and *aslot =*arvedilol>.
Central Nervous System
%he *entral Eervous 8egment is one of the important focus areas identified by
&anbaxy with 8erlift being the key brand. In India 8erlift is number / amongst
8ertraline brands. Eew product introductions will be drivers of growth in this
category.
Gastrointestinal
*urrently gastrointestinal drugs are the second:largest category for &anbaxy.
%he key brands in this category include Fistac and &omesac. %he current
annual sales of &anitidine are estimated to be around ?8 B /, Mn and the
product is marketed in more than 3+ countries.
Rheumatologicals
%he first generation *ox:3 inhibitors principally drive worldwide growth in
rheumatology. %his category is estimated to grow exponentially for &anbaxy
with brands like *elecoxib. %his year &ofibax =&ofecoxib> introduced in India
has established itself as a leader in the *ox:3 inhibitor category and has
overtaken all *elecoxib brands. It has been identified as a key but also possibly unpaid tax
demands unpaid dividends and other items.
• Cash : bank balances cash holdings and short:term investments.
The three major characteristics of current assets are:
• %hey have a short life span.
• *ash balances are held only for a week or so.
• %hey are rapidly transformed into other assets form.
Some of the decisions taken in working capital management are:
• !n adequate supply of raw materials.
• *ash to meet the operational payments.
• %he ability to grant credit to customers.
• Investment in various current assets.
• !ppropriate sources of fund to finance current assets.
• )roportion of long term and short term funds to finance current assets.
Objective of Working Capital Management;
• %wo fold ob#ective of working capital management
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• Maintenance of working capital and
• !vailability of ample funds at the times of need.
Uses of Working Capital:
• %he typical uses of working capital are as follows;
• !d#usted net loss from operations
• )urchase of non:current assets;
• &epayment of long:term debt =debentures or bonds> and short:term debt =bank
borrowing>
• &edemption of redeemable preference shares
• )ayment of cash dividend.
ADVANTAGES OF ADEQUATE WORKING
CAPITAL
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• Increase in debt capacity and goodwill; !dequate working capital represents the
financial soundness of the company. If one company is financially sound it would be
able to pay its creditors timely and properly. It will increase company(s goodwill.
%hus a firm with adequate working capital can raise requisite funds from market
borrow short:term credit from banks and purchase inventories of raw materials etc.
for the smooth operation of its business.
• Increase in production efficiency; 1ith adequate working capital the firm can
smoothly carryout research and development activities and thus adds to its production
efficiency.
• @xploitation of favorable opportunities; In the presence of adequate working capital a
company can avail the benefits of favorable opportunities. !dequate working capital
will help the company to have bulk purchases seasonal storage of raw material etc.
which would reduce the cost of production.
• Meeting contingencies and adverse changes; ! company can easily face certain
business and economic crises. ! company having adequate working capital can
successfully meet contingencies such as business oscillations financial crisis arising
from heavy losses etc.
• !vailable cash discount; Maintenance of adequate working capital enables a company
to avail the advantage of cash discount by making cash payments for to the suppliers
of raw materials and merchandise.
• 8olvency and efficiency of fixed assets; It helps to maintain the solvency of the
company so that payments could be made in time as and when they fall due.
• !ttractive 'ividend to 8hareholders; It enables the company to offer attractive
dividend to the shareholders so that sense of security and confidence will increase
among them. It also increases the market value of its shares.
DISADVANTAGE OF INADEQUATE WORKING
CAPITAL
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• Loss of goodwill and creditworthiness: !s the firm fails to honor its current
liabilities it loses it goodwill and creditworthiness among its creditors.
• Firm can`t make use of favorable opportunities; %he firm fails to undertake the
profitable pro#ects which not only prevent the firm from availing the benefits of
favorable opportunities but also stagnate its growth.
• Adverse effects of credit opportunities: %he firm also fails to avail the attractive
credit opportunities but also stagnate its growth.
• Operational inefficiencies: It leads the company to operating inefficiencies as day:
to:day commitments cannot be met.
• Effects on financial capacity: Inadequacy of working capital also weakens the
shock:absorbing capacity of the firm because it cannot meet the contingencies arising
from business oscillations financial losses due to shortage of working capital.
• Non-achievement of Profit Target: %he firm cannot implement operational plans
due to unavailability of fund which will lead to non:achievement of profit targets.
Dangers of Redundant working capital
• 5ow rate of return on capital
• 'ecline in *apital and @fficiency
• 5oss of how current assets will be financed.
is considered to be
one in which holdings of cash securities inventories fixed assets and accounts payables are
minimized. %he level of accounts receivables should be used as a means of stimulating sales
and other income. )revious literature on working capital management has found a negative
association overall between level of working capital and operating performance as
measured by operating returns and operating margins =)eterson and &a#an /44->. ?nder
conditions of certainty =i.e. sales costs lead times payment periods and so on are known>
firms have little reason to hold more working capital than a minimum level. 5arger amounts
would increase the level of operating assets increase the need for external funding resulting
in lower return on assets and a lower return on equity without any increase in profit.
Fowever the picture changes when uncertainty =i.e. uncertain growth> is introduced
=Brigham and Fouston 3+++>. 5arger amounts of cash securities accounts receivables
marketable securities inventories and fixed assets will be needed to support increased sales
&equired levels will be based on expected sales levels and expected order lead times.
!dditional holdings may be needed to enable the firm to deal with departures from the
expected values. Further firms will also attempt to increase their accounts payable balances
as a means of financing increased levels of current operating assets. Firms which are in high
growth stages will face the challenge of maintaining the necessary level of operating assets to
support subsequent growth while at the same time attempting to maintain adequate
performance indicators.
%his study focuses on understanding how I)" companies manage their working capital and
other balance sheet items to support subsequent growth. %his study supports the existing
literature on working capital and contributes to the existing literature by examining a sample
of firms =i.e. recent I)" firms> which have a wider range of growth levels than non:I)"
firms. "ur study examines the impact of working capital management on the operating
performance and growth of new public companies. %he study also examines these
relationships under three categories of growth =i.e. negative growth moderate growth and
high growth>. %he study also examines other selected firm characteristics in light of working
capital management; firm operating and financial risk amount of debt firm size and
industry.
!n underlying theme of this study is that high growth certainly does not ensure high
operating performance. *onsistent with prior research =)eterson and &a#an /44-> this study
provides further evidence that good working capital management is positively associated
with better operating performance. Figher levels of accounts receivable are associated with
higher operating performance in all three of the growth rate categories. %he study also finds
that maintaining control over levels of cash securities inventory fixed assets and accounts
payables is associated with higher operating performance. 1e find that firms which are
experiencing very high growth will hold higher levels of cash securities inventory fixed
assets and accounts payable to support the high growth. %he study suggests that these firms
are sacrificing operating performance =accepting lower operating returns> to support the high
growth. %his in turn increases financial and operating risk for these firms. )erhaps I)"
firms should stay more focused on their operating performance while maintaining more
moderate growth levels
Page 39 of 93
!nother aspect of this study is that it fills a void in the initial public offerings literature.
&ecent literature finds that new public companies underperform the market after going
public. &itter in his /44/ paper reports substantially lower stock returns for I)" firms
between /4-6 and /4.0 than for a size:and:industry:matched sample of seasoned firms.
8ince then there is a growing literature explaining I)" underperformance as related to
agency cost =8mith /44+> institutional holdings =Field /446> venture capital =Lain and
market timing of I)" =Benninga 3++0> and earnings
management =%eho et al. /44.D !hmad:zaluki et al. 3++.>. Fowever there is no study
linking the working capital management and post:I)" performance. "ur paper tries to fill the
void. %he findings of this study would be interesting to investors and creditors of new public
companies.
METHODOLOGY
! study by analyzing the trends of working capital of the firm and to examine the possible
causes for any significant differences. %he data has been collected from the financial
statements. For the purpose of this study profitability is measured by &eturn on %otal !ssets
=&"%!> which is defined as profit before interest and tax divided by total assets.
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! comprehensive measure of profitability is best captured by computing the return on total
assets which is equal to the total liabilities of the firms, made up mainly of equity capital
and current liabilities.
!ll important ratios have been calculated to know the financial health of the company with
the help of past trends mainly profitability 7 return ratios considered in section I of analysis
part. It also covers the 'u)ont analysis and correlation analysis of working capital 7 its
impact on profitability of the company. 8ection II consists of in depth analysis of every
component of working capital.
!ll important components of working capital have been analyzed in detail i.e Inventory
*ash and )ayables etc
The methodology to be adopted is as follows:
• *ollection of financial data of &!EB!OP and 'r &eddy from annual reports and
company(s internal resources.
• *omputation of various financial ratios and comparing them with standards and with
each others.
• !nalyzing the trends of working capital of the firm and to examine the possible
causes for any significant differences.
• 9arious tools of analysis like correlation analysis 'u)ont analysis &atio analysis etc
to be applied.
• !ll important components of working capital to be analyzed in detail i.e. &eceivables
Inventory *ash )ayables and "perating cycle.
• Making comparison of the above computations with that of 'r &eddys.and industry
standards.
• !nalysis of results drawing conclusions and giving recommendations.
FINANCIAL PERFORMANCE OF RANBAXY
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Profit after Tax (PAT) - Rs in Million
Sales (Rs in Millions)
Page 42 of 93
%hough the 8ales of the company had been on a constant increase over the last /+ years
there was a sudden fall in the )rofit !fter %ax =)!%
rofit available to the @quity holders and
the organization itself> in 3++6 3++, and 3++.. %he key reason for the sudden fall in )!% can
be attributed to the sudden hike in the &7' expenditure in 3++6.
In 3++. there was an unprecedented economic downturn across all markets globally and the
fluctuating financial and Forex environment created a substantial negative impact on
profitability. Further prohibition on drugs by the ?8 Food and 'rug !dministration and
pricing stress has acted as a wet blanket in the periodical figures of the company. %he trend
line shows the reason behind the fall in profitability.
SELLING AND ADMINISTRATION COSTS
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Comparison with the Industry Standards
%he following financial comparison has been made keeping in view the scale of operations of
the company and the Industry 8tandards. %he Industry standards have been taken from
*entre for Monitoring Indian @conomy =*MI@> March 3++4.
%he following is the list of *ompany taken for *omparison;
/. *ipla
3. 8un )harmaceuticals
2. 'r &eddy(s 5aboratories
0. 5upin
6. &anbaxy 5aboratories 5td.
For any company functioning in the free market its important how best it operates but this is
equally important =if not more> that how it performs viz:a:viz its rivals i.e. other similar
companies in the market. Fere to find out about &anbaxy a comparison has been made with
6 other companies operating on comparable size to see whether &anbaxy is following
industry norms or not or whether &anbaxy is doing better =or worse> compared to its rivals.
Its liquidity position has been compared by considering 1orking *apital %urnover &atio
Page 44 of 93
*urrent &atio and Huick &atio and further )rofitability of &anbaxy viz:a:viz other
companies have been compared by considering &eturn on *apital @mployed and @arnings
per share.
Liquidity Ratios
%he liquidity refers to the availability of cash and cash convertible assets with an
organization to meet its short:term obligations i.e. creditors and other *urrent 5iabilities.
!ny companyAs liquidity may vary due to seasonality the timing of sales and the state of the
economy. But liquidity ratios can provide small business owners with useful limits to help
them regulate borrowing and spending. 8ome of the best:known measures of a companyAs
liquidity include;
1. Working Capital Turnover Ratio
It is a measurement comparing the depletion of working capital to the generation of sales
over a given period. %his provides some useful information as to how effectively a company
is using its working capital to generate sales.
! company uses working capital to fund operations and purchase inventory . %hese
operations and inventory are then converted into sales revenue for the company . %he
working capital turnover ratio is used to analyze the relationship between the money used to
fund operations and the sales generated from these operations. In a general sense the higher
Page 45 of 93
the working capital turnover the better it is because it means that the company is generating
a great degree of sales as compared to the money it utilizes.
From the Industry comparison it is apparent that &anbaxy is way above the Industry
standards in 3++. which implies that the sales generated by &anbaxy 5aboratories has always
been much higher than the cost incurred to generate those sa les as compared to other
)harmaceutical giants in the Industry.
2. Current Ratio
%he current ratio of &anbaxy has been compared with the %op five )harmaceutical organizations
for the year 3++.. ! *urrent ratio measures the ability of an entity to pay its near:term
obligations. %hough the ideal current ratio depends to some extent on the type of business a
general rule of thumb is that it should be at least 3;/. %he higher the current ratio the greater the
KcushionK between current obligations and a firmAs ability to pay them. ! lower current ratio
means that the company may not be able to pay its bills on time while
a higher ratio means that the company has money in cash or safe investments that could be put to
better use in the business.
%he ideal *urrent ratio to be maintained by the pharmaceutical cannot be accurately assessed
because the scale of operations and the inventory size has been different for all the concerns in
the Industry. !ccording to *MI@ Industry 8tandards the current ratio for 3++. is /.626.
Page 46 of 93
!s per the above graph the *urrent ratio maintained by &anbaxy in 3++. is way below the
normal industry standards. %he reason for a lower *urrent &atio is the heavy amount of
*urrent liabilities incurred mainly due to huge loss on derivative valuations. Ban in ?.8
market for more than 2+ generic drugs and depreciation in several currencies were other
factors for &anbaxy(s dismal performance in 3++..
3. Quick Ratio
Huick &atio also known as U!cid %est &atio? is an even conservative measure of liquidity.
%he ratio expresses the degree to which a companyAs current liabilities are covered by the
most liquid current assets. Fere Huick assets include all current assets except inventories.
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! high ratio indicates under stocking and low ratio indicates over stocking. 8tock is excluded
because it may take time to be converted into cash. Huick ratio measures those assets which
are immediately converted into cash without much loss. %hough there is no way to measure
an ideal Huick ratio but as a rule of thumb it should be at least /;/.
From the above comparison it can be inferred that a &anbaxy(s *urrent liabilities were much
more as compared to other companies. %his is because although the Huick &atio maintained
by &anbaxy is very near a said ideal ratio of /;/ but that way below the Industry standards of
/./4 of the year 3++.. Moreover it can be clearly viewed from the Balance 8heet that a
decent component of the *urrent liabilities includes fair valuation loss on derivatives.
Page 48 of 93
Profitability Ratios
)rofit is the difference between revenue and expenses over a period of time. %he profitability
ratios are calculated to measure the operating efficiency of the company.
1. Return on Capital Employed
! return on capital employed also called earning power is a measure of business
performance which is not affected by interest charges and tax:burden. It abstracts away the
effect of capital structure and tax factor and focuses on operating performance. Fence it is
eminently suited for inter: firm so internally consistent.
Return on Capital employed ÷ Profit Before Tax / Total Assets
!s compared to other )harmaceutical rivals in the Industry &anbaxy has a negative return on
*apital employed and way below the Industry standards of ..+,C for the year 3++.. %his
means that the )rofit before %ax =)B%> of the company is heavier on the %otal !ssets which
is dragging down the &eturn on *apital @mployed. %his is mainly because of the forex
decline due to global economic downturn and ban on generic products in the ?.8 market.
2. Earnings per Share(EPS)
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@)8 states a corporationAs profits on a per share basis. It can be helpful in further comparison
to the market price of the stock. It is an index of profitability from shareholder(s point of
view. %he higher the earning per share the more attractive will be the investment plan.
Earnings per share ÷ Profit after tax / Number of equity shares
From the Industry comparison it is clear that the earnings per share for the @quity
8hareholders of &anbaxy are negative. %he main reason for the figure of @)8 being negative
is the drastically low )rofits it has incurred in the year 3++..
Page 50 of 93
LIQUIDITY ANALYSIS OF
RANBAXY LABORATORIES LIMITED
5iquidity of any company is the indicator as to how the company is placed with reference to
its capacity to meet its current financial obligation. %his means that here we have to consider
the current assets which can be easily converted into cash to meet its immediate financial
obligations or dues. 5iquidity position of &anbaxy 5aboratories 5imited has been analyzed in
the following paragraphs based on different measures.
Current Assets
&anbaxy has a growth of around 2/..32C in current assets over the period of ten years. From
&s /32/+.30 Million in /44.:44 %he *ompany has increased its current assets to &s
6/0.6.30 Million. *oefficient of variation for this period has been 04.// which indicate that
the growth of current assets during the period under consideration has been sustainable
except for the year 3++-:+. which shows a sharp increase in current assets which is largely
due to increase in cash and bank balances which has increased more than ten times as
compared to 3++-.
Liquid Assets
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*ompany has also witnessed significant increase in liquid assets. From &s .2.3.33 M in
/44.:44 to &s 246++.+6 M in 3++-:+. there has been a growth of 2-/.30C in ten years. !s
it is clear from the above mentioned data liquid assets growth has been slightly more than
the growth of current assets. 8tandard deviation and coefficient of variation for this period
has been &s 4+-4.2. M and 6-../C respectively.
Current Liabilities
From /44.:44 to 3++-:+. current liabilities for &anbaxy 5aboratories have increased from
&s 0/63.-. M to &s 03-36.4- M with average current liabilities over this period being &s
/2+,-.0- M. !s we see here growth rate for current liabilities in this period has been
43...6C which is much higher than the growth for current and liquid assets which shows
that current liabilities have increased at a higher pace than its corresponding assets. Further
coefficient of variation for this period is .0.4/ which also reflect more flexibility in current
liabilities during this time. *urrent liabilities increased more than four times from 3++- to
3++. primarily because of huge loss on derivative valuations. Ban in ?.8 market for more
than 2+ generic drugs and deprecation in several currencies were another factors for
&anbaxy(s dismal performance in 3++..
Page 52 of 93
Working Capital
Eet working capital is an important measure which itself indicate margin of safety or cushion
of protection provided to the creditors. !s the following diagram shows the company has all
over positive net working capital. %he greater the amount of net work ing capital the greater
the liquidity of the firm. E1* of the company increased from &s ./6-.0, M to &s .-64.3-
M i.e. overall growth of -.2.C only. *oefficient of variation for the E1* is also 3+.44C
which is also less as compared to current assets or current liabilities. %here is a decrease in
Eet working capital in the year 3++..@ven though there is an increase in current asset and
current liabilities however increase in current liabilities is much more which has let to decline
in Eet working capital. %here is a decrease in Eet working capital in the year 3++..@ven
though there is an increase in current asset and current liabilities however increase in current
liabilities is much more which has let to decline in Eet working capital.
Page 53 of 93
Growth Index of Net Working Capital
Page 54 of 93
Working Capital (Quick)
Fowever the measure of Eet 1orking *apital does not indicate the true ability to pay current
debts when they become due. %he reason being the E1* being access of current assets over
current liabilities and since these current assets comprises of illiquid inventory the measure
of Huick Eet 1orking *apital has been adopted. %his is nothing but liquid or quick assets
less the current liabilities. Huick assets refer to current assets less inventory. Following
diagram shows that even though HE1* of the company has all along been positive during
3++2:+0 it has been substantially low. Further in 3++-:+. it was negative because of
exceptional increase in current liabilities.
Page 55 of 93
Page 56 of 93
Components of Gross Working Capital
%ype of collection efforts.
Degree of Collection efforts
Page 80 of 93
It refers what degree of effortsD company is using to collect its receivables. If company use
strict efforts than bad debts costs will decline and average collection period will also reduce.
But cost involved in this kind of strategy is comparatively high. !lso sales volume can be
decline with this policy. "n the other hand lenient efforts are #ust opposite to strict efforts.
8o company has to decide that method in which overall cost is low and revenue is high.
Type of collection efforts
%he methods available are
• %elephone calls for personal contacts
• 5etters including reminders
• )ersonal 9isits
• Felp of *ollection agencies
• 5egal !ction
CREDIT POLICY OF RANBAXY
!s we know that a manufacturing company is frequently deals with debtors and most of its
sales are credit sales. ! huge amount of capital is blocked in to receivables. %herefore to
make an effective credit policy is very important for the company. &anbaxy is like many
other companies involves in both kinds of sales i.e. domestic as well as exports. It have
different credit policies for both domestic and export customers.
For domestic customers; Most of the domestic sales of &anbaxy are based on advance
payment. 8ome part of contract money is received in advance and then sale is made.
&emaining amount is received later on. . *ompany also doesn(t plan for any bad debts losses but if any bad debt
happen than it has to be written off fully.
For obtaining information related to the new applicants only internal sources are used. !s
company generally deals with blue chip companies or old customers it is not a difficult #ob
to obtain information about them. Eo external source is used by &anbaxy.
!nd for the analysis part company use both qualitative and quantitative tools. !s per
qualitative tool company generally go for market reputation and past record of customer and
for quantitative tool company use the size of order financial position of customer etc.
!s far as collection efforts are concerned company generally uses lenient efforts. But in
some cases company also go for strict methods. &anbaxy normally uses all types of
collection efforts like letters including reminders telephone calls personal visits 7 legal
actions. But company doesn(t take help of collection agencies.
%he collection cost is very nominal in domestic sales and difficult to determine. 1hereas
capital cost is equal to the cost of working capital which is not determined because of
confidentiality.
For @xport 8ales; From the sale data of &anbaxy it was found that around ,,C of sales are
based on exports. %herefore it is very important area for planning. @xports are based on letter
of credit. ! foreign company who want to purchase the material from &anbaxy sent an 5*
first. %han on the basis of that 5* export order is made. *opy of that order is sent to
corporate office and head office at operating
=ii> non
perating
=iii> Financial.
*ash sales and cash received from debtors come under operating cash flows. Eon S operating
income includes sale of fixed assets dividends 7 interest income. Issue of shares 7 loans
etc. considered as financial inflows.
%he next step is to determine cash outflows. *ash outflows include;
=i> "perating outflows; cash purchase payments of payables advances to suppliers
wages 7 salaries etc.
=ii> *apital expenditure
=iii> *ontractual payments; repayment of loan interest 7 tax payments etc.
=iv> 'iscretionary payments; ordinary and preference dividend.
Cash Management in Ranbaxy:
*ash management system adopted by Finance 'epartment in &anbaxy is very reliable and
transparent. !s cash is a very important activity for a good operation of company here in
&55 cash is monitored every day and intimated to Finance 'epartment. %he daily cash report
includes the all details of cash inflows and outflows. Monthly cash budgets are maintained
for the estimated of monthly cash inflows and outflows. Finally the annual cash budget is
made by the Finance 'epartment in the corporate head office.
%he corporate office allocates different amount of each to different manufacturing units as
per their requirement. *orporate office acts as a linkage between the manufacturing unit and
creditors. *orporate office has determined the credit facility for every units of the company
and this keeps on changing from year to year depending up on company(s position
transactions profitability and inventory position.
Page 85 of 93
%he corporate office provides cash to manufacturing units but there most function is
controlled in unit itself. !ll the need related to inventory is met through corporate office as
well as individual efforts of unit.
Fund Allocation:
Fere the initial allocation for manufacturing units is done by corporate office and all
supplementary requirements are to look upon by *ommercial department.
Fund Utilization:
*ompany operates an annual R*ash Budget( and a rolling R*ash )lan( drawn up every month.
!lthough specific forecasting technique is used funds are deployed to different departments
as per their requirements. 'aily reports on cash transaction are prepared by )rocurement
department to keep a track of all payments made in the days work. @very month cash
transaction report is sent to Finance department in the corporate office showing all the
transaction of cash =inflow and outflows> actual utilization of cash and allocation of fund is
compared. If the utilization of cash is more than the allocation of fund then the plant has to
#ustify its more utilization.
%o meet the requirement of cash company approach to bank and present the required detailed
by the bank. &55 kept less cash in hand to meet the entire cash requirement it depends on
financing process.
LIMITATIONS
• !vailability of the financial data was very limited which is not disclosed due to
sensitive nature for the company.
• %he year ended for &anbaxy is 'ecember and that of 'r &eddys is March. 8o figures
taken are past 0 years but 2 months difference is there in the corresponding figures of
&55 7 '&5.
Page 86 of 93
• %he main component of working capital is cost of capital which is not described in
the pro#ect because of confidential nature.
• @xternal environment influence was not considered while doing the theoretical
standard rather than the industrial standard because of unavailability of any such
specific standard.
• 5ack of availability of plant related data to finance department which acted as a
limitation for the pro#ect.
• @fficiency falls to a great extent due the technical errors in the system. %hese errors refer
to the following;
? %he 8!) server goes low due to the exhaustive load on a single server.
? %here is lack of machines at disposal because of which the speed of work
goes down.
? %he hardware provided to the staff is not up to the mark which adversely
affects the efficiency to a great extent.
SUMMARY OF FINDINGS
• %here is a huge investment in working capital at &anbaxy 5aboratories 5imited as it
has a large production cycles. %he company follows a steady production policy and
hence there are no seasonal variations. !ggressive policy of more profitability more
risk is followed which is an ideal situation as far as the strategy for working capital
financing is concerned. &anbaxy has a good earning recordD thus it en#oys great
confidence of the suppliers as it is looked upon favorably.
Page 87 of 93
• !s far as components of working capital are concerned on the domestic front sales
have increased as well as the finished goods inventory has also increased.
• %he increase in the current ratio of 3++/ as compared to that of the previous year
indicates that the liquidity position of the company is improving. %he inventory
turnover ratio of the company is not very high. It should try to achieve a quicker
movement of stock into sales. %here is an inverse relationship between sales and
working capital at &anbaxy 5aboratories 5imited.
WORKING CAPITAL TURNOVER RATIO
• In general higher the ratio more efficient is the management. 8ince &anbaxy
5aboratories 5imited has a low working capital ratio it should look carefully into this
area to ensure its effective utilization.
DEBTORS TURNOVER RATIO
• !fter analysis of the debtors turnover ratio it was found out that &anbaxy
5aboratories 5imited has a low debtors turnover ratio which may be a result of a
liberal and inefficient credit and collection policy. %his involves the risk of bad debts
and the burden of high interests. %his is another area that should be looked into.
INVENTORY TURNOVER RATIO
• !fter analysis of this ratio we can conclude that &anbaxy 5aboratories 5imited is
holding an unfavorable quantity of inventory. 8ince the inventory turnover ratio is
not very high we can conclude that the management of inventory is not very efficient
because the stocks are not sold very frequently as a result of which a large amount of
money is required to finance the working capital requirement.
QUICK RATIO
• &anbaxy has a satisfactory liquidity position.
CURRENT RATIO
• ! current ratio of 3;/ is considered to be a satisfactory. If the current ratio is 3 or
more it means that the company is adequately liquid and has the ability to meet its
current obligations. ! lower current ratio indicates that the company may be trading
beyond its capacity. &anbaxy 5aboratories 5imited has a satisfactorily high current
ratio but at same time it may mean that the company has idle cash which when
invested can yield returns to the company.
RELATIONSHIP BETWEEN SALES AND GROSS WORKING CAPITAL
• %here exists a negative correlation between the two which indicates that the sales are
low and this has led to an accumulation of stock.
RELATIONSHIP BETWEEN SALES AND NET WORKING CAPITAL
Page 88 of 93
• 8ales and net working capital have a negative correlation which implies that there is
an inverse relationship between sales and net working capital. It shows that the sales
are low and this has led to an accumulation of stock.
• )rofitability ratios of &anbaxy are low as compared to industry ratios it means that
company is investing a lot in its operations to compete with its competitors and is
expecting to reap profits in its coming years.
• %he return ratios are not showing an increasing trend which is not a good sign for the
company(s growth. But return of working capital is increasing which means that
company is doing more sales with less working capital.
• is almost constant due to this their Eet 1orking
*apital cycle is also not showing a significant change.
• !verage collection period is also increasing which needs to be shortened
&@*"MM@E'!%I"E8 !E' 8?.
• Financial Management Jalyani publishers
Page 92 of 93
WebPages
• www.pharmaceutical:business:review.com
• http;GGwww.ranbaxy.com
• http;GGwww.cipla.com
• http;GGwww.google.com
• http;GGwww.wikipedia.com
• http;GGwww.drreddy.com
• http;GGwww.lupingroup.com
• http;GGwww.sunpharma.com
• http;GGwww.moneypore.com
• www.bizstats.com
• www.reuters.com
• www.economictimes.com
• www.dereddys.com
• www.bloomsberg.com
• www.livemint.com
• www.studyfinance.com
• www.bized.com
• www.bpubs.com
Page 93 of 93
doc_436110080.doc
A firm is required to maintain a balance between liquidity and profitability while conducting its day to day operations. Liquidity is a precondition to ensure that firms are able to meet its short-term obligations and its continued flow can be guaranteed from a profitable venture.
Project Report
On
STUDY OF WORKING CAPITAL
MANAGEMENT OF RANBAXY LAB LTD
A Comparative Analysis
Submitted to:
PREFACE
Businesses face ever increasing pressure on costs and growing Financing
requirements as a result of intensive competition in globalize markets. Many of
them are therefore considering ways of making themselves more efficient. In
identifying possible options it is important not to focus exclusively on income
and expense items but also to take the balance sheet into account.
Improvements to the existing capital structure can free up valuable resources
and bring increased efficiency. !ctive working capital management is an
extremely effective way to increase enterprise value. "ptimizing working
capital results in a rapid release of liquid resources and contributes to an
improvement in free cash flow and to a permanent reduction in inventory and
capital costs.
My pro#ect on ~Analysis of Working Capital Management in Ranbaxy
Laboratories Ltd.$
%he attempt is aimed to analyze the various aspects of working capital
management of &anbaxy and compare it with that of 'r &eddy(s and with
industry standards.
By adopting various calculation and analysis and then making interpretation
with the solution of specific problem best efforts on giving appropriate
suggestion to the company have been made.
%o this context various methods and techniques like ratio analysis 'u)ont
analysis statistical tool *orrelation analysis and working towards the optimal
level of working capital estimation of working capital and various ratios have
been used to draw an exact picture of company.
Page 2 of 93
TABLE OF CONTENTS
!bstract +,
Introduction +-
Industry )rofile +.
&esearch and 'evelopment //
"rganizational profile /0
1orking capital 23
'efining the problem 24
5iterature review 0/
Methodology 02
Financial performance of Ranbaxy
5iquidity &atios 0.
)rofitability &atios 6/
5iquidity !nalysis 62
&atio !nalysis ,2
5iquidity &anking -,
*redit !nalysis 7 )olicies ./
Conclusion
5imitations .4
8ummary of findings 4+
&ecommendations and 8uggestions 43
&eferences 46
Page 3 of 93
ABSTRACT
! pro#ect work is a mandatory requirement for the Business Management
)rogramme. %his type of study aims at exposing the young prospective
executive to the actual business world.
%his pro#ect gives me knowledge about the working capital of the company.
1orking capital refers to the funds required for day to day operations of the
organization. It is very effective way to #udge a company(s cash flow prospects
as cash is like blood life for any company.
%he report initially begins with the company profile followed by the detailed
analysis of company like businesses of the company products offered by the
company financials of the company etc
%he report involves a lot of research to understand what exactly working capital
is why companies require working capital what are the ideal ratios for
1orking *apital a *ompany should maintain etc. The purpose is to develop
an action plan that creates such a working capital that will upgrades and
standardize the quality of business analysis.
9arious tools including financial tools are used in this pro#ect to calculate and
compare the financial position of the company e.g. ratio analysis 'u)ont
analysis 81"% analysis etc.
INTRODUCTION
Page 4 of 93
! firm is required to maintain a balance between liquidity and profitability
while conducting its day to day operations. 5iquidity is a precondition to ensure
that firms are able to meet its short:term obligations and its continued flow can
be guaranteed from a profitable venture.
%he importance of cash as an indicator of continuing financial health should not
be surprising in view of its crucial role within the business. %his requires that
business must be run both efficiently and profitably. In the process an asset:
liability mismatch may occur which may increase firm(s profitability in the
short run but at a risk of its insolvency.
%he purpose of this pro#ect is to examine the trends in working capital and its
impact on firm(s performance. %he trend in working capital needs and
profitability of firm is examined to identify the causes for any significant
differences.
%he rest of the report is organized as follows; It starts with the Industry profile
7 then a detailed introduction of the company. %he following section of the
report looks briefly at the theoretical underpinnings and the relevant literature
which attempts to explain the link between poor performance and working
capital management.
!fter that the analysis part covers in depth analysis of working capital of
&anbaxy. Finally the conclusion is made 7 it has been observed that the overall
structure of working capital of the co. is good and it is a growing concern. %he
company uses various techniques to maintain its working capital. 8ome
suggestions have been given on the basis of the conclusion.
INDUSTRY PROFILE
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Industry Definition
“The Indian pharmaceutical industry is a success story providing employment for millions
and ensuring that essential drugs at affordable prices are available to the vast population of
this sub-continent.”
Richard Gerster
%he 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.
Facts about the &ole of )harmaceutical Industry in Indian ;
• Indian )harmaceutical Industry ranks fourth in the world pertaining to the volume of
sales.
• %he estimated worth of the Indian )harmaceutical Industry is US$ 6 billion.
• %he growth rate of the industry is about 13º per year.
• !lmost most 70º of the domestic demand for bulk drugs is catered by the Indian
)harma Industry.
• %he )harma Industry in India produces around 20º to 24º of the global in the international arena.
• %he Indian )harma sector leads the science:based industries in the country.
• !round 40º of the total pharmaceutical produce is exported.
• 55º of the total exports constitute of formulations and the other 45º comprises of
bulk drugs.
• %he Indian )harma Industry includes small scaled medium scaled large scaled
players which totals nearly 300 different companies.
• !s per the present growth rate the Indian )harma Industry is expected to be a US$ 20
billion industry by the year 3+/6.
• %he Indian )harmaceutical sector is also expected to be among the Top Ten Pharma
based markets in the world in the next ten years
• %he sales of the Indian )harma Industry would worth US$ 43 billion within the next
decade.
• %he multinational companies investing in research and development in India may
save up to 30º to 50º of the expenses incurred
• %he cost of hiring a research chemist in the ?8 is five times higher than its Indian
counterpart.
Page 6 of 93
• %he manufacturing cost of pharmaceutical products in India is nearly half of the cost
incurred in ?8.
• %he cost of performing clinical trials in India is one tenth of the cost incurred in ?8.
• %he cost of performing research in India is one eighth of the cost incurred in ?8.
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 'rug *ontrol !uthority. %echnologically strong and
totally self:reliant the pharmaceutical industry in India has low costs of production low
&7' costs innovative scientific manpower strength of national laboratories and an
increasing balance of trade. %he )harmaceutical Industry with its rich scientific talents and
research capabilities supported by Intellectual )roperty )rotection regime is well set to take
on the international market.
ADVANTAGE IN INDIA
Competent workforce: India has a pool of personnel with high managerial and technical
competence as also skilled workforce. It has an educated work force and @nglish is
commonly used. )rofessional services are easily available.
Cost-effective chemical synthesis: Its track record of development particularly in the area
of improved cost:beneficial chemical synthesis for various drug molecules is excellent. It
provides a wide variety of bulk drugs and exports sophisticated bulk drugs.
Legal & Financial Framework: India has a 62 year old democracy and hence has a solid
legal framework and strong financial markets. %here is already an established international
industry and business community.
Information & Technology: It has a good network of world:class educational institutions
and established strengths in Information %echnology.
Globalization: %he country is committed to a free market economy and globalization. !bove
all it has a -+ million middle class market which is continuously growing.
Consolidation: For the first time in many years the international pharmaceutical industry is
finding great opportunities in India. %he process of consolidation which has become a
generalized phenomenon in the world pharmaceutical industry has started taking place in
Page 7 of 93
India.
THE GROWTH SCENARIO
IndiaAs ?8B 2./ billion pharmaceutical industry is growing at the rate of /0 percent per year.
It is one of the largest and most advanced among the developing countries.
"ver 3++++ registered pharmaceutical manufacturers exist in the country. %he domestic
pharmaceuticals industry output is expected to exceed &s3,+ billion in the financial year
3++3 which accounts for merely /.2C of the global pharmaceutical sector. "f this bulk
drugs will account for &s 60 bn =3/C> and formulations the remaining &s 3/+ bn =-4C>. In
financial year 3++/ imports were &s 3+ bn while exports were &s.- bn.
%he above graph shows the percentage of pharmaceutical products export by various
countries.
=8"?&*@ *ompetitiveness of the Indian pharmaceutical industry in the new product patent
regime a report by FI**I>
Page 8 of 93
RESEARCH AND DEVELOPMENT
Drug discovery is the process by which
potential drugs are discovered or
designed. In the past most drugs have
been discovered either by isolating the
active ingredient from traditional
remedies or by serendipitous discovery.
Modern biotechnology often focuses on understanding the
metabolic pathways related to a disease state or pathogen,
and manipulating these pathways using molecular biology or
Biochemistry. A great deal of early-stage drug discovery has
traditionally been carried out by universities and research
institutions.
Drug development refers to activities undertaken after a compound is identified as a
potential drug in order to establish its suitability as a medication. "b#ectives of drug
development are to determine appropriate Formulation and 'osing as well as to establish
safety. &esearch in these areas generally includes a combination of in vitro studies in vivo
studies and clinical trials. %he amount of capital required for late stage development has
made it a historical strength of the larger pharmaceutical companies
"ften large multinational corporations exhibit vertical integration participating in a broad
range of drug discovery and development manufacturing and quality control marketing
sales and distribution. 8maller organizations on the other hand often focus on a specific
aspect such as discovering drug candidates or developing formulations. "ften collaborative
agreements between research organizations and large pharmaceutical companies are to
explore the potential of new drug substances formed
The cost of innovation
'rug discovery and development is very expensiveD of all compounds investigated for use in
humans only a small fraction are eventually approved in most nations by government
appointed medical institutions or boards who have to approve new drugs before they can be
marketed in those countries. @ach year only about 36 truly novel drugs =Eew chemical
entities> are approved for marketing. %his approval comes only after heavy investment in pre:
clinical development and clinical trials as well as a commitment to ongoing safety
monitoring. 'rugs which fail part:way through this process often incur large costs while
generating no revenue in return. If the cost of these failed drugs is taken into account the
cost of developing a successful new drug =Eew chemical entity or E*@> has been estimated
at about / billion ?8'.
! study by the consulting firm Bain 7 *ompany reported that the cost for discovering
developing and launching =which factored in marketing and other business expenses> a new
Page 9 of 93
drug =along with the prospective drugs that fail> rose over a five year period to nearly B/.-
billion in 3++2.
%hese estimates also take into account the opportunity cost of investing capital many years
before revenues are realized =see %ime:value of money>. Because of the very long time
needed for discovery development and approval of pharmaceuticals these costs can
accumulate to nearly half the total expense. 8ome approved drugs such as those based on re:
formulation of an existing active ingredient =also referred to as 5ine:extensions> are much
less expensive to develop. %he consumer advocacy group )ublic *itizen suggests on its web
site that the actual cost is under B3++ million about 34C of which is spent on F'!:required
clinical trials. For me:too:drugs and for generics the cost are even less.
*alculations and claims in this area are controversial because of the implications for
regulation and subsidization of the industry through federally funded research grants.
Controversy about drug development and testing
%here have been increasing accusations and findings that clinical trials conducted or funded
by pharmaceutical companies are much more likely to report positive results for the preferred
medication.
In response to public outcry about specific cases in which unfavorable data from
pharmaceutical company:sponsored research was suppressed the )harmaceutical &esearch
and Manufacturers of !merica have published new guidelines urging companies to report all
findings and limit the financial involvement in drug companies of researchers. !s a result of
this public outcry and )harma response the ?8 congress signed into law a bill which requires
phase II and phase III clinical trials to be registered by the sponsor on the EIF website
'rug researchers not directly employed by pharmaceutical companies often look to
companies for grants and companies often look to researchers for studies that will make their
products look favorable. 8ponsored researchers are rewarded by drug companies for
example with support for their conferenceGsymposium costs. 5ecture scripts and even #ournal
articles presented by academic researchers may actually be Aghost:writtenA by pharmaceutical
companies. 8ome researchers who have tried to reveal ethical issues with clinical trials or
who tried to publish papers that show harmful effects of new drugs or cheaper alternatives
have been threatened by drug companies with lawsuits.
Product approval in the US
In the ?nited 8tates new pharmaceutical products must be approved by the F'! as being
both safe and effective. %his process generally involves submission of an Investigational new
drug filing with sufficient pre:clinical data to support proceeding with human trials.
Following IE' approval three phases of progressively larger human clinical trials may be
conducted. )hase I generally studies toxicity using healthy volunteers. )hase II can include
)harmacokinetics and 'osing in patients and )hase III is a very large study of efficacy in the
intended patient population.
! fourth phase of post:approval surveillance is also often required due to the fact that even
the largest clinical trials cannot effectively predict the prevalence of rare side:effects. )ost:
marketing surveillance ensures that after marketing the safety of a drug is monitored closely.
In certain instances its indication may need to be limited to particular patient groups and in
Page 10 of 93
others the substance is withdrawn from the market completely. Huestions continue to be
raised regarding the standard of both the initial approval process and subsequent changes to
product labeling =it may take many months for a change identified in post:approval
surveillance to be reflected in product labeling> and this is an area where congress is active.
%he F'! provides information about approved drugs at the "range Book site.
I
In the ?J the
British Eational Formulary is the core guide for pharmacists and clinicians.
Orphan drugs
%here are special rules for certain rare diseases =Korphan
diseasesK> involving fewer than 3+++++ patients in the ?nited
8tates or larger populations in certain circumstances. Because
medical research and development of drugs to treat such diseases is financially
disadvantageous companies that do so are rewarded with tax reductions fee waivers and
market exclusivity on that drug for a limited time =seven years> regardless of whether the
drug is protected by patents.
Indutr! revenue
For the first time ever in 3++, global spending on prescription drugs topped B,02 billion
even as growth slowed somewhat in @urope and Eorth !merica. %he ?nited 8tates accounts
for almost half of the global pharmaceutical market with B3.4 billion in annual sales
followed by the @? and Lapan. @merging markets such as *hina &ussia 8outh Jorea and
Mexico outpaced that market growing a huge ./ percent. ?8 profit growth was maintained
even whilst other top industries saw slowed or no growth. 'espite this K..the pharmaceutical
industry is M and has been for years M the most profitable of all businesses in the ?.8. In
the annual Fortune 6++ survey the pharmaceutical industry topped the list of the most
profitable industries with a return of /-C on revenue.K
)fizerAs cholesterol pill 5ipitor remains the best:selling drug in the world for the fifth year in
a row. Its annual sales were B/3.4 billion more than twice as much as its closest competitors;
)lavix the blood thinner from Bristol:Myers 8quibb and 8anofi:!ventisD Eexium the
heartburn pill from !straNenecaD and !dvair the asthma inhaler from . %he company has entered into strategic
business arrangements with companies such as Bayer !< . %he )lant is divided into two plant areas !.
and !4
THE VARIOUS DEPARTMENTS
Page 24 of 93
Human Resource Department
%he basic function of the human resource department in the modern corporate
world is knowledge management. %he F& department strives to maintain
cohesiveness among employees. It also ensures interdepartmental cooperation
in achieving targets. %he appraisal system is also taken care by this department.
%he F& department delves deep into the employee(s psyche to analyze the
positives and negatives of each employee so that a proper system of delegation
and G or empowerment can be evolved.
Finance Department
%he finance department takes care of the regular financial needs of the company
it ensures proper allocation of funds and takes care of the working capital
requirements. It verifies capital raised by different departments and sends them
for approval to the higher authorities.
Stores Department
%he function of this department is to provide adequate and proper storage and
preservation of various items to meet the demand of various other departments
by proper issues and maintaining accounts of consumption. It also keeps a track
of stock accumulation and abnormal consumption.
Erection and Fabrication Department
!s the name suggests this department identifies new pro#ects and helps in
erecting them. %his department also undertakes ma#or modifications of
equipment.
ERP Department
@&) department helps to integrate the entire enterprise starting from the
supplier to the customer covering financial and human resources. %his will
enable the enterprise to increase productivity by reducing costs. It also ensures a
single solution to the information needs of the whole organization.
Production Department
Page 25 of 93
!s a part of their on going commitment to produce hi:tech quality drugs and
pharmaceuticals that take care of the specific needs of markets around the
world &anbaxy 5aboratories 5imited has increased the investment in the
production department. It is the most important department of the company and
has the following ob#ectives;
/. Improving volume of production.
3. &educing re#ection rate.
2. Maintaining rework rate.
Engineering Department
%his department undertakes building construction and maintenance.
Maintaining service facilities such as water gas heating ventilation air
conditioning painting and plumbing are some of the other areas dealt by this
department. %his department also helps in maintaining electrical equipments
such as generators transformers telephone system and electrical installation.
Purchase Department
%he purchase department provides material to the factory without which the
wheels of machines cannot move. %he various functions performed by this
department include; 8ecuring good vendor performance including prompt
deliveries of supplies of acceptable qualities.
/. %o develop satisfactory sources of supply and maintaining good
relationships with the suppliers.
3. %o pay reasonably low prices.
Quality Control/Quality Assurance Department
%he purpose of H* 7 H! departments is to ensure that the desired quality
standard is achieved. It also ensures that the processing or fabrication of
material conforms to the specific characteristics selected to assure that the
resulting product will in fact perform its intended function.
Page 26 of 93
PRODUCT REVIEW
&anbaxy(s therapeutic width covers five of the top six categories including
!nti:infective is the market leader in the cholesterol reducer
segment. !nother leading brand in this category is 8torvas =!torvastatin>.
8torvas has been one of the fastest:ever to enter the top:2++ brands list of the
Indian pharma industry. "ther global cardiovascular brands are *ovance
=5osartan> and *aslot =*arvedilol>.
Central Nervous System
%he *entral Eervous 8egment is one of the important focus areas identified by
&anbaxy with 8erlift being the key brand. In India 8erlift is number / amongst
8ertraline brands. Eew product introductions will be drivers of growth in this
category.
Gastrointestinal
*urrently gastrointestinal drugs are the second:largest category for &anbaxy.
%he key brands in this category include Fistac and &omesac. %he current
annual sales of &anitidine are estimated to be around ?8 B /, Mn and the
product is marketed in more than 3+ countries.
Rheumatologicals
%he first generation *ox:3 inhibitors principally drive worldwide growth in
rheumatology. %his category is estimated to grow exponentially for &anbaxy
with brands like *elecoxib. %his year &ofibax =&ofecoxib> introduced in India
has established itself as a leader in the *ox:3 inhibitor category and has
overtaken all *elecoxib brands. It has been identified as a key but also possibly unpaid tax
demands unpaid dividends and other items.
• Cash : bank balances cash holdings and short:term investments.
The three major characteristics of current assets are:
• %hey have a short life span.
• *ash balances are held only for a week or so.
• %hey are rapidly transformed into other assets form.
Some of the decisions taken in working capital management are:
• !n adequate supply of raw materials.
• *ash to meet the operational payments.
• %he ability to grant credit to customers.
• Investment in various current assets.
• !ppropriate sources of fund to finance current assets.
• )roportion of long term and short term funds to finance current assets.
Objective of Working Capital Management;
• %wo fold ob#ective of working capital management
Page 32 of 93
• Maintenance of working capital and
• !vailability of ample funds at the times of need.
Uses of Working Capital:
• %he typical uses of working capital are as follows;
• !d#usted net loss from operations
• )urchase of non:current assets;
• &epayment of long:term debt =debentures or bonds> and short:term debt =bank
borrowing>
• &edemption of redeemable preference shares
• )ayment of cash dividend.
ADVANTAGES OF ADEQUATE WORKING
CAPITAL
Page 33 of 93
• Increase in debt capacity and goodwill; !dequate working capital represents the
financial soundness of the company. If one company is financially sound it would be
able to pay its creditors timely and properly. It will increase company(s goodwill.
%hus a firm with adequate working capital can raise requisite funds from market
borrow short:term credit from banks and purchase inventories of raw materials etc.
for the smooth operation of its business.
• Increase in production efficiency; 1ith adequate working capital the firm can
smoothly carryout research and development activities and thus adds to its production
efficiency.
• @xploitation of favorable opportunities; In the presence of adequate working capital a
company can avail the benefits of favorable opportunities. !dequate working capital
will help the company to have bulk purchases seasonal storage of raw material etc.
which would reduce the cost of production.
• Meeting contingencies and adverse changes; ! company can easily face certain
business and economic crises. ! company having adequate working capital can
successfully meet contingencies such as business oscillations financial crisis arising
from heavy losses etc.
• !vailable cash discount; Maintenance of adequate working capital enables a company
to avail the advantage of cash discount by making cash payments for to the suppliers
of raw materials and merchandise.
• 8olvency and efficiency of fixed assets; It helps to maintain the solvency of the
company so that payments could be made in time as and when they fall due.
• !ttractive 'ividend to 8hareholders; It enables the company to offer attractive
dividend to the shareholders so that sense of security and confidence will increase
among them. It also increases the market value of its shares.
DISADVANTAGE OF INADEQUATE WORKING
CAPITAL
Page 34 of 93
• Loss of goodwill and creditworthiness: !s the firm fails to honor its current
liabilities it loses it goodwill and creditworthiness among its creditors.
• Firm can`t make use of favorable opportunities; %he firm fails to undertake the
profitable pro#ects which not only prevent the firm from availing the benefits of
favorable opportunities but also stagnate its growth.
• Adverse effects of credit opportunities: %he firm also fails to avail the attractive
credit opportunities but also stagnate its growth.
• Operational inefficiencies: It leads the company to operating inefficiencies as day:
to:day commitments cannot be met.
• Effects on financial capacity: Inadequacy of working capital also weakens the
shock:absorbing capacity of the firm because it cannot meet the contingencies arising
from business oscillations financial losses due to shortage of working capital.
• Non-achievement of Profit Target: %he firm cannot implement operational plans
due to unavailability of fund which will lead to non:achievement of profit targets.
Dangers of Redundant working capital
• 5ow rate of return on capital
• 'ecline in *apital and @fficiency
• 5oss of how current assets will be financed.
is considered to be
one in which holdings of cash securities inventories fixed assets and accounts payables are
minimized. %he level of accounts receivables should be used as a means of stimulating sales
and other income. )revious literature on working capital management has found a negative
association overall between level of working capital and operating performance as
measured by operating returns and operating margins =)eterson and &a#an /44->. ?nder
conditions of certainty =i.e. sales costs lead times payment periods and so on are known>
firms have little reason to hold more working capital than a minimum level. 5arger amounts
would increase the level of operating assets increase the need for external funding resulting
in lower return on assets and a lower return on equity without any increase in profit.
Fowever the picture changes when uncertainty =i.e. uncertain growth> is introduced
=Brigham and Fouston 3+++>. 5arger amounts of cash securities accounts receivables
marketable securities inventories and fixed assets will be needed to support increased sales
&equired levels will be based on expected sales levels and expected order lead times.
!dditional holdings may be needed to enable the firm to deal with departures from the
expected values. Further firms will also attempt to increase their accounts payable balances
as a means of financing increased levels of current operating assets. Firms which are in high
growth stages will face the challenge of maintaining the necessary level of operating assets to
support subsequent growth while at the same time attempting to maintain adequate
performance indicators.
%his study focuses on understanding how I)" companies manage their working capital and
other balance sheet items to support subsequent growth. %his study supports the existing
literature on working capital and contributes to the existing literature by examining a sample
of firms =i.e. recent I)" firms> which have a wider range of growth levels than non:I)"
firms. "ur study examines the impact of working capital management on the operating
performance and growth of new public companies. %he study also examines these
relationships under three categories of growth =i.e. negative growth moderate growth and
high growth>. %he study also examines other selected firm characteristics in light of working
capital management; firm operating and financial risk amount of debt firm size and
industry.
!n underlying theme of this study is that high growth certainly does not ensure high
operating performance. *onsistent with prior research =)eterson and &a#an /44-> this study
provides further evidence that good working capital management is positively associated
with better operating performance. Figher levels of accounts receivable are associated with
higher operating performance in all three of the growth rate categories. %he study also finds
that maintaining control over levels of cash securities inventory fixed assets and accounts
payables is associated with higher operating performance. 1e find that firms which are
experiencing very high growth will hold higher levels of cash securities inventory fixed
assets and accounts payable to support the high growth. %he study suggests that these firms
are sacrificing operating performance =accepting lower operating returns> to support the high
growth. %his in turn increases financial and operating risk for these firms. )erhaps I)"
firms should stay more focused on their operating performance while maintaining more
moderate growth levels
Page 39 of 93
!nother aspect of this study is that it fills a void in the initial public offerings literature.
&ecent literature finds that new public companies underperform the market after going
public. &itter in his /44/ paper reports substantially lower stock returns for I)" firms
between /4-6 and /4.0 than for a size:and:industry:matched sample of seasoned firms.
8ince then there is a growing literature explaining I)" underperformance as related to
agency cost =8mith /44+> institutional holdings =Field /446> venture capital =Lain and
market timing of I)" =Benninga 3++0> and earnings
management =%eho et al. /44.D !hmad:zaluki et al. 3++.>. Fowever there is no study
linking the working capital management and post:I)" performance. "ur paper tries to fill the
void. %he findings of this study would be interesting to investors and creditors of new public
companies.
METHODOLOGY
! study by analyzing the trends of working capital of the firm and to examine the possible
causes for any significant differences. %he data has been collected from the financial
statements. For the purpose of this study profitability is measured by &eturn on %otal !ssets
=&"%!> which is defined as profit before interest and tax divided by total assets.
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! comprehensive measure of profitability is best captured by computing the return on total
assets which is equal to the total liabilities of the firms, made up mainly of equity capital
and current liabilities.
!ll important ratios have been calculated to know the financial health of the company with
the help of past trends mainly profitability 7 return ratios considered in section I of analysis
part. It also covers the 'u)ont analysis and correlation analysis of working capital 7 its
impact on profitability of the company. 8ection II consists of in depth analysis of every
component of working capital.
!ll important components of working capital have been analyzed in detail i.e Inventory
*ash and )ayables etc
The methodology to be adopted is as follows:
• *ollection of financial data of &!EB!OP and 'r &eddy from annual reports and
company(s internal resources.
• *omputation of various financial ratios and comparing them with standards and with
each others.
• !nalyzing the trends of working capital of the firm and to examine the possible
causes for any significant differences.
• 9arious tools of analysis like correlation analysis 'u)ont analysis &atio analysis etc
to be applied.
• !ll important components of working capital to be analyzed in detail i.e. &eceivables
Inventory *ash )ayables and "perating cycle.
• Making comparison of the above computations with that of 'r &eddys.and industry
standards.
• !nalysis of results drawing conclusions and giving recommendations.
FINANCIAL PERFORMANCE OF RANBAXY
Page 41 of 93
Profit after Tax (PAT) - Rs in Million
Sales (Rs in Millions)
Page 42 of 93
%hough the 8ales of the company had been on a constant increase over the last /+ years
there was a sudden fall in the )rofit !fter %ax =)!%
rofit available to the @quity holders andthe organization itself> in 3++6 3++, and 3++.. %he key reason for the sudden fall in )!% can
be attributed to the sudden hike in the &7' expenditure in 3++6.
In 3++. there was an unprecedented economic downturn across all markets globally and the
fluctuating financial and Forex environment created a substantial negative impact on
profitability. Further prohibition on drugs by the ?8 Food and 'rug !dministration and
pricing stress has acted as a wet blanket in the periodical figures of the company. %he trend
line shows the reason behind the fall in profitability.
SELLING AND ADMINISTRATION COSTS
Page 43 of 93
Comparison with the Industry Standards
%he following financial comparison has been made keeping in view the scale of operations of
the company and the Industry 8tandards. %he Industry standards have been taken from
*entre for Monitoring Indian @conomy =*MI@> March 3++4.
%he following is the list of *ompany taken for *omparison;
/. *ipla
3. 8un )harmaceuticals
2. 'r &eddy(s 5aboratories
0. 5upin
6. &anbaxy 5aboratories 5td.
For any company functioning in the free market its important how best it operates but this is
equally important =if not more> that how it performs viz:a:viz its rivals i.e. other similar
companies in the market. Fere to find out about &anbaxy a comparison has been made with
6 other companies operating on comparable size to see whether &anbaxy is following
industry norms or not or whether &anbaxy is doing better =or worse> compared to its rivals.
Its liquidity position has been compared by considering 1orking *apital %urnover &atio
Page 44 of 93
*urrent &atio and Huick &atio and further )rofitability of &anbaxy viz:a:viz other
companies have been compared by considering &eturn on *apital @mployed and @arnings
per share.
Liquidity Ratios
%he liquidity refers to the availability of cash and cash convertible assets with an
organization to meet its short:term obligations i.e. creditors and other *urrent 5iabilities.
!ny companyAs liquidity may vary due to seasonality the timing of sales and the state of the
economy. But liquidity ratios can provide small business owners with useful limits to help
them regulate borrowing and spending. 8ome of the best:known measures of a companyAs
liquidity include;
1. Working Capital Turnover Ratio
It is a measurement comparing the depletion of working capital to the generation of sales
over a given period. %his provides some useful information as to how effectively a company
is using its working capital to generate sales.
! company uses working capital to fund operations and purchase inventory . %hese
operations and inventory are then converted into sales revenue for the company . %he
working capital turnover ratio is used to analyze the relationship between the money used to
fund operations and the sales generated from these operations. In a general sense the higher
Page 45 of 93
the working capital turnover the better it is because it means that the company is generating
a great degree of sales as compared to the money it utilizes.
From the Industry comparison it is apparent that &anbaxy is way above the Industry
standards in 3++. which implies that the sales generated by &anbaxy 5aboratories has always
been much higher than the cost incurred to generate those sa les as compared to other
)harmaceutical giants in the Industry.
2. Current Ratio
%he current ratio of &anbaxy has been compared with the %op five )harmaceutical organizations
for the year 3++.. ! *urrent ratio measures the ability of an entity to pay its near:term
obligations. %hough the ideal current ratio depends to some extent on the type of business a
general rule of thumb is that it should be at least 3;/. %he higher the current ratio the greater the
KcushionK between current obligations and a firmAs ability to pay them. ! lower current ratio
means that the company may not be able to pay its bills on time while
a higher ratio means that the company has money in cash or safe investments that could be put to
better use in the business.
%he ideal *urrent ratio to be maintained by the pharmaceutical cannot be accurately assessed
because the scale of operations and the inventory size has been different for all the concerns in
the Industry. !ccording to *MI@ Industry 8tandards the current ratio for 3++. is /.626.
Page 46 of 93
!s per the above graph the *urrent ratio maintained by &anbaxy in 3++. is way below the
normal industry standards. %he reason for a lower *urrent &atio is the heavy amount of
*urrent liabilities incurred mainly due to huge loss on derivative valuations. Ban in ?.8
market for more than 2+ generic drugs and depreciation in several currencies were other
factors for &anbaxy(s dismal performance in 3++..
3. Quick Ratio
Huick &atio also known as U!cid %est &atio? is an even conservative measure of liquidity.
%he ratio expresses the degree to which a companyAs current liabilities are covered by the
most liquid current assets. Fere Huick assets include all current assets except inventories.
Page 47 of 93
! high ratio indicates under stocking and low ratio indicates over stocking. 8tock is excluded
because it may take time to be converted into cash. Huick ratio measures those assets which
are immediately converted into cash without much loss. %hough there is no way to measure
an ideal Huick ratio but as a rule of thumb it should be at least /;/.
From the above comparison it can be inferred that a &anbaxy(s *urrent liabilities were much
more as compared to other companies. %his is because although the Huick &atio maintained
by &anbaxy is very near a said ideal ratio of /;/ but that way below the Industry standards of
/./4 of the year 3++.. Moreover it can be clearly viewed from the Balance 8heet that a
decent component of the *urrent liabilities includes fair valuation loss on derivatives.
Page 48 of 93
Profitability Ratios
)rofit is the difference between revenue and expenses over a period of time. %he profitability
ratios are calculated to measure the operating efficiency of the company.
1. Return on Capital Employed
! return on capital employed also called earning power is a measure of business
performance which is not affected by interest charges and tax:burden. It abstracts away the
effect of capital structure and tax factor and focuses on operating performance. Fence it is
eminently suited for inter: firm so internally consistent.
Return on Capital employed ÷ Profit Before Tax / Total Assets
!s compared to other )harmaceutical rivals in the Industry &anbaxy has a negative return on
*apital employed and way below the Industry standards of ..+,C for the year 3++.. %his
means that the )rofit before %ax =)B%> of the company is heavier on the %otal !ssets which
is dragging down the &eturn on *apital @mployed. %his is mainly because of the forex
decline due to global economic downturn and ban on generic products in the ?.8 market.
2. Earnings per Share(EPS)
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@)8 states a corporationAs profits on a per share basis. It can be helpful in further comparison
to the market price of the stock. It is an index of profitability from shareholder(s point of
view. %he higher the earning per share the more attractive will be the investment plan.
Earnings per share ÷ Profit after tax / Number of equity shares
From the Industry comparison it is clear that the earnings per share for the @quity
8hareholders of &anbaxy are negative. %he main reason for the figure of @)8 being negative
is the drastically low )rofits it has incurred in the year 3++..
Page 50 of 93
LIQUIDITY ANALYSIS OF
RANBAXY LABORATORIES LIMITED
5iquidity of any company is the indicator as to how the company is placed with reference to
its capacity to meet its current financial obligation. %his means that here we have to consider
the current assets which can be easily converted into cash to meet its immediate financial
obligations or dues. 5iquidity position of &anbaxy 5aboratories 5imited has been analyzed in
the following paragraphs based on different measures.
Current Assets
&anbaxy has a growth of around 2/..32C in current assets over the period of ten years. From
&s /32/+.30 Million in /44.:44 %he *ompany has increased its current assets to &s
6/0.6.30 Million. *oefficient of variation for this period has been 04.// which indicate that
the growth of current assets during the period under consideration has been sustainable
except for the year 3++-:+. which shows a sharp increase in current assets which is largely
due to increase in cash and bank balances which has increased more than ten times as
compared to 3++-.
Liquid Assets
Page 51 of 93
*ompany has also witnessed significant increase in liquid assets. From &s .2.3.33 M in
/44.:44 to &s 246++.+6 M in 3++-:+. there has been a growth of 2-/.30C in ten years. !s
it is clear from the above mentioned data liquid assets growth has been slightly more than
the growth of current assets. 8tandard deviation and coefficient of variation for this period
has been &s 4+-4.2. M and 6-../C respectively.
Current Liabilities
From /44.:44 to 3++-:+. current liabilities for &anbaxy 5aboratories have increased from
&s 0/63.-. M to &s 03-36.4- M with average current liabilities over this period being &s
/2+,-.0- M. !s we see here growth rate for current liabilities in this period has been
43...6C which is much higher than the growth for current and liquid assets which shows
that current liabilities have increased at a higher pace than its corresponding assets. Further
coefficient of variation for this period is .0.4/ which also reflect more flexibility in current
liabilities during this time. *urrent liabilities increased more than four times from 3++- to
3++. primarily because of huge loss on derivative valuations. Ban in ?.8 market for more
than 2+ generic drugs and deprecation in several currencies were another factors for
&anbaxy(s dismal performance in 3++..
Page 52 of 93
Working Capital
Eet working capital is an important measure which itself indicate margin of safety or cushion
of protection provided to the creditors. !s the following diagram shows the company has all
over positive net working capital. %he greater the amount of net work ing capital the greater
the liquidity of the firm. E1* of the company increased from &s ./6-.0, M to &s .-64.3-
M i.e. overall growth of -.2.C only. *oefficient of variation for the E1* is also 3+.44C
which is also less as compared to current assets or current liabilities. %here is a decrease in
Eet working capital in the year 3++..@ven though there is an increase in current asset and
current liabilities however increase in current liabilities is much more which has let to decline
in Eet working capital. %here is a decrease in Eet working capital in the year 3++..@ven
though there is an increase in current asset and current liabilities however increase in current
liabilities is much more which has let to decline in Eet working capital.
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Growth Index of Net Working Capital
Page 54 of 93
Working Capital (Quick)
Fowever the measure of Eet 1orking *apital does not indicate the true ability to pay current
debts when they become due. %he reason being the E1* being access of current assets over
current liabilities and since these current assets comprises of illiquid inventory the measure
of Huick Eet 1orking *apital has been adopted. %his is nothing but liquid or quick assets
less the current liabilities. Huick assets refer to current assets less inventory. Following
diagram shows that even though HE1* of the company has all along been positive during
3++2:+0 it has been substantially low. Further in 3++-:+. it was negative because of
exceptional increase in current liabilities.
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Page 56 of 93
Components of Gross Working Capital
%ype of collection efforts.
Degree of Collection efforts
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It refers what degree of effortsD company is using to collect its receivables. If company use
strict efforts than bad debts costs will decline and average collection period will also reduce.
But cost involved in this kind of strategy is comparatively high. !lso sales volume can be
decline with this policy. "n the other hand lenient efforts are #ust opposite to strict efforts.
8o company has to decide that method in which overall cost is low and revenue is high.
Type of collection efforts
%he methods available are
• %elephone calls for personal contacts
• 5etters including reminders
• )ersonal 9isits
• Felp of *ollection agencies
• 5egal !ction
CREDIT POLICY OF RANBAXY
!s we know that a manufacturing company is frequently deals with debtors and most of its
sales are credit sales. ! huge amount of capital is blocked in to receivables. %herefore to
make an effective credit policy is very important for the company. &anbaxy is like many
other companies involves in both kinds of sales i.e. domestic as well as exports. It have
different credit policies for both domestic and export customers.
For domestic customers; Most of the domestic sales of &anbaxy are based on advance
payment. 8ome part of contract money is received in advance and then sale is made.
&emaining amount is received later on. . *ompany also doesn(t plan for any bad debts losses but if any bad debt
happen than it has to be written off fully.
For obtaining information related to the new applicants only internal sources are used. !s
company generally deals with blue chip companies or old customers it is not a difficult #ob
to obtain information about them. Eo external source is used by &anbaxy.
!nd for the analysis part company use both qualitative and quantitative tools. !s per
qualitative tool company generally go for market reputation and past record of customer and
for quantitative tool company use the size of order financial position of customer etc.
!s far as collection efforts are concerned company generally uses lenient efforts. But in
some cases company also go for strict methods. &anbaxy normally uses all types of
collection efforts like letters including reminders telephone calls personal visits 7 legal
actions. But company doesn(t take help of collection agencies.
%he collection cost is very nominal in domestic sales and difficult to determine. 1hereas
capital cost is equal to the cost of working capital which is not determined because of
confidentiality.
For @xport 8ales; From the sale data of &anbaxy it was found that around ,,C of sales are
based on exports. %herefore it is very important area for planning. @xports are based on letter
of credit. ! foreign company who want to purchase the material from &anbaxy sent an 5*
first. %han on the basis of that 5* export order is made. *opy of that order is sent to
corporate office and head office at operating
=ii> non
perating=iii> Financial.
*ash sales and cash received from debtors come under operating cash flows. Eon S operating
income includes sale of fixed assets dividends 7 interest income. Issue of shares 7 loans
etc. considered as financial inflows.
%he next step is to determine cash outflows. *ash outflows include;
=i> "perating outflows; cash purchase payments of payables advances to suppliers
wages 7 salaries etc.
=ii> *apital expenditure
=iii> *ontractual payments; repayment of loan interest 7 tax payments etc.
=iv> 'iscretionary payments; ordinary and preference dividend.
Cash Management in Ranbaxy:
*ash management system adopted by Finance 'epartment in &anbaxy is very reliable and
transparent. !s cash is a very important activity for a good operation of company here in
&55 cash is monitored every day and intimated to Finance 'epartment. %he daily cash report
includes the all details of cash inflows and outflows. Monthly cash budgets are maintained
for the estimated of monthly cash inflows and outflows. Finally the annual cash budget is
made by the Finance 'epartment in the corporate head office.
%he corporate office allocates different amount of each to different manufacturing units as
per their requirement. *orporate office acts as a linkage between the manufacturing unit and
creditors. *orporate office has determined the credit facility for every units of the company
and this keeps on changing from year to year depending up on company(s position
transactions profitability and inventory position.
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%he corporate office provides cash to manufacturing units but there most function is
controlled in unit itself. !ll the need related to inventory is met through corporate office as
well as individual efforts of unit.
Fund Allocation:
Fere the initial allocation for manufacturing units is done by corporate office and all
supplementary requirements are to look upon by *ommercial department.
Fund Utilization:
*ompany operates an annual R*ash Budget( and a rolling R*ash )lan( drawn up every month.
!lthough specific forecasting technique is used funds are deployed to different departments
as per their requirements. 'aily reports on cash transaction are prepared by )rocurement
department to keep a track of all payments made in the days work. @very month cash
transaction report is sent to Finance department in the corporate office showing all the
transaction of cash =inflow and outflows> actual utilization of cash and allocation of fund is
compared. If the utilization of cash is more than the allocation of fund then the plant has to
#ustify its more utilization.
%o meet the requirement of cash company approach to bank and present the required detailed
by the bank. &55 kept less cash in hand to meet the entire cash requirement it depends on
financing process.
LIMITATIONS
• !vailability of the financial data was very limited which is not disclosed due to
sensitive nature for the company.
• %he year ended for &anbaxy is 'ecember and that of 'r &eddys is March. 8o figures
taken are past 0 years but 2 months difference is there in the corresponding figures of
&55 7 '&5.
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• %he main component of working capital is cost of capital which is not described in
the pro#ect because of confidential nature.
• @xternal environment influence was not considered while doing the theoretical
standard rather than the industrial standard because of unavailability of any such
specific standard.
• 5ack of availability of plant related data to finance department which acted as a
limitation for the pro#ect.
• @fficiency falls to a great extent due the technical errors in the system. %hese errors refer
to the following;
? %he 8!) server goes low due to the exhaustive load on a single server.
? %here is lack of machines at disposal because of which the speed of work
goes down.
? %he hardware provided to the staff is not up to the mark which adversely
affects the efficiency to a great extent.
SUMMARY OF FINDINGS
• %here is a huge investment in working capital at &anbaxy 5aboratories 5imited as it
has a large production cycles. %he company follows a steady production policy and
hence there are no seasonal variations. !ggressive policy of more profitability more
risk is followed which is an ideal situation as far as the strategy for working capital
financing is concerned. &anbaxy has a good earning recordD thus it en#oys great
confidence of the suppliers as it is looked upon favorably.
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• !s far as components of working capital are concerned on the domestic front sales
have increased as well as the finished goods inventory has also increased.
• %he increase in the current ratio of 3++/ as compared to that of the previous year
indicates that the liquidity position of the company is improving. %he inventory
turnover ratio of the company is not very high. It should try to achieve a quicker
movement of stock into sales. %here is an inverse relationship between sales and
working capital at &anbaxy 5aboratories 5imited.
WORKING CAPITAL TURNOVER RATIO
• In general higher the ratio more efficient is the management. 8ince &anbaxy
5aboratories 5imited has a low working capital ratio it should look carefully into this
area to ensure its effective utilization.
DEBTORS TURNOVER RATIO
• !fter analysis of the debtors turnover ratio it was found out that &anbaxy
5aboratories 5imited has a low debtors turnover ratio which may be a result of a
liberal and inefficient credit and collection policy. %his involves the risk of bad debts
and the burden of high interests. %his is another area that should be looked into.
INVENTORY TURNOVER RATIO
• !fter analysis of this ratio we can conclude that &anbaxy 5aboratories 5imited is
holding an unfavorable quantity of inventory. 8ince the inventory turnover ratio is
not very high we can conclude that the management of inventory is not very efficient
because the stocks are not sold very frequently as a result of which a large amount of
money is required to finance the working capital requirement.
QUICK RATIO
• &anbaxy has a satisfactory liquidity position.
CURRENT RATIO
• ! current ratio of 3;/ is considered to be a satisfactory. If the current ratio is 3 or
more it means that the company is adequately liquid and has the ability to meet its
current obligations. ! lower current ratio indicates that the company may be trading
beyond its capacity. &anbaxy 5aboratories 5imited has a satisfactorily high current
ratio but at same time it may mean that the company has idle cash which when
invested can yield returns to the company.
RELATIONSHIP BETWEEN SALES AND GROSS WORKING CAPITAL
• %here exists a negative correlation between the two which indicates that the sales are
low and this has led to an accumulation of stock.
RELATIONSHIP BETWEEN SALES AND NET WORKING CAPITAL
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• 8ales and net working capital have a negative correlation which implies that there is
an inverse relationship between sales and net working capital. It shows that the sales
are low and this has led to an accumulation of stock.
• )rofitability ratios of &anbaxy are low as compared to industry ratios it means that
company is investing a lot in its operations to compete with its competitors and is
expecting to reap profits in its coming years.
• %he return ratios are not showing an increasing trend which is not a good sign for the
company(s growth. But return of working capital is increasing which means that
company is doing more sales with less working capital.
• is almost constant due to this their Eet 1orking
*apital cycle is also not showing a significant change.
• !verage collection period is also increasing which needs to be shortened
&@*"MM@E'!%I"E8 !E' 8?.
• Financial Management Jalyani publishers
Page 92 of 93
WebPages
• www.pharmaceutical:business:review.com
• http;GGwww.ranbaxy.com
• http;GGwww.cipla.com
• http;GGwww.google.com
• http;GGwww.wikipedia.com
• http;GGwww.drreddy.com
• http;GGwww.lupingroup.com
• http;GGwww.sunpharma.com
• http;GGwww.moneypore.com
• www.bizstats.com
• www.reuters.com
• www.economictimes.com
• www.dereddys.com
• www.bloomsberg.com
• www.livemint.com
• www.studyfinance.com
• www.bized.com
• www.bpubs.com
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