Working Capital Management A Story of Aurobindo Pharmaceutical Working Capital

1. WORKING CAPITAL MANAGEMENT
A STUDY OF AUROBINDO PHARMACEUTICALS WORKING CAPITAL.
Submitted by:
Arpan Khanna
Submitted to:
Dr. Surabhi Goyal
ANSAL UNIVERSITY

2. INTRODUCTION
 The concept of working capital was first developed by Karl Marx.
 There are two concepts of working capital, gross working capital and net working capital.
 Gross working Capital = Total Current Assets
 Net Working Capital = Current Assets – Current Liabilities
 Working capital is important as it ensures:
 Liquidity Position of the firm
 Financing of current assets by sources of long-term funds.

3. SIGNIFICANCE OF WORKING CAPITAL
 Solvency and easy loan to the business
 Regular supply of raw material
 Getting benefit of cash discount
 Ability to face unfavourable condition
 Regular payment of operational expenses

4. COMPONENTS OF WORKING CAPITAL

5. PHARMACEUTICAL INDUSTRY
 India is the largest provider of generic drugs globally
 Indian pharmaceutical sector industry supplies over 50 per cent of global demand for
various vaccines
 40 per cent of generic demand in the US and 25 per cent of all medicine in UK.
 The pharmaceutical sector was valued at US$ 33 billion in 2017
 The Indian pharmaceutical market grew by 10 per cent year-on-year.
 India’s pharmaceutical exports stood at US$ 17.27 billion in FY18 and US$ 15.52 billion in
FY19

6. ABOUT AUROBINDO PHARMA
 Aurobindo Pharma was founded in 1986 by Mr. P. V. Ramaprasad Reddy and Mr. K.
Nityananda Reddy
 With a single unit manufacturing semi synthetic penicillin (SSPs) at Pondicherry
 It has set up overseas branches/ representative offices
 Ethiopia, Tanzania, Kenya, Uganda, Italy, Ghana, Vietnam, and United Kingdom.
 Catering to over 100 countries
 Invested significant resources in building a mega infrastructure

7. PRODUCTS OF AUROBINDO PHARMACEUTICALS
 Formulation– In this segment it manufactures formulation for cardio vascular, central
nervous system, gastroenterological, anti–retroviral and anti–infectives. It has developed
formulations namely Trandolapril, Captopril, Benazepril Hydrochloride, etc.
 Active Pharmaceutical Ingredients (API) – Aurobindo’s five units for APIs and four units for
formulations are designed for the regulated markets.
 Organic Intermediates– It manufactures wide range of organic intermediates namely
Dimethyl Azithromycin, Methenamine, Benzimidazole, ECPPA and many more.

8. CASH FLOW OF AUROBINDO PHARMACEUTICAL

9. FACTOR DETERMINE CASH NEEDS
 Terms of purchase & sale
 Collection period of receivables
 Credit position of the firm
 Production policy of the firm
 Nature of demand of firm’s products
Company Cash conversion days
Auro 133.25
Sun pharma 137.09
Dr. Reddy 142.51

10. THE MAIN CAUSES OF CASH FLOW PROBLEMS
 Low profits or (worse) losses
 Over-investment in capacity
 Too much stock
 Allowing customers too much credit
 Seasonal demand

11. MARKETABLE SECURITIES OF AUROBINDO PHARMA
 Marketable securities are securities or debts that are to be sold or redeemed
within a year
 Government treasury bills
 Equity
 Agency securities such as local governments securities
 Securities issued by banks
 Commercial paper
 Negotiable certificates of deposits
AUROBINDO PHARMA DO ONLY INVESTMENTS IN LONG
TERM SECURITIES LIKE DEBENTURES, EQUITY SHARE,
PREFFERENCE SHARE, JOINT VENTURES.

13. ALTERNATIVE SUGGESTION FOR INVESTMENTS
 The company could also invest in the govt securities to make their portfolio broader and
less risky but as this company is the pharmaceutical company, this is to suggested that the
company no need to block its money in any kind of govt bond or securities other than this
they have many options to invest they could also invest in the MF (mutual funds) but the
company is going great in it’s way of pharma industry and is the second biggest company in
the india.

14. SOURCES OF FUNDS
 A firm can exercise its option in using the different sources of fund for financing its
working capital requirements.
 Any source depends on its availability, costs, terms and conditions to obtain the
funds etc.
 Short Term Sources of Funds
 Trade credit
 Bank credit
 Retained earnings
 Long term sources
 Equity
 Debenture
 Long term bank loan

15. LONG TERM SOURCES OF AUROBINDO PHARMACEUTICAL

16. SHORT TERM SOURCES OF AUROBINDO PHARMACEUTICALS

17. ANALYSIS
This five-year data of Aurobindo pharma represent that the company is depend upon both
debt and equity for the source of fund the company’s equity increased from 29.15 to
58.59cr from march 16 to the total debt upon the company on march 18 is 3653.83 cr. which is
increased from 2870.17 cr. from last year,
This company used more debt capital than equity the debt being raised to 3653.83cr in relation
with equity of just 58.59cr
If we look at current liability of company it’s 5758.34cr which is more than it’s total liability in
2018. Most of it consist of short-term borrowings which stand at 3653.83cr. other than this the
company has trade payable of 1633.40cr this means the company is less depend upon the equity
capital for the working capital requirement but use “SHORT TERM BORROWINGS & TRADE
PAYABLES” as the source of fund for working capital

18. PAYABLE MANAGEMENT OF AUROBINDO PHARMACEUTICALS

19. ANALYSIS
 Days Payable outstanding: Average Account payable/COGS X 365
 Aurobindo has 81.91 day’s Account payables

20. RECEIVABLE MANAGEMENT OF AUROBINDO PHARMA
 Accounts receivable management incorporates is all about ensuring that
customers pay their invoices
 Good receivables management helps prevent overdue payment or non-
payment
 Benefit of good Receivable Management
 It reduces bad debt
 Better cash flow
 Higher available liquidity
 Boosts a company’s professional image

21. TRADE RECEIVABLES IN BALANCE SHEET

22. CASH FLOW FROM TRADE RECEIVABLES
 The Non-current trade receivables are nil
 But has current trade receivables of 44,774.4 as on 31st march
2018

23. NATURE OF TRADE RECEIVABLES

24. TRADE RECEIVABLES FROM OTHER COUNTRIES
 The above shown table shows the trade receivables from the countries other than india
and in other currency format i.e. USD, GBP, Euro
 The maximum amount is stand in US dollar; it is because USA is the main target market of
Aurobindo pharmaceuticals

25. ANALYSIS
 The company has increased the provision for doubtful receivables which is not good as it was
60.2 as on march 2017, and then it rises to 94.8cr. rupees
 There is also hike in the trade receivables which leads to the net cash outflow i.e. 5225.3 cr.
Rupees
 Which was last year on 5320.2 cr. Rupees
 The total current trade receivables are 44774.4cr. rupees on 31st march 2018, Which is
increased from the last year was 37,736.3cr. rupees.

26. INVENTORY MANAGEMENT OF AUROBINDO PHARMACEUTICALS
 Inventory is the term for the goods available for sale and raw materials used
to produce goods available for sale.
 Inventory represents one of the most important assets of a business
 The turnover of inventory represents one of the primary sources of revenue
generation
 Include
 Finished goods (that are available to be sold)
 Work-in-progress (meaning in the process of being made)
 Raw materials (to be used to produce more finished goods)

27. INVENTORY MANAGEMENT TECHNIQUES OF AUROBINDO
PHARMACEUTICALS
Year A S I Year EOQ
2018 180 3.5 2.4 Q2018 22.91
2017 167 3.5 2.5 Q2017 21.62
2016 140 3.1 3 Q2016 17.001
2015 112 2.8 2.1 Q2015 17.28
2014 98 2.8 1.9 Q2014 16.99
Q = √2AS/I
where Q stands for quantity per order;
A stand for annual requirements of an item in terms of rupees;
S stands for cost of placement of an order in rupees; and
I stand for inventory carrying cost per unit per year in rupees.
EOQ

28. CONTINUED
Group Percentage of
total Inv.
Value of Total
Inv.
A 10 – 20% 50%
B 20 – 30% 30%
C 50 – 60% 20%
ABC Model
Year Inventory Group % of Value
2018 3808.77 A 16 1904.38
B 28 952.19
C 56 952.19
2017 3409.23 A 18 2045.4
B 26 1022.76
C 56 2727.38
2016 2433.62 A 14 1400
B 28 801
C 58 232.62
2015 2431.6 A 19 1623.48
B 30 592.5
C 51 215.62
2014 2145.05 A 20 1630.2
B 30 308.91

29. INVENTORIES IN BALANCE SHEET

30. CHANGE IN INVENTORIES

31. PROBLEMS IN INVENTORY HOLDING
 Material Expiration
 Quality Rejects
 Human and procedure Error
 Equipment Failure
 Reprocess

32. REFERENCES
 https://www.aurobindo.com/
 https://www.aurobindo.com/about-us/
 https://www.aurobindo.com/wp-content/uploads/2018/10/Annual-Report-2017-18.pdf
 https://www.screener.in/company/AUROPHARMA/consolidated/
 https://www.moneycontrol.com/annual-report/aurobindopharma/directors-report/AP#AP
 https://www.investopedia.com/terms/i/inventory-management.asp
 https://www.moneycontrol.com/india/stockpricequote/pharmaceuticals/aurobindopharma/AP
 http://shodhganga.inflibnet.ac.in/bitstream/10603/177182/10/10_chapter%203.pdf
 https://www.wisdomjobs.com/e-university/accounts-and-finance-for-managers-tutorial-292/various-
committee-reports-on-working-capital-9304.html
 https://www.screener.in/company/AUROPHARMA/consolidated/