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  1. 1. Project Report On STUDY OF WORKING CAPITALMANAGEMENT OF RANBAXY LAB LTD A Comparative Analysis Submitted to:
  2. 2. PREFACEBusinesses face ever increasing pressure on costs and growing Financingrequirements as a result of intensive competition in globalize markets. Manyof them are therefore considering ways of making themselves more efficient.In identifying possible options it is important not to focus exclusively onincome and expense items, but also to take the balance sheet into account.Improvements to the existing capital structure can free up valuable resourcesand bring increased efficiency. Active working capital management is anextremely effective way to increase enterprise value. Optimizing workingcapital results in a rapid release of liquid resources and contributes to animprovement in free cash flow and to a permanent reduction in inventory andcapital costs.My project on “Analysis of Working Capital Management in RanbaxyLaboratories Ltd.”The attempt is aimed to analyze the various aspects of working capitalmanagement of Ranbaxy and compare it with that of Dr Reddy’s and withindustry standards. By adopting various calculation and analysis and then making interpretationwith the solution of specific problem, best efforts on giving appropriatesuggestion to the company have been made.To this context various methods and techniques like ratio analysis DuPontanalysis, statistical tool, Correlation analysis, and working towards theoptimal level of working capital, estimation of working capital and variousratios have been used to draw an exact picture of company. Page 2 of 96
  3. 3. TABLE OF CONTENTSAbstract 06Introduction 07Industry Profile 08Research and Development 11Organizational profile 14Working capital 32Defining the problem 39Literature review 41Methodology 43Financial performance of RanbaxyLiquidity Ratios 48Profitability Ratios 51Liquidity Analysis 53Ratio Analysis 63Liquidity Ranking 76Credit Analysis & Policies 81ConclusionLimitations 89Summary of findings 90Recommendations and Suggestions 92References 95 Page 3 of 96
  4. 4. ABSTRACTA project work is a mandatory requirement for the Business ManagementProgramme. This type of study aims at exposing the young prospectiveexecutive to the actual business world.This project gives me knowledge about the working capital of the company.Working capital refers to the funds required for day to day operations of theorganization. It is very effective way to judge a company’s cash flowprospects, as cash is like blood life for any company.The report initially begins with the company profile, followed by the detailedanalysis of company, like businesses of the company, products offered by thecompany, financials of the company, etcThe report involves a lot of research to understand what exactly workingcapital is, why companies require working capital, what are the ideal ratios forWorking Capital a Company should maintain, etc. The purpose is to developan action plan that creates such a working capital that will upgrades andstandardize the quality of business analysis.Various tools, including financial tools, are used in this project to calculate andcompare the financial position of the company, e.g. ratio analysis, DuPontanalysis, SWOT analysis, etc. Page 4 of 96
  5. 5. INTRODUCTIONA firm is required to maintain a balance between liquidity and profitabilitywhile conducting its day to day operations. Liquidity is a precondition toensure that firms are able to meet its short-term obligations and its continuedflow can be guaranteed from a profitable venture.The importance of cash as an indicator of continuing financial health shouldnot be surprising in view of its crucial role within the business. This requiresthat business must be run both efficiently and profitably. In the process, anasset-liability mismatch may occur which may increase firm’s profitability inthe short run but at a risk of its insolvency.The purpose of this project is to examine the trends in working capital and itsimpact on firm’s performance. The trend in working capital needs andprofitability of firm is examined to identify the causes for any significantdifferences.The rest of the report is organized as follows: It starts with the Industry profile& then a detailed introduction of the company. The following section of thereport looks briefly at the theoretical underpinnings and the relevant literaturewhich attempts to explain the link between poor performance and workingcapital management.After that, the analysis part covers in depth analysis of working capital ofRanbaxy. Finally the conclusion is made & it has been observed that theoverall structure of working capital of the co. is good and it is a growingconcern. The company uses various techniques to maintain its working capital.Some suggestions have been given on the basis of the conclusion. Page 5 of 96
  6. 6. INDUSTRY PROFILEIndustry Definition“The Indian pharmaceutical industry is a success story providing employment for millionsand ensuring that essential drugs at affordable prices are available to the vast populationof this sub-continent.” Richard GersterThe Indian Pharmaceutical Industry today is in the front rank of India’s science-basedindustries with wide ranging capabilities in the complex field of drug manufacture andtechnology.Facts about the Role of Pharmaceutical Industry in Indian Gross Domestic Product (GDP): • Indian Pharmaceutical Industry ranks fourth in the world, pertaining to the volume of sales. • The estimated worth of the Indian Pharmaceutical Industry is US$ 6 billion. • The growth rate of the industry is about 13% per year. • Almost most 70% of the domestic demand for bulk drugs is catered by the Indian Pharma Industry. • The Pharma Industry in India produces around 20% to 24% of the global Generic drugs. • The Indian Pharmaceutical Industry is one of the biggest producers of the Active Pharmaceutical Ingredients (API) in the international arena. • The Indian Pharma sector leads the science-based industries in the country. • Around 40% of the total pharmaceutical produce is exported. • 55% of the total exports constitute of formulations and the other 45% comprises of bulk drugs. • The Indian Pharma Industry includes small scaled, medium scaled, large scaled players, which totals nearly 300 different companies. • As per the present growth rate, the Indian Pharma Industry is expected to be a US$ 20 billion industry by the year 2015. • The Indian Pharmaceutical sector is also expected to be among the Top Ten Pharma based markets in the world in the next ten years Page 6 of 96
  7. 7. • The sales of the Indian Pharma Industry would worth US$ 43 billion within the next decade. • The multinational companies, investing in research and development in India may save up to 30% to 50% of the expenses incurred • The cost of hiring a research chemist in the US is five times higher than its Indian counterpart. • The manufacturing cost of pharmaceutical products in India is nearly half of the cost incurred in US. • The cost of performing clinical trials in India is one tenth of the cost incurred in US. • The cost of performing research in India is one eighth of the cost incurred in US.Following the de-licensing of the pharmaceutical industry, industrial licensing for most ofthe drugs and pharmaceutical products has been done away with. Manufacturers are free toproduce any drug duly approved by the Drug Control Authority. Technologically strong andtotally self-reliant, the pharmaceutical industry in India has low costs of production, lowR&D costs, innovative scientific manpower, strength of national laboratories and anincreasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents andresearch capabilities, supported by Intellectual Property Protection regime is well set to takeon the international market.ADVANTAGE IN INDIACompetent workforce: India has a pool of personnel with high managerial and technicalcompetence as also skilled workforce. It has an educated work force and English iscommonly used. Professional services are easily available.Cost-effective chemical synthesis: Its track record of development, particularly in the areaof improved cost-beneficial chemical synthesis for various drug molecules is excellent. Itprovides a wide variety of bulk drugs and exports sophisticated bulk drugs.Legal & Financial Framework: India has a 53 year old democracy and hence has a solidlegal framework and strong financial markets. There is already an established internationalindustry and business community.Information & Technology: It has a good network of world-class educational institutionsand established strengths in Information Technology. Page 7 of 96
  8. 8. Globalization: The country is committed to a free market economy and globalization.Above all, it has a 70 million middle class market, which is continuously growing.Consolidation: For the first time in many years, the international pharmaceutical industry isfinding great opportunities in India. The process of consolidation, which has become ageneralized phenomenon in the world pharmaceutical industry, has started taking place inIndia.THE GROWTH SCENARIOIndias US$ 3.1 billion pharmaceutical industry is growing at the rate of 14 percent per year.It is one of the largest and most advanced among the developing countries.Over 20,000 registered pharmaceutical manufacturers exist in the country. The domesticpharmaceuticals industry output is expected to exceed Rs260 billion in the financial year2002, which accounts for merely 1.3% of the global pharmaceutical sector. Of this, bulkdrugs will account for Rs 54 bn (21%) and formulations, the remaining Rs 210 bn (79%). Infinancial year 2001, imports were Rs 20 bn while exports were Rs87 bn.The above graph shows the percentage of pharmaceutical products export by variouscountries. Page 8 of 96
  9. 9. (SOURCE Competitiveness of the Indian pharmaceutical industry in the new product patentregime a report by FICCI) 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 apotential drug in order to establish its suitability as a medication. Objectives of drugdevelopment are to determine appropriate Formulation and Dosing, as well as to establishsafety. Research in these areas generally includes a combination of in vitro studies, in vivostudies, and clinical trials. The amount of capital required for late stage development hasmade it a historical strength of the larger pharmaceutical companiesOften, large multinational corporations exhibit vertical integration, participating in a broadrange of drug discovery and development, manufacturing and quality control, marketing,sales, and distribution. Smaller organizations, on the other hand, often focus on a specificaspect such as discovering drug candidates or developing formulations. Often, collaborativeagreements between research organizations and large pharmaceutical companies are toexplore the potential of new drug substances formedThe cost of innovationDrug discovery and development is very expensive; of all compounds investigated for usein humans only a small fraction are eventually approved in most nations by governmentappointed medical institutions or boards, who have to approve new drugs before they can bemarketed in those countries. Each year, only about 25 truly novel drugs (New chemicalentities) are approved for marketing. This approval comes only after heavy investment inpre-clinical development and clinical trials, as well as a commitment to ongoing safetymonitoring. Drugs which fail part-way through this process often incur large costs, whilegenerating no revenue in return. If the cost of these failed drugs is taken into account, the Page 9 of 96
  10. 10. cost of developing a successful new drug (New chemical entity or NCE), has beenestimated at about 1 billion USD. A study by the consulting firm Bain & Company reported that the cost for discovering,developing and launching (which factored in marketing and other business expenses) a newdrug (along with the prospective drugs that fail) rose over a five year period to nearly $1.7billion in 2003.These estimates also take into account the opportunity cost of investing capital many yearsbefore revenues are realized (see Time-value of money). Because of the very long timeneeded for discovery, development, and approval of pharmaceuticals, these costs canaccumulate to nearly half the total expense. Some approved drugs, such as those based onre-formulation of an existing active ingredient (also referred to as Line-extensions) aremuch less expensive to develop. The consumer advocacy group Public Citizen suggests onits web site that the actual cost is under $200 million, about 29% of which is spent on FDA-required clinical trials. For me-too-drugs and for generics, the cost are even less.Calculations and claims in this area are controversial because of the implications forregulation and subsidization of the industry through federally funded research grants.Controversy about drug development and testingThere have been increasing accusations and findings that clinical trials conducted or fundedby pharmaceutical companies are much more likely to report positive results for thepreferred medication.In response to public outcry about specific cases in which unfavorable data frompharmaceutical company-sponsored research was suppressed, the Pharmaceutical Researchand Manufacturers of America have published new guidelines urging companies to reportall findings and limit the financial involvement in drug companies of researchers. As aresult of this public outcry and Pharma response the US congress signed into law a billwhich requires phase II and phase III clinical trials to be registered by the sponsor on theNIH websiteDrug researchers not directly employed by pharmaceutical companies often look tocompanies for grants, and companies often look to researchers for studies that will maketheir products look favorable. Sponsored researchers are rewarded by drug companies, forexample with support for their conference/symposium costs. Lecture scripts and evenjournal articles presented by academic researchers may actually be ghost-written bypharmaceutical companies. Some researchers who have tried to reveal ethical issues withclinical trials or who tried to publish papers that show harmful effects of new drugs orcheaper alternatives have been threatened by drug companies with lawsuits.Product approval in the USIn the United States, new pharmaceutical products must be approved by the FDA as beingboth safe and effective. This process generally involves submission of an Investigationalnew drug filing with sufficient pre-clinical data to support proceeding with human trials.Following IND approval, three phases of progressively larger human clinical trials may be Page 10 of 96
  11. 11. conducted. Phase I generally studies toxicity using healthy volunteers. Phase II can includePharmacokinetics and Dosing in patients, and Phase III is a very large study of efficacy inthe intended patient population.A fourth phase of post-approval surveillance is also often required due to the fact that eventhe largest clinical trials cannot effectively predict the prevalence of rare side-effects. Post-marketing surveillance ensures that after marketing the safety of a drug is monitoredclosely. In certain instances, its indication may need to be limited to particular patientgroups, and in others the substance is withdrawn from the market completely. Questionscontinue to be raised regarding the standard of both the initial approval process, andsubsequent changes to product labeling (it may take many months for a change identified inpost-approval surveillance to be reflected in product labeling) and this is an area wherecongress is active.The FDA provides information about approved drugs at the Orange Book site.] In the UK,the British National Formulary is the core guide for pharmacists and clinicians.Orphan drugsThere are special rules for certain rare diseases ("orphandiseases") involving fewer than 200,000 patients in the UnitedStates, or larger populations in certain circumstances. Becausemedical research and development of drugs to treat such diseases is financiallydisadvantageous, companies that do so are rewarded with tax reductions, fee waivers, andmarket exclusivity on that drug for a limited time (seven years), regardless of whether thedrug is protected by patents.Industry revenuesFor the first time ever, in 2006, global spending on prescription drugs topped $643 billion,even as growth slowed somewhat in Europe and North America. The United States accountsfor almost half of the global pharmaceutical market, with $289 billion in annual salesfollowed by the EU and Japan. Emerging markets such as China, Russia, South Korea andMexico outpaced that market, growing a huge 81 percent. US profit growth was maintainedeven whilst other top industries saw slowed or no growth. Despite this, "..thepharmaceutical industry is — and has been for years — the most profitable of all businessesin the U.S. In the annual Fortune 500 survey, the pharmaceutical industry topped the list ofthe most profitable industries, with a return of 17% on revenue."Pfizers cholesterol pill Lipitor remains the best-selling drug in the world for the fifth year ina row. Its annual sales were $12.9 billion, more than twice as much as its closestcompetitors: Plavix, the blood thinner from Bristol-Myers Squibb and Sanofi-Aventis;Nexium, the heartburn pill from AstraZeneca; and Advair, the asthma inhaler fromGlaxoSmithKline. IMS Health publishes an analysis of trends expected in the pharmaceutical industry in2007, including increasing profits in most sectors despite loss of some patents, and newblockbuster drugs on the horizon. Page 11 of 96
  12. 12. Teradata Magazine predicted that by 2007, $40 billion in U.S. sales could be lost at the top10 pharma companies as a result of slowdown in R&D innovation and the expiry of patentson major products, with 19 blockbuster drugs losing patent.STEPS TO STRENGTHEN THE INDUSTRYIndian companies need to attain the right product-mix for sustained future growth. Corecompetencies will play an important role in determining the future of many Indianpharmaceutical companies in the post product-patent regime after 2005. Indian companies,in an effort to consolidate their position, will have to increasingly look at merger andacquisition options of either companies or products. This would help them to offset loss ofnew product options, improve their R&D efforts and improve distribution to penetratemarkets.Research and development has always taken the back seat amongst Indian pharmaceuticalcompanies. In order to stay competitive in the future, Indian companies will have to refocusand invest heavily in R&D.The Indian pharmaceutical industry also needs to take advantage of the recent advances inbiotechnology and information technology. The future of the industry will be determined byhow well it markets its products to several regions and distributes risks, its forward andbackward integration capabilities, its R&D, its consolidation through mergers andacquisitions, co-marketing and licensing agreements. Page 12 of 96
  13. 13. INTRODUCTION TO RANBAXYCOMPANY PROFILE “A company empowered by one mission –to place itself on the world map. Anenterprise propelled by one force-that synergizes its energies to charter unexploredmarkets. Organizations fuelled by one dream-to transform competition into opportunity.”Ranbaxy Laboratories Ltd. was incorporated in June 1961, in the name of M/S LEPITITRANBAXY LABORATORIES LTD and it commenced its business in MARCH 1962, intechnical and financial collaboration with an international company named LEPTIT SPA,MILAN, ITALY. Page 13 of 96
  14. 14. Ranbaxy Laboratories Pvt. Ltd. merged with “Leptit Ranbaxy Laboratories Pvt. Ltd.” in1962 Ranbaxy and company also merged with this company in 1966. The collaborationarrangement with M/S LEPTIT was terminated in 1966; after which Indian nationalsacquired the entire share capital of the company.Therefore the word Leptit was removed from the name of the company. The name is knownas RANBAXY LABORATORIES LIMITED. In 1973 the company issued shares to thegeneral public and became a full fledged PUBLIC LIMITED COMPANY.Today, Ranbaxy has emerged as a LeadingPharmaceutical Company on the Indian firmament,with the second largest market share and enjoys anenviable reputation for its high standard of ethics andquality around its core strength of anti-infective, it hasproduced new brands in emerging therapeutic areaslike cardiovascular, central nervous system andnutritional. Supporting this expansion, the companyhas invested in world class manufacturing infrastructure that leverages India’s comparativecostAdvantage and skilled manpower, while delivering international quality.The company’s drive for Internationalism is guided by the well planned brand strategy thatcovers some of the world emerging markets like China, Central Europe and Latin America .Its position today is in league of the Top Ten Pharmaceutical companies of three world andecent ranking as the eleventh largest company in the international generics space is theresounding endorsement of its strategic mind.It is clear that for a long time, the dominant share of revenues of the company wouldcontinue to come from the ever expanding global generics market. Hence the intent ofRanbaxy mission is to achieve a sustained growth rate through the continuous pursuit ofinnovation phase one trials for pervasion, a compound for treating prosthetic males havebeen completed. Phase 1 trials with clafrinast, an asthma compound is an important steptowards research based value creation.This company also had success with Ciplofloxacine, an ingenious form, created through thenovel drug delivery systems research. As the demand of the bulk drugs inside the countryand abroad was increasingly rapidly a new, plant was set up at Toansa near Ropar in 1987.This was a higher capacity plant designed to cater to the present and future needs, initiallyantibiotics like Ampicillin, Trihydrate and Doxycycline were manufactured. Later, on the other drugs like Cephalexin monohydrate and Ranitidine were also prepared. The plant at Toansa was designed to meet the stringent standards set by the Food and Drug Administration (FDA) of U.S.A. This plant has been approved by FDA and this will open up American and other newer markets for Ranbaxy’s products . Page 14 of 96
  15. 15. At present Ranbaxy have four plants for the manufacture of bulk drugs two at Mohali, oneat Dewas (M.P) AND Another at Toansa near ROPAR. At present, Ranbaxy is the secondmost Indian company engaged in the manufacturing of Pharmaceuticals, Bulk Drugs andFine Chemicals.RANBAXY’s vast range of highly pure laboratory reagent and chemicals enjoy a place ofpride in the market. IT trends, has rebuilt As a step towards leveraging information forvalue creation using its information backbone around an ERP application, along the focuson reengineering several business processes around the internet and has putting placebusiness solutions that challenge existing ways of doing Business. The undying spirit of thecompany’s human assets and their intensive competitive and entrepreneurial energy hasplayed a great part in transforming the company into a multicultural and multiracial team.Today, Ranbaxy is the largest exporter accounting for 12% of the industry exportspharmaceutical substance and dosages forms to over 50 countries with the internationalssales comprising of 45% of the total turnover. Page 15 of 96
  16. 16. VISION GARUDADuring the year 2002, the company has evolved a 10-year vision till 2012, forsustaining significant growth consistent with its mission to be an internationalresearch based Pharmaceutical Company, under the rubric ‘Vision Garuda’,with increasing emphasis on Novel Drug Delivery Systems Research (DDR).In licensing and out licensing, relationship with other importantpharmaceutical entities, expansion of manufacturing facilities both in Indiaand strategic overseas locations, revamping of organizational structures tocater to the wider and more dispersed span of operations, and streamlining andstandardizing the business processes through out the global organization, areother areas that receive focus and attention of management on priority. Page 16 of 96
  17. 17. Mission “To become a Research based International pharmaceutical company” Vision-2012 Achieve significant business in Proprietary prescription products By 2012With a strong presence in developed markets Aspirations-2012 Aspire to be a$5 billion company Become a Top 5 global generics playerSignificant income from Proprietary products Page 17 of 96
  18. 18. OPERATING JOINT VENTURES AND SUBSIDIARIESBRAZIL : Ranbaxy S.P. Medicamentos Ltd.CHINA : Ranbaxy (Guangzhou China) Ltd.EGYPT : Ranbaxy Egypt Ltd.GERMANY : Basics Gmb H.HONG KONG : Ranbaxy (Hong Kong) Ltd.INDIA : Rexcel pharmaceuticals Ltd., Solus pharmaceuticals Ltd., Vidyut Travel Services ltd.IRELAND : Ranbaxy Ireland Ltd.MALAYSIA : Ranbaxy (Malaysia) Sdn. Bhd.NETHERLANDS : Ranbaxy Pharmaceuticals B.V.NIGERIA : Ranbaxy Nigeria Ltd.PANAMA : Ranbaxy Panama SA.POLAND : Ranbaxy Poland Sp. Zo.SOUTH AFRICA : Ranbaxy (SA) (Pty.) Ltd.THAILAND : Unichem pharmaceuticals LTD., Unichem Distributors Ltd. Part, Ranbaxy Unichem CO.Ltd.U.K : Ranbaxy (UK) LtdUSA : Ranbaxy pharmaceuticals Inc. Ohm Laboratories Inc., Ranbaxy Schein Pharma, LLCVIETNAM : Ranbaxy Vietnam Company Ltd. Page 18 of 96
  19. 19. ALLIED BUSINESSESRanbaxy Animal HealthThe Animal Health division saw an encouraging growth despite the prevailingpoor market conditions. The division grew at twice the growth rate recorded inthe industry. On the basis of having a vast dome satiated animal population,the livestock, poultry business and pets business are among the fastest growingsectors in India. A vast infrastructure of veterinary colleges, agriculturalinstitutes, technologists and researchers are helping farmers to source healthy,cost effective products. In conjunction with the present scenario, the AHCdivision of Ranbaxy Laboratories Limited has introduced several latestgeneration products.Ranbaxy Fine Chemicals Limited (RFCL) The division ranked 4th in theindustry and captured 11% marketshare. RANKEM is established asa powerful brand, RFCLs brandfor its range of Reagents is nowsynonymous with excellence inreagents and fine chemicals in thecountry. The focus of businessremains on developing extensivecustomer relations; enhancing service levels and enriching the product mixwith the help of a qualified and competent marketing and sales teamDiagnosticsThe diagnostics division has aggressively focused on market expansionactivities based on strategy of reliability, quality products and efficient service. Page 19 of 96
  20. 20. Introduction of products in ‘Point of Care’ markets has expanded marketpresence and over the next 1 – 2 years this segment will see considerableexpansion in line with world trends.The Dade Behring segment has increased its installation base by 60% inleading hospitals and laboratories. Plans are afoot for the introduction of moreparameters for the ‘Point of Care’ market and the launch of SpecialChemistries, a range of drug assays, plus an entry into automated microbiologyin both the Base and Dade Behring business areas.The company has also witnessed significant milestones in the area of NovelDrug Delivery Systems (NDDS). The company has entered into strategicbusiness arrangements with companies such as Bayer AG, Glaxo-Wellcome,Eli-Lilly etc. for production and co-marketing operations. Many innovativedevelopments have been taking place in recent times. The company’s researchteam is capable of developing one NDDS product every 12 to 18 months.Also, two new products: Roletra-D and Altiva-D, will soon be launched inIndia.In order to expand and promote global growth, the company opened severalnew markets during the year, notably in Brazil, where 25 filings wereundertaken in a span of 2-3 months.The company has planned to build and protect intellectual property with thehelp of IPC, which addresses all matters pertaining to patents. CQA supervisesthe implementation of standard operating procedures (SOP) and ensurescompliance to corporate quality assurance policy in all technologicaloperations of the organization. The company is committed to invest 6% of thesales in R and D by 2003, of which 7% of the expenditure will be earmarkedfor research on New Drug Discovery and Novel Drug Delivery Systems. There Page 20 of 96
  21. 21. will be continuous emphasis on augmenting R and D performance andproductivity with advanced scientific and technological tools. VALUES OF RANBAXY LABORATORIES LIMITED 1. Achieving customer satisfaction is fundamental to their business. 2. Practice dignity and equity in relationships and provide opportunities for people to realize their full potential. 3. Ensure profitable growth and enhance wealth of shareholders. 4. Foster mutually beneficial relationships with all their business partners. 5. Manage their operations with concern for safety and environment. 6. Be a responsible corporate citizen. Page 21 of 96
  22. 22. OBJECTIVES OF RANBAXY LABORATORIES LTD.1. To be a leader in the Pharmaceutical industry.2. To be a profitable company with a steady growth in earnings.3. To set an example as a socially responsible company.4. To diversify in health care related areas.5. To strive for excellence and continuous improvement in all spheres.6. To improve the quality of life of people by providing better services and quality products. VARIOUS DIVISIONS OF RANBAXY LABORATORIES LTD.1. Chemical Division2. Diagnostic Division3. Stan care Division4. Curradia Division5. International Division6. Pharmaceutical Division7. Technical Division8. Corporate Division9. Animal Health Care Division DIVISIONS IN VARIOUS GEOGRAPHICAL AREAS 1. India and Middle East 2. Europe, CIS and Africa 3. Asia Pacific and Latin America 4. North America Page 22 of 96
  23. 23. JOINT VENTURE OF THE COMPANY.2000 Ranbaxy files IND Application for Asthma Molecule- RBx4638, after successful completion of pre-clinical studies. Ranbaxy acquires Bayer’s Generics business (trading under the Name of Basics) in Germany. Ranbaxy forays into Brazil, the largest pharmaceutical market in South America and achieves global sales of U.S. $ 2.5 million in this market.2001 Ranbaxy took a significant step forward in Vietnam by initiating the Setting up of a new manufacturing facility with an investment of U.S. $ 10 million. Ranbaxy achieved a turnover of U.S. $ 502 million for the year 2002 and moved closer to achieving a target of 1 billion dollar by 2004.2002 Receives approval from FDA to market Midazolam Hydrochloride Syrup 2 Mg base/ ml. Ranbaxy receives and approval from FDA to manufacture and market Cefpodoxime Proxetil for Oral Suspension, Lisinopril + Hydrochlorothiazide Tablets Us, Terazosin Hydrochloride Capsules and Amoxcillin Oral suspension USP.Heralding the company’s entry into the Indian OTC market.2003 Ranbaxy received the economic times award for corporate excellence-for the company for Page 23 of 96
  24. 24. year.ranbaxy signed an agreement toacquire RPG(aventis) SA along with its fully owned subsidiary,OPIH SARL,in france2004 Ranbaxy launched its first range of herbal projects.2005 Acquisition of additional stake in Ranbaxy Farmaceutica Ltda., Brazil Ranbaxy announced the acquisition of Be-Tabs Pharmaceuticals (Pty) Limited2008 Acquired by the Japanese giant, the $9.62 billion Daiichi Sankyo, ranked No. 3 in Japan BRIEF INTRO OF RANBAXY PLANTS IN INDIAIn the chemical division, various bulk drugs are manufactured. The chemicaldivision had three units in Punjab. One is located at Toansa, two are located atMohali and one unit is located at Dewas near Indore in Madhya Pradesh,where Ciprofloxacine is manufactured. In the plant of the chemical division,various drugs like Antibiotics, Anti-malarial, Antibacterial and Anti-ulcer aremanufactured. One of the older plants of Ranbaxy was closed after theaccident in June 2003.the second one is still working Page 24 of 96
  25. 25. The 1991, the Toansa plant started functioning in 1992 and the Dewas plantstarted functioning in 1999. Various plant heads independently manage allthese plants.In each unit, separate facilities with respect to the manufacture of drugs, alongwith their manufacturing areas have been provided. This is required to reducethe chances of any cross contamination under the drug laws and to complywith good manufacturing practices.At Mohali plant, separate blocks have been provided for the preparation ofeach drug .The Toansa, Mohali and Dewas plants are planned in such a waythat their system, facilities, manufacturing practices and standards meet therequirements of FDA. Mohali Plant also mainly in the manufacturing ofActive Pharmaceutical Ingredients (API). The Plant is divided into two plantareas A8 and A9 THE VARIOUS DEPARTMENTSHuman Resource DepartmentThe basic function of the human resource department in the modern corporateworld is knowledge management. The HR department strives to maintaincohesiveness among employees. It also ensures interdepartmental cooperationin achieving targets. The appraisal system is also taken care by thisdepartment. The HR department delves deep into the employee’s psyche toanalyze the positives and negatives of each employee, so that a proper systemof delegation and / or empowerment can be evolved.Finance DepartmentThe finance department takes care of the regular financial needs of thecompany it ensures proper allocation of funds and takes care of the workingcapital requirements. It verifies capital raised by different departments andsends them for approval to the higher authorities.Stores DepartmentThe function of this department is to provide adequate and proper storage andpreservation of various items to meet the demand of various other departments Page 25 of 96
  26. 26. by proper issues and maintaining accounts of consumption. It also keeps atrack of stock accumulation and abnormal consumption.Erection and Fabrication DepartmentAs the name suggests, this department identifies new projects and helps inerecting them. This department also undertakes major modifications ofequipment.ERP DepartmentERP department helps to integrate the entire enterprise starting from thesupplier to the customer, covering financial and human resources. This willenable the enterprise to increase productivity by reducing costs. It also ensuresa single solution to the information needs of the whole organization.Production DepartmentAs a part of their on going commitment to produce hi-tech quality drugs andpharmaceuticals that take care of the specific needs of markets around theworld, Ranbaxy Laboratories Limited has increased the investment in theproduction department. It is the most important department of the companyand has the following objectives: 1. Improving volume of production. 2. Reducing rejection rate. 3. Maintaining rework rate.Engineering DepartmentThis department undertakes building, construction and maintenance.Maintaining service facilities such as water, gas, heating, ventilation, airconditioning, painting and plumbing are some of the other areas dealt by thisdepartment. This department also helps in maintaining electrical equipmentssuch as generators, transformers, telephone system and electrical installation.Purchase DepartmentThe purchase department provides material to the factory without which thewheels of machines cannot move. The various functions performed by this Page 26 of 96
  27. 27. department include: Securing good vendor performance, including promptdeliveries of supplies of acceptable qualities. 1. To develop satisfactory sources of supply and maintaining good relationships with the suppliers. 2. To pay reasonably low prices.Quality Control/Quality Assurance DepartmentThe purpose of QC & QA departments is to ensure that the desired qualitystandard is achieved. It also ensures that the processing or fabrication ofmaterial conforms to the specific characteristics selected, to assure that theresulting product will in fact perform its intended function. PRODUCT REVIEWRanbaxy’s therapeutic width covers five of the top six categories includingAnti-infective, Gastrointestinal, Nutritionals, Cardiovascular, Central NervousSystem, Respiratory, Dermatological and others. While anti-infectivecontribute 56% of the total sales, Ranbaxy’s other brands like Simvotin andStorvas in the cardiovascular segment, Serlift in CNS and Revital and Riconiain Nutritionals, are on their way to success in multiple markets.During Jan - Dec 2000, amongst the top products of Ranbaxy, Sporidex(Cephalexin) was the Number 1 brand, closely followed by Cifran(Ciprofloxacin).Anti - InfectivesAnti- infective has been the main driver of Ranbaxy’s sales. The importantbrands in this category are Cifran (Ciprofloxacin), Sporidex (Ciphalexin),Enhancin (Amoxyclav), Crixan (Clarithromycin), Vercef (Cefaclor), Oframax(Ceftriaxone), Cepodem (Cefpodoxime Proxetil), Zanocin (Ofloxacin),Ceroxim (Cefuroxime Axetil), and Loxof (Levofloxacin).Cifran (Ciprofloxacin) is the key brand in the anti- infective portfolio, withestimated sales of US $ 32 Mn, currently being marketed in 15 countries. Page 27 of 96
  28. 28. Development of Ciprofloxacin once a day has been an important landmarkachieved by Ranbaxy. The product has been licensed to Bayer. Cifrancontinues to be a dominant player in the quinolones market in India, China andRussia.Sporidex is another leading brand in Ranbaxy’s product portfolio withworldwide annual sales of US $ 35 Mn. It is available in eight different dosageforms including capsules, dry powder for suspension, redimix, dispersibletablets, paediatric drops, soft gelatin capsules, sachet and advancedformulation for twice-daily administration. It is currently marketed in 15countries. In India, Sporidex is the leading brand with a market share of 36%of the Cephalexin segment.Keflor is available in seven different dosage forms and is the third-largestselling brand for Ranbaxy worldwide. The dosage forms list includes capsules,dry syrup, modified release tablets, dispersible tablets, drops and redimix.Enhancin is expected to be the leading product in Ranbaxy’s product portfoliowith estimated sales of US $ 45 Mn by the year 2005. The product will berolled out to about 20 important markets during this period.Zanocin, with approximate sales of US $ 10 Mn, is the seventh-largestcontributor to Ranbaxy’s total sales.Cepodem is currently available in three different countries outside India, andwill be rolled out to 13 different countries in the near future.CardiovascularsCardiovascular is projected to be the second-best category for Ranbaxy.Statins have been the key drivers for this segment. The sale of Simvastatin hasgrown substantially in the past few years, a trend that is likely to continue inthe future. In India, Simvotin (Simvastatin) is the market leader in thecholesterol reducer segment. Another leading brand in this category is Storvas(Atorvastatin). Storvas has been one of the fastest-ever to enter the top-300brands list of the Indian pharma industry. Other global cardiovascular brandsare Covance (Losartan) and Caslot (Carvedilol).Central Nervous SystemThe Central Nervous Segment is one of the important focus areas identified byRanbaxy, with Serlift being the key brand. In India, Serlift is number 1 Page 28 of 96
  29. 29. amongst Sertraline brands. New product introductions will be drivers ofgrowth in this category.GastrointestinalCurrently, gastrointestinal drugs are the second-largest category for Ranbaxy.The key brands in this category include Histac and Romesac. The currentannual sales of Ranitidine are estimated to be around US $ 16 Mn and theproduct is marketed in more than 20 countries.RheumatologicalsThe first generation Cox-2 inhibitors principally drive worldwide growth inrheumatology. This category is estimated to grow exponentially for Ranbaxy,with brands like Celecoxib. This year, Rofibax (Rofecoxib) introduced inIndia, has established itself as a leader in the Cox-2 inhibitor category and hasovertaken all Celecoxib brands. It has been identified as a key Global brandfor the future.NutritonalsNutritionals have been a major contributor to Ranbaxy’s sales. Two of theimportant products in this category are Revital and Riconia. With annual salesestimated at about US $ 10 Mn, Revital contributes a significant share of totalsales. It is a leading brand in India and has done exceedingly well in someparts of the world as an OTC product.DermatologicalsThe dermatology category is mainly driven by India region and is likely toshow a good growth pattern in the future. Some of the key brands doing wellin this segment are Mobizox, Silverex, Moisturex, etc. Page 29 of 96
  30. 30. WORKING CAPITAL MANAGEMENTINTRODUCTIONAs levers of financial management go, none bears more weight than working capital. Theviability of every business activity rests on daily changes in receivables, inventory andpayables. It’s the lifeblood of the business, and every manager’s primary task to keep itmoving and put shareholders capital to work efficiently and effectively.Working Capital is the capital used for the day-to-day operations in the organization. Itdenotes the money that circulates in the organization for smooth functioning of theorganization.Strict working capital management leads to immense improvement in internal efficiencies.Working Capital is the difference between resources in cash (current assets) andorganizational commitments for which cash would be soon required (Current Liabilities).Current Assets are the resources which are in cash or will soon be converted into cash in“ordinary course of business”. The faster a business expands the more cash it will need forworking capital and investment.Good management of working capital will generate cash, help to improve the profits,solidify the relationships with suppliers and customers, and reduce risks. Page 30 of 96
  31. 31. This project was undertaken to analyze the working capital policies, working capitalmanagement of the company and to reduce down their problems and finding the solutionswith respect to the working capital management of the company.Working in an organization, especially with a brand like RANBAXY the main objective isto learn maximum from the intellectually stimulating mentors and multi-dimensionalcolleagues in the organization. • To study and compare the working capital of RANBAXY with its competitors in the industry • To see whether the company is prepared with enough working capital to face any kind of contingencies. • To assess Liquidity position, Long term solvency, operational efficiency, and overall profitability of RANBAXYValue Addition for the companyA well designed and implemented working capital management is expected to contributepositively to the creation of a firm’s value The purpose of this project is to examine thetrends in working capital management and its impact on firms’ performance.This project would help Ranbaxy in comparing its financial status with its competitors. Thein depth analysis might bring out some key issues that may be ignored but may prove Page 31 of 96
  32. 32. significant for the company. Various analyses conducted for analyzing the working capitalwill prove beneficial to the company.Working Capital:“Working Capital includes the current assets and current liabilities areas of thebalance sheet. Working Capital can be called by its alternative name - "Net CurrentAssets”.Working Capital Management is the process of planning and controlling the level and mixof current assets of the firm as well as financing these assets. It may be regarded as a lifeblood of a business; its effective provision can do much to ensure the success of a business,while its efficient management may lead not only to loss of profits but loss to ultimatedownfall in a going concern. Analysis of working capital is of major importance to internaland external analysis because it is closely related to the current day-to-day operations. WORKING CAPITAL INCLUDES FOUR BALANCE SHEET ITEMS • Stock - stocks of raw materials, partly completed production and finished goods awaiting sale. • Debtors - amounts owed to the company, mainly from customers in respect of sales made on credit. • Creditors - amounts owed BY the company, mainly to suppliers of raw materials, services (electricity, water, telephone, rent, etc.) but also, possibly, unpaid tax demands, unpaid dividends and other items. • Cash - bank balances, cash holdings and short-term investments. Page 32 of 96
  33. 33. The three major characteristics of current assets are: • They have a short life span. • Cash balances are held only for a week or so. • They are rapidly transformed into other assets form.Some of the decisions taken in working capital management are: • An adequate supply of raw materials. • Cash to meet the operational payments. • The ability to grant credit to customers. • Investment in various current assets. • Appropriate sources of fund to finance current assets. • Proportion of long term and short term funds to finance current assets.Objective of Working Capital Management: • Two fold objective of working capital management • Maintenance of working capital, and • Availability of ample funds at the times of need.Uses of Working Capital: • The typical uses of working capital are as follows: • Adjusted net loss from operations • Purchase of non-current assets: • Repayment of long-term debt (debentures or bonds) and short-term debt (bank borrowing) • Redemption of redeemable preference shares • Payment of cash dividend. Page 33 of 96
  34. 34. ADVANTAGES OF ADEQUATE WORKING CAPITAL• Increase in debt capacity and goodwill: Adequate 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. Thus 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: With adequate working capital the firm can smoothly carryout research and development activities and thus adds to its production efficiency.• Exploitation of favorable opportunities: In the presence of adequate working capital, a company can avail the benefits of favorable opportunities. Adequate working capital will help the company to have bulk purchases, seasonal storage of raw material etc., which would reduce the cost of production. Page 34 of 96
  35. 35. • Meeting contingencies and adverse changes: A company can easily face certain business and economic crises. A company having adequate working capital can successfully meet contingencies such as business oscillations, financial crisis arising from heavy losses etc. • Available 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. • Solvency 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. • Attractive Dividend to Shareholders: 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 • Loss of goodwill and creditworthiness: As 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: The firm fails to undertake the profitable projects, which not only prevent the firm from availing the benefits of favorable opportunities but also stagnate its growth. • Adverse effects of credit opportunities: The 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 Page 35 of 96
  36. 36. arising from business oscillations, financial losses, due to shortage of working capital. • Non-achievement of Profit Target: The firm cannot implement operational plans due to unavailability of fund, which will lead to non-achievement of profit targets.Dangers of Redundant working capital • Low rate of return on capital • Decline in Capital and Efficiency • Loss of Goodwill and Confidence • Evils of Over-Capitalization • Destruction of Turnover RatioCompany must have adequate working capital pursuant to its requirements. It shouldneither be excessive nor inadequate. Both situations are dangerous. While inadequateworking capital adversely affects the business operations and profitability, excessiveworking capital remains idle and earns no profits for the company. So company mustassure its working capital is adequate for its operations. STUDY OF WORKING CAPITAL MANAGEMENT OF RANBAXY LABORATORIES LTDBusinesses face ever increasing pressure on costs and growing Financingrequirements as a result of intensive competition in globalize markets. Manyof them are therefore considering ways of making themselves more efficient.In identifying possible options it is important not to focus exclusively onincome and expense items, but also to take the balance sheet into account.Improvements to the existing capital structure can free up valuable resourcesand bring increased efficiency. Active working capital management is anextremely effective way to increase enterprise value. Optimizing workingcapital results in a rapid release of liquid resources and contributes to animprovement in free cash flow and to a permanent reduction in inventory andcapital costs. Page 36 of 96
  37. 37. My project on “Analysis of Working Capital Management in RanbaxyLaboratories Ltd.”The attempt is aimed to analyze the various aspects of working capitalmanagement of Ranbaxy and compare it with that of Dr Reddy’s,otherscompetitors and with industry standards. By adopting various calculation and analysis and then making interpretationwith the solution of specific problem, best efforts on giving appropriatesuggestion to the company have been made. DEFINING THE PROBLEMAreas of working capital has different problems and these are discussed separately in thefollowing sections: 1. Stock controlProblemIf too much stock is held, the organisation wastes money through a variety offactors: • Money is tied up in stock when it could be put to better use. • There are superfluous warehousing and storage costs. Page 37 of 96
  38. 38. • Stock may deteriorate. • There is a potentially greater risk of theft.On the other hand, too little stock can lead to stock-outs which can: • Halt activity • Lose income • Cause discomfort or distress to clientsHowever, finding the correct level of stock for any one particular item iscomplex. This is because there are many influencing factors including theanticipated demand for the items and the cost-efficient use of the organisationsresources. The aim is to find the right balance. 2. Debtor Control Problem “It is better to have cash in your bank account than in your customers ” Commercial organisations normally give credit to their customers in order to encourage sales. In the case of charities it is less likely that you are encouraging additional sales by giving credit and more likely that your clients will want credit and will wish to dictate the terms on which they will pay. Therefore, for voluntary organisations, management is more about dealing with credit than deciding on a control policy. • If you get the money in quickly you can use it for other purposes which will advance the organisations objectives. • Giving credit costs money, even if it is only a small amount of interest foregone. If you have an overdraft, the costs rise sharply. • If a large client demands an unreasonable amount of credit you may have to simply walk away from the contract. You cannot afford to risk running out of cash. • If stage payments are delayed, you may perhaps have to say, for example, that you will be unable to complete the contract; this may help with neogitations 3. Cashflow Management Page 38 of 96
  39. 39. Cash flow management is about achieving maximum effectiveness of cash receipts and payments. The aim is to strike a balance between: • Putting money to work for the charity so it returns a satisfactory yield from deposit accounts or short-term investments • Ensuring cash is available when needed to pay the day-to-day running expenses of the organisation, and also the fairly predictable "lump-sum" amounts - replacement of computing equipment, for example. Managing your cash balances is the most important part of working capital management. If an organisation runs out of cash resources it will have to stop operating immediately. There may not even be the money to pay the salaries at the end of the month, and the banks might have started dishonouring cheques. Furthermore, the trustees or directors could stand charged with wrongful or fraudulent trading, which could entail personal liability or even imprisonment. 4. Creditor control Creditor control is managing your relationship with organisations or people you owe money to, such as suppliers. It forms part of working capital management. It is, unfortunately the area over which not-for profit organisations have least control. If you are dealing with an industrial giant or a big local authority, they generally dictate the terms of trade. LITERATURE REVIEWWorking capital policy refers to the firms policies regarding1) target levels for each category of current operating assets and liabilities, and2) how current assets will be financed.Generally good working capital policy (i.e. under conditions of certainty) is considered tobe one in which holdings of cash, securities, inventories, fixed assets, and accounts payablesare minimized. The level of accounts receivables should be used as a means of stimulatingsales and other income. Previous literature on working capital management has found anegative association, overall, between level of working capital and operating performanceas measured by operating returns and operating margins (Peterson and Rajan, 1997). Underconditions 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. Larger amountswould increase the level of operating assets, increase the need for external funding, Page 39 of 96
  40. 40. resulting in lower return on assets and a lower return on equity, without any increase inprofit.However the picture changes when uncertainty (i.e. uncertain growth) is introduced(Brigham and Houston, 2000). Larger amounts of cash, securities, accounts receivables,marketable securities, inventories, and fixed assets will be needed to support increased salesRequired levels will be based on expected sales levels and expected order lead times.Additional holdings may be needed to enable the firm to deal with departures from theexpected values. Further, firms will also attempt to increase their accounts payable balancesas a means of financing increased levels of current operating assets. Firms which are in highgrowth stages will face the challenge of maintaining the necessary level of operating assetsto support subsequent growth, while at the same time attempting to maintain adequateperformance indicators.This study focuses on understanding how IPO companies manage their working capital andother balance sheet items to support subsequent growth. This study supports the existingliterature on working capital and contributes to the existing literature by examining asample of firms (i.e. recent IPO firms) which have a wider range of growth levels than non-IPO firms. Our study examines the impact of working capital management on the operatingperformance and growth of new public companies. The study also examines theserelationships under three categories of growth (i.e. negative growth, moderate growth, andhigh growth). The study also examines other selected firm characteristics in light ofworking capital management: firm operating and financial risk, amount of debt, firm size,and industry.An underlying theme of this study is that high growth certainly does not ensure highoperating performance. Consistent with prior research (Peterson and Rajan, 1997) this studyprovides further evidence that good working capital management is positively associatedwith better operating performance. Higher levels of accounts receivable are associated withhigher operating performance, in all three of the growth rate categories. The study also findsthat maintaining control over levels of cash, securities, inventory, fixed assets, and accountspayables is associated with higher operating performance. We find that firms which areexperiencing very high growth will hold higher levels of cash, securities, inventory, fixedassets, and accounts payable to support the high growth. The study suggests that these firmsare sacrificing operating performance (accepting lower operating returns) to support thehigh growth. This, in turn, increases financial and operating risk for these firms. PerhapsIPO firms should stay more focused on their operating performance, while maintainingmore moderate growth levelsAnother aspect of this study is that it fills a void in the initial public offerings literature.Recent literature finds that new public companies underperform the market after goingpublic. Ritter in his 1991 paper reports substantially lower stock returns for IPO firmsbetween 1975 and 1984 than for a size-and-industry-matched sample of seasoned firms.Since then there is a growing literature explaining IPO underperformance as related toagency cost (Smith, 1990), institutional holdings (Field, 1995), venture capital (Jain andGompers, 1997; Jain and Kini, 2000), market timing of IPO (Benninga, 2004), and earningsmanagement (Teho et al., 1998; Ahmad-zaluki et al., 2008). However, there is no studylinking the working capital management and post-IPO performance. Our paper tries to fillthe void. The findings of this study would be interesting to investors and creditors of newpublic companies. Page 40 of 96
  41. 41. METHODOLOGYA study by analyzing the trends of working capital of the firm and to examine the possiblecauses for any significant differences. The data has been collected from the financialstatements. For the purpose of this study, profitability is measured by Return on TotalAssets (ROTA), which is defined as profit before interest and tax divided by total assets.A comprehensive measure of profitability is best captured by computing the return ontotal assets which is equal to the total liabilities of the firms, made up mainly of equitycapital and current liabilities. All important ratios have been calculated to know the financial health of the company withthe help of past trends, mainly profitability & return ratios considered in section I ofanalysis part. It also covers the DuPont analysis and correlation analysis of working capital& its impact on profitability of the company. Section II consists of in depth analysis ofevery component of working capital. Page 41 of 96
  42. 42. All important components of working capital have been analyzed in detail i.e, Inventory,Cash, and Payables etcThe methodology to be adopted is as follows: • Collection of financial data of RANBAXY and Dr Reddy from annual reports and company’s internal resources. • Computation of various financial ratios and comparing them with standards and with each others. • Analyzing the trends of working capital of the firm and to examine the possible causes for any significant differences. • Various tools of analysis like correlation analysis, DuPont analysis, Ratio analysis etc to be applied. • All important components of working capital to be analyzed in detail i.e. Receivables, Inventory, Cash, Payables and Operating cycle. • Making comparison of the above computations with that of Dr Reddys.and industry standards. • Analysis of results, drawing conclusions and giving recommendations.FINANCIAL PERFORMANCE OF RANBAXYProfit after Tax (PAT) - Rs in Million Page 42 of 96
  43. 43. Sales (Rs in Millions) Page 43 of 96
  44. 44. Though the Sales of the company had been on a constant increase over the last 10 years,there was a sudden fall in the Profit After Tax (PAT-Profit available to the Equity holdersand the organization itself) in 2005, 2006 and 2008. The key reason for the sudden fall inPAT can be attributed to the sudden hike in the R&D expenditure in 2005.In 2008, there was an unprecedented economic downturn across all markets globally and thefluctuating financial and Forex environment created a substantial negative impact onprofitability. Further prohibition on drugs by the US Food and Drug Administration andpricing stress has acted as a wet blanket in the periodical figures of the company. The trendline shows the reason behind the fall in profitability.SELLING AND ADMINISTRATION COSTS Page 44 of 96
  45. 45. Comparison with the Industry StandardsThe following financial comparison has been made keeping in view the scale of operationsof the company and the Industry Standards. The Industry standards have been taken fromCentre for Monitoring Indian Economy (CMIE), March 2009.The following is the list of Company taken for Comparison:1. Cipla2. Sun Pharmaceuticals3. Dr Reddy’s Laboratories4. Lupin5. Ranbaxy Laboratories Ltd.For any company functioning in the free market, its important how best it operates but thisis equally important (if not more) that how it performs viz-a-viz its rivals i.e. other similarcompanies in the market. Here, to find out about Ranbaxy, a comparison has been madewith 5 other companies operating on comparable size to see whether Ranbaxy is followingindustry norms or not or whether Ranbaxy is doing better (or worse) compared to its rivals.Its liquidity position has been compared by considering Working Capital Turnover Ratio,Current Ratio and Quick Ratio and further Profitability of Ranbaxy viz-a-viz other Page 45 of 96
  46. 46. companies have been compared by considering Return on Capital Employed and Earningsper share.Liquidity RatiosThe liquidity refers to the availability of cash and cash convertible assets with anorganization to meet its short-term obligations i.e. creditors and other Current Liabilities.Any companys liquidity may vary due to seasonality, the timing of sales, and the state ofthe economy. But liquidity ratios can provide small business owners with useful limits tohelp them regulate borrowing and spending. Some of the best-known measures of acompanys liquidity include:1. Working Capital Turnover RatioIt is a measurement comparing the depletion of working capital to the generation of salesover a given period. This provides some useful information as to how effectively a companyis using its working capital to generate sales.A company uses working capital to fund operations and purchase inventory . Theseoperations and inventory are then converted into sales revenue for the company . Theworking capital turnover ratio is used to analyze the relationship between the money used tofund operations and the sales generated from these operations. In a general sense, the higher Page 46 of 96
  47. 47. the working capital turnover, the better it is because it means that the company is generatinga great degree of sales as compared to the money it utilizes.From the Industry comparison, it is apparent that Ranbaxy is way above the Industrystandards in 2008 which implies that the sales generated by Ranbaxy Laboratories hasalways been much higher than the cost incurred to generate those sa les as compared toother Pharmaceutical giants in the Industry.2. Current RatioThe current ratio of Ranbaxy has been compared with the Top five Pharmaceuticalorganizations for the year 2008. A Current ratio measures the ability of an entity to pay its near-term obligations. Though 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 2:1. The higher the current ratio, the greaterthe "cushion" between current obligations and a firms ability to pay them. A lower current ratiomeans that the company may not be able to pay its bills on time, whilea higher ratio means that the company has money in cash or safe investments that could be putto better use in the business.The ideal Current ratio to be maintained by the pharmaceutical cannot be accurately assessedbecause the scale of operations and the inventory size has been different for all the concerns inthe Industry. According to CMIE Industry Standards the current ratio for 2008 is 1.535. Page 47 of 96
  48. 48. As per the above graph, the Current ratio maintained by Ranbaxy in 2008 is way below thenormal industry standards. The reason for a lower Current Ratio is the heavy amount ofCurrent liabilities incurred mainly due to huge loss on derivative valuations. Ban in U.Smarket for more than 30 generic drugs and depreciation in several currencies were otherfactors for Ranbaxy’s dismal performance in 2008.3. Quick RatioQuick Ratio also known as „Acid Test Ratio‟ is an even conservative measure of liquidity.The ratio expresses the degree to which a companys current liabilities are covered by themost liquid current assets. Here Quick assets include all current assets except inventories. Page 48 of 96
  49. 49. A high ratio indicates under stocking and low ratio indicates over stocking. Stock isexcluded because it may take time to be converted into cash. Quick ratio measures thoseassets, which are immediately converted into cash without much loss. Though there is noway to measure an ideal Quick ratio but as a rule of thumb, it should be at least 1:1.From the above comparison, it can be inferred that a Ranbaxy’s Current liabilities weremuch more as compared to other companies. This is because although the Quick Ratiomaintained by Ranbaxy is very near a said ideal ratio of 1:1 but that way below the Industrystandards of 1.19 of the year 2008. Moreover, it can be clearly viewed from the BalanceSheet that a decent component of the Current liabilities includes fair valuation loss onderivatives. Page 49 of 96
  50. 50. Profitability RatiosProfit is the difference between revenue and expenses over a period of time. Theprofitability ratios are calculated to measure the operating efficiency of the company. 1. Return on Capital EmployedA return on capital employed, also called earning power is a measure of businessperformance which is not affected by interest charges and tax-burden. It abstracts away theeffect of capital structure and tax factor and focuses on operating performance. Hence it iseminently suited for inter- firm, so internally consistent.Return on Capital employed = Profit Before Tax / Total AssetsAs compared to other Pharmaceutical rivals in the Industry, Ranbaxy has a negative returnon Capital employed and way below the Industry standards of 8.06% for the year 2008.This means that the Profit before Tax (PBT) of the company is heavier on the Total Assetswhich is dragging down the Return on Capital Employed. This is mainly because of theforex decline due to global economic downturn and ban on generic products in the U.Smarket. 2. Earnings per Share(EPS) Page 50 of 96
  51. 51. EPS states a corporations profits on a per share basis. It can be helpful in furthercomparison to the market price of the stock. It is an index of profitability fromshareholder’s point of view. The higher the earning per share, the more attractive will be theinvestment plan.Earnings per share = Profit after tax / Number of equity sharesFrom the Industry comparison, it is clear that the earnings per share for the EquityShareholders of Ranbaxy are negative. The main reason for the figure of EPS beingnegative is the drastically low Profits it has incurred in the year 2008. Page 51 of 96
  52. 52. LIQUIDITY ANALYSIS OF RANBAXY LABORATORIES LIMITEDLiquidity of any company is the indicator as to how the company is placed with reference toits capacity to meet its current financial obligation. This means that here we have toconsider the current assets which can be easily converted into cash to meet its immediatefinancial obligations or dues. Liquidity position of Ranbaxy Laboratories Limited has beenanalyzed in the following paragraphs based on different measures.Current AssetsRanbaxy has a growth of around 318.23% in current assets over the period of ten years.From Rs 12310.24 Million in 1998-99, The Company has increased its current assets to Rs51485.24 Million. Coefficient of variation for this period has been 49.11 which indicate thatthe growth of current assets during the period under consideration has been sustainableexcept for the year 2007-08 which shows a sharp increase in current assets which is largelydue to increase in cash and bank balances which has increased more than ten times ascompared to 2007.Liquid Assets Page 52 of 96
  53. 53. Company has also witnessed significant increase in liquid assets. From Rs 8382.22 M in1998-99 to Rs 39500.05 M in 2007-08, there has been a growth of 371.24% in ten years. Asit is clear from the above mentioned data, liquid assets growth has been slightly more thanthe growth of current assets. Standard deviation and coefficient of variation for this periodhas been Rs 9079.38 M and 57.81% respectively.Current LiabilitiesFrom 1998-99 to 2007-08, current liabilities for Ranbaxy Laboratories have increased fromRs 4152.78 M to Rs 42725.97 M with average current liabilities over this period being Rs13067.47 M. As we see here, growth rate for current liabilities in this period has been928.85% which is much higher than the growth for current and liquid assets which showsthat current liabilities have increased at a higher pace than its corresponding assets. Further,coefficient of variation for this period is 84.91 which also reflect more flexibility in currentliabilities during this time. Current liabilities increased more than four times from 2007 to2008 primarily because of huge loss on derivative valuations. Ban in U.S market for morethan 30 generic drugs and deprecation in several currencies were another factors forRanbaxy’s dismal performance in 2008. Page 53 of 96
  54. 54. Working CapitalNet working capital is an important measure which itself indicate margin of safety orcushion of protection provided to the creditors. As the following diagram shows, thecompany has all over positive net working capital. The greater the amount of net work ingcapital, the greater the liquidity of the firm. NWC of the company increased from Rs8157.46 M to Rs 8759.27 M i.e. overall growth of 7.38% only. Coefficient of variation forthe NWC is also 20.99% which is also less as compared to current assets or currentliabilities. There is a decrease in Net working capital in the year 2008.Even though there isan increase in current asset and current liabilities however increase in current liabilities ismuch more which has let to decline in Net working capital. There is a decrease in Networking capital in the year 2008.Even though there is an increase in current asset andcurrent liabilities however increase in current liabilities is much more which has let todecline in Net working capital. Page 54 of 96
  55. 55. Growth Index of Net Working Capital Page 55 of 96
  56. 56. Working Capital (Quick)However, the measure of Net Working Capital does not indicate the true ability to paycurrent debts when they become due. The reason being the NWC being access of currentassets over current liabilities and since these current assets comprises of illiquid inventory,the measure of Quick Net Working Capital has been adopted. This is nothing but liquid orquick assets less the current liabilities. Quick assets refer to current assets less inventory.Following diagram shows that even though QNWC of the company has all along beenpositive, during 2003-04, it has been substantially low. Further, in 2007-08 it was negativebecause of exceptional increase in current liabilities. Page 56 of 96
  57. 57. Page 57 of 96
  58. 58. Components of Gross Working CapitalGross Working Capital has many constituents like inventory, sundry debtors, cash and bankaccounts etc. Composition has been calculated in Annexure-B at the end of this part ofreport. Gross Working Capital has been calculated considering four components namelyInventory, Sundry Debtors, Cash & Bank Balances and Loan & advances.Sundry Debtors to Gross Working CapitalOut of all four components of working capital, the component, namely sundry debtorscontributed highest to the working capital. It varied from a lowest of 19.69% in 2002-03 tothe highest of 40.40% in 2005-06. Over the period of time, on an average, sundry debtorscontributed 33.2% to the working capital. The increase in percentage of sundry debtorreflects a liberal credit policy with chances of bad debts and collection charges. Page 58 of 96
  59. 59. Inventory to Gross Working CapitalNext major component after sundry debtors is the inventory which decreased from 31.91%in 1998-99 to 23.28% in 2007-08 with the highest contribution in 2004-2005 that of39.33%. Over the period of time, on an average inventory has contributed 33.43% to theworking capital. However, in these ten years, there have not been substantial changes as faras inventory percentage is concerned as also evident from the diagram below.Cash & Bank to Gross Working CapitalCash and Bank balances have contributed the least to the gross working capital. It variedfrom 4.09% in 1998-99 to 37.58% in 2007-08 with lowest of 1.11% in 1999-00 and highestof 37.58% in 2007-08. On an average, in this period, cash and bank balance has contributed7.30% only to the working capital. Even the average of 7.30% is because of high percentagein 2007-08, in all other financial years this component has contributed very little toWorking Capital. In a business which is comfortable financed, cash and bank balanceshould not run less than 5 to 10% of the current assets. Further, as the current liabilities arenot expected to exceed half of the current assets, the cash percentage should not run under10 to 20%. This data indicates that the company had not maintained sufficient cash and Page 59 of 96
  60. 60. bank balance and this definitely affects the profitability of the company except for the year2008 which was high due to increase in deposit accounts of scheduled banks.Loan & Advances to Gross Working CapitalLoan and advances even though constituted one of the most important component of networking capital in 1998-99 (i.e. 25.02%), declined over the period of time as percentage ofworking capital. Over these ten years, approximately 26% working capital has beencontributed from loans and advances with a highest of 43.09% in 2002-2003. Page 60 of 96
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  62. 62. Ratio AnalysisEven though above analysis based on composition provide some indicator to the liquidityposition of the company, these do not show the extent of margin of safety provided forcurrent creditors. For this, ratio analysis has been done as follows:Current RatioRelationship between current assets and current liabilities is shown by current ratio. Itbasically measures company‟s ability to meet its short term obligation out of its short termresources. Higher the current ratio, the greater is the assurance of the ability to pay thecurrent liabilities and vice versa. However, even though a higher value of current ratio isgood for the creditors against their credit, it may not be good for the management as it willindicate poor financial planning and over capitalization. In normal circumstances,hypothetical norm of 2:1 is supposed to be a good current ratio and if the current ratio forthe company is less than that, the solvency or liquidity of the company becomesquestionable.As it is evident from the following table and the graph, the company had an average currentratio of 1.87 over the period of seven years from 2002 to 2008. However, as it is clear fromthe data that it varied from 2.19 to 1.21 which shows a variation over the years. Further, acurrent ratio of less than 2 is normally not supposed to be good as such it can be considered Page 62 of 96
  63. 63. the company passed through a difficult phase of liquidity in 2004 and 2008.However, over all for this period, the company was sound as far as its liquidity wasconcerned and it had liquidity facilities available for the creditors. The performancestandards of the Indian Pharmaceutical Industry for 2002-2008, as published by Centre forMonitoring Indian Economy (CMIE) are 1.51 to 1.54.The current ratios are always abovethe standards during the study period indicating a comfortable liquidity position for thecompany except for 2008. The average was also higher than the standard set by the CMIE.However, current ratio considers the quantity of current assets only and not its quality. So a Page 63 of 96
  64. 64. more in-depth analysis is required for definite inference to be drawn for the company’sliquidity.Quick Ratio or Acid Test RatioCurrent assets sometime also include a high amount of slow moving inventory or whichmay not move at all which means that even though current ratio of a company is very high,even though it may not be in a position to meet its immediate liabilities. For that, ananalysis of quick ratio is also needed which shows the extent of cushion provided from thequick assets to the current creditors. This ratio excludes the inventory and bank overdraft,which are normally difficult to realize at short notice. Quick ratio is defined as the ratio ofquick assets to quick liabilities. Under normal circumstance, an ideal quick ratio of 1:1 issupposed to be good enough which will reflect a satisfactory current financial condition. Page 64 of 96
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  66. 66. Above data for Ranbaxy Laboratories indicates that Acid Test Ratio for the period understudy has consistently been above 1 except for 2008 where it was lowest of 0.92 and anaverage of 1.23. It shows that the company has a healthy liquidity position in this period. Asper the set standards according to Indian Pharmaceutical Industry, norm for Acid Test Ratiois 1.07 to 1.19 and as such, considering the above data, it can be said that company’simmediate payment position was satisfactory and its liquid assets were adequate to meet itsshort term obligations.Absolute Liquidity Ratio or Cash Position RatioEven more rigorous than the quick ratio is the absolute liquidity ratio which is calculated evenexcluding receivables from the current assets. It does away with the doubts about the realizationof receivables and debtors. Absolute liquidity ratio or cash position ratio is calculated bydividing cash including bank balances and marketable securities by the amount of currentliabilities. Basically, it shows that how much cash is available for immediate payment for thecurrent obligations. A high cash position ratio is good from the creditors‟ point of view butfrom the management point of view, it indicates poor investment policy. Normally a ratio of0.5:1 or say 1:2 is considered to be acceptable. Page 66 of 96
  67. 67. Above data indicates that absolute liquidity ratio of cash position ratio of the company hasbeen consistently very low compared to the industry norm except for the year 2007- 2008where it rose to 0.45. It varied from a lowest of 0.03 to highest of 0.45. Over the period oftime, its average has been only 0.14. This shows that company has followed a policy of notmaintaining a high cash position ratio and rather focused more on utilization of cashresources. However, from a creditors point of view, cash position ratio for the company wasnot acceptable for the said duration. As compared to Industry standards of CMIE, theaverage was much lower than the acceptable norm.Inventory to Sales Ratio or Inventory Turnover RatioRelationship between the sales and average stock kept by the company is normally reflectedby the Inventory to Sales Ratio which is also called as Inventory Turnover Ratio. This is Page 67 of 96
  68. 68. also an indicator for the liquidity of the concern as it will reflect the rate at whichinventories are being converted into sales and subsequently cash. A higher inventory tosales ratio will show higher efficiency on the part of the management and vice versa.Following table shows that Inventory Sales Ratio varied from 3.78 in 2001-02 to 4.38 in2007-08. On an average, the value of Inventory Sales Ratio remained 3.82 for this period.Further, it is also evident from the table and the graph, that from 2001-02, efficiency ofmanagement has improved as far as conversion of inventory into sales was concerned. Asper the industry norm, normally an inventory sales ratio of more than 2 to 2.5 is consideredacceptable. As during this time, average of inventory turnover ratio in Ranbaxy was higherthan the Industry standard of CMIE, the inventory management of the company can be saidto be satisfactory from 2001-02 to 2007-08. Page 68 of 96
  69. 69. Debtors to Sales Ratio or Debtors Turnover RatioA company adopts a policy for credit and collection and this is important to find out howthe debtors are performing over the year. Debtors to Sales Ratio or Debtors Turnover Ratiois the indicator of number of times the debtors are turned over during the year. Sincedebtors constitute a major element of current assets, the credit and collection policy of aconcern must be under continuous watch. The liquidity of a firm depends upon the qualityof debtors to a great extent. Debtors Turnover Ratio measures the rapidity or slowness ofdebtors‟ collectability. Generally, the higher the value of the debtors‟ turnover ratio, themore efficient is the management of assets.As has been calculated in the following table, initially debtors to sales ratio for Ranbaxy in2001-02 was 4.0 initially which slightly improved over the period of time to 4.4 in 2007-08though it remained maximum in 2002-03 at 7.3. Over the period under consideration,average Debtors to Sales Ratio has been 4.78 with standard deviation 1.15 and coefficientof variation as 24.14. As per the standard norms, normally for an Indian ManufacturingCompany, the average debtors‟ turnover ratio is 4.92. This shows that the debtor‟s turnoverratio in the Ranbaxy was lower than the standard set by the industry norms which is not agood sign from the liquidity point of view. Page 69 of 96
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  71. 71. Working Capital Turnover RatioThere is a close relationship between sales and the working capital and the working capitalturnover ratio is an indicator of that. This ratio is computed by dividing the net sales by thenet working capital. It basically helps to understand the efficiency with which net workingcapital is being utilized. The higher the turnover, the greater is the efficiency and the largeris the rate of profit earned. However, a very high working capital turnover ratio is alsoindicative of over trading and lack of working capital. In other words, if the working capitalturnover ratio is very less, it means that working capital has not been efficiently utilized.In the table below, Ranbaxy has successfully improved its performance with reference torelationship between working capital and sales as is evident from the fact that WorkingCapital Turnover Ratio has improved from 2.95 in 2001-02 to 5.12 in 2007-08. For theduration of seven years, average ratio has been 3.46. It also means that for generating a saleof Rs 1, the company invested Rs 0.29. This shows that the management was active to takeassume risk and tended to reduce the size of working capital in relation to sales volume overthe period of time. The average of working capital turnover ratio for the company washigher than the standard set by CMIE. Page 71 of 96
  72. 72. Current Assets to Sales RatioCurrent Assets Turnover Ratio or Current assets to sales ratio is applied to measure theturnover and profitability of the total current assets employed to conduct the operations of afirm. This is calculated by dividing the amount of sales by the amount o f current assets.This will give an overall impression of how rapidly the total investment in current assets isbring turned. Lower the turnover of the current assets, the worse is the utilization of currentassets and vice-versa.This is to say that analysis of current assets to sales ratio over a period of time will show theoverall efficiency of the working capital management of the company.Following table again shows that the company over the period of time has improved itsefficiency as it is reflected by the fact that Current Assets to Sales Ratio has improved from1.6 in 2001-02 to 1.48 in 2006-07 except for 2007-08 where it has again decreased to 0.87.For the period of seven year, average current assets turnover ratio has been 1.45 withstandard deviation of 0.26 and coefficient of deviation as 18.13%. It shows that thedecreased volume of current assets in relation to sales was put in a commercially prudentmanner. The average of working capital turnover ratio for the company was lower than thestandard set by CMIE. Page 72 of 96
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  74. 74. Current Assets to Total Assets RatioThis ratio indicates the relationship between the total amount of current assets and theamount of investments in total assets. It indicates the extent of funds invested for workingcapital purpose out of total investment. Page 74 of 96