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Project Report


A Comparative Analysis

Submitted to:

Businesses face ever increasing pressure on costs and growing Financing

requirements as a result of intensive competition in globalize markets. Many of
them are therefore considering ways of making themselves more efficient. In
identifying possible options it is important not to focus exclusively on income
and expense items, but also to take the balance sheet into account.

Improvements to the existing capital structure can free up valuable resources

and bring increased efficiency. Active working capital management is an
extremely effective way to increase enterprise value. Optimizing working
capital results in a rapid release of liquid resources and contributes to an
improvement in free cash flow and to a permanent reduction in inventory and
capital costs.

My project on “Analysis of Working Capital Management in Ranbaxy

Laboratories Ltd.”

The attempt is aimed to analyze the various aspects of working capital

management of Ranbaxy and compare it with that of Dr Reddy’s and with
industry standards.

By adopting various calculation and analysis and then making interpretation

with the solution of specific problem, best efforts on giving appropriate
suggestion to the company have been made.

To this context various methods and techniques like ratio analysis DuPont
analysis, statistical tool, Correlation analysis, and working towards the optimal
level of working capital, estimation of working capital and various ratios have
been used to draw an exact picture of company.

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Abstract 06
Introduction 07
Industry Profile 08
Research and Development 11
Organizational profile 14
Working capital 32
Defining the problem 39
Literature review 41
Methodology 43

Financial performance of Ranbaxy

Liquidity Ratios 48
Profitability Ratios 51
Liquidity Analysis 53
Ratio Analysis 63
Liquidity Ranking 76
Credit Analysis & Policies 81

Limitations 89
Summary of findings 90
Recommendations and Suggestions 92
References 95

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A project work is a mandatory requirement for the Business Management

Programme. This type of study aims at exposing the young prospective
executive 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 the
organization. It is very effective way to judge a company’s cash flow prospects,
as cash is like blood life for any company.

The report initially begins with the company profile, followed by the detailed
analysis of company, like businesses of the company, products offered by the
company, financials of the company, etc

The report involves a lot of research to understand what exactly working capital
is, why companies require working capital, what are the ideal ratios for Working
Capital a Company should maintain, etc. The purpose is to develop an action
plan that creates such a working capital that will upgrades and standardize
the quality of business analysis.

Various tools, including financial tools, are used in this project to calculate and
compare the financial position of the company, e.g. ratio analysis, DuPont
analysis, SWOT analysis, etc.

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A firm is required to maintain a balance between liquidity and profitability

while conducting its day to day operations. Liquidity is a precondition to ensure
that firms are able to meet its short-term obligations and its continued flow can
be guaranteed from a profitable venture.

The importance of cash as an indicator of continuing financial health should not

be surprising in view of its crucial role within the business. This requires that
business must be run both efficiently and profitably. In the process, an asset-
liability mismatch may occur which may increase firm’s profitability in the
short run but at a risk of its insolvency.

The purpose of this project is to examine the trends in working capital and its
impact on firm’s performance. The trend in working capital needs and
profitability of firm is examined to identify the causes for any significant

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 the
report looks briefly at the theoretical underpinnings and the relevant literature
which attempts to explain the link between poor performance and working
capital management.

After that, the analysis part covers in depth analysis of working capital of
Ranbaxy. Finally the conclusion is made & it has been observed that the overall
structure of working capital of the co. is good and it is a growing concern. The
company uses various techniques to maintain its working capital. Some
suggestions have been given on the basis of the conclusion.

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Industry Definition

“The Indian pharmaceutical industry is a success story providing employment for millions
and ensuring that essential drugs at affordable prices are available to the vast population of
this sub-continent.”
Richard Gerster

The Indian Pharmaceutical Industry today is in the front rank of India’s science-based
industries with wide ranging capabilities in the complex field of drug manufacture and

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
• 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
• 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
• The sales of the Indian Pharma Industry would worth US$ 43 billion within the next
• The multinational companies, investing in research and development in India may
save up to 30% to 50% of the expenses incurred
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• The cost of hiring a research chemist in the US is five times higher than its Indian
• 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 of the
drugs and pharmaceutical products has been done away with. Manufacturers are free to
produce any drug duly approved by the Drug Control Authority. Technologically strong and
totally self-reliant, the pharmaceutical industry in India has low costs of production, low
R&D costs, innovative scientific manpower, strength of national laboratories and an
increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and
research capabilities, supported by Intellectual Property Protection regime is well set to take
on the international market.


Competent workforce: India has a pool of personnel with high managerial and technical
competence as also skilled workforce. It has an educated work force and English is
commonly used. Professional services are easily available.

Cost-effective chemical synthesis: Its track record of development, particularly in the area
of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It
provides a wide variety of bulk drugs and exports sophisticated bulk drugs.

Legal & Financial Framework: India has a 53 year old democracy and hence has a solid
legal framework and strong financial markets. There is already an established international
industry and business community.

Information & Technology: It has a good network of world-class educational institutions

and established strengths in Information Technology.

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 is
finding great opportunities in India. The process of consolidation, which has become a
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generalized phenomenon in the world pharmaceutical industry, has started taking place in


India's 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 domestic
pharmaceuticals industry output is expected to exceed Rs260 billion in the financial year
2002, which accounts for merely 1.3% of the global pharmaceutical sector. Of this, bulk
drugs will account for Rs 54 bn (21%) and formulations, the remaining Rs 210 bn (79%). In
financial year 2001, imports were Rs 20 bn while exports were Rs87 bn.

The above graph shows the percentage of pharmaceutical products export by various
(SOURCE Competitiveness of the Indian pharmaceutical industry in the new product patent
regime a report by FICCI)

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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

Drug development refers to activities undertaken after a compound is identified as a

potential drug in order to establish its suitability as a medication. Objectives of drug
development are to determine appropriate Formulation and Dosing, as well as to establish
safety. Research in these areas generally includes a combination of in vitro studies, in vivo
studies, and clinical trials. The amount of capital required for late stage development has
made it a historical strength of the larger pharmaceutical companies

Often, large multinational corporations exhibit vertical integration, participating in a broad

range of drug discovery and development, manufacturing and quality control, marketing,
sales, and distribution. Smaller organizations, on the other hand, often focus on a specific
aspect such as discovering drug candidates or developing formulations. Often, collaborative
agreements between research organizations and large pharmaceutical companies are to
explore the potential of new drug substances formed

The cost of innovation

Drug discovery and development is very expensive; of all compounds investigated for use in
humans only a small fraction are eventually approved in most nations by government
appointed medical institutions or boards, who have to approve new drugs before they can be
marketed in those countries. Each year, only about 25 truly novel drugs (New chemical
entities) are approved for marketing. This approval comes only after heavy investment in pre-
clinical development and clinical trials, as well as a commitment to ongoing safety
monitoring. Drugs which fail part-way through this process often incur large costs, while
generating no revenue in return. If the cost of these failed drugs is taken into account, the cost
of developing a successful new drug (New chemical entity or NCE), has been estimated 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 new

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drug (along with the prospective drugs that fail) rose over a five year period to nearly $1.7
billion in 2003.

These estimates also take into account the opportunity cost of investing capital many years
before revenues are realized (see Time-value of money). Because of the very long time
needed for discovery, development, and approval of pharmaceuticals, these costs can
accumulate to nearly half the total expense. Some approved drugs, such as those based on re-
formulation of an existing active ingredient (also referred to as Line-extensions) are much
less expensive to develop. The consumer advocacy group Public Citizen suggests on its 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 for
regulation and subsidization of the industry through federally funded research grants.

Controversy about drug development and testing

There have been increasing accusations and findings that clinical trials conducted or funded
by pharmaceutical companies are much more likely to report positive results for the preferred

In response to public outcry about specific cases in which unfavorable data from
pharmaceutical company-sponsored research was suppressed, the Pharmaceutical Research
and Manufacturers of America have published new guidelines urging companies to report all
findings and limit the financial involvement in drug companies of researchers. As a result of
this public outcry and Pharma response the US congress signed into law a bill which requires
phase II and phase III clinical trials to be registered by the sponsor on the NIH website

Drug researchers not directly employed by pharmaceutical companies often look to

companies for grants, and companies often look to researchers for studies that will make their
products look favorable. Sponsored researchers are rewarded by drug companies, for example
with support for their conference/symposium costs. Lecture scripts and even journal articles
presented by academic researchers may actually be 'ghost-written' by pharmaceutical
companies. Some researchers who have tried to reveal ethical issues with clinical trials or
who tried to publish papers that show harmful effects of new drugs or cheaper alternatives
have been threatened by drug companies with lawsuits.

Product approval in the US

In the United States, new pharmaceutical products must be approved by the FDA as being
both safe and effective. This process generally involves submission of an Investigational new
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
conducted. Phase I generally studies toxicity using healthy volunteers. Phase II can include
Pharmacokinetics and Dosing in patients, and Phase III is a very large study of efficacy in the
intended patient population.

A fourth phase of post-approval surveillance is also often required due to the fact that even
the largest clinical trials cannot effectively predict the prevalence of rare side-effects. Post-
marketing surveillance ensures that after marketing the safety of a drug is monitored closely.
In certain instances, its indication may need to be limited to particular patient groups, and in

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others the substance is withdrawn from the market completely. Questions continue to be
raised regarding the standard of both the initial approval process, and subsequent changes to
product labeling (it may take many months for a change identified in post-approval
surveillance to be reflected in product labeling) and this is an area where congress is active.

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 drugs

There are special rules for certain rare diseases ("orphan

diseases") involving fewer than 200,000 patients in the United
States, or larger populations in certain circumstances. Because
medical research and development of drugs to treat such diseases is financially
disadvantageous, companies that do so are rewarded with tax reductions, fee waivers, and
market exclusivity on that drug for a limited time (seven years), regardless of whether the
drug is protected by patents.

Industry revenues

For 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 accounts
for almost half of the global pharmaceutical market, with $289 billion in annual sales
followed by the EU and Japan. Emerging markets such as China, Russia, South Korea and
Mexico outpaced that market, growing a huge 81 percent. US profit growth was maintained
even whilst other top industries saw slowed or no growth. Despite this, "..the pharmaceutical
industry is — and has been for years — the most profitable of all businesses in the U.S. In the
annual Fortune 500 survey, the pharmaceutical industry topped the list of the most profitable
industries, with a return of 17% on revenue."

Pfizer's cholesterol pill Lipitor remains the best-selling drug in the world for the fifth year in
a row. Its annual sales were $12.9 billion, more than twice as much as its closest competitors:
Plavix, the blood thinner from Bristol-Myers Squibb and Sanofi-Aventis; Nexium, the
heartburn pill from AstraZeneca; and Advair, the asthma inhaler from GlaxoSmithKline.

IMS Health publishes an analysis of trends expected in the pharmaceutical industry in 2007,
including increasing profits in most sectors despite loss of some patents, and new
'blockbuster' drugs on the horizon.

Teradata Magazine predicted that by 2007, $40 billion in U.S. sales could be lost at the top 10
pharma companies as a result of slowdown in R&D innovation and the expiry of patents on
major products, with 19 blockbuster drugs losing patent.

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Indian companies need to attain the right product-mix for sustained future growth. Core
competencies will play an important role in determining the future of many Indian
pharmaceutical 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 and acquisition
options of either companies or products. This would help them to offset loss of new product
options, improve their R&D efforts and improve distribution to penetrate markets.

Research and development has always taken the back seat amongst Indian pharmaceutical
companies. In order to stay competitive in the future, Indian companies will have to refocus
and invest heavily in R&D.

The Indian pharmaceutical industry also needs to take advantage of the recent advances in
biotechnology and information technology. The future of the industry will be determined by
how well it markets its products to several regions and distributes risks, its forward and
backward integration capabilities, its R&D, its consolidation through mergers and
acquisitions, co-marketing and licensing agreements.

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“A company empowered by one mission –to place itself on the world map. An
enterprise propelled by one force-that synergizes its energies to charter unexplored
markets. Organizations fuelled by one dream-to transform competition into opportunity.”

Ranbaxy Laboratories Ltd. was incorporated in June 1961, in the name of M/S LEPITIT
RANBAXY LABORATORIES LTD and it commenced its business in MARCH 1962, in
technical and financial collaboration with an international company named LEPTIT SPA,

Ranbaxy Laboratories Pvt. Ltd. merged with “Leptit Ranbaxy Laboratories Pvt. Ltd.” in 1962
Ranbaxy and company also merged with this company in 1966. The collaboration
arrangement with M/S LEPTIT was terminated in 1966; after which Indian nationals acquired
the entire share capital of the company.

Therefore the word Leptit was removed from the name of the company. The name is known
as RANBAXY LABORATORIES LIMITED. In 1973 the company issued shares to the
general public and became a full fledged PUBLIC LIMITED COMPANY.

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Today, Ranbaxy has emerged as a Leading
Pharmaceutical Company on the Indian firmament,
with the second largest market share and enjoys an
enviable reputation for its high standard of ethics and
quality around its core strength of anti-infective, it has
produced new brands in emerging therapeutic areas
like cardiovascular, central nervous system and
nutritional. Supporting this expansion, the company
has invested in world class manufacturing infrastructure that leverages India’s comparative
Advantage and skilled manpower, while delivering international quality.

The company’s drive for Internationalism is guided by the well planned brand strategy that
covers 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 an
decent ranking as the eleventh largest company in the international generics space is the
resounding endorsement of its strategic mind.

It is clear that for a long time, the dominant share of revenues of the company would continue
to come from the ever expanding global generics market. Hence the intent of Ranbaxy
mission is to achieve a sustained growth rate through the continuous pursuit of innovation
phase one trials for pervasion, a compound for treating prosthetic males have been completed.
Phase 1 trials with clafrinast, an asthma compound is an important step towards research
based value creation.

This company also had success with Ciplofloxacine, an ingenious form, created through the
novel drug delivery systems research. As the demand of the bulk drugs inside the country and
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, initially
antibiotics 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

At present Ranbaxy have four plants for the manufacture of bulk drugs two at Mohali, one at
Dewas (M.P) AND Another at Toansa near ROPAR. At present, Ranbaxy is the second most
Indian company engaged in the manufacturing of Pharmaceuticals, Bulk Drugs and Fine

RANBAXY’s vast range of highly pure laboratory reagent and chemicals enjoy a place of
pride in the market. IT trends, has rebuilt As a step towards leveraging information for value
creation using its information backbone around an ERP application, along the focus on
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reengineering several business processes around the internet and has putting place business
solutions that challenge existing ways of doing Business. The undying spirit of the
company’s human assets and their intensive competitive and entrepreneurial energy has
played 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 exports
pharmaceutical substance and dosages forms to over 50 countries with the internationals sales
comprising of 45% of the total turnover.


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During the year 2002, the company has evolved a 10-year vision till 2012, for
sustaining significant growth consistent with its mission to be an international
research 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 important pharmaceutical

entities, expansion of manufacturing facilities both in India and strategic
overseas locations, revamping of organizational structures to cater to the wider
and more dispersed span of operations, and streamlining and standardizing the
business processes through out the global organization, are other areas that
receive focus and attention of management on priority.


“To become a Research based

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International pharmaceutical company”


Achieve significant business in

Proprietary prescription products
By 2012
With a strong presence in developed markets


Aspire to be a$5 billion company

Become a Top 5 global generics player
Significant income from Proprietary products



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BRAZIL : 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) Ltd
USA : Ranbaxy pharmaceuticals Inc.
Ohm Laboratories Inc.,
Ranbaxy Schein Pharma, LLC
VIETNAM : Ranbaxy Vietnam Company Ltd.

Ranbaxy Animal Health

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The Animal Health division saw an encouraging growth despite the prevailing
poor market conditions. The division grew at twice the growth rate recorded in
the industry. On the basis of having a vast dome satiated animal population, the
livestock, poultry business and pets business are among the fastest growing
sectors in India. A vast infrastructure of veterinary colleges, agricultural
institutes, technologists and researchers are helping farmers to source healthy,
cost effective products. In conjunction with the present scenario, the AHC
division of Ranbaxy Laboratories Limited has introduced several latest
generation products.

Ranbaxy Fine Chemicals Limited (RFCL)

The division ranked 4th in the

industry and captured 11% market
share. RANKEM is established as a
powerful brand, RFCL's brand for
its range of Reagents is now
synonymous with excellence in
reagents and fine chemicals in the
country. The focus of business
remains on developing extensive
customer relations; enhancing service levels and enriching the product mix with
the help of a qualified and competent marketing and sales team


The diagnostics division has aggressively focused on market expansion

activities based on strategy of reliability, quality products and efficient service.
Introduction of products in ‘Point of Care’ markets has expanded market
presence and over the next 1 – 2 years this segment will see considerable
expansion in line with world trends.

The Dade Behring segment has increased its installation base by 60% in leading
hospitals and laboratories. Plans are afoot for the introduction of more
parameters for the ‘Point of Care’ market and the launch of Special Chemistries,
a range of drug assays, plus an entry into automated microbiology in both the
Base and Dade Behring business areas.

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The company has also witnessed significant milestones in the area of Novel
Drug Delivery Systems (NDDS). The company has entered into strategic
business arrangements with companies such as Bayer AG, Glaxo-Wellcome,
Eli-Lilly etc. for production and co-marketing operations. Many innovative
developments have been taking place in recent times. The company’s research
team 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 in India.

In order to expand and promote global growth, the company opened several new
markets during the year, notably in Brazil, where 25 filings were undertaken in
a span of 2-3 months.

The company has planned to build and protect intellectual property with the
help of IPC, which addresses all matters pertaining to patents. CQA supervises
the implementation of standard operating procedures (SOP) and ensures
compliance to corporate quality assurance policy in all technological operations
of the organization. The company is committed to invest 6% of the sales in R
and D by 2003, of which 7% of the expenditure will be earmarked for research
on New Drug Discovery and Novel Drug Delivery Systems. There will be
continuous emphasis on augmenting R and D performance and productivity
with advanced scientific and technological tools.

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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.



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.

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1. Chemical Division
2. Diagnostic Division
3. Stan care Division
4. Curradia Division
5. International Division
6. Pharmaceutical Division
7. Technical Division
8. Corporate Division
9. Animal Health Care Division



1. India and Middle East

2. Europe, CIS and Africa
3. Asia Pacific and Latin America
4. North America


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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 year.ranbaxy signed an agreement
toacquire RPG(aventis) SA along with its fully owned
subsidiary,OPIH SARL,in france

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) Limited
2008 Acquired by the Japanese giant, the $9.62 billion Daiichi Sankyo, ranked
No. 3 in Japan


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In the chemical division, various bulk drugs are manufactured. The chemical
division had three units in Punjab. One is located at Toansa, two are located at
Mohali 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 are
manufactured. One of the older plants of Ranbaxy was closed after the accident
in June 2003.the second one is still working

The 1991, the Toansa plant started functioning in 1992 and the Dewas plant
started functioning in 1999. Various plant heads independently manage all these
In each unit, separate facilities with respect to the manufacture of drugs, along
with their manufacturing areas have been provided. This is required to reduce
the chances of any cross contamination under the drug laws and to comply with
good manufacturing practices.
At Mohali plant, separate blocks have been provided for the preparation of each
drug .The Toansa, Mohali and Dewas plants are planned in such a way that their
system, facilities, manufacturing practices and standards meet the requirements
of FDA. Mohali Plant also mainly in the manufacturing of Active
Pharmaceutical Ingredients (API). The Plant is divided into two plant areas A8
and A9


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Human Resource Department

The basic function of the human resource department in the modern corporate
world is knowledge management. The HR department strives to maintain
cohesiveness among employees. It also ensures interdepartmental cooperation in
achieving targets. The appraisal system is also taken care by this department.
The HR department delves deep into the employee’s psyche to analyze the
positives and negatives of each employee, so that a proper system of delegation
and / or empowerment can be evolved.

Finance Department

The finance department takes care of the regular financial needs of the company
it ensures proper allocation of funds and takes care of the working capital
requirements. It verifies capital raised by different departments and sends them
for approval to the higher authorities.

Stores Department

The function of this department is to provide adequate and proper storage and
preservation of various items to meet the demand of various other departments
by proper issues and maintaining accounts of consumption. It also keeps a track
of stock accumulation and abnormal consumption.

Erection and Fabrication Department

As the name suggests, this department identifies new projects and helps in
erecting them. This department also undertakes major modifications of

ERP Department

ERP department helps to integrate the entire enterprise starting from the
supplier to the customer, covering financial and human resources. This will
enable the enterprise to increase productivity by reducing costs. It also ensures a
single solution to the information needs of the whole organization.

Production Department

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As a part of their on going commitment to produce hi-tech quality drugs and
pharmaceuticals that take care of the specific needs of markets around the
world, Ranbaxy Laboratories Limited has increased the investment in the
production department. It is the most important department of the company and
has the following objectives:

1. Improving volume of production.

2. Reducing rejection rate.
3. Maintaining rework rate.

Engineering Department

This department undertakes building, construction and maintenance.

Maintaining service facilities such as water, gas, heating, ventilation, air
conditioning, painting and plumbing are some of the other areas dealt by this
department. This department also helps in maintaining electrical equipments
such as generators, transformers, telephone system and electrical installation.

Purchase Department

The purchase department provides material to the factory without which the
wheels of machines cannot move. The various functions performed by this
department include: Securing good vendor performance, including prompt
deliveries 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 Department

The purpose of QC & QA departments is to ensure that the desired quality

standard is achieved. It also ensures that the processing or fabrication of
material conforms to the specific characteristics selected, to assure that the
resulting product will in fact perform its intended function.

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Ranbaxy’s therapeutic width covers five of the top six categories including
Anti-infective, Gastrointestinal, Nutritionals, Cardiovascular, Central Nervous
System, Respiratory, Dermatological and others. While anti-infective contribute
56% of the total sales, Ranbaxy’s other brands like Simvotin and Storvas in the
cardiovascular segment, Serlift in CNS and Revital and Riconia in 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

Anti - Infectives

Anti- infective has been the main driver of Ranbaxy’s sales. The important
brands 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, with
estimated sales of US $ 32 Mn, currently being marketed in 15 countries.
Development of Ciprofloxacin once a day has been an important landmark
achieved by Ranbaxy. The product has been licensed to Bayer. Cifran continues
to be a dominant player in the quinolones market in India, China and Russia.

Sporidex is another leading brand in Ranbaxy’s product portfolio with

worldwide annual sales of US $ 35 Mn. It is available in eight different dosage
forms including capsules, dry powder for suspension, redimix, dispersible
tablets, paediatric drops, soft gelatin capsules, sachet and advanced formulation
for twice-daily administration. It is currently marketed in 15 countries. In India,
Sporidex is the leading brand with a market share of 36% of the Cephalexin

Keflor is available in seven different dosage forms and is the third-largest

selling 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 portfolio

with estimated sales of US $ 45 Mn by the year 2005. The product will be rolled
out to about 20 important markets during this period.

Zanocin, with approximate sales of US $ 10 Mn, is the seventh-largest

contributor to Ranbaxy’s total sales.

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Cepodem is currently available in three different countries outside India, and
will be rolled out to 13 different countries in the near future.


Cardiovascular is projected to be the second-best category for Ranbaxy. Statins

have been the key drivers for this segment. The sale of Simvastatin has grown
substantially in the past few years, a trend that is likely to continue in the future.
In India, Simvotin (Simvastatin) is the market leader in the cholesterol reducer
segment. Another leading brand in this category is Storvas (Atorvastatin).
Storvas has been one of the fastest-ever to enter the top-300 brands list of the
Indian pharma industry. Other global cardiovascular brands are Covance
(Losartan) and Caslot (Carvedilol).

Central Nervous System

The Central Nervous Segment is one of the important focus areas identified by
Ranbaxy, with Serlift being the key brand. In India, Serlift is number 1 amongst
Sertraline brands. New product introductions will be drivers of growth in this


Currently, gastrointestinal drugs are the second-largest category for Ranbaxy.

The key brands in this category include Histac and Romesac. The current annual
sales of Ranitidine are estimated to be around US $ 16 Mn and the product is
marketed in more than 20 countries.


The first generation Cox-2 inhibitors principally drive worldwide growth in

rheumatology. This category is estimated to grow exponentially for Ranbaxy,
with brands like Celecoxib. This year, Rofibax (Rofecoxib) introduced in India,
has established itself as a leader in the Cox-2 inhibitor category and has
overtaken all Celecoxib brands. It has been identified as a key Global brand for
the future.


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Nutritionals have been a major contributor to Ranbaxy’s sales. Two of the
important products in this category are Revital and Riconia. With annual sales
estimated at about US $ 10 Mn, Revital contributes a significant share of total
sales. It is a leading brand in India and has done exceedingly well in some parts
of the world as an OTC product.


The dermatology category is mainly driven by India region and is likely to show
a good growth pattern in the future. Some of the key brands doing well in this
segment are Mobizox, Silverex, Moisturex, etc.



As levers of financial management go, none bears more weight than working capital. The
viability of every business activity rests on daily changes in receivables, inventory and

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payables. It’s the lifeblood of the business, and every manager’s primary task to keep it
moving and put shareholders capital to work efficiently and effectively.

Working Capital is the capital used for the day-to-day operations in the organization. It
denotes the money that circulates in the organization for smooth functioning of the

Strict working capital management leads to immense improvement in internal efficiencies.

Working Capital is the difference between resources in cash (current assets) and
organizational 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 for
working 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.

This project was undertaken to analyze the working capital policies, working capital
management of the company and to reduce down their problems and finding the solutions
with respect to the working capital management of the company.

Working in an organization, especially with a brand like RANBAXY the main objective is to
learn maximum from the intellectually stimulating mentors and multi-dimensional colleagues
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 RANBAXY

Value Addition for the company

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A well designed and implemented working capital management is expected to contribute
positively to the creation of a firm’s value The purpose of this project is to examine the trends
in working capital management and its impact on firms’ performance.
This project would help Ranbaxy in comparing its financial status with its competitors. The in
depth analysis might bring out some key issues that may be ignored but may prove significant
for the company. Various analyses conducted for analyzing the working capital will prove
beneficial to the company.

Working Capital:

“Working Capital includes the current assets and current liabilities areas of the balance
sheet. Working Capital can be called by its alternative name - "Net Current Assets”.

Working Capital Management is the process of planning and controlling the level and mix of
current assets of the firm as well as financing these assets. It may be regarded as a life blood
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 ultimate downfall in a
going concern. Analysis of working capital is of major importance to internal and external
analysis because it is closely related to the current day-to-day operations.



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• 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.

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.
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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
• Redemption of redeemable preference shares
• Payment of cash dividend.


• 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.

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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

• 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.

• 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.



• Loss of goodwill and creditworthiness: As the firm fails to honor its current
liabilities it loses it goodwill and creditworthiness among its creditors.

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• 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 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 Ratio

Company must have adequate working capital pursuant to its requirements. It should neither
be excessive nor inadequate. Both situations are dangerous. While inadequate working
capital adversely affects the business operations and profitability, excessive working capital
remains idle and earns no profits for the company. So company must assure its working
capital is adequate for its operations.



Businesses face ever increasing pressure on costs and growing Financing

requirements as a result of intensive competition in globalize markets. Many of
them are therefore considering ways of making themselves more efficient. In

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identifying possible options it is important not to focus exclusively on income
and expense items, but also to take the balance sheet into account.

Improvements to the existing capital structure can free up valuable resources

and bring increased efficiency. Active working capital management is an
extremely effective way to increase enterprise value. Optimizing working
capital results in a rapid release of liquid resources and contributes to an
improvement in free cash flow and to a permanent reduction in inventory and
capital costs.

My project on “Analysis of Working Capital Management in Ranbaxy

Laboratories Ltd.”

The attempt is aimed to analyze the various aspects of working capital

management of Ranbaxy and compare it with that of Dr Reddy’s,others
competitors and with industry standards.

By adopting various calculation and analysis and then making interpretation

with the solution of specific problem, best efforts on giving appropriate
suggestion to the company have been made.


Areas of working capital has different problems and these are discussed separately in the
following sections:

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1. Stock control


If too much stock is held, the organisation wastes money through a variety of
• Money is tied up in stock when it could be put to better use.
• There are superfluous warehousing and storage costs.
• 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 clients
However, finding the correct level of stock for any one particular item is
complex. This is because there are many influencing factors including the
anticipated demand for the items and the cost-efficient use of the organisation's
resources. The aim is to find the right balance.

2. Debtor Control


“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 organisation's 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.

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• 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

3. Cashflow Management

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.


Working capital policy refers to the firm's policies regarding

1) target levels for each category of current operating assets and liabilities, and

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2) how current assets will be financed.

Generally good working capital policy (i.e. under conditions of certainty) is considered to be
one in which holdings of cash, securities, inventories, fixed assets, and accounts payables are
minimized. The level of accounts receivables should be used as a means of stimulating sales
and other income. Previous literature on working capital management has found a negative
association, overall, between level of working capital and operating performance as measured
by operating returns and operating margins (Peterson and Rajan, 1997). Under conditions of
certainty (i.e. sales, costs, lead times, payment periods, and so on, are known), firms have
little reason to hold more working capital than a minimum level. Larger amounts would
increase the level of operating assets, increase the need for external funding, resulting in
lower return on assets and a lower return on equity, without any increase in profit.

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 sales Required
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 the expected values.
Further, firms will also attempt to increase their accounts payable balances as a means of
financing increased levels of current operating assets. Firms which are in high growth stages
will face the challenge of maintaining the necessary level of operating assets to support
subsequent growth, while at the same time attempting to maintain adequate performance

This study focuses on understanding how IPO companies manage their working capital and
other balance sheet items to support subsequent growth. This study supports the existing
literature on working capital and contributes to the existing literature by examining a sample
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 operating
performance and growth of new public companies. The study also examines these
relationships under three categories of growth (i.e. negative growth, moderate growth, and
high growth). The study also examines other selected firm characteristics in light of working
capital management: firm operating and financial risk, amount of debt, firm size, and

An underlying theme of this study is that high growth certainly does not ensure high
operating performance. Consistent with prior research (Peterson and Rajan, 1997) this study
provides further evidence that good working capital management is positively associated with
better operating performance. Higher levels of accounts receivable are associated with higher
operating performance, in all three of the growth rate categories. The study also finds that
maintaining control over levels of cash, securities, inventory, fixed assets, and accounts
payables is associated with higher operating performance. We find that firms which are
experiencing very high growth will hold higher levels of cash, securities, inventory, fixed
assets, and accounts payable to support the high growth. The study suggests that these firms
are sacrificing operating performance (accepting lower operating returns) to support the high
growth. This, in turn, increases financial and operating risk for these firms. Perhaps IPO firms
should stay more focused on their operating performance, while maintaining more moderate
growth levels

Another 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 going
public. Ritter in his 1991 paper reports substantially lower stock returns for IPO firms
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between 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 to agency cost
(Smith, 1990), institutional holdings (Field, 1995), venture capital (Jain and Gompers, 1997;
Jain and Kini, 2000), market timing of IPO (Benninga, 2004), and earnings management
(Teho et al., 1998; Ahmad-zaluki et al., 2008). However, there is no study linking the
working capital management and post-IPO performance. Our paper tries to fill the void. The
findings of this study would be interesting to investors and creditors of new public


A study by analyzing the trends of working capital of the firm and to examine the possible
causes for any significant differences. The data has been collected from the financial
statements. For the purpose of this study, profitability is measured by Return on Total Assets
(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 on total

assets which is equal to the total liabilities of the firms, made up mainly of equity capital
and current liabilities.
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All important ratios have been calculated to know the financial health of the company with
the help of past trends, mainly profitability & return ratios considered in section I of analysis
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 of every
component of working capital.

All important components of working capital have been analyzed in detail i.e, Inventory,
Cash, and Payables etc

The 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
• Analysis of results, drawing conclusions and giving recommendations.


Profit after Tax (PAT) - Rs in Million

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Sales (Rs in Millions)

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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 holders and the
organization itself) in 2005, 2006 and 2008. The key reason for the sudden fall in PAT 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 the
fluctuating financial and Forex environment created a substantial negative impact on
profitability. Further prohibition on drugs by the US Food and Drug Administration and
pricing stress has acted as a wet blanket in the periodical figures of the company. The trend
line shows the reason behind the fall in profitability.


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Comparison with the Industry Standards
The following financial comparison has been made keeping in view the scale of operations of
the company and the Industry Standards. The Industry standards have been taken from Centre
for Monitoring Indian Economy (CMIE), March 2009.

The following is the list of Company taken for Comparison:

1. Cipla
2. Sun Pharmaceuticals
3. Dr Reddy’s Laboratories
4. Lupin
5. Ranbaxy Laboratories Ltd.

For any company functioning in the free market, its important how best it operates but this is
equally important (if not more) that how it performs viz-a-viz its rivals i.e. other similar
companies in the market. Here, to find out about Ranbaxy, a comparison has been made with
5 other companies operating on comparable size to see whether Ranbaxy is following
industry 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 companies
have been compared by considering Return on Capital Employed and Earnings per share.
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Liquidity Ratios
The liquidity refers to the availability of cash and cash convertible assets with an organization
to meet its short-term obligations i.e. creditors and other Current Liabilities. Any company's
liquidity may vary due to seasonality, the timing of sales, and the state of the economy. But
liquidity ratios can provide small business owners with useful limits to help them regulate
borrowing and spending. Some of the best-known measures of a company's liquidity include:

1. Working Capital Turnover Ratio

It is a measurement comparing the depletion of working capital to the generation of sales over
a given period. This provides some useful information as to how effectively a company is
using its working capital to generate sales.
A company uses working capital to fund operations and purchase inventory . These
operations and inventory are then converted into sales revenue for the company . The
working capital turnover ratio is used to analyze the relationship between the money used to
fund operations and the sales generated from these operations. In a general sense, the higher
the working capital turnover, the better it is because it means that the company is generating a
great degree of sales as compared to the money it utilizes.

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From the Industry comparison, it is apparent that Ranbaxy is way above the Industry
standards in 2008 which implies that the sales generated by Ranbaxy Laboratories has always
been much higher than the cost incurred to generate those sa les as compared to other
Pharmaceutical giants in the Industry.

2. Current Ratio

The current ratio of Ranbaxy has been compared with the Top five Pharmaceutical organizations
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 greater the
"cushion" between current obligations and a firm's ability to pay them. A lower current ratio
means that the company may not be able to pay its bills on time, while
a higher ratio means that the company has money in cash or safe investments that could be put to
better use in the business.
The ideal Current ratio to be maintained by the pharmaceutical cannot be accurately assessed
because the scale of operations and the inventory size has been different for all the concerns in
the Industry. According to CMIE Industry Standards the current ratio for 2008 is 1.535.

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As per the above graph, the Current ratio maintained by Ranbaxy in 2008 is way below the
normal industry standards. The reason for a lower Current Ratio is the heavy amount of
Current liabilities incurred mainly due to huge loss on derivative valuations. Ban in U.S
market for more than 30 generic drugs and depreciation in several currencies were other
factors for Ranbaxy’s dismal performance in 2008.

3. Quick Ratio

Quick Ratio also known as „Acid Test Ratio‟ is an even conservative measure of liquidity.
The ratio expresses the degree to which a company's current liabilities are covered by the
most liquid current assets. Here Quick assets include all current assets except inventories.

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A high ratio indicates under stocking and low ratio indicates over stocking. Stock is excluded
because it may take time to be converted into cash. Quick ratio measures those assets, which
are immediately converted into cash without much loss. Though there is no way 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 were much
more as compared to other companies. This is because although the Quick Ratio maintained
by Ranbaxy is very near a said ideal ratio of 1:1 but that way below the Industry standards of
1.19 of the year 2008. Moreover, it can be clearly viewed from the Balance Sheet that a
decent component of the Current liabilities includes fair valuation loss on derivatives.

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Profitability Ratios
Profit is the difference between revenue and expenses over a period of time. The profitability
ratios are calculated to measure the operating efficiency of the company.

1. Return on Capital Employed

A return on capital employed, also called earning power is a measure of business

performance which is not affected by interest charges and tax-burden. It abstracts away the
effect of capital structure and tax factor and focuses on operating performance. Hence it is
eminently suited for inter- firm, so internally consistent.

Return on Capital employed = Profit Before Tax / Total Assets

As compared to other Pharmaceutical rivals in the Industry, Ranbaxy has a negative return on
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 Assets which
is dragging down the Return on Capital Employed. This is mainly because of the forex
decline due to global economic downturn and ban on generic products in the U.S market.

2. Earnings per Share(EPS)

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EPS states a corporation's profits on a per share basis. It can be helpful in further comparison
to the market price of the stock. It is an index of profitability from shareholder’s point of
view. The higher the earning per share, the more attractive will be the investment plan.

Earnings per share = Profit after tax / Number of equity shares

From the Industry comparison, it is clear that the earnings per share for the Equity
Shareholders of Ranbaxy are negative. The main reason for the figure of EPS being negative
is the drastically low Profits it has incurred in the year 2008.

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Liquidity of any company is the indicator as to how the company is placed with reference to
its capacity to meet its current financial obligation. This means that here we have to consider
the current assets which can be easily converted into cash to meet its immediate financial
obligations or dues. Liquidity position of Ranbaxy Laboratories Limited has been analyzed in
the following paragraphs based on different measures.

Current Assets

Ranbaxy 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 Rs
51485.24 Million. Coefficient of variation for this period has been 49.11 which indicate that
the growth of current assets during the period under consideration has been sustainable except
for the year 2007-08 which shows a sharp increase in current assets which is largely due to
increase in cash and bank balances which has increased more than ten times as compared to

Liquid Assets

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Company has also witnessed significant increase in liquid assets. From Rs 8382.22 M in
1998-99 to Rs 39500.05 M in 2007-08, there has been a growth of 371.24% in ten years. As it
is clear from the above mentioned data, liquid assets growth has been slightly more than the
growth of current assets. Standard deviation and coefficient of variation for this period has
been Rs 9079.38 M and 57.81% respectively.

Current Liabilities

From 1998-99 to 2007-08, current liabilities for Ranbaxy Laboratories have increased from
Rs 4152.78 M to Rs 42725.97 M with average current liabilities over this period being Rs
13067.47 M. As we see here, growth rate for current liabilities in this period has been
928.85% which is much higher than the growth for current and liquid assets which shows that
current liabilities have increased at a higher pace than its corresponding assets. Further,
coefficient of variation for this period is 84.91 which also reflect more flexibility in current
liabilities during this time. Current liabilities increased more than four times from 2007 to
2008 primarily because of huge loss on derivative valuations. Ban in U.S market for more
than 30 generic drugs and deprecation in several currencies were another factors for
Ranbaxy’s dismal performance in 2008.

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Working Capital

Net working capital is an important measure which itself indicate margin of safety or cushion
of protection provided to the creditors. As the following diagram shows, the company has all
over positive net working capital. The greater the amount of net work ing capital, the greater
the liquidity of the firm. NWC of the company increased from Rs 8157.46 M to Rs 8759.27
M i.e. overall growth of 7.38% only. Coefficient of variation for the NWC is also 20.99%
which is also less as compared to current assets or current liabilities. There is a decrease in
Net working capital in the year 2008.Even though there is an increase in current asset and
current liabilities however increase in current liabilities is much more which has let to decline
in Net working capital. There is a decrease in Net working capital in the year 2008.Even
though there is an increase in current asset and current liabilities however increase in current
liabilities is much more which has let to decline in Net working capital.

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Growth Index of Net Working Capital

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Working Capital (Quick)

However, the measure of Net Working Capital does not indicate the true ability to pay current
debts when they become due. The reason being the NWC being access of current assets 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 or quick 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 been positive, during
2003-04, it has been substantially low. Further, in 2007-08 it was negative because of
exceptional increase in current liabilities.

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Components of Gross Working Capital
Gross Working Capital has many constituents like inventory, sundry debtors, cash and bank
accounts etc. Composition has been calculated in Annexure-B at the end of this part of report.
Gross Working Capital has been calculated considering four components namely Inventory,
Sundry Debtors, Cash & Bank Balances and Loan & advances.

Sundry Debtors to Gross Working Capital

Out of all four components of working capital, the component, namely sundry debtors
contributed highest to the working capital. It varied from a lowest of 19.69% in 2002-03 to
the highest of 40.40% in 2005-06. Over the period of time, on an average, sundry debtors
contributed 33.2% to the working capital. The increase in percentage of sundry debtor reflects
a liberal credit policy with chances of bad debts and collection charges.

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Inventory to Gross Working Capital

Next 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 of 39.33%.
Over the period of time, on an average inventory has contributed 33.43% to the working
capital. However, in these ten years, there have not been substantial changes as far as
inventory percentage is concerned as also evident from the diagram below.

Cash & Bank to Gross Working Capital

Cash and Bank balances have contributed the least to the gross working capital. It varied from
4.09% in 1998-99 to 37.58% in 2007-08 with lowest of 1.11% in 1999-00 and highest of
37.58% in 2007-08. On an average, in this period, cash and bank balance has contributed
7.30% only to the working capital. Even the average of 7.30% is because of high percentage
in 2007-08, in all other financial years this component has contributed very little to Working
Capital. In a business which is comfortable financed, cash and bank balance should not run
less than 5 to 10% of the current assets. Further, as the current liabilities are not expected to
exceed half of the current assets, the cash percentage should not run under 10 to 20%. This
data indicates that the company had not maintained sufficient cash and bank balance and this

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definitely affects the profitability of the company except for the year 2008 which was high
due to increase in deposit accounts of scheduled banks.

Loan & Advances to Gross Working Capital

Loan and advances even though constituted one of the most important component of net
working capital in 1998-99 (i.e. 25.02%), declined over the period of time as percentage of
working capital. Over these ten years, approximately 26% working capital has been
contributed from loans and advances with a highest of 43.09% in 2002-2003.

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Ratio Analysis
Even though above analysis based on composition provide some indicator to the liquidity
position of the company, these do not show the extent of margin of safety provided for
current creditors. For this, ratio analysis has been done as follows:

Current Ratio

Relationship between current assets and current liabilities is shown by current ratio. It
basically measures company‟s ability to meet its short term obligation out of its short term
resources. Higher the current ratio, the greater is the assurance of the ability to pay the current
liabilities and vice versa. However, even though a higher value of current ratio is good for the
creditors against their credit, it may not be good for the management as it will indicate 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 for the company is less than that,
the solvency or liquidity of the company becomes questionable.
As it is evident from the following table and the graph, the company had an average current
ratio of 1.87 over the period of seven years from 2002 to 2008. However, as it is clear from
the data that it varied from 2.19 to 1.21 which shows a variation over the years. Further, a
current ratio of less than 2 is normally not supposed to be good as such it can be considered
the company passed through a difficult phase of liquidity in 2004 and 2008.

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However, over all for this period, the company was sound as far as its liquidity was
concerned and it had liquidity facilities available for the creditors. The performance standards
of the Indian Pharmaceutical Industry for 2002-2008, as published by Centre for Monitoring
Indian Economy (CMIE) are 1.51 to 1.54.The current ratios are always above the standards
during the study period indicating a comfortable liquidity position for the company 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 more in-depth analysis is
required for definite inference to be drawn for the company’s liquidity.

Quick Ratio or Acid Test Ratio

Current assets sometime also include a high amount of slow moving inventory or which may
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, an analysis of
quick ratio is also needed which shows the extent of cushion provided from the quick 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 of quick assets
to quick liabilities. Under normal circumstance, an ideal quick ratio of 1:1 is supposed to be
good enough which will reflect a satisfactory current financial condition.

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Above data for Ranbaxy Laboratories indicates that Acid Test Ratio for the period under
study has consistently been above 1 except for 2008 where it was lowest of 0.92 and an
average of 1.23. It shows that the company has a healthy liquidity position in this period. As
per the set standards according to Indian Pharmaceutical Industry, norm for Acid Test Ratio
is 1.07 to 1.19 and as such, considering the above data, it can be said that company’s
immediate payment position was satisfactory and its liquid assets were adequate to meet its
short term obligations.

Absolute Liquidity Ratio or Cash Position Ratio

Even more rigorous than the quick ratio is the absolute liquidity ratio which is calculated even
excluding receivables from the current assets. It does away with the doubts about the realization
of receivables and debtors. Absolute liquidity ratio or cash position ratio is calculated by dividing
cash including bank balances and marketable securities by the amount of current liabilities.
Basically, it shows that how much cash is available for immediate payment for the current
obligations. A high cash position ratio is good from the creditors‟ point of view but from the
management point of view, it indicates poor investment policy. Normally a ratio of 0.5:1 or say
1:2 is considered to be acceptable.

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Above data indicates that absolute liquidity ratio of cash position ratio of the company has
been consistently very low compared to the industry norm except for the year 2007- 2008
where it rose to 0.45. It varied from a lowest of 0.03 to highest of 0.45. Over the period of
time, its average has been only 0.14. This shows that company has followed a policy of not
maintaining a high cash position ratio and rather focused more on utilization of cash
resources. However, from a creditors point of view, cash position ratio for the company was
not acceptable for the said duration. As compared to Industry standards of CMIE, the average
was much lower than the acceptable norm.

Inventory to Sales Ratio or Inventory Turnover Ratio

Relationship between the sales and average stock kept by the company is normally reflected
by the Inventory to Sales Ratio which is also called as Inventory Turnover Ratio. This is also

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an indicator for the liquidity of the concern as it will reflect the rate at which inventories are
being converted into sales and subsequently cash. A higher inventory to sales 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 in
2007-08. 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 of
management has improved as far as conversion of inventory into sales was concerned. As per
the industry norm, normally an inventory sales ratio of more than 2 to 2.5 is considered
acceptable. As during this time, average of inventory turnover ratio in Ranbaxy was higher
than the Industry standard of CMIE, the inventory management of the company can be said to
be satisfactory from 2001-02 to 2007-08.

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Debtors to Sales Ratio or Debtors Turnover Ratio

A company adopts a policy for credit and collection and this is important to find out how the
debtors are performing over the year. Debtors to Sales Ratio or Debtors Turnover Ratio is the
indicator of number of times the debtors are turned over during the year. Since debtors
constitute a major element of current assets, the credit and collection policy of a concern must
be under continuous watch. The liquidity of a firm depends upon the quality of debtors to a
great extent. Debtors Turnover Ratio measures the rapidity or slowness of debtors‟
collectability. Generally, the higher the value of the debtors‟ turnover ratio, the more
efficient is the management of assets.
As has been calculated in the following table, initially debtors to sales ratio for Ranbaxy in
2001-02 was 4.0 initially which slightly improved over the period of time to 4.4 in 2007-08
though 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 coefficient of variation
as 24.14. As per the standard norms, normally for an Indian Manufacturing Company, the
average debtors‟ turnover ratio is 4.92. This shows that the debtor‟s turnover ratio in the
Ranbaxy was lower than the standard set by the industry norms which is not a good sign from
the liquidity point of view.

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Working Capital Turnover Ratio
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There is a close relationship between sales and the working capital and the working capital
turnover ratio is an indicator of that. This ratio is computed by dividing the net sales by the
net working capital. It basically helps to understand the efficiency with which net working
capital is being utilized. The higher the turnover, the greater is the efficiency and the larger is
the rate of profit earned. However, a very high working capital turnover ratio is also
indicative of over trading and lack of working capital. In other words, if the working capital
turnover 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 to
relationship between working capital and sales as is evident from the fact that Working
Capital Turnover Ratio has improved from 2.95 in 2001-02 to 5.12 in 2007-08. For the
duration of seven years, average ratio has been 3.46. It also means that for generating a sale
of Rs 1, the company invested Rs 0.29. This shows that the management was active to take
assume risk and tended to reduce the size of working capital in relation to sales volume over
the period of time. The average of working capital turnover ratio for the company was higher
than the standard set by CMIE.

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Current Assets to Sales Ratio

Current Assets Turnover Ratio or Current assets to sales ratio is applied to measure the
turnover and profitability of the total current assets employed to conduct the operations of a
firm. 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 is bring
turned. Lower the turnover of the current assets, the worse is the utilization of current assets
and vice-versa.
This is to say that analysis of current assets to sales ratio over a period of time will show the
overall efficiency of the working capital management of the company.
Following table again shows that the company over the period of time has improved its
efficiency as it is reflected by the fact that Current Assets to Sales Ratio has improved from
1.6 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 with standard
deviation of 0.26 and coefficient of deviation as 18.13%. It shows that the decreased volume
of current assets in relation to sales was put in a commercially prudent manner. The average
of working capital turnover ratio for the company was lower than the standard set by CMIE.

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Current Assets to Total Assets Ratio

This ratio indicates the relationship between the total amount of current assets and the amount
of investments in total assets. It indicates the extent of funds invested for working capital
purpose out of total investment.

Table above shows that current assets to total assets ratio was 0.63 in 2001-02 which came
down to 0.44 in 2007-2008. Over the period of seven years under consideration, average
current assets to total assets ratio has been 0.5 with standard deviation of 0.13 and coefficient
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of variation as 25.47%. Higher investment in current assets shows that the firm had a better
liquidity in the beginning however it also shows that profitability was less as higher liquidity
normally results in lesser profitability. The average of working capital turnover ratio for the
company was lower than the standard set by CMIE

Consistency among all ratios

Table given in Annexure C shows the calculation of all the ratios in addition to its mean,
standard deviation and coefficient of variation. By comparing CV for different variables,
consistency of different ratio can be compared with. Greater the CV, less consistent is the
ratio or it can be considered more fluctuating.
As evident from the table, absolute liquidity ratio is least consistent and fluctuates a lot
between different values whereas inventory to sales ratio is the most consistent with very
little fluctuations.

Liquidity Ranking
Liquidity position of the company is affected by the composition of working capital. In order
to evaluate the overall liquidity position, Motaal‟s comprehensive test has been applied. In
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this test, a method of ranking has been applied to arrive at a more comprehensive assessment
of liquidity in which four different factors viz inventory to current assets ratio, sundry debtors
to current assets ratio, cash & bank to current assets ratio and loans & advances to current
assets ratios have been computed and combines in a points score. To calculate that, a high
value of sundry debtors to current assets ratio, cash & bank to current assets ratio and loans &
advances to current assets ratios shows a relatively favorable liquidity position and ranking
has been done in that order. Contrary to this, a low inventory to current assets ratio indicates
more favorable liquidity position and hence, ranking has been done accordingly. Final
ranking has been done on the basis that the lower the total of the individual ranks, the more
favorable is the liquidity position of the company and vice versa.
A comprehensive calculation sheet is attached at Annexure D which resulted in following

Above table shows that the Ranbaxy had the most sound liquidity position during the year
1998-1999 and 2006-2007. On the contrary, 2003-2004 was the weakest year as far as the
liquidity position was concerned.

Coefficient of a Rank Correlation and testing the

As the liquidity and profitability, both are important for any company, I have analyzed the
relationship between the two by using Spearman’s rank correlation coefficient. Further, to
judge the significance of the relationship, the t-test has been applied.

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To do this analysis, liquidity indicator has been taken to be the ratio of current assets to total
assets. Ratio of return on capital employed has been taken as the indicator for profitability. A
detailed calculation has been done in the excel table which has resulted in the following:

Rank correlation coefficient between the liquidity and profitability of the company has been
calculated as 0.452562. To study the significance of the computed value of correlation
coefficient, the t-test has been applied as:
H0: Null Hypothesis – There exists no significant correlation between the liquidity and
profitability of Ranbaxy Laboratories Limited.
H1: Alte rnative Hypothesis – There exists a significant correlation between the liquidity
and profitability of Ranbaxy Laboratories Limited.
Say 5 % level of significance, α = 0.05
Critical Value of t for 5 % level of significance = 2.306

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In above case, t has been calculated in above table itself which comes out to be 2.571 which
is greater than the critical value of t i.e.2.262 which shows that the null hypothesis may be
rejected which means that there is significant relationship between liquidity and profitability.

Financing of Working Capital

Need of working capital could be met in many ways. However, it‟s normally consists of
Short term financing and long term financing. Cost of financing is different for short term and
long term financing and it‟s this reason that an attempt has been made to analyze the funding
pattern of working capital at Ranbaxy Laboratories Limited. Calculation for financing of
working capital has been made in the following table by dividing it into short term and long
term financing.

As is evident from the above table, during 1998-99, % of long term finance used for working
capital requirement was 38.02% which has seen an overall decline in the period under
consideration to 7.48% in 2007-08. It has reached the maximum in 1998-99 to 38.02%. There
is a clear indication that company has with passage of time shifted its preference towards
short term financing (aggressive policy) which might be primarily because of the uncertain
and short term nature of the pharmaceutical market.

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Working Capital Trend Analysis
Working capital trend is very important to study about the practice and policy of the
management of the company with regard to whether the company is following a proper policy
towards working capital or some improvement is needed for better management of working
capital funds. The trend value of working capital has been calculated as follows:

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It is evident from the above table that working capital has increased over the period of time
from Rs 8157.46 M in 1998-99 to Rs 8759.27 M in 2007-08. It had an increasing trend except
in the year 200-01, 2003-04 and 2007-08 where the working capital had actually declined.

Besides establishing credit standard, a firm should develop procedures for evaluating credit
applicants. The second aspect of credit policy of a firm is credit analysis and investigation.

There are two steps involved in the credit investigation.

• Obtaining Credit Information
• Analysis of Credit Information

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Obtaining of credit information

The first step in credit analysis is obtaining credit information on which to the base
evaluation of a customer. The sources of information are:
Internal Sources: Usually company requires their customers to fill various forms and
documents giving details about financial operations. Some times company also asks for
references. Another source of internal information is the records of the firm contemplating an
extension of credit.
• External Sources: Some of the external sources of information are
• Financial Statements
• Bank References
• Trade References
• Credit Bureau Reports

Analysis of credit information

Once the credit information has been collected from different sources, it should be analyzed
to determine the credit worthiness of customer. The analysis should cover two aspects.
Quantitative Analysis The assessment of the quantitative aspects is based on the factual
information available from the financial statements, past records of the firm and so on.

First step in this assessment is to prepare an aging schedule to calculate average age of
accounts payable. Another method is ratio analysis, i.e. calculation of liquidity, profitability
and debt capacity ratios, of the applicant. These ratios will help to find out financial strength
of applicant.

Qualitative Analysis This type of assessment is based on subjective judgment. It covers

quality of management, references from suppliers, banks and other reports prepared by
special credit bureaus. On the basis of all these things analysis will be drawn under qualitative

Other important decision in receivables management is related to terms of credit. The
stipulations under which goods are sold on credit are referred as credit terms. These are
relates to the repayment of the amount under the credit sale.
Credit terms have three components:
• Credit Period
• Cash Discount
• Cash Discount Period

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Credit Period

It is the duration of time for which trade credit is extended – during this period the overdue
amount must be paid by the customer.

Cash Discount

This is the amount for which the customer can take advantage of by making early payment.
Sometimes company offer its customer a condition that if they will pay amount early than the
scheduled the time than they will get some discount. This is called cash discount. Cash
discount provided by the company can affect the sales volume, average collection period and
profits of the company.

Cash Discount Period

It refers as duration during which the cash discount can be availed of. It is directly related to
sales generally. For instance, if company increases its cash discount period than its average
collection period will also increase. With the increase in average collection period sales level
is also increases.


Collection policies refer to the procedures followed to collect the account receivables when,
after the expiry of the credit period they become due. It includes two aspects:

(i) Degree of collection efforts and

(ii) Type of collection efforts.

Degree of Collection efforts

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It refers what degree of efforts; company is using to collect its receivables. If company use
strict efforts than bad debts costs will decline, and average collection period will also reduce.
But cost involved in this kind of strategy is comparatively high. Also sales volume can be
decline with this policy. On the other hand, lenient efforts are just opposite to strict efforts.
So company has to decide that method in which overall cost is low and revenue is high.

Type of collection efforts

The methods available are

• Telephone calls for personal contacts
• Letters including reminders
• Personal Visits
• Help of Collection agencies
• Legal Action


As we know that a manufacturing company is frequently deals with debtors and most of its
sales are credit sales. A huge amount of capital is blocked in to receivables. Therefore to
make an effective credit policy is very important for the company. Ranbaxy is, like many
other companies, involves in both kinds of sales i.e. domestic as well as exports. It have
different credit policies for both domestic and export customers.
For domestic customers: Most of the domestic sales of Ranbaxy are based on advance
payment. Some part of contract money is received in advance and then sale is made.
Remaining amount is received later on. Generally, the credit period allowed by Ranbaxy is up
to 45 days but sometimes it went up to 60 days also (only via prior approval of management).

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Company also doesn’t plan for any bad debts losses, but if any bad debt happen than it has to
be written off fully.

For obtaining information related to the new applicants only internal sources are used. As
company generally deals with blue chip companies or old customers, it is not a difficult job to
obtain information about them. No external source is used by Ranbaxy.
And for the analysis part, company use both qualitative and quantitative tools. As per
qualitative tool, company generally go for market reputation and past record of customer and
for quantitative tool, company use the size of order, financial position of customer etc.
As far as collection efforts are concerned, company generally uses lenient efforts. But in
some cases company also go for strict methods. Ranbaxy normally uses all types of collection
efforts like letters including reminders, telephone calls, personal visits & legal actions. But
company doesn’t take help of collection agencies.
The collection cost is very nominal in domestic sales and difficult to determine. Whereas
capital cost is equal to the cost of working capital which is not determined because of

For Export Sales: From the sale data of Ranbaxy it was found that around 66% of sales are
based on exports. Therefore it is very important area for planning. Exports are based on letter
of credit. A foreign company who want to purchase the material from Ranbaxy sent an LC
first. Than on the basis of that LC, export order is made. Copy of that order is sent to
corporate office and head office at Gurgaon and New Delhi respectively.. From the
manufacturing plants, the material is dispatched as per the export order and LC is sent to bank
for collection. Banks collects the amount and transfers it to Ranbaxy’s account. No other
credit policy is present for export sale of Ranbaxy.

Collection cost is around 0.5 – 1 % of export order. Capital cost is here also equal to the
working capital cost.


Cash flows in a cycle into, around and out of a business. It is the business's lifeblood and
every manager's primary task is to help keep it flowing and to use the cash flow to generate
profits. If a business is operating profitably, then it should, in theory, generate cash surpluses.
If it doesn't generate surpluses, the business will eventually run out of cash and expire. The
faster a business expands the more cash it will need for working capital and investment. The
cheapest and best sources of cash exist as working capital right within business.
The goal is to receive cash as soon as possible while at the same time waiting to pay out cash
as long as possible. Even profitable companies fail if they have inadequate cash flow.
Liabilities are settled with cash not profits. Here a firm already is holding the cash so the goal
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is to maximize the benefits from holding it and wait to pay out the cash being held until the
last possible moment. The primary objective of working capital management is to ensure that
sufficient cash is available to:

• Meet day-to-day cash flow needs;

• Pay wages and salaries when they fall due;
• Pay creditors to ensure continued supplies of goods and services;
• Pay government taxation and providers of capital – dividends;
• Ensure the long-term survival of the business entity.

Cash is both the balancing figures between debtors, stock and creditors, and also the control
element. It is not possible to extend credit, order stock or pay creditors if there is not the cash
available to meet working capital demands.

Here the liquidity, risk and return of investments must all come into play with the length of
time before funds are needed playing an important role.
More fundamental than this is cash flow control – making sure funds are available when
needed. In the short term this is best achieved by preparation of weekly or monthly forecasts
for comparison with actual results.

Reason for firms holding Cash:

The finance profession recognizes the three primary reasons offered by economist John
Maynard Keynes to explain why firms hold cash. The three reasons are for the purpose of
speculation, for the purpose of precaution, and for the purpose of making transactions. All
three of these reasons stem from the need for companies to possess liquidity.


Here company holding cash as creating the ability for a firm to take advantage of special
opportunities that if acted upon quickly will favor the firm. An example of this would be
purchasing extra inventory at a discount that is greater than the carrying costs of holding the


Holding cash as a precaution serves as an emergency fund for a firm. If expected cash inflows
are not received as expected cash held on a precautionary basis could be used to satisfy short-
term obligations that the cash inflow may have been bench marked for.


Firms hold cash in order to satisfy the cash inflow and cash outflow needs that they have. The
firm needs cash primarily to make payments for purchases, wages and salaries, other
operating expenses, taxes, dividends, etc. The need to hold cash would not arise if there were
perfect synchronization between cash receipts and cash payments.

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Cash Planning

Cash planning is a technique to plan and control the use of cash. It helps to anticipate the
future cash flows and needs of the firm and reduces the possibility of idle cash balances and
cash deficits. Cash planning protects the financial condition of the firm by developing a
projected cash statement from a forecast of expected cash inflows and outflows for a given
period. Cash planning may be done on daily, weekly or monthly basis. The period and
frequency of the planning generally depends upon the size and nature of business of

Types of cash planning:-

• Short term cash planning

• Long term cash planning


Definition and functions

It is comparative easy to make short term cash forecasts. It helps in determining the cash
requirements for a predetermined period to run a business. If the cash requirements are not
determined, it would not be possible for management to know – how much cash balance is to
be kept in hand, to what extent bank financing be dependent upon and whether surplus funds
would be available to invest in marketable securities. The important functions of short term
cash planning are:-

• To determine operating cash requirements

• To anticipate short term financing
• To manage investment of surplus cash
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• The receipts and disbursement method

• The adjusted net income method

The receipts and disbursement method:-

This method is generally employed to forecast for limited periods, such as a week or month.
Cash flows in and out in most companies on a continuous basis. The prime aim of this
method is to summarize these flows during a predetermined period. Three broad sources of
cash inflows can be identified as

(i) operating,
(ii) non-operating
(iii) Financial.

Cash sales and cash received from debtors come under operating cash flows. Non – operating
income includes sale of fixed assets, dividends & interest income. Issue of shares & loans etc.
considered as financial inflows.
The next step is to determine cash outflows. Cash outflows include:

(i) Operating outflows: cash purchase, payments of payables, advances to suppliers,

wages & salaries etc.
(ii) Capital expenditure,
(iii) Contractual payments: repayment of loan, interest & tax payments etc.
(iv) Discretionary payments: ordinary and preference dividend.

Cash Management in Ranbaxy:

Cash management system adopted by Finance Department in Ranbaxy is very reliable and
transparent. As cash is a very important activity for a good operation of company here in RLL
cash is monitored every day and intimated to Finance Department. The daily cash report
includes the all details of cash inflows and outflows. Monthly cash budgets are maintained for
the estimated of monthly cash inflows and outflows. Finally the annual cash budget is made
by the Finance Department in the corporate head office.
The corporate office allocates different amount of each to different manufacturing units as per
their requirement. Corporate office acts as a linkage between the manufacturing unit and
creditors. Corporate office has determined the credit facility for every units of the company
and this keeps on changing from year to year depending up on company’s position
transactions, profitability and inventory position.
The corporate office provides cash to manufacturing units but there most function is
controlled in unit itself. All the need related to inventory is met through corporate office as
well as individual efforts of unit.
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Fund Allocation:

Here the initial allocation for manufacturing units is done by corporate office and all
supplementary requirements are to look upon by Commercial department.

Fund Utilization:

Company operates an annual ‘Cash Budget’ and a rolling ‘Cash Plan’ drawn up every month.
Although specific forecasting technique is used, funds are deployed to different departments
as per their requirements. Daily reports on cash transaction are prepared by Procurement
department to keep a track of all payments made in the days work. Every month cash
transaction report is sent to Finance department in the corporate office showing all the
transaction of cash, (inflow and outflows) actual utilization of cash and allocation of fund is
compared. If the utilization of cash is more than the allocation of fund, then the plant has to
justify its more utilization.
To meet the requirement of cash company approach to bank and present the required detailed
by the bank. RLL kept less cash in hand to meet the entire cash requirement it depends on
financing process.


• Availability of the financial data was very limited which is not disclosed due to
sensitive nature for the company.

• The year ended for Ranbaxy is December, and that of Dr Reddys is March. So figures
taken are past 4 years but 3 months difference is there in the corresponding figures of

• The main component of working capital is cost of capital, which is not described in
the project because of confidential nature.

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• External environment influence was not considered while doing the theoretical
standard rather than the industrial standard because of unavailability of any such
specific standard.

• Lack of availability of plant related data to finance department which acted as a

limitation for the project.

• Efficiency falls to a great extent due the technical errors in the system. These errors refer
to the following:

The SAP server goes low due to the exhaustive load on a single server.
There is lack of machines at disposal because of which the speed of work
goes down.
The hardware provided to the staff is not up to the mark which adversely
affects the efficiency to a great extent.


• There is a huge investment in working capital at Ranbaxy Laboratories Limited, as it

has a large production cycles. The company follows a steady production policy and
hence there are no seasonal variations. Aggressive policy of more profitability, more
risk is followed, which is an ideal situation as far as the strategy for working capital
financing is concerned. Ranbaxy has a good earning record; thus it enjoys great
confidence of the suppliers, as it is looked upon favorably.

• As far as components of working capital are concerned, on the domestic front, sales
have increased as well as the finished goods inventory has also increased.

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• The increase in the current ratio of 2001 as compared to that of the previous year
indicates that the liquidity position of the company is improving. The inventory
turnover ratio of the company is not very high. It should try to achieve a quicker
movement of stock into sales. There is an inverse relationship between sales and
working capital at Ranbaxy Laboratories Limited.


• In general higher the ratio, more efficient is the management. Since Ranbaxy
Laboratories Limited has a low working capital ratio, it should look carefully into this
area to ensure its effective utilization.


• After analysis of the debtors turnover ratio, it was found out that Ranbaxy
Laboratories Limited has a low debtors turnover ratio, which may be a result of a
liberal and inefficient credit and collection policy. This involves the risk of bad debts
and the burden of high interests. This is another area that should be looked into.


• After analysis of this ratio, we can conclude that Ranbaxy Laboratories Limited is
holding an unfavorable quantity of inventory. Since, the inventory turnover ratio is
not very high, we can conclude that the management of inventory is not very efficient
because the stocks are not sold very frequently, as a result of which a large amount of
money is required to finance the working capital requirement.

• Ranbaxy has a satisfactory liquidity position.


• A current ratio of 2:1 is considered to be a satisfactory. If the current ratio is 2 or

more, it means that the company is adequately liquid and has the ability to meet its
current obligations. A lower current ratio indicates that the company may be trading
beyond its capacity. Ranbaxy Laboratories Limited has a satisfactorily high current
ratio but at same time it may mean that the company has idle cash which when
invested can yield returns to the company.


• There exists a negative correlation between the two, which indicates that the sales are
low and this has led to an accumulation of stock.


• Sales and net working capital have a negative correlation, which implies that there is
an inverse relationship between sales and net working capital. It shows that the sales
are low and this has led to an accumulation of stock.
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• Profitability ratios of Ranbaxy are low as compared to industry ratios it means that
company is investing a lot in its operations to compete with its competitors and is
expecting to reap profits in its coming years.

• The return ratios are not showing an increasing trend which is not a good sign for the
company’s growth. But return of working capital is increasing which means that
company is doing more sales with less working capital.

• Gearing ratio is low which shows that it is less levered firm, which is a good sign for
company and moreover its liquidity position is very strong.
The overall liquidity position is very strong. The company’s current ratio is approx.
3.5 from last many years which mean that company can manage any sort of financial

• The correlation shows the impact of various components of Working Capital on

Profitability of the company. So, that company can take care of main components.

• Ranbaxy’s Raw Material holding period is decreasing due to which its Raw Material
turnover is increasing, which is a positive sign.

• As far as Receivables are concerned co.’s credit policy varies from party to party and
according to the nature of the business & one can say that this policy is good for a
pharma company. Most of the domestic sales of Ranbaxy are based on advance
payment. Some part of contract money is received in advance and then sale is made
Ranbaxy’s total exports accounts for 66% & the balance 33% represent sales in India.

• The Inventory Holding Period (IHP) is almost constant due to this their Net Working
Capital cycle is also not showing a significant change.

• Average collection period is also increasing which needs to be shortened


Pertaining to Working Capital Management:

• Management of the company would be interested in every aspect of the financial

analysis. It is their overall responsibility to see that the firm’s resources are most
effectively and efficiently utilized to ensure a sound financial position of the

• The financial policy of working capital management policy of the company has to be
revised. The firm follows an aggressive policy as far as working capital management

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is concerned. According to this policy, Risk and Profitability should be increased and
the liquidity should be reduced. Though the company has increased risk and reduced
liquidity, the profitability has not increased. This is an area into which the
management needs to look. Future forecasts of cash should also be made effectively in
order to meet unexpected requirements.

• As far as the inventory position is concerned, the company doesn’t have a sound
position. Better the quality, lesser would be the work-in-process. The rejected stock
has to go through further modifications until the quality department approves it. This
therefore remains as work-in-process and increases the value of the work-in-process.
Speeding up the quality checks can reduce the holding time of finished goods.

• Efforts should be made to keep the norms up to date. Thus a quarterly review is
suggested. Norms should be as realistic as possible as to give a correct estimate of the
inventory levels. The firm should make consistent efforts to increase its earnings in
order to move towards the path of growth.

• It is suggested that the firm should neither have too high nor too low debtor turnover

• There is an increase in the current ratio suggesting that there may be idle funds with
the company. It is therefore recommended that the company should invest the excess
cash in marketable securities. This would be more profitable than holding idle cash.

• It may also be mentioned that there is no rule of thumb or standard ratio. The norms
may be different depending upon the nature of the industry and business condition.

• Ranbaxy should focus on maintaining its consistency or increasing it as there is a

decline in their Operating Profit from last 3 years. It can be done by increasing its
sales and decreasing its operating costs. If company’s operating profit will increase,
then it will help in increasing its overall profitability.

• Company’s return ratios also need a check. Turnover ratios are decreasing but not up
to that extent. Dr.Reddys, its nearest competitor have better turnover ratios which
mean that Ranbaxy has scope to lower down its assets to maintain the same level of
sales or increase its sales on the same level of assets.

• As it was clear that company have high liquidity in its capital structure, it means a
close observation is required for the benefits of share holders. It should chanalize its
investments towards those areas where returns would be higher.

• The company should try to reduce its inventory holding to lower down the holding
cost & increase its Raw Material Turnover. It can also help in lower down the
operating cycle.

• The company should also try to reduce its Average collection period to It can also
help in lower down the operating cycle.

• Company can make some improvements in their credit policy. Currently they take
advance before delivering the consignment. They can increase the credit period as
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well, currently it is 45 to 120 days depending upon different parties and their

• As far as the cash management is concerned, it’s difficult to suggest anything because
I believe that company’s cash planning is very good. All the time company looks for
new investment opportunities in the market on a reasonable rate of return.

• The reduction in inventory holding period can be done by more outsource


• As company’s international sales are high (66%) and company should focus the
domestic markets as well, as demand for healthcare products is increasing in Indian
market. Also it is their social responsibility to provide maximum benefits to its
domestic customers.

Pertaining to Work Culture and Working Conditions:

• Besides improving the working efficiency of the employees, it is important that the
morale of the employees at work should be kept up through the following methods:

 They could be provided with rigorous training periodically so that they can be
well versed with the technology rather than confining their knowledge to their
domain only.

 They could be provided with regular incentives both monetary and non-
monetary so that they have a positive attitude towards their work. On the
contrary, this negative attitude becomes a bottleneck for the employees and the
swiftness of the system as a whole.

 Employees are required to give output rather than putting in time at their
workplace. Measures should be adopted to measure their performance rather
than measuring their work hours. They can be given deadlines both for a work
and the time. For this, timings could be made flexible.
It is the inter-dependency of the employees which makes their working rigid and lowers their
efficiency. This could be removed or at least minimized by regular training and improving the
working conditions for the staff.

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Pertaining to Technology:

The following changes need to be inculcated in the provision of technology to the employees:
 The machines provided to the employees are not up to the mark. There is no
uniformity in the speed and compatibility of systems. The systems should be regularly
upgraded. This would have an impact on the working efficiency of the employees.
 The number of machines on the floor at accounts department needs to be increased
because the existing systems are not able to do the needful.
 The SAP system is over-loaded due to exhaustive usage. This needs to be corrected
by taking the required measures. It can be rectified by changing or adding a server for
supporting SAP in Ranbaxy.

• Company’s Internal Documents
• Annual Reports
• Journals of Ranbaxy
• Text Books & Literature ( I.M Pandey).
• Financial Management Kalyani publishers



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