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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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TABLE OF CONTENTS
Abstract Introduction Industry Profile Research and Development Organizational profile Working capital Defining the problem Literature review Methodology Financial performance of Ranbaxy Liquidity Ratios Profitability Ratios Liquidity Analysis Ratio Analysis Liquidity Ranking Credit Analysis & Policies Conclusion Limitations Summary of findings Recommendations and Suggestions References
06 07 08 11 14 32 39 41 43 48 51 53 63 76 81 89 90 92 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 assetliability 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 differences. 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 technology. Facts about the Role of Pharmaceutical Industry in Indian Gross Domestic Product (GDP):
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Indian Pharmaceutical Industry ranks fourth in the world, pertaining to the volume of sales. The estimated worth of the Indian Pharmaceutical Industry is US$ 6 billion. The growth rate of the industry is about 13% per year. Almost most 70% of the domestic demand for bulk drugs is catered by the Indian Pharma Industry. The Pharma Industry in India produces around 20% to 24% of the global Generic drugs. The Indian Pharmaceutical Industry is one of the biggest producers of the Active Pharmaceutical Ingredients (API) in the international arena. The Indian Pharma sector leads the science-based industries in the country. Around 40% of the total pharmaceutical produce is exported. 55% of the total exports constitute of formulations and the other 45% comprises of bulk drugs. The Indian Pharma Industry includes small scaled, medium scaled, large scaled players, which totals nearly 300 different companies. As per the present growth rate, the Indian Pharma Industry is expected to be a US$ 20 billion industry by the year 2015. The Indian Pharmaceutical sector is also expected to be among the Top Ten Pharma based markets in the world in the next ten years The sales of the Indian Pharma Industry would worth US$ 43 billion within the next decade. The multinational companies, investing in research and development in India may save up to 30% to 50% of the expenses incurred Page 6 of 94
• • • •
The cost of hiring a research chemist in the US is five times higher than its Indian counterpart. The manufacturing cost of pharmaceutical products in India is nearly half of the cost incurred in US. The cost of performing clinical trials in India is one tenth of the cost incurred in US. The cost of performing research in India is one eighth of the cost incurred in US.
Following the de-licensing of the pharmaceutical industry, industrial licensing for most 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.
ADVANTAGE IN INDIA Competent workforce: India has a pool of personnel with high managerial and technical competence as also skilled workforce. It has an educated work force and 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 Page 7 of 94
generalized phenomenon in the world pharmaceutical industry, has started taking place in India. THE GROWTH SCENARIO 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 countries. (SOURCE Competitiveness of the Indian pharmaceutical industry in the new product patent regime a report by FICCI)
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RESEARCH AND DEVELOPMENT
Drug discovery is the process by which potential drugs are discovered or designed. In the past most drugs have been discovered either by isolating the active ingredient from traditional remedies or by serendipitous discovery. Modern biotechnology often focuses on understanding the metabolic pathways related to a disease state or pathogen, and manipulating these pathways using molecular biology or Biochemistry. A great deal of early-stage drug discovery has traditionally been carried out by universities and research institutions.
Drug development refers to activities undertaken after a compound is identified as a potential drug in order to establish its suitability as a medication. 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 preclinical 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 Page 9 of 94
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 reformulation 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 medication. 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. Postmarketing surveillance ensures that after marketing the safety of a drug is monitored closely. In certain instances, its indication may need to be limited to particular patient groups, and in Page 10 of 94
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.
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.
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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STEPS TO STRENGTHEN THE INDUSTRY 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.
INTRODUCTION TO RANBAXY
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COMPANY PROFILE “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, MILAN, ITALY. 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. Page 13 of 94
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 cost 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 Chemicals.
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 Page 14 of 94
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.
Mission “To become a Research based
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International pharmaceutical company” Vision-2012 Achieve significant business in Proprietary prescription products By 2012 With a strong presence in developed markets
Aspirations-2012 Aspire to be a$5 billion company Become a Top 5 global generics player Significant income from Proprietary products
OPERATING JOINT VENTURES AND SUBSIDIARIES
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BRAZIL CHINA EGYPT GERMANY HONG KONG INDIA IRELAND MALAYSIA NETHERLANDS NIGERIA PANAMA POLAND SOUTH AFRICA THAILAND U.K USA VIETNAM
: : : : : : : : : : : : : : : : :
Ranbaxy S.P. Medicamentos Ltd. Ranbaxy (Guangzhou China) Ltd. Ranbaxy Egypt Ltd. Basics Gmb H. Ranbaxy (Hong Kong) Ltd. Rexcel pharmaceuticals Ltd., Solus pharmaceuticals Ltd., Vidyut Travel Services ltd. Ranbaxy Ireland Ltd. Ranbaxy (Malaysia) Sdn. Bhd. Ranbaxy Pharmaceuticals B.V. Ranbaxy Nigeria Ltd. Ranbaxy Panama SA. Ranbaxy Poland Sp. Zo. Ranbaxy (SA) (Pty.) Ltd. Unichem pharmaceuticals LTD., Unichem Distributors Ltd. Part, Ranbaxy Unichem CO.Ltd. Ranbaxy (UK) Ltd Ranbaxy pharmaceuticals Inc. Ohm Laboratories Inc., Ranbaxy Schein Pharma, LLC 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 Diagnostics 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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VALUES OF RANBAXY LABORATORIES LIMITED
1. Achieving customer satisfaction is fundamental to their business. 2. Practice dignity and equity in relationships and provide opportunities for people to realize their full potential. 3. Ensure profitable growth and enhance wealth of shareholders. 4. Foster mutually beneficial relationships with all their business partners. 5. Manage their operations with concern for safety and environment. 6. Be a responsible corporate citizen.
OBJECTIVES OF RANBAXY LABORATORIES LTD.
1. 2. 3. 4. 5. 6. To be a leader in the Pharmaceutical industry. To be a profitable company with a steady growth in earnings. To set an example as a socially responsible company. To diversify in health care related areas. To strive for excellence and continuous improvement in all spheres. To improve the quality of life of people by providing better services and quality products.
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VARIOUS DIVISIONS OF RANBAXY LABORATORIES LTD.
1. 2. 3. 4. 5. 6. 7. 8. 9. Chemical Division Diagnostic Division Stan care Division Curradia Division International Division Pharmaceutical Division Technical Division Corporate Division Animal Health Care Division
DIVISIONS IN VARIOUS GEOGRAPHICAL AREAS
1. 2. 3. 4. India and Middle East Europe, CIS and Africa Asia Pacific and Latin America North America
JOINT VENTURE OF THE COMPANY.
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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 excellencefor 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
BRIEF INTRO OF RANBAXY PLANTS IN INDIA
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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 plants. 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
THE VARIOUS DEPARTMENTS
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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 equipment. 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.
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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 (Ciprofloxacin). 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 segment. 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. Cardiovasculars 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 category. Gastrointestinal 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. Rheumatologicals 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. Dermatologicals 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.
WORKING CAPITAL MANAGEMENT
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 Page 29 of 94
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 organization. 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.
WORKING CAPITAL INCLUDES FOUR BALANCE SHEET ITEMS
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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 made on credit. respect of sales
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. Page 32 of 94
Uses of Working Capital:
• • • • • • The typical uses of working capital are as follows: Adjusted net loss from operations Purchase of non-current assets: Repayment of long-term debt (debentures or bonds) and short-term debt (bank borrowing) Redemption of redeemable preference shares Payment of cash dividend.
ADVANTAGES OF ADEQUATE WORKING CAPITAL
• Increase in debt capacity and goodwill: Adequate working capital represents the financial soundness of the company. If one company is financially sound it would be able to pay its creditors timely and properly. It will increase company’s goodwill. Page 33 of 94
Thus a firm with adequate working capital can raise requisite funds from market, borrow short-term credit from banks, and purchase inventories of raw materials, etc., for the smooth operation of its business. • Increase in production efficiency: With adequate working capital the firm can smoothly carryout research and development activities and thus adds to its production efficiency. Exploitation of favorable opportunities: In the presence of adequate working capital, a company can avail the benefits of favorable opportunities. Adequate working capital will help the company to have bulk purchases, seasonal storage of raw material etc., which would reduce the cost of production. Meeting contingencies and adverse changes: A company can easily face certain business and economic crises. A company having adequate working capital can successfully meet contingencies such as business oscillations, financial crisis arising from heavy losses etc. Available cash discount: Maintenance of adequate working capital enables a company to avail the advantage of cash discount by making cash payments for to the suppliers of raw materials and merchandise. Solvency and efficiency of fixed assets: It helps to maintain the solvency of the company, so that payments could be made in time as and when they fall due. Attractive Dividend to Shareholders: It enables the company to offer attractive dividend to the shareholders so that sense of security and confidence will increase among them. It also increases the market value of its shares.
DISADVANTAGE OF INADEQUATE WORKING CAPITAL
• Loss of goodwill and creditworthiness: As the firm fails to honor its current liabilities it loses it goodwill and creditworthiness among its creditors.
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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 dayto-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.
STUDY OF WORKING CAPITAL MANAGEMENT OF RANBAXY LABORATORIES LTD
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.
DEFINING THE PROBLEM
Areas of working capital has different problems and these are discussed separately in the following sections:
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1. Stock control
Problem If too much stock is held, the organisation wastes money through a variety of factors: • 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 Problem
“It is better to have cash in your bank account than in your customers ”
Commercial organisations normally give credit to their customers in order to encourage sales. In the case of charities it is less likely that you are encouraging additional sales by giving credit and more likely that your clients will want credit and will wish to dictate the terms on which they will pay. Therefore, for voluntary organisations, management is more about dealing with credit than deciding on a control policy.
If you get the money in quickly you can use it for other purposes which will advance the 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 neogitations
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 Page 38 of 94
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 indicators. 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 industry. 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 Page 39 of 94
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 companies.
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. Page 40 of 94
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 standards. Analysis of results, drawing conclusions and giving recommendations.
FINANCIAL PERFORMANCE OF RANBAXY
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.
SELLING AND ADMINISTRATION COSTS
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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. Page 44 of 94
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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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 ANALYSIS OF RANBAXY LABORATORIES LIMITED
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.
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 2007.
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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.
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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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 Page 58 of 94
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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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:
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 Page 65 of 94
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 Page 72 of 94
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 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 Page 73 of 94
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 results.
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 significance
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 Page 75 of 94
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 Page 78 of 94
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 analysis.
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 Page 79 of 94
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 Page 80 of 94
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
CREDIT POLICY OF RANBAXY
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). Page 81 of 94
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 confidentiality. 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 Page 82 of 94
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. Speculation: 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 inventory.
Precaution: 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 shortterm obligations that the cash inflow may have been bench marked for. Transaction: 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. Page 83 of 94
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 company. Types of cash planning:• • Short term cash planning Long term cash planning
SHORT 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 Page 84 of 94
Methods • • 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. Page 85 of 94
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 RLL & DRL. 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.
SUMMARY OF FINDINGS
• 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. Page 87 of 94
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.
WORKING CAPITAL TURNOVER RATIO • 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.
DEBTORS TURNOVER RATIO • 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.
INVENTORY TURNOVER RATIO • 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.
QUICK RATIO • Ranbaxy has a satisfactory liquidity position. CURRENT RATIO • 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.
RELATIONSHIP BETWEEN SALES AND GROSS WORKING CAPITAL • There exists a negative correlation between the two, which indicates that the sales are low and this has led to an accumulation of stock.
RELATIONSHIP BETWEEN SALES AND NET WORKING CAPITAL • 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. Page 88 of 94
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 contingencies. 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
• • •
RECOMMENDATIONS AND SUGGESTIONS
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 company. 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 Page 89 of 94
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 ratio. 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 Page 90 of 94
well, currently it is 45 to 120 days depending upon different parties and their creditworthiness. • 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 manufacturing. 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 nonmonetary 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
WebPages • • www.pharmaceutical-business-review.com http://www.ranbaxy.com Page 92 of 94
• • • • • • • • • • • • • • • •
http://www.cipla.com http://www.google.com http://www.wikipedia.com http://www.drreddy.com http://www.lupingroup.com http://www.sunpharma.com http://www.moneypore.com www.bizstats.com www.reuters.com www.economictimes.com www.dereddys.com www.bloomsberg.com www.livemint.com www.studyfinance.com www.bized.com www.bpubs.com
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