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CHAPTER-1 INDUSTRY OVERVIEW

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Industry overview The pharmaceutical industry is an exciting industry worldwide with growth rate of 8% and a turnover of around US$ 650 billion. In terms of value, the major constituents are the United States (US) (48% share), European Union (EU) (30%share) and Japan with a share of 9%, and the rest of the world, including India, contributes around 13%. However, in terms of volume, the share of the rest of the world is approximately three times larger. An example in this regard, is India, which ranks 4th in terms of volume with a share of 8% in the world pharmaceutical market and only 13th in terms of value. The annual turnover of the Indian pharmaceutical industry is approximately, US$ 20 billion according to Economic Survey Report of 2009-10. India now ranks 4th worldwide in volume and 13th in value. India exported drugs worth around US$ 8 billion in 2008-09, most of which to the US and Europe, followed by Central and Eastern Europe, Latin America and Africa and its drug exports have been growing 30 percent annually . Indian pharmaceutical industry is entering an era in which it is becoming a global hub for R&D activities, which may be in the area of new drug discovery. Indian pharmaceutical industry has also been increasing the R&D expenditure significantly in the recent years. Top Players: The top 10 big players in the market together occupy approximately 36% of the total market share. The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 6 % of the market share. It is an extremely fragmented market with severe price competition and government price control. Cipla the biggest pharmaceutical company (in terms of sales) is followed by Ranbaxy with market shares of 5.42 % and 5.09% respectively.

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1. Cipla 2. Ranbaxy 3. GSK(India) 4. Piramal Healthcare 5. Zydus Cadila 6. Sun Pharma 7. Lupin Laboratories 8. Alkem 9. Sanofi-Aventis(India) 10. Mankind Pharma ROLE OF PHARMACEUTICAL INDUSTRY IN INDIA:
 The Pharmaceutical Industry in India is one of the largest in the world of which 40% of

the total pharmaceutical produce in India is exported to other countries.  As of 2008, pharmaceutical sales comprised 1.22% of GDP.  55% of the total exports constitute of formulations and the other 45% comprises of bulk drugs.  Pharmaceutical Industry in India produces around 20% to 24% of the global generic drugs.  Sales of the Indian Pharmaceutical Industry would worth US$ 43 billion within the next decade.  This sector is one of the major foreign direct investments encouraging sectors.  The Indian Pharmaceutical sector is also expected to be among the top ten Pharmaceutical based markets in the world in the next ten years.  The Indian Pharmaceutical Industry is one of the biggest producers of the active pharmaceutical ingredients (API) in the international arena. 3

 The Indian Pharmaceutical sector leads the science-based industries in the country.  The pharmaceutical sector in India has the capacity and technology pertaining to complex drug manufacturing facilities.  The Indian Pharmaceutical Industry includes small scaled, medium scaled, large scaled players, which totals nearly 300 different companies. Future Prospects of the sector Indian pharmaceutical market, which is currently valued at USD 20 billion, could see the figure almost double in next 5 years majorly propelled by the steady growth in the domestic segment. The domestic market which is growing at almost 10 to 14 per cent at present itself will provide US$ 20 to 24 billion in 2015 and the exports and contract manufacturing business, which are growing at 10 per cent per annum, will contribute to achieve the predicted growth. Contract manufacturing business, which registered US$ 4 billion in 2007, is expected to reach 10 billion in 2015, with a 25 per cent growth rate. Contract manufacturing opportunity for India including for the international generic business is forecast to the level of US$ 18 to 20 billion. Contract manufacturing of core products of multi nationals in India is another opportunity for domestic companies as that business itself could add US$ 7 to 8 billion by 2015.India’s potential in R&D will be between US$ 8 to 10 billion by 2020. By 2015, the manufacturing opportunity in India including for the international generic business and the contract manufacturing business will be at US$ 18 to 20 billion. Indian companies should shift their focus from market capture to market creation, by entering into rural or unexplored areas. The companies should also customize the India business model and should explore global scale partnerships with capable firms for future growth. SWOT Analysis: Strengths
 Capital Investment in Technology: Owing to the availability of advanced technology at

low costs, the companies can produce drugs at lower costs.
 Cost Effective: The filing cost of ANDAS and DMFs is comparatively low for the Indian

companies.
 Manpower: There is a large pool of technical experts available at modest salaries.

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 Contract Research & Contract Manufacturing: There is a good scope for contract

research and contract manufacturing.
 Infrastructure: There is a well-developed infrastructure for the pharmaceutical industry.  Generic Drugs: In the last few years, the generic drug-manufacturing segment has

received huge investments, in the process making it more competitive and efficient. Weakness

Failure of the new patent system: Prerequisites associated with Sec 3(d) of

the Patent (Amendment) Act 2005 restrict the copyright of an existing drug. Moreover, mandatory licensing permits Indian companies to keep producing generics of copyright products for overseas selling to underdeveloped nations.

Lack of proper infrastructure: Issues associated with regular power cuts

and lack of suitable transport infrastructure will decelerate the expansion of the sector.

Inadequate funds: Restricted funding from FIs, venture capitalists and the Regulatory impediments: Rising of due meticulousness and conformity with Severe competition: Low margins and restricted capital to assist R&D is the

government may decelerate the expansion of biotechnology sector in India.

product standards leads to high costs and interruption in the launch of new products.

result of intense pricing competition among local producers. This rivalry will further deepen from the joining in of the big drug companies in the Indian market to control the cost benefit and large reserve sources. Opportunities: The main opportunities for the Indian pharmaceutical industry are in the areas of:    Generics (including biotechnology generics) Biotechnology Outsourcing (including contract manufacturing, information technology (IT) and R&D outsourcing). India is considered a highly promising outsourcing IT and clinical data management destination because of its rich talent pool, technological innovation, creditable quality, 5

Operational flexibility, cost effectiveness, time-to-market and competitive advantage. India's Other Advantages for off shoring 

Low-cost skill base Current Good Manufacturing Practice (CGMP) and U.S. FDA compliance High visibility in generics High-quality, compliant manufacturing Strong financial position with ability to scale up Manufacturing capacity Access to new technologies Cost efficiency and track record Industry position Recognition of product patents

levels        

Challenges:      Patents and Intellectual property rights Pricing issues Regulatory reforms R&D spending

The domestic industry is still spending far too little on R&D, which must change

quickly if it is even to begin to address these new opportunities and challenges. INDUSTRY STRUCTURE NUMBER OF PLAYERS  There are about 15 companies which are market leaders in global pharmaceutical industry  The “organized” sector of India's pharmaceutical industry consists of 250 to 300 companies.  The total sector has nearly 20000 companies 6

MARKET SIZE  The Indian pharmaceutical industry is worth US$ 20 billion according to Economic Survey Report of 2009-10.  It is estimated to be US$ 40 billion industry by 2015with a CAGR of 13.5% according to Mckinsey research. STRUCTURAL CHANGES  The global pharmaceutical industry is undergoing consolidation by M&A, strategic alliances and joint ventures.  Reasons for consolidation: – Competition – Economies of scale – Diversifying drug portfolio – High R&D investments – Enter new markets

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Distribution:

Pricing: The prices and the margins of drugs for the wholesaler and retailers are largely decided by the National Pharmaceutical Pricing Authority (NPPA), which varies depending on whether the active constituent of the product is a scheduled drug or a non-scheduled drug. Wholesalers and retailers are also compensated with additional trade offers. Hospitals and large institutions sometimes directly negotiate with the manufacturing company and get the drugs in their pharmacy at lower costs. Promotion: The Organization of Pharmaceutical Producers of India (OPPI), which is a premier organization of pharmaceutical manufacturers in India, has revised its model code on standards of promotion activity to medical practitioners. This model code aims to restrict pharmaceutical companies from providing ‘freebies’ to medical practitioners so as to reduce influence on prescribing drugs 8

of a particular company. The OPPI has a nobel intention that there should not have any influence on the medical professional by any company for prescribing their product so as to benefit the patient. PEST ANALYSIS: Technological advancements, tighter regulatory-compliance overheads, rafts of patent expiries and volatile investor confidence have made the modern pharmaceutical industry an increasingly tough and competitive environment. Below is an analysis of the structure of the pharmaceutical industry using the PEST (political, economic, social and technological) model? Increasing Political Attention: Over the years, the industry has witnessed increased political attention due to the increased recognition of the economic importance of healthcare as a component of social welfare. Political interest has also been generated because of the increasing social and financial burden of healthcare. Examples are the UK’s National Health Service debate and Medicare in the US. Economic Value Added: In the decade to 2003 the pharmaceutical industry witnessed high value mergers and acquisitions7. With a projected stock value growth rate of 10.5% (2003-2010) and Health Care growth rate of 12.5% (2003-2010), the audited value of the global pharmaceutical market is estimated to reach a huge 500 billion dollars by 2004. The Social Dimension: Good health is an important personal and social requirement and the unique role pharmaceutical firm’s play in meeting society’s need for popular wellbeing cannot be underestimated. In recent times, the impact of various global epidemics e.g. SARS, AIDS etc has also attracted popular and media attention to the industry. The effect of the intense media and political attention has resulted in increasing industry efforts to create and maintain good government-industry-society communications. Technological Advances: Modern scientific and technological advances in science are forcing industry players to adapt ever faster to the evolving environments in which they participate.

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Scientific advancements have also increased the need for increased spending on research and development in order to encourage innovation. Legal Environment: The pharmaceutical industry is a highly regulated and compliance enforcing industry. As results there are immense legal, regulatory and compliance overheads which the industry has to absorb. This tends to restrict it’s dynamism but in recent years, government have begun to request industry proposals on regulatory overheads to so as not to discourage innovation in the face of mounting global challenges from external markets.

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CHAPTER-2 COMPANY OVERVIEW

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Company profile: Hetero Drugs Limited was incorporated on 6th April 1993 under companies act 1956 with a clear concept to manufacture value added bulk drugs. Hetero is a research based global pharmaceutical company focused on development, manufacturing and marketing of Active Pharmaceutical Ingredients (APIs), Intermediate Chemicals & Finished Dosages. Ever since its establishment in 1993, Hetero showed a tradition of excellence and deep sense of commitment in developing cost effective processes to offer wide range of affordable drugs. Hetero is building on the strengths of vertical integration in discovery research, process chemistry, API manufacturing, formulation development and commercialization. Hetero is a leading international supplier with a rich portfolio of over 200 products from wide range of therapeutic categories both in active pharmaceutical ingredients and finished dosages.

Founder: Dr. Bandi Parthasaradhi Reddy, Chairman & Managing Director of Hetero group is academically endowed with a Post Graduate and Doctoral degrees with distinction in the field of synthetic chemistry. Prior to founding of Hetero Drugs Limited, Dr. B.P.S Reddy had a stint in leading pharmaceutical companies as the head of the Research & Development division. A visionary the world knows as Dr. B.P.S.Reddy, is the driving force behind this growing pharmaceutical phenomenon called “HETERO”. Dr.B.P.S.Reddy’s dream child, Hetero was born in the year 1993 as a small API unit. Today, 17 years later, the name is synonymous with leadership in pharmaceuticals with more than 18 manufacturing units and 8000 employees. This is an entity that is grown in stature by virtue of its combined strength in research, manufacturing and marketing. Dr. B.P.S.Reddy is now focusing on giving new dimensions to Hetero in terms of research and innovation programs in discovery research to take the company to greater heights.

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Organisation structure: This include • • • • • • • • • • • • • • Chairman and managing director Executive director Director – Finance Director – Corporate Technology Director – Quality control Director – Production Scientists Research and development chemists Manufacturing chemists and engineers Quality control and assurance professionals Marketing dept staff Finance dept staff Purchase dept staff Administrative dept staff

The crew of Hetero Drugs Ltd include manpower that fall into various categories like

MCKINSEY 7’S FRAMEWORK: The McKinsey 7S model involves seven interdependent factors which are categorized as either "hard" or "soft" elements: Hard Elements Strategy Structure Systems Soft Elements Shared Values Skills Style Staff

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"Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems. "Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful.

Strategy: the plan devised to maintain and build competitive advantage over the competition. The company manufacturers various API’s and finished dosage forms. Structure: the way the organization is structured and who reports to whom. It is a nonlisted company. It has a chairman, board of directors and a director for each field like finance, marketing, operations and human resources. Staff in each department reports to their next higher authority till director.

Systems: the daily activities and procedures that staff members engage in to get the job done. Hetero has one registered office, an unit for research and development and 9 units for manufacturing.
o o o

Manufacturing – operating dept staff Marketing & indentifying opportunities - marketing dept staff Accounts & finance works – finance dept staff 14

o •

Recruiting & managing human resources – HR dept staff

Shared Values: called "superordinate goals" when the model was first developed, these are the core values of the company that are evidenced in the corporate culture and the general work ethic.

Style: the style of leadership adopted. The chairman, Mr. B.Partha Sarathy Reddy takes all the major decisions. The director, Mr. M. Srinivas Reddy is at the top of hierarchy and manages all the departments.

Staff: the employees and their general capabilities. Hetero is managed by professionals. All the concerned departments have highly qualified professionals. Skills: the actual skills and competencies of the employees working for the company. Hetero is known for developing various cost-effective processes for manufacturing. It had wide manufacturing facilities to manufacture around 200 different products.

Research- the key to success: With the success in developing novel processes for several API’s and finished dosages Hetero is now committed to continual process of consolidation of its research base, strengthening its manufacturing and marketing capabilities for many products, that are going to be off-patent in the very near future. Hetero is also in the process of carrying out basic research and entered the field of developing new chemical entities to cater to the changing therapeutic needs. Apart from the research for development of processes for the producing going off patent, Hetero is providing facilities for customer synthesis of several high value intermediates and Active Pharmaceutical Ingredients for internationally renowned Pharmaceutical Companies. Hetero’s full-fledged Research Facility “the Hetero research Foundation” started with an initial investment of approximately 2 Mn US Dollars. The foundation is planned to avail the services of about 100 more scientists in different areas of research of new drug discovery. Awards and Recognitions: The efforts of Hetero towards achieving the recognition as an organization to reckon with in the Pharmaceutical sector have yielded results crossing numerous milestones, in its journey to success. Hetero was awarded “The National award for best efforts in Research and 15

Development” by the department of Scientific and Industrial research, Ministry of Science and technology, Government of India. A track of few events that saw Hetero reaching its Zenith of glory are : 2009  Top Pharmexcil Gold Patent award.  Top Pharmexcil Outstanding Export Performance award in Drugs and Pharmaceuticals. 2006  Chemexil Trishul export award for outstanding export performance 2001 Excellence & National Integration award in recognition of the efforts for excellence with affairs connected with educational specialties and creating teaching skills besides promoting harmony at all levels in the college. 1999  Highest exporter award against stiff competition from internationally recognized domestic competitors. 1998  Top Chemexil award for Exports. 1996  National award for "Best Efforts in Research and Development" from the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India, in the year 1996. Global presence: Having earned a foothold in the international Pharmaceutical marketing particularly in South America, Latin America, Asian and East European Countries, Hetero is now in the process of making an advent into more competitive and tough pharmaceutical markets of untied states, Canada, Europe, and Japan. Hetero has already made a starting towards this side beginning with the marketing of its APIs’ in Canada and Japan. Hetero exports its products across different regions – USA, Canada, Europe, Japan, Latin America, Africa, Middle East, Far East, Australia,

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Russia & CIS, in the world and is catering to the requirements of around 138 countries in the world. Company’s vision on Global Markets:  Having defined its goals and set up its mission to be a global player in the field of Pharmaceutical industry, Hetero is in search of strategic alliances and joint ventures for days ahead.  Hetero plans to have tie ups with eminent companies in pharmaceutical industry for the manufacture and supply of Active pharmaceutical ingredients.  Hetero also intends to supply Intermediate chemicals for several Active ingredients being manufactured by notable companies.  Hetero has plans to work towards contract research with some well known companies.  With abilities in the fields of Research and development, Hetero wishes to enter the field of Custom Synthesis which it already has begun for few companies.  Hetero has the capabilities for the transfer of technologies, processes, impurity profiles and formulating procedures for different products.  Hetero is ready to share its expertise with pharmaceutical companies o develop costeffective manufacturing processes in the changing scenario where there is a stiff competition in terms of both cost and quality “With untiring efforts and contributions towards becoming a leader in the manufacture and marketing of the pharmaceuticals, hetero is inclining itself towards the zenith of success and is now a force to reckon with” Quality Assurance: The company has recognized the fact that the driving force for the organization to run its business is customer satisfaction, a factor that is ultimately linked to product quality. Hetero recognizes quality not only as the one that is related to the product but also to the organization as a whole. This has led the organization to implement the quality systems in all its wings right from the Research and development to marketing of the product. The organization has obtained 17

the ISO 9002 quality systems certification for the manufacture and marketing of the APIs’ and is in the process of including the research and development activity under the certification. To meet the quality norms for the product both regulatory and customer related, the organization has established state of art quality control laboratories at its manufacturing facilities, where the most advanced analytical equipment are used for the testing and release of the product. In addition, the organization has also established a Corporate Analytical Research wing for the purpose of establishing the in house specifications for all its products being developed and commercialized. Social Responsibility Initiatives Hetero recognizes its obligations towards the society and as a socially responsible organization, we strive to take care of the less privileged sections of our society. We extend our expertise to transform the lives of our people and make a difference to the society. In this initiative, Hetero has adapted few villages for their overall development. Education Hetero assists in setting up of schools where there is no access to education facilities, providing financial assistance to the poor students who have promising academic record, adapting schools. Sports Hetero sponsers athletics from various educational institutions to participate in National and International level competition. Medical Hetero conducts periodical medical camps at various locations in socially backward areas to provide timely medical assistance to the needy. Hetero has liberally donated medicines to the Government of India, Government of A.P. and to various Hospitals. Hetero’s Manufacturing Facilities: With the increase in its technical capabilities and evolution of the processes for a number of drugs, hetero has also expanded its manufacturing facilities to cater to the growing demand for the Active Pharmaceutical Ingredients of a wide range of therapeutic categories. The company is having manufacturing facilities in and around Hyderabad city. The units are located at the following places. API Facilities 18

 Unit – I (Bonthapally): API Manufacturing Facility for Regulatory Markets – USFDA Approved  Unit – IV (Bonthapally): API Manufacturing Facility for Non-Regulatory & Domestic Markets  Unit VI (Vizag Non SEZ): API Manufacturing Facility for Domestic Market & Semi-Regulatory Market  Unit VIII (Bonthapally - EOU): API Manufacturing Facility - EOU  Unit IX (Vizag SEZ): API Manufacturing Facility for Semi- Regulatory & Regulatory Markets Formulation facilities.  Unit – II (Gandhinagar): Finished dosage manufacturing facility.  Unit – IIIA (Jeedimetla): Finished dosage manufacturing facility for semi-regulatory markets – WHO Approved  Unit – IIIB (Jeedimetla): Finished dosage manufacturing facility for regulatory markets – USFDA Approved  Unit – V (Baddi): Finished dosage manufacturing facility for Indian market Products of Hetero : Products of Hetero Drugs Ltd are divided into various categories as follows  Antihypertnesives  Antithrombotics  Antihyperlipoproteinomics 19

 Antiulceratives  Antidepressants  Anticonvulsants  Antiparkinsonians  Antidiabetics  Antihistaminics  Antibacterials  Cephalosporins  Antiretrovirals  Antivirals  Antifungals  Antirheumatics  Erectile dysfunction  Antidiarrheals  Antimalarials  Diuretics

Various finished dosage forms are present under the above categories which are the products of Hetero Drugs Ltd. These products are present in the form of different formulations like tablets, capsules, sustained release tablets, injections, solutions, suspensions and syrups.

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CHAPTER-3

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OBJECTIVES, METHODOLOGY & THEORITICAL FRAMEWORK

Purpose of the study The purpose of this particular study is to analyse the financial and operational performance of Hetero Drugs limited based on financial statements or annual reports. This will help to management to make appropriate decisions on the basis of result.

Objectives The main objectives of this study are:  To understand various policies and organization structure of the company  To conduct both qualitative and quantitative study of the performance of the company  To analyse the company’s competitive position in Indian Pharmaceutical Industry 22

Data collection The study is an empirical one. It uses both primary and secondary source of data. The two main sources of data for this study are primary data through personal interaction with the finance officials in the company and secondary data which is based on published annual reports of the company. The proposed methodology is to find out the proportion of each item and their impact on working capital. Secondly to assess the liquidity position of the company through a detailed ratio analysis and focus will also be laid on receivables management and cash management. This study was proposed to conduct for a period of two months which includes data collection, analysis of data, research work and report presentation. The recommendations and findings were drawn based on the liquidity and financial position results of the company. This will help in formulating policies and standards to maintain better financial position of the company in the future. Period of analysis A five year period from 2003-2008 has been taken for the study. Tools used for analysis  Ratio Analysis  Trend analysis  Analysis of components of working capital  Schedule of changes in working capital

Ratio analysis Ratio analysis is a widely used tool of financial analysis. It can be used to compare the risk and return relationship of firms of different sizes. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weakness of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items / variables. It should be noted that, computing the ratios does not add any information not already inherent in the figures of profits 23

and sales. These ratios reveal the relationship in a more meaningful way so as to enable equity investors; management and lenders make better investment and credit decisions. The rationale of ratio analysis lies in the fact that it makes related information comparable. A single figure by itself has no meaning but expressed in terms of a related figure, it yields significant inferences. The ratio analysis involves comparison for useful interpretation of the financial statements. The easiest way to evaluate the performance of a firm is to compare its current ratios with past ratios. When financial ratios over a period of time are compared it is known as the time series or trend analysis. It gives an indication of direction of change and reflects whether the firm's financial performance has improved, deteriorated or remained constant over time. The cause for the change also should be understood. The change may be affected by changes in the finish program. Management can use the ratio analysis of working capital as means of checking upon the efficiency with which working capital is being used in the enterprise. The most important ratios for the working capital management are; ♦ Turnover of working capital management ♦ Current ratio The turnover of net working capital ratio measures the rate of working capital utilization. The ratio shows how many times turnover in trading transaction. A company showing a turnover in excess of industry may be in need of additional working capital to be supplied by owners through reinvested earnings or the sale of additional shares. Excess of investment in net working capital is suggested by a concern with lower than average ratio. An increasing ratio indicates that working capital is more active than it has been in the past i.e. working capital is being utilized more intensively than in the past. The current ratio measures the relative ability of a firm to pay its short-term debts. It measures the firm's liquidity. Nature of Ratio Analysis Ratio analysis is a technique of analysis and interpretation of financial statement. It is the process of establishing and interpreting various ratios which help in making certain decisions. 24

Four steps involved in ratio analysis are: • • • • Selection of relevant data from the financial statement of depending upon Objective of analysis. Calculation of appropriate ratios from the above data. Comparison of the calculated ratios with the ratios of the same firm or ratios of some other firm or comparison with ratios of this industry to which this firm belong. • Interpretation of ratios

Advantages of Ratio Analysis Helpful in forecasting The ratios can be used by financial managers for future financial planning. Ratios calculated for a number of years work as a guide for the future.

Useful in co-ordination Ratios are useful in coordinating which is very much needed in business. The efficiency and weakness of an enterprise if communicated properly will establish a better co-ordination among areas of appreciation and control. Helpful in control The most important aspect of ratio analysis is that it is very useful in controlling the areas of inefficiencies or weakness. It can be useful by the management as a technique of correction. Helpful in communication Ratios are used for communication of weak and good points to the concerned parties. Helpful in efficiency Appraisal

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Ratios are the scale of comparison; here the variations in financial statements .If they need appreciation are brought to limelight. For example: better solvency ratio speaks about good financial position. Helpful in evaluation of financial position The ratio analysis is useful for financial diagnosis of an enterprise Helpful to inventories, financial institutions position The ratios are economic barometer useful to all mentioned above as they can know good and bad position of a company by making comparative study of financial statement. Liquidity ratios or Working capital ratios: Meaning of working capital Capital required for a business can be classified under two main categories viz 1) Fixed capital and 2) Working capital Every business needs funds for two purposes-for it establishment and to carry out its dayto-day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, furniture etc. Investments in these assets represent that part of firm's capital which blocked on a permanent or fixed basis and it is called fixed capital. Funds are also needed for short term purposes for the purchase of raw materials, payment of wages and other day-to-day expenses etc. these funds are known as working capital. In simple words, working capital refers to that part of firm's capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly-into cash and this cash flow out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short-term capital. In the words of Shubin, "Working capital is the amount of funds necessary to cover the cost of operating the enterprise". Concepts of working capital

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1) Gross working capital 2) Net working capital Gross working capital: In the broad sense, the term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital is the capital invested in total current asset of the enterprise. Current assets are those assets which in the ordinary course of business can be converted into cash within a short period of normally one accounting year. In narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current asset over current liabilities, or say: Net working capital= current assets-current liabilities

Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets or the income of the business. Classification or kinds of working capital Working capital may be classified in two ways: a) On the basis of concept b) On the basis of time On the basis of concept On the basis of concept, working capital is classified into gross working capital and net working capital. 1) Gross working capital: gross working capital refers to the firm's investment in current assets. Current assets are the assets which can be converted into cash within an accounting year

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(or operating cycle) and include cash, short-term securities, debtors, (accounts receivable or book debts) bills receivable and stock (inventory). 2) Net working capital: net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature the payment within an accounting year and include creditors (account payable), bills payable, and outstanding expenses. Net working capital may be positive or negative. A positive net working capital arise when current asset exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. On the basis of time On the basis of time, working capital may be classified into permanent or fixed working capital and temporary or variable working capital.

Permanent or fixed working capital: Permanent working capital represents that part of the capital which is permanently locked in current assets to carry out the business smoothly. There is always a minimum level of current assets which is continuously required by the firm to carry on its business operations. This minimum level of current assets is referred to as permanent or fixed working capital. Temporary or variable working capital: Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as seasonal working capital and special working capital. The capital required to meet seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc. Determinants of Working Capital There are no set rates or formulate to determine the working capital requirements of firms. A large number of factors, each is having a different importance, influence working needs of firms. Also, the importance of factors changes for a firm over time. Therefore an analysis of 28

relevant factors should be made in order to determine total investment in working capital. In order to determine the proper amount of working capital of a concern, the following factors should be considered carefully. Nature of business Working capital requirements of a firm are basically influenced by the nature of the business. Trading and financial firms have a very small investment in fixed assets, but require a large sum of money to be invested in working capital. In concerns where the cost of raw material to be used in the manufacture of a product is very large in proportion to its total cost of manufacture requirements of working capital will be very large. Some manufacture businesses also have to invest substantially in working capital and a nominal amount in fixed assets. Working capital requires most of the manufacturing concerns to fall between two extremes requirements of trading firms and public utilities. Such concerns have to make adequate investment in current assets depending upon the total assets structure and other variables. Size of business Size of the business unit is also a determining factor in estimating the total amount of working capital. The general principle in this regard is that the bigger the size, the large will be the amount of working capital required as because the larger business units are required to maintain big inventories for the flow of the business. Large units have to spend more in carrying out the business operations smoothly. Business cycle Business cycle affects the requirements of working capital. At times, when prices go up and up and up boom conditions prevail, the tendency management is to pile up a big stock of raw materials and to maintain a big stock of finished goods with an expectation to earn more profits. The expansion of business units caused by the inflammatory conditions creates demand for more and more working capital. Sales growth The working capital needs of the firm increase as it sales grow. A growing firm may need to invest funds in fixed assets in order to sub stain its growing production and sales. This will in turn, increase investment in current assets to support enlarged scale of operations. It should be 29

realized that a growing firm needs fund continuously. It uses external sources as well as internal sources to meet increasing needs of funds. Such a firm faces further financial problems when it retains substantial portion of its profits.

Price level changes The increasing shifts in price level make functions of financial manager difficult. He should anticipate the effect of price level changes on working capital requirements of-the firm. Generally, rising price levels will require a firm to maintain higher amount of working capital. Some levels of current assets will need increased investment when prices are increasing. However, companies which can immediately revise their product prices with rising price levels will not face a severe working capital problem. Thus, effect of rising prices will be different for different companies. Firm's credit policy The credit policy of the firm affects the working capital by influencing the level of debtors. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practices. In order to ensure the unnecessary funds are not tied in debtors, the firm should follow a rationalized credit policy based on the credit standing of customers and other relevant factors. The firm should evaluate the credit standing of new customers and periodically review the creditworthiness of the existing customers. Availability of credit The working capital requirements of a firm are also affected by credit terms granted by its customers. A firm will need less working capital if liberal credit terms are available to it. Similarly, the availability of credit from banks also influences the working capital needs of the firm. A firm, which can get bank credit easily on favourable conditions, will operate with less working capital than a firm without such a facility Few commonly used liquidity ratios are 1. Current Ratio

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2. Quick Ratio 3. Absolute Liquid Ratio. 4. Working Capital turnover Ratio

CHAPTER-4
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DATA ANALYSIS

1) Current Ratio: Current ratio express the relationship between current assets (cash, marketable securities, accounts receivables and inventories) and current liabilities (accounts payable, short term notes payable, current maturities of long term debt, accrued income taxes and other accrued expenses especially wages). A current ratio of 2:1 is considered as an ideal ratio i.e. if the actual current ratio is less than the standard; it shows inaccuracy of the working capital. 2:1 indicates a highly solvent position. Current ratio= current assets/ current liabilities. Table No: 1 Statement Showing Current Ratio (Rs. In Lakhs) Year Current Assets Current Liabilities Current ratio

32

2004-05 2005-06 2006-07 2007-08 2008-09

24659.89 40416.09 45035.09 53219.61 72163.7

7235.75 16047.35 16726.8 14921.18 29967.98

3.41 2.52 2.69 3.57 2.41

Chart No: 1 Graph Showing Current Ratio

33

The average current ratio for pharmaceutical industry is 1.73 Interpretation: A higher current ratio means that the company will be able to pay its debts maturing within a year. On the other hand, a low current ratio points to the possibility that a firm may not be able to pay its short term debts. A low ratio would mean inadequacy of working capital which may deter smooth functioning of an enterprise. In the beginning year current ratio is a highly satisfactory one. From 2005 onwards there is a decrease in the current ratio. In the year 2007-08, there is a high improvement in the current ratio i.e. current ratio is nearly 3.5. The trend clearly points out the adequacy of working capital in the firm. The current ratio of hetero drugs ltd is very high when comapared with industry average of 1.73. This suggests that this company has higher credit worthiness in the industry.

2. Quick Ratio Quick ratio is a measure of judging the immediate ability of a firm to pay off its current obligations. It is obtained by dividing quick current assets by current liabilities. Thus quick current assets consist of cash, marketable securities and accounts receivable. Inventories are excluded from quick assets because they are slower to convert into cash. Quick ratio = Liquid assets /Current Liabilities Liquid assets= Total current assets – inventory Table No: 2 Statement Showing Quick Ratio (Rs. In Lakhs) Liquid Assets=CAInventory

Year

Current Liabilities

quick ratio 34

2004-05 2005-06 2006-07 2007-08 2008-09

15218.8 27745.06 30752.98 35714.22 49721.64

7235.75 16047.35 16726.8 14921.18 29967.98 Chart No: 2 Graph Showing Quick Ratio

2.10 1.73 1.84 2.39 1.66

Interpretation: Usually, a high ratio indicates the firm's liquidity and it’s liable to meet its current liabilities. Since 2004-05, the quick ratio has been satisfactory and is more than the standard ratio i.e. 1:1 clearly indicating that the firm's quick assets are increasing year by year resulting in the adequacy of working capital. However in the year 2008-09, there is decrease in quick ratio though maintaining above standard ratio. 3. Absolute Liquid Ratio It is also called super quick ratio or cash ratio. The absolute liquid ratio shows how much cash is available to the current obligation maturing immediately. Absolute liquid assets include cash in hand, cash at bank and short term marketable securities. The accepted form for this ratio is 1:2. The standard ratio is 1:1 Absolute liquid ratio= cash and cash equivalents/ current liabilities 35

Table No: 3 Statement Showing Absolute Liquid Ratio (Rs. In Lakh) Year 2004-05 2005-06 2006-07 2007-08 2008-09 cash & cash Equivalents 971.54 827.42 954.68 448.27 109.44 Current Liabilities 7235.75 16047.35 16726.8 14921.18 29967.98 Absolute liquid ratio 0.13 0.05 0.06 0.03 0.00

Chart No: 3 Graph Showing Absolute Liquid Ratio

Interpretation: 36

The accepted standard cash position ratio is 1:1. Here in the table we see that the ratio is decreasing drastically year by year and it was almost negligible in the year 2008-2009. It indicates the inefficiency of the absolute liquid assets showing that the firm is unable to pay its current obligations. 4. Net Working capital Ratio Net Working Capital is used as a measure of a firm’s liquidity. Higher the Net Working Capital, greater the company’s ability to meet its current obligations. NWC, measures the firm’s potential reservoir of funds. It can be related to net assets. Net Working Capital Ratio= Net Working Capital/Net Assets Net Assets= Net Fixed Assets + Net Current Assets

Table No: 4 Statement Showing Net Working Capital ratio (Rs. In Lakhs)

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Net Working Capital Net Assets 7688.88 10817.26 12130.92 17738.56 20074.22 Chart No: 4

Net Working Capital Ratio 29361.57 42570.58 54146.1 76623.81 93810.38 0.26 0.25 0.22 0.23 0.21

Statement Showing Net Working Capital ratio

37

Interpretation: Here in the table we see that the ratio is decreasing slightly year by year and it reached 0.21 in the year 2008-2009. It indicates the efficiency of the firm to be able to pay its current obligations is not highly satisfactory

LEVERAGE RATIOS 1. Proprietary Ratio This ratio establishes the relationship between net worth and total assets. It indicates the proportion of total assets financed by the shareholders. Proprietary ratio = (Net worth/ Total assets)*100 This ratio is usually expressed in percentage. This relation reflects the general financial strength of the company. It encases creditors to find out the proportion of assets. A high Proprietary ratio indicates a relatively favourable position to creditors' in respect of liquidly position of the company. A low ratio indicates a higher risk to creditors. Table No: 5 Statement Showing Proprietary Ratio (Rs. In Lakhs)

38

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Net Worth 14352.3 19000.88 26505.81 33382.05 41614.08

Total Assets 29361.57 42570.58 54146.1 76623.81 93810.38

Proprietary ratio 48.88 44.63 48.95 43.57 44.36

Chart No: 5 Graph Showing Proprietary Ratio

Interpretation:

39

A high proportion ratio indicates a favourable position to the creditors in terms of the liquidity position of the company and vice versa. Here in this table we can see that the Proprietary ratio is showing almost constant trend. Proprietary ratio shows that shareholders funds constitute about half of the total assets continuously which indicates that the financial strength of the company is satisfactory. 2. Debt Equity Ratio Several debt ratios may used to analyze the long term solvency of the firm. The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. Total debt include short and long term borrowings from financial institutions, debenture/bonds, deferred payment arrangements for buying capital equipments, and bank borrowings, public deposits and any other interest bearing loan. The relationship describing the lender's contribution for each rupee of the owner's contribution is called Debt-Equity Ratio. Debt Equity Ratio = Outsiders Fund / Shareholders Fund

Table No: 6 Statement Showing Debt Equity Ratio (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Creditors funds 15009.27 23569.7 27640.29 43241.76 52196.3 Shareholders’ funds 14352.3 19000.88 26505.81 33382.05 41614.08 Debt Equity ratio 1.05 1.24 1.04 1.30 1.25

Chart No: 6 Graph Showing Debt Equity Ratio

40

The average debt-equity ratio for this industry is 0.26 Interpretation: The debt equity ratio of the Hetero shows a constant trend. During the year 2003-04 the ratio was 1:1, which increased to 1.2 during 2008-09. While in the years of study debt equity ratio showed similar trend, i.e., lender's contribution is slightly more than the owner's contribution which means slight increase in the use of long term debt. The company’s debt-equity ratio when compared with industry average of 0.26 gives idea that it is a highly levered company. Coverage Ratio: Debt ratios are static in nature and fail to indicate the firm’s ability to meet interest obligations. The interest coverage ratio or the times-interest earned is used to test the firm’s debt-servicing capacity. The interest coverage ratio is computed by dividing earnings before interest and taxes (EBIT) by interest charges. Interest Coverage =EBIT/Interest Table No: 7 Statement Showing Interest Coverage Ratio Year 2004-05 EBIT 3553.4 Interest 809.74 Interest Coverage 4.39 41

2005-06 2006-07 2007-08 2008-09

6104.14 7575.74 6948.89 8304.69

1370.94 1725.81 2482.99 4902.68

4.45 4.39 2.80 1.69

Chart No: 7 Graph Showing Interest Coverage Ratio

The average interest coverage ratio for this industry is 7.31

42

Intepretation: This ratio indicates the extent to which earnings may fall without causing any embarrassment to the firm regarding the payment of the interest charges. A higher ratio is desirable.In case of Hetero this ratio is showing decreasing trend. The firm should make efforts to improve the operating effeciency or to retire debt to have a comfortable coverage ratio. Hetero’s interest cover ratio is far less than the industry of 7.31. this indicates that hetero’s cover of earnings for interest is very less. Profitability Ratios The purpose of study and analysis of profitability ratios is to help assessing the adequacy of profits earned by the company and also to discover whether profit ability is increasing or decreasing. Profitability ratios show the combined effects of liquidity, asset management and debt management on operating results. Profitability ratios are as the matter of facts, best indicators of overall efficiency of a business concern because they compare return on value over and above the values put into a business with sale or service carried on by the firm with the help of assets employed 1. Gross Profit Ratio This ratio measures the gross profit margin on the total net sales made by the company. The ratio measures the efficiency of the company's operations and this can be compared with previous year's result to ascertain the efficiency partners with respect to previous years. Table No: 8 Statement Showing Gross Profit Ratio (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Gross Profit 6334.48 17673.02 19426.19 19532.71 24028.4 Sales 42710.56 76343.39 79562.24 83642.45 120450.55 Gross Profit ratio 14.83 23.15 24.42 23.35 19.95 43

Graph No: 8 Graph Showing Gross Profit Ratio

Interpretation: A high ratio is an indication of good management or a high selling price of the product or low cost of production. A relatively low margin is certainly a danger signal, warranting a careful and detailed analysis of factors responsible for it. Here, the ratio has been increasing year by year indicating a good signal as the gross profit is increasing compared to sales. 2. Net Profit Ratio This ratio measures the relationship between net profit and sales of the firm and is obtained by dividing net profit by sales. It shows per rupee profit generating capacity of sale. This ratio is calculated as follows; Net profit ratio = (Net profit after tax/ sales)*100 The net profit ratio indicates the management's ability to earn sufficient profits on sales not only to cover all revenue operating expenses of the business, the cost of borrowed funds etc but also to have a sufficient margin to pay reasonable compensation to shareholders on their contribution to the firm. Higher the ratio better it is. Table No: 9

44

Statement Showing Net Profit Ratio (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Net Profit 3553.4 6104.14 7575.74 6948.89 8304.69 Sales 42710.56 76343.39 79562.24 83642.45 120450.55 Net Profit ratio 8.32 8.00 9.52 8.31 6.89

Chart No: 9 Graph Showing Net Profit Ratio

Interpretation: A high ratio ensures adequate return as well as to enable a firm to withstand adverse economic conditions. A low margin has an opposite implications. In 2006-07 the net profit was 45

10% recording highest during period of study. The net profit margin got reduced because of the increase in administrative, selling expenses and other interest and finance charges during 20072009. 3. Return on Capital Employed or Return on Investment It establishes the relationship between net profits and capital employed. Capital employed refers to the funds provided by long term creditors and the owners. Return on capital employed = Net profit / capital employed * 100

Table No: 10 Statement Showing Return on Capital Employed (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Net Profit 3553.4 6104.14 7575.74 6948.89 8304.69 Capital Employed 29361.57 42570.58 54146.09 76623.81 93810.38 Return on Capital Employed 12.10 14.34 13.99 9.07 8.85

Chart No: 10 Graph Showing Return on Capital Employed

46

Interpretation: This ratio measures the overall performance of the firm and may be useful in comparing the firm's efficiency with that of similar firm with industry. The higher is the ratio, the efficiently the funds are used. The above table showed that the return on investment was satisfactory in the year 2005-07. During the period 2007-09 returns were reducing as the company has focused on employing its capital in setting up of new production units. So returns are expected in the coming years. 4. Return on Net Worth/ Return on Shareholder's fund This ratio expresses the net profit in terms of the equity shareholder's funds. This ratio is useful in measuring the rate of return as a percentage of the book value of shareholders equity. This ratio is an important yardstick of performance for equity shareholders since it indicates the return on the funds employed by them. Return on net worth = (Net profit/ Net worth)*100 Table No: 11

47

Statement Showing Return On Net Worth (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Net Profit 3553.4 6104.14 7575.74 6948.89 8304.69 Net worth 14352.3 19000.88 26505.81 33382.05 41614.08 Return on Net worth 24.76 32.13 28.58 20.82 19.96

Chart No: 11 Graph Showing Return on Net Worth

Interpretation:

48

The higher the ratio, better are the results. Here, the return on shareholders’ funds ratio showing decreasing trend because the company is in expansion phase investing in new production units increasing production volumes which increases administrative expenses and other finance charges 5. Return on Assets The profitability of the firm is measured by establishing relation of net profit with total assets of the organization. This ratio indicates the efficiency of utilization of assets in generating revenue. Return on assets = Net profit after tax/ Total assets.

Table No: 12 Statement Showing Return On Assets (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Net Profit 3553.4 6104.14 7575.74 6948.89 8304.69 Total Assets 29361.57 42570.58 54146.1 76623.81 93810.38 Return on Assets 12.10 14.34 13.99 9.07 8.85

Chart No: 12 Graph Showing Return on Assets

49

Interpretation: The ratio of return on assets shows that how much the company earn on their total assets. In 2004-05, 2005-06 and 2006-07 there was increasing trend. During 2007-08 and 2008-09 the firm showed a decreasing trend. It is because of the investments in new production units which increased selling and administrative expenses. Trend analysis Effective use of financial ratios can be put by observing the behaviour of ratios over a period of time. This is trend analysis depicting trends in the operation of the enterprise. Whenever the comparison is to be made for a longer period, the comparative financial statements may not serve purposefully, since the data become too cumbersome. The best course, in such a case, is to compare the figures with the help of index number. Index number can be computed by taking a common base. The figures of the initial years, for which data are available, by choice or otherwise can take as 100 and the figures of all the later years can be converted into index numbers. This process set longer terms comparison. The trend percentages may be computed only in respect of certain important items only

Table No: 21 Trend Analysis of Current Assets 50

(Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Current assets 24659.89 40416.09 45035.09 53219.61 72163.7 Trend Percentage 100.00 163.8940401 182.6248617 215.8144663 292.6359363

Chart No: 21 Trend Analysis of Current Assets

Interpretation:

51

From the table we can understand that current asset is showing increasing trend. The year 2003-04, is taken as the base year and trend percentage shows a highest trend above 100% i.e.300% in the year 2008-2009.This shows good sign for the company about its performance over the years.

Table No: 22 Trend Analysis of Current Liabilities (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Current Liabilities 7235.75 16047.35 16726.8 14921.18 29967.98 Trend Percentage 100.00 221.7786684 231.1688491 206.2146979 414.1654977

Chart No: 22 Trend Analysis of Current Liabilities

52

Interpretation: From table we can see that trend of current liabilities is increasing and decreasing year by year. During years 2004-2007 the trend was increased at its maximum of 231 % and then decreased in 2007-08. However in the next year it went to all time highest to 400% which can be justified with increase in fixed and current assets.

Table No: 23 Trend Analysis of Fixed Assets (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Fixed assets 10565.17 18261.33 23780.6 34566.16 46963.41 Trend Percentage 100.00 172.8446395 225.084878 327.1708832 444.5116359

Chart No: 23 Trend Analysis of Fixed Assets

53

Interpretation: The table showing trend of fixed assets is on a increasing trend by year by year. In the last year it reached up to a percentage of 400, which indicates that the company’s performance is in good shape over the years.

Table No: 24 Trend Analysis of Working Capital (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Net Working Capital( CA-CL) 7688.88 10817.26 12130.92 17738.56 20074.22 Trend Percentage 100.00 140.6870702 157.7722633 230.7040817 261.0811978

Table No: 24 Trend Analysis of Working Capital

54

Interpretation: The trend of working capital is also showing increasing trend. The trend percentage is attributed in constant increasing in production volumes with increase in production units. Hence, the working capital shows a better position. Table No: 25 Trend Analysis of Sales (Rs. In Lakhs) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Sales 42710.56 76343.39 79562.24 83642.45 120450.55 Trend Percentage 100.00 178.7459354 186.282362 195.8355264 282.0158528

Chart No: 25 Trend Analysis of Sales 55

Interpretation: The table showed the trend analysis of net sales. It shows an increasing trend from the year 200405 to 2008-09 and it was at its maximum with 280%. This is good sign for the company.

ANALYSIS OF COMPONENTS OF WORKING CAPITAL TABLE N0: 1 56

STATEMENT SHOWING NET WORKING CAPITAL Current Assets Lakhs) Particulars Inventories Sundry Debtors Cash and bank balances Loans and advances Total current assets 2004-2005 9441.09 10745.35 971.53 3501.91 24659.88 2005-2006 12671.03 22295.06 827.42 4622.57 40416.08 2006-2007 14282.1 22770.2 954.68 7028.09 45035.07 2007-2008 17505.39 24671.93 448.27 10594.01 53219.6 2008-2009 22442.06 36529.59 109.44 13082.59 72163.68 (Rs in

Current Liabilities Liabilities 6480.91 14887.93 15666.29 13770.84 27957.93

Provisions

1100.81

1954.09

1339.7

1150.33

2010.04

Bank Borrowings

9735.26

13551.48

16177.37

20559.88

22121.49

Total current liabilities

17316.98

30393.5

33183.36

35481.05

52089.46

Net working capital

7342.9

10022.58

11851.71

17738.55

20074.22

ANALYSIS OF CHANGES IN WORKING CAPITAL TABLE NO: 2 STATEMENT OF CHANGES IN WORKING CAPITAL 57

(Rs. In Lakhs) Particulars Current assets Inventories Sundry Debtors Cash & Bank Loans and advances Total Current liabilities Liabilities Provisions Bank Borrowings Total Working capital 6480.91 1100.81 9735.26 17316.98 7342.9 14887.93 1954.09 13551.48 30393.5 10022.58 8407.02 853.28 3816.22 13076.52 2679.68 9441.09 10745.35 971.53 3501.91 24659.88 12671.03 22295.06 827.42 4622.57 40416.08 1120.66 15756.2 3229.94 11549.71 144.11 2004-2005 2005-2006 Increase Decrease

TABLE NO: 3 STATEMENT OF CHANGES IN WORKING CAPITAL (Rs. In Lakhs)

58

Particulars Current assets Inventories Sundry Debtors Cash & Bank Loans and advances Total Current liabilities Liabilities Provisions Bank Borrowings Total Working capital

2005-2006 12671.03 22295.06 827.42 4622.57 40416.08 14887.93 1954.09 13551.48 30393.5 10022.58

2006-2007 14282.1 22770.2 954.68 7028.09 45035.07 15666.29 1339.7 16177.37 33183.36 11851.71

Increase 1611.07 475.14 127.26 2405.52 4618.99 778.36

Decrease

614.39 2625.89 2789.86 1829.13

TABLE NO: 4 STATEMENT OF CHANGES IN WORKING CAPITAL (Rs. In Lakhs) 59

Particulars Current assets Inventories Sundry Debtors Cash & Bank Loans and advances Total Current liabilities Liabilities Provisions Bank Borrowings Total Working capital

2006-2007

2007-2008

Increase

Decrease

14282.1 22770.2 954.68 7028.09 45035.07

17505.39 24671.93 448.27 10594.01 53219.6

3223.29 1901.73 506.41 3565.92 8184.53

15666.29 1339.7 16177.37 33183.36 11851.71

13770.84 1150.33 20559.88 35481.05 17738.55 4382.51 2297.69 5886.84

1895.45 189.37

TABLE NO: 5 STATEMENT OF CHANGES IN WORKING CAPITAL (Rs. In Lakhs) 60

Particulars Current assets Inventories Sundry Debtors Cash & Bank Loans and advances Total Current liabilities Liabilities Provisions Bank Borrowings Total Working capital

2007-2008

2008-2009

Increase

Decrease

17505.39 24671.93 448.27 10594.01 53219.6

22442.06 36529.59 109.44 13082.59 72163.68

4936.67 11857.66 338.83 2488.58 18944.08

13770.84 1150.33 20559.88 35481.05 17738.55

27957.93 2010.04 22121.49 52089.46 20074.22

14187.09 859.71 1561.61 16608.41 2335.67

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CHAPTER-5 FINDINGS FROM THE STUDY

Findings from the study:  The net profit ratio showed increasing trend for the first half of period under study and then decreased for the last half. The net profit margin got reduced because of the increase 62

in administrative, selling expenses and other interest and finance charges during 20072009. This may be attributed in increase in production units.  The return on capital employed is also decreasing according to the changes in net profit. The results showed that the return on investment was satisfactory in the year 2005-07. During the period 2007-09 returns were reducing as the company has focused on employing its capital in setting up of new production units expecting returns in the coming years.  Current ratio of the company shows a highly satisfactory sign. An ideal current ratio is 2:1. The company is showing above ideal ratio throughout all the years under study.  Company’s quick ratio for the last five years is showing a fluctuating trend. The standard norm fixed for quick ratio is 1:1. It shows that the company’s liquidity position is satisfactory as it is well above the standard norms.

 The absolute liquid ratio is highly deteriorating for the company. The acceptable ratio is 1:2. This shows that company’s financial position is not satisfactory and it indicates the inefficiency of the absolute liquid assets showing that the firm is unable to pay its current obligations.  Net working capital ratio of the company indicates the efficiency of the firm to be able to pay its current obligations is not highly satisfactory  Proprietary ratio is showing almost constant trend. Proprietary ratio shows that shareholders funds constitute about half of the total assets continuously which indicates that the financial strength of the company is satisfactory.  Debt-Equity ratio for the year 2003-04 was 1:1, which increased to 1.2 during 2008-09. Throughout the years of study debt equity ratio showed similar trend, i.e., lender's contribution is slightly more than the owner's contribution which means slight increase in the use of long term debt.

63

 Interest Coverage ratio is showing decreasing trend showing a caution for the company. The firm should make efforts to improve the operating effeciency or to retire debt to have a comfortable coverage ratio.  Trend analysis of current assets, fixed assets and sales show an increasing trend over year by year.  The volume of current liabilities increased in the last year and that can be attributed to increasing trend of above factors like current and fixed assets.

64

CHAPTER-6 RECOMMENDATIONS

Suggestions:

65

 The company’s liquidity position is also not satisfactory, so it should try to maintain better liquidity position. A relatively low margin is certainly a danger signal, warranting a careful and detailed analysis of factors responsible for it.  The company should make efforts to improve the operating effeciency or to retire debt to have a comfortable coverage ratio.  The company should take necessary steps to check the increase in current liabilities.  The company’s net profit ratio is decreasing over last two years because of increasing operating cost. Therefore measures should be taken to reduce the operating costs.  The company should monitor its operating expenses and take corrective measures to have control on them.  Adequate working capital should be needed for the firm its smooth operation. So that proper balance between current asset and current liabilities should be maintained.

66

CHAPTER-7 LIMITATIONS & CONCLUSION

67

Limitations of the Study:  The period of the study was very limited.  The study involves use of ratio analysis which have its own limitations.  The reliability and accuracy of calculations and interpretations depends very much on the information supplied in the form of annual reports and other records.  In this short period of time the research could not go through all the aspects of working capital management. Conclusion: In this study an attempt is made to analyse the working capital position of the company. The study shows that the overall performance of the company is satisfactory. The analysis and interpretation of various data relating to working capital management helped to reach a conclusion that the efficiency of working capital and profitability position is in good shape since there is increase in working capital and profit over the years. But it reveals that the company is not having satisfactory liquidity position as its cash reserves are deteriorating shape. The company should focus on this and analyze the factors responsible for it The overall success of any company depends upon its working capital position. So it should be handled properly because it shows the efficiency and financial strength of the company. Therefore the company should continue to enforce strict and possible measures in every sphere of its activity to maintain the company in sufficient working capital position and improve its financial performance for better prospects in the coming days which again requires better short term fund and long term fund management.

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CHAPTER-8 LEARNING OUTCOME

69

LEARNING OUTCOME: Broadly, I had a very good exposure to the corporate culture. The two most important things that I understood during this two month internship period are the importance of commitment and punctuality in the corporate world. During the analysis I learned the necessity of a corporate to be proactive for grabbing the market opportunity. Hetero drugs ltd got patent rights for Swine Flu drug called Tamiflu which increased its revenue by 40% in just one year. Also I learned various ways in which a company’s financial performance can be gauzed and how conclusions are drawn from the ratio analysis.

70

CHAPTER-9 BIBLIOGRAPHY

71

Bibliography: Books:  Financial Accounting for Management, N Ramachandran, Ram Kumar kakani, Second Edition, McGraw-Hill Company.  Financial Management, I.M Pandey, Vikas Publishing House Research Reports/Journals:  Pharmaceuticals and Medical products practice, Indian Pharma 2015- Unlocking the potential of the Indian Pharmaceuticals Market.  Deutsche Bank Research Report on India’s Pharmaceutical Industry on course of Globalisation.  KPMG Research on Indian Pharma Outlook.  Top 10 pharmaceutical companies in India – A report by Business Insights.  What makes India, the preferred outsourcing destination – A report by Asia life science services.

Websites:  www.heterodrugs.com  www.pharmabiz.com  www.phrma.org

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CHAPTER-10 ANNEXTURE

73

74

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Fortnightly Status Report Sl.N0: 1 Name of the Student: Sudheer Gadey Reg. No: 09PG113 Submitted to : Dr Rekha Title of Dissertation Work: Performance Analysis of Hetero Drugs Ltd. Hyderabad. Summary of Previous Fortnight(s) report Previous report consists of IIP Proposal and other information like objectives, methodology and scope of work. The proposed time frame with respect to the work was mentioned. Work carried out during the fortnight under report : a. Books / Chapters read / procured : • • Financial Accounting for Management, N Ramachandran, Ram Kumar kakani, Second Edition, McGraw-Hill Company. Financial Management, I.M pandey, Vikas Publishing House Date : 30-04-2010

b. Research Papers / Articles read / procured / downloaded : • • An Outlook of Indian Pharmaceutical Industry by KPMG “Trend in Working Capital Management and its impact on Firm’s performance: Intenational Review of Business Research Papers.

c. Visits to Institutions / Libraries / Companies, if any : Gurunank College of Engineering and Management, Patancheru, Hyderabad. d. Internet Searching results, if any: • Information about the company was acquired from the company website ie www.heterodrugs.com • Various pdf files were downloaded to get the overview of the Indian Pharmaceutical industry e. Meeting with target group members, if any: 76

Conversation with Mr Veera Reddy, Manager Finance Department once in two days and other deparment people as and when required. f. Problems encountered, if any : The main problem that I am facing is regarding the collection of primary data and some information was not revealed due to confidentiality. Also, the company doesnt have the procedure of preparing reports for the work carried. g. Proposed steps during the next fortnight: After collection of relevant data, the analysis shall be done by calculation of various ratios.

77

Fortnightly Status Report Sl.N0: 2 Name of the Student: Sudheer Gadey Reg. No: 09PG113 Submitted to : Dr Rekha Title of Dissertation Work: Performance Analysis of Hetero Drugs Ltd. Hyderabad. Summary of Previous Fortnight(s) report Previous report consists of the details of various books referred, the information gathered through internet and through personal enquiry of people at the industry. The basic information about the company was collected from annual reports and through website and the pharmaceutical industry overview was known through various sources like journals and internet. Work carried out during the fortnight under report : h. Books / Chapters read / procured : • • Financial Accounting for Management, N Ramachandran, Ram Kumar kakani, Second Edition, McGraw-Hill Company. Financial Management, I.M pandey, Vikas Publishing House Date : 14-05-2010

i. Research Papers / Articles read / procured / downloaded : • • Indian pharma 2015, a report by McKinsey & company. India’s pharmaceutical industry on course of globilisation, Deutsche bank research.

j. Internet Searching results, if any: • Information about the company was acquired from the company website ie www.heterodrugs.com • Methodology and elements of McKinsey’s 7 S framework was collected from internet. • Sun pharma analysis report. k. Meeting with target group members, if any: 78

Conversation with Mr Veera Reddy, Manager Finance Department once in two days and other deparment people as and when required. l. Proposed steps during the next fortnight: The details of the company shall be streamlined into various categories and some of the calculated ratios will be analysed based on their trends.

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Fortnightly Status Report Sl.N0: 3 Name of the Student: Sudheer Gadey Reg. No: 09PG113 Submitted to : Dr Rekha Title of Dissertation Work: Performance Analysis of Hetero Drugs Ltd. Hyderabad. Summary of Previous Fortnight(s) report Previous report consists of work done regarding the calculation of financial ratios and details of various books referred and download results from the internet. Also, the methodology for preparation of Mckinsey 7’s framework and SWOT analysis was acquired from online resources. Work carried out during the fortnight under report : m. Books / Chapters read / procured : • Financial Accounting for Management, N Ramachandran, Ram Kumar kakani, Second Edition, McGraw-Hill Company. • Financial Management, I.M pandey, Vikas Publishing House n. Research Papers / Articles read / procured / downloaded : • Top 10 pharmaceutical companies in India – A report by Business Insights. • What makes India, the preferred outsourcing destination – A report by Asia life science services. o. Internet Searching results, if any: • Information about the company was acquired from the company website ie www.heterodrugs.com • Sun pharma analysis report. p. Meeting with target group members, if any: Conversation with Mr Veera Reddy, Manager Finance Department once in two days and other deparment people as and when required. q. Proposed steps during the next fortnight: Various ratios that are calculated will be analysed based on trends and comparitive methods and also conclusions about the company’s performance shall be stipulated. Date : 28-05-2010

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Fortnightly Status Report Sl.N0: 4 Name of the Student: Sudheer Gadey Reg. No: 09PG113 Submitted to : Dr Rekha Title of Dissertation Work: Performance Analysis of Hetero Drugs Ltd. Hyderabad. Summary of Previous Fortnight(s) report Previous report consists of analysis of various financial ratios and various findings that are possible from the ratios. Also, the details of various resources that helped in gathering the information. Work carried out during the fortnight under report : r. Books / Chapters read / procured : • • Financial Accounting for Management, N Ramachandran, Ram Kumar kakani, Second Edition, McGraw-Hill Company. Financial Management, I.M pandey, Vikas Publishing House Date : 16-06-2010

s. Research Papers / Articles read / procured / downloaded : • Indian patent law and pharma industry by Dr Gopakumar G Nair.

t. Internet Searching results, if any: • Information about the company was acquired from the company website ie www.heterodrugs.com u. Meeting with target group members, if any: Conversation with Mr Veera Reddy, Manager Finance Department once in two days and other deparment people as and when required. v. Proposed steps during the next fortnight:

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During the next few days various conclusions shall be drawn about the company’s financial position and give recommendations to the company. Also, the draft report shall be compiled.

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