54023648 project report on working capital

8/3/2019 54023648 Project Report on Working Capital

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Project Report On STUDY OF WORKING CAPITAL MANAGEMENT OF RANBAXY LAB LTD A Comparative Analysis

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PREFACE

Businesses face ever increasing pressure on costs and growing Financing requirements as a result of intensive competition in globalize markets. Many of them aretherefore considering ways of making themselves more efficient. In identifyingpossible options it is important not to focus exclusively on income and expenseitems, but also to take the balance sheet into account. Improvements to the exis

ting 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 WorkingCapital Management in Ranbaxy Laboratories Ltd. The attempt is aimed to analyze the various aspects of working capital management of Ranbaxy and compare it withthat of Dr Reddys 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. Tothis 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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ABSTRACT

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 ofthe company. Working capital refers to the funds required for day to day operations of the organization. It is very effective way to judge a companys cash flow p

rospects, 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 ratiosfor Working Capital a Company should maintain, etc. The purpose is to develop anaction 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 thecompany, e.g. ratio analysis, DuPont analysis, SWOT analysis, etc.

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INTRODUCTIONA 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 canbe guaranteed from a profitable venture. The importance of cash as an indicatorof continuing financial health should not be surprising in view of its crucialrole within the business. This requires that business must be run both efficient

ly and profitably. In the process, an assetliability mismatch may occur which may increase firms 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 itsimpact on firms performance. The trend in working capital needs and profitabilityof firm is examined to identify the causes for any significant differences. Therest 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 theoverall structure of working capital of the co. is good and it is a growing conc

ern. 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 PROFILEIndustry 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 TheIndian Pharmaceutical Industry today is in the front rank of Indias 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 G

ross Domestic Product (GDP):

Indian Pharmaceutical Industry ranks fourth in the world, pertaining to the volume of sales. The estimated worth of the Indian Pharmaceutical Industry is US$ 6billion. 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 PharmaIndustry 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 Industrywould 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 theexpenses incurred Page 6 of 94


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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 isnearly 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 researchin India is one eighth of the cost incurred in US.

Following the de-licensing of the pharmaceutical industry, industrial licensingfor 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 industryin 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 onthe 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 exportssophisticated bulk drugs. Legal & Financial Framework: India has a 53 year olddemocracy 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 hasa 70 million middle class market, which is continuously growing. Consolidation:For the first time in many years, the international pharmaceutical industry is f

inding great opportunities in India. The process of consolidation, which has become a Page 7 of 94


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generalized phenomenon in the world pharmaceutical industry, has started takingplace 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 andmost 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 wil

l account for Rs 54 bn (21%) and formulations, the remaining Rs 210 bn (79%). Infinancial year 2001, imports were Rs 20 bn while exports were Rs87 bn.

The above graph shows the percentage of pharmaceutical products export by 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 DEVELOPMENTDrug 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 orBiochemistry. 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 identifiedas 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 ofcapital 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 anddevelopment, manufacturing and quality control, marketing, sales, and distribution. Smaller organizations, on the other hand, often focus on a specific aspectsuch as discovering drug candidates or developing formulations. Often, collabora

tive agreements between research organizations and large pharmaceutical companies are to explore the potential of new drug substances formed

The cost of innovationDrug discovery and development is very expensive; of all compounds investigatedfor use in humans only a small fraction are eventually approved in most nationsby government appointed medical institutions or boards, who have to approve newdrugs 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 d

eveloping a successful new drug (New chemical entity or NCE), has been estimatedat 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


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drug (along with the prospective drugs that fail) rose over a five year period to nearly $1.7 billion in 2003. These estimates also take into account the opportunity cost of investing capital many years before revenues are realized (see Time-value of money). Because of the very long time needed for discovery, development, and approval of pharmaceuticals, these costs can accumulate to nearly half the total expense. Some approved drugs, such as those based on 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 costare even less. Calculations and claims in this area are controversial because ofthe implications for regulation and subsidization of the industry through federally funded research grants.

Controversy about drug development and testingThere have been increasing accusations and findings that clinical trials conducted or funded by pharmaceutical companies are much more likely to report positiveresults for the preferred medication. In response to public outcry about specific cases in which unfavorable data from pharmaceutical company-sponsored researc

h was suppressed, the Pharmaceutical Research and Manufacturers of America havepublished 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 theNIH website Drug researchers not directly employed by pharmaceutical companiesoften look to companies for grants, and companies often look to researchers forstudies that will make their products look favorable. Sponsored researchers arerewarded 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 USIn the United States, new pharmaceutical products must be approved by the FDA asbeing both safe and effective. This process generally involves submission of anInvestigational 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


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others the substance is withdrawn from the market completely. Questions continueto 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 isthe core guide for pharmacists and clinicians.

Orphan drugsThere are special rules for certain rare diseases ("orphan diseases") involvingfewer 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 limitedtime (seven years), regardless of whether the drug is protected by patents.

Industry revenuesFor the first time ever, in 2006, global spending on prescription drugs topped $643 billion, even as growth slowed somewhat in Europe and North America. The Uni

ted 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 81percent. US profit growth was maintained even whilst other top industries saw slowed or no growth. Despite this, "..the pharmaceutical industry is and has beenfor 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 profitableindustries, with a return of 17% on revenue." Pfizer

s cholesterol pill Lipitorremains 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 pharmaceu

tical industry in 2007, including increasing profits in most sectors despite loss of some patents, and new

blockbuster

drugs on the horizon. Teradata Magazinepredicted 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 postproduct-patent regime after 2005. Indian companies, in an effort to consolidatetheir position, will have to increasingly look at merger and acquisition optionsof 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 ma

rkets. 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 andinformation technology. The future of the industry will be determined by how well it markets its products to several regions and distributes risks, its forwardand backward integration capabilities, its R&D, its consolidation through mergers and acquisitions, co-marketing and licensing agreements.

INTRODUCTION TO RANBAXYPage 12 of 94


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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 charterunexplored markets. Organizations fuelled by one dream-to transform competitioninto opportunity. Ranbaxy Laboratories Ltd. was incorporated in June 1961, in thename 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 Lept

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

Therefore the word Leptit was removed from the name of the company. The name isknown as RANBAXY LABORATORIES LIMITED. In 1973 the company issued shares to thegeneral public and became a full fledged PUBLIC LIMITED COMPANY. Page 13 of 94


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

l quality. The companys drive for Internationalism is guided by the well plannedbrand 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 revenuesof 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 ratethrough 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 valuecreation. 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 designedto 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 wasdesigned 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 Ranbaxys products . At present Ranbaxy have fourplants for the manufacture of bulk drugs two at Mohali, one at Dewas (M.P) ANDAnother at Toansa near ROPAR. At present, Ranbaxy is the second most Indian company engaged in the manufacturing of Pharmaceuticals, Bulk Drugs and Fine Chemicals.

RANBAXYs vast range of highly pure laboratory reagent and chemicals enjoy a placeof 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


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reengineering several business processes around the internet and has putting place business solutions that challenge existing ways of doing Business. The undying spirit of the companys 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 accountingfor 12% of the industry exports pharmaceutical substance and dosages forms to over 50 countries with the internationals sales comprising of 45% of the total tu

rnover.

VISION GARUDA

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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 outlicensing, relationship with other important pharmaceutical entities, expansionof manufacturing facilities both in India and strategic overseas locations, revamping of organizational structures to cater to the wider and more dispersed spa

n of operations, and streamlining and standardizing the business processes through out the global organization, are other areas that receive focus and attentionof management on priority.

Mission To become a Research basedPage 16 of 94


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International pharmaceutical company Vision-2012 Achieve significant business inProprietary 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 genericsplayer Significant income from Proprietary products

OPERATING JOINT VENTURES AND SUBSIDIARIES

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BRAZIL CHINA EGYPT GERMANY HONG KONG INDIA IRELAND MALAYSIA NETHERLANDS NIGERIAPANAMA 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 pharm

aceuticals Ltd., Vidyut Travel Services ltd. Ranbaxy Ireland Ltd. Ranbaxy (Malaysia) Sdn. Bhd. Ranbaxy Pharmaceuticals B.V. Ranbaxy Nigeria Ltd. Ranbaxy PanamaSA. 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.

ALLIED BUSINESSESRanbaxy Animal Health

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The Animal Health division saw an encouraging growth despite the prevailing poormarket 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 sectorsin 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 Ran

baxy 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, arange 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 DrugDelivery 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 takingplace in recent times. The companys 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, where25 filings were undertaken in a span of 2-3 months. The company has planned tobuild 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 assurancepolicy 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 andproductivity with advanced scientific and technological tools.

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VALUES OF RANBAXY LABORATORIES LIMITED1. Achieving customer satisfaction is fundamental to their business. 2. Practicedignity 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 lifeof 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 AREAS1. 2. 3. 4. India and Middle East Europe, CIS and Africa Asia Pacific and Latin

America North America

JOINT VENTURE OF THE COMPANY.Page 22 of 94


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2000 Ranbaxy files IND Application for Asthma Molecule- RBx4638, after successful completion of pre-clinical studies. Ranbaxy acquires Bayers 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 Mgbase/ 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.Heraldingthe companys entry into the Indian OTC market. 2003 Ranbaxy received the economictimes award for corporate excellencefor the company for year.ranbaxy signed anagreement 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 announcedthe 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.thesecond one is still working The 1991, the Toansa plant started functioning in 1

992 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 thedrug 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 Plantalso mainly in the manufacturing of Active Pharmaceutical Ingredients (API). ThePlant 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 inthe 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 employees 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 ta

kes 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 ofvarious 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 financialand human resources. This will enable the enterprise to increase productivity by

reducing costs. It also ensures a single solution to the information needs of the whole organization.

Production Department

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As a part of their on going commitment to produce hi-tech quality drugs and pharmaceuticals that take care of the specific needs of markets around the world, Ranbaxy Laboratories Limited has increased the investment in the production department. It is the most important department of the company and has the following objectives: 1. Improving volume of production. 2. Reducing rejection rate. 3. Maintaining rework rate. Engineering Department This department undertakes building, construction and maintenance. Maintaining service facilities such as water, ga

s, heating, ventilation, air conditioning, painting and plumbing are some of theother areas dealt by this department. This department also helps in maintainingelectrical 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 departmentsis 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.

PRODUCT REVIEWPage 26 of 94


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Ranbaxys 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% ofthe total sales, Ranbaxys 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 topproducts of Ranbaxy, Sporidex (Cephalexin) was the Number 1 brand, closely follo

wed by Cifran (Ciprofloxacin). Anti - Infectives Anti- infective has been the main driver of Ranbaxys 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 ofCiprofloxacin 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 leadingbrand in Ranbaxys product portfolio with worldwide annual sales of US $ 35 Mn. Itis 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 Ranbaxys 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 Ranbaxys total sales.Page 27 of 94


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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. CardiovascularsCardiovascular is projected to be the second-best category for Ranbaxy. Statinshave 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 Segmentis 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. Thekey brands in this category include Histac and Romesac. The current annual salesof Ranitidine are estimated to be around US $ 16 Mn and the product is marketedin 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, Rofi

bax (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.

Nutritonals

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Nutritionals have been a major contributor to Ranbaxys sales. Two of the important products in this category are Revital and Riconia. With annual sales estimatedat about US $ 10 Mn, Revital contributes a significant share of total sales. Itis a leading brand in India and has done exceedingly well in some parts of theworld 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 MANAGEMENTINTRODUCTIONAs 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


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payables. Its the lifeblood of the business, and every managers 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 w

ould 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, andreduce 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 andmulti-dimensional colleagues in the organization.

To study and compare the working capital of RANBAXY with its competitors in theindustry 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 firms 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 beignored but may prove significant for the company. Various analyses conducted for analyzing the working capital will prove beneficial to the company. Working C

apital: Working Capital includes the current assets and current liabilities areasof 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 andexternal 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 goodsawaiting 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, s

ervices (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. Th

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


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Uses of Working Capital: The typical uses of working capital are as follows: Adjusted net loss from opetions Purchase of non-current assets: Repayment of long-term debt (debentures orbonds) and short-term debt (bank borrowing) Redemption of redeemable preferenceshares Payment of cash dividend.

ADVANTAGES OF ADEQUATE WORKING CAPITAL

Increase in debt capacity and goodwill: Adequate working capital represents thefinancial soundness of the company. If one company is financially sound it wouldbe able to pay its creditors timely and properly. It will increase companys goodwill. Page 33 of 94


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Thus a firm with adequate working capital can raise requisite funds from market,borrow short-term credit from banks, and purchase inventories of raw materials,etc., for the smooth operation of its business. Increase in production efficiency: With adequate working capital the firm can smoothly carryout research and development activities and thus adds to its production efficiency. Exploitation offavorable opportunities: In the presence of adequate working capital, a companycan avail the benefits of favorable opportunities. Adequate working capital wil

l 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 availthe advantage of cash discount by making cash payments for to the suppliers ofraw materials and merchandise. Solvency and efficiency of fixed assets: It helpsto maintain the solvency of the company, so that payments could be made in timeas and when they fall due. Attractive Dividend to Shareholders: It enables thecompany to offer attractive dividend to the shareholders so that sense of security and confidence will increase among them. It also increases the market value o

f 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 cant make use of favorable opportunities: The firm fails to undertake the profitable projects, which not only prevent the firm from availing the benefits offavorable opportunities but also stagnate its growth. Adverse effects of creditopportunities: The firm also fails to avail the attractive credit opportunitiesbut also stagnate its growth. Operational inefficiencies: It leads the company

to operating inefficiencies, as dayto-day commitments cannot be met. Effects onfinancial 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 tounavailability 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 Goodwilland 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

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identifying possible options it is important not to focus exclusively on incomeand expense items, but also to take the balance sheet into account. Improvementsto 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 aimedto analyze the various aspects of working capital management of Ranbaxy and compare it with that of Dr Reddys,others competitors and with industry standards. Byadopting various calculation and analysis and then making interpretation with the solution of specific problem, best efforts on giving appropriate suggestion tothe 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 controlProblem 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 particula

r item is complex. This is because there are many influencing factors includingthe 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 ProblemIt 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 wantcredit and will wish to dictate the terms on which they will pay. Therefore, forvoluntary organisations, management is more about dealing with credit than deci

ding 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 risesharply.

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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. Ifstage 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 ManagementCash 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 organisationruns out of cash resources it will have to stop operating immediately. There maynot even be the money to pay the salaries at the end of the month, and the bank

s 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 controlCreditor control is managing your relationship with organisations or people youowe money to, such as suppliers. It forms part of working capital management. Itis, unfortunately the area over which not-for profit organisations have least control. If you are dealing with an industrial giant or a big local authority, they generally dictate the terms of trade.

LITERATURE REVIEWWorking capital policy refers to the firm

s policies regarding 1) target levelsfor each category of current operating assets and liabilities, and Page 38 of 94


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2) how current assets will be financed. Generally good working capital policy (i.e. under conditions of certainty) is considered to be one in which holdings ofcash, 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 founda negative association, overall, between level of working capital and operatingperformance as measured by operating returns and operating margins (Peterson an

d 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 returnon assets and a lower return on equity, without any increase in profit. Howeverthe 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 todeal with departures from the expected values. Further, firms will also attemptto increase their accounts payable balances as a means of financing increased le

vels 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 managetheir 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 underthree 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, fir

m 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, andaccounts payables is associated with higher operating performance. We find thatfirms 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 shouldstay 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 reportssubstantially lower stock returns for IPO firms Page 39 of 94


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between 1975 and 1984 than for a size-and-industry-matched sample of seasoned firms. Since then there is a growing literature explaining IPO underperformance asrelated 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 andpost-IPO performance. Our paper tries to fill the void. The findings of this st

udy would be interesting to investors and creditors of new public companies.

METHODOLOGYA 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 isbest 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


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All important ratios have been calculated to know the financial health of the company with the help of past trends, mainly profitability & return ratios considered in section I of analysis part. It also covers the DuPont analysis and correlation analysis of working capital & its impact on profitability of the company.Section II consists of in depth analysis of every component of working capital.All important components of working capital have been analyzed in detail i.e, Inventory, Cash, and Payables etc

The methodology to be adopted is as follows: Collection of financial data ofBAXY and Dr Reddy from annual reports and companys 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 MillionPage 41 of 94


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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 10years, there was a sudden fall in the Profit After Tax (PAT-Profit available tothe Equity holders and the organization itself) in 2005, 2006 and 2008. The keyreason 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 dru

gs by the US Food and Drug Administration and pricing stress has acted as a wetblanket 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 StandardsThe following financial comparison has been made keeping in view the scale of operations of the company and the Industry Standards. The Industry standards havebeen 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 Reddys Laboratories 4. Lupin 5. Ranbaxy Laboratories Ltd. For any company functioning in the free market, its important how best it operates but this i

s 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 comparedby considering Working Capital Turnover Ratio, Current Ratio and Quick Ratio and further Profitability of Ranbaxy viz-a-viz other companies have been comparedby considering Return on Capital Employed and Earnings per share. Page 44 of 94


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Liquidity RatiosThe 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 RatioIt is a measurement comparing the depletion of working capital to the generationof 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 inventoryare 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, thehigher 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 lesas compared to other Pharmaceutical giants in the Industry.

2. Current RatioThe 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 beat 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 meansthat the company may not be able to pay its bills on time, while a higher ratiomeans that the company has money in cash or safe investments that could be putto better use in the business. The ideal Current ratio to be maintained by the pharmaceutical cannot be accurately assessed because the scale of operations andthe 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 theheavy 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 depreciationin several currencies were other factors for Ranbaxys dismal performance in 2008.

3. Quick RatioQuick Ratio also known as Acid Test Ratio is an even conservative measure of liquidity. The ratio expresses the degree to which a 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 Ranbaxys Current liabilities

were much more as compared to other companies. This is because although the Quick Ratio maintained by Ranbaxy is very near a said ideal ratio of 1:1 but that way below the Industry standards of 1.19 of the year 2008. Moreover, it can be clearly viewed from the Balance Sheet that a decent component of the Current liabilities includes fair valuation loss on derivatives.

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Profitability RatiosProfit is the difference between revenue and expenses over a period of time. Theprofitability ratios are calculated to measure the operating efficiency of thecompany.

1. Return on Capital EmployedA 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 operatingperformance. 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% forthe 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 andban 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 shareholders 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 EPSbeing negative is the drastically low Profits it has incurred in the year 2008.

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

Current AssetsRanbaxy has a growth of around 318.23% in current assets over the period of tenyears. 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.

Liquid Assets

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

Current LiabilitiesFrom 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 forthis period is 84.91 which also reflect more flexibility in current liabilitiesduring 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 Ranbaxys dismal performance in 2008.

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Working CapitalNet working capital is an important measure which itself indicate margin of safety or cushion of protection provided to the creditors. As the following diagramshows, 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 thecompany 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 whichhas 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 accessof 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, ithas 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 CapitalGross Working Capital has many constituents like inventory, sundry debtors, cashand bank accounts etc. Composition has been calculated in Annexure-B at the endof 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 CapitalOut 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 anaverage, sundry debtors contributed 33.2% to the working capital. The increasein percentage of sundry debtor reflects a liberal credit policy with chances ofbad debts and collection charges.

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Inventory to Gross Working CapitalNext major component after sundry debtors is the inventory which decreased from31.91% 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 CapitalCash 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 averageof 7.30% is because of high percentage in 2007-08, in all other financial yearsthis 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 to10% of the current assets. Further, as the current liabilities are not expectedto 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 cas

h and bank balance and this Page 58 of 94


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

Loan & Advances to Gross Working CapitalLoan and advances even though constituted one of the most important component ofnet working capital in 1998-99 (i.e. 25.02%), declined over the period of timeas percentage of working capital. Over these ten years, approximately 26% workin

g capital has been contributed from loans and advances with a highest of 43.09%in 2002-2003.

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

Current Ratio

Relationship between current assets and current liabilities is shown by currentratio. It basically measures companys 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 normof 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 whic

h 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 passedthrough 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 liquiditywas concerned and it had liquidity facilities available for the creditors. Theperformance 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 t

he 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 companys liquidity.

Quick Ratio or Acid Test RatioCurrent 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 companyis 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 supp

osed 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 lowestof 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 companys immediate payment position was satisfactory and its liquid assets were adequate to meet its short term obligation

s.

Absolute Liquidity Ratio or Cash Position RatioEven more rigorous than the quick ratio is the absolute liquidity ratio which iscalculated 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 currentobligations. A high cash position ratio is good from the creditors point of viewbut 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 thecompany has been consistently very low compared to the industry norm except forthe 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 f

or the said duration. As compared to Industry standards of CMIE, the average wasmuch lower than the acceptable norm.

Inventory to Sales Ratio or Inventory Turnover RatioRelationship between the sales and average stock kept by the company is normallyreflected by the Inventory to Sales Ratio which is also called as Inventory Turnover Ratio. This is also Page 65 of 94


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an indicator for the liquidity of the concern as it will reflect the rate at which inventories are being converted into sales and subsequently cash. A higher inventory to sales ratio will show higher efficiency on the part of the managementand 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. Asduring this time, average of inventory turnover ratio in Ranbaxy was higher than the Industry standard of CMIE, the inventory management of the company can besaid to be satisfactory from 2001-02 to 2007-08.

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Debtors to Sales Ratio or Debtors Turnover RatioA 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 turnedover 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. D

ebtors 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

54023648 project report on working capital

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