Beruflich Dokumente
Kultur Dokumente
On
STUDY OF WORKING CAPITAL
MANAGEMENT OF RANBAXY LAB LTD
A Comparative Analysis
Submitted to:
PREFACE
Page 2 of 94
TABLE OF CONTENTS
Abstract
Introduction
Industry Profile
Research and Development
Organizational profile
Working capital
Defining the problem
Literature review
Methodology
06
07
08
11
14
32
39
41
43
48
51
53
63
76
81
Conclusion
Limitations
Summary of findings
Recommendations and Suggestions
References
89
90
92
95
Page 3 of 94
ABSTRACT
INTRODUCTION
Page 4 of 94
INDUSTRY PROFILE
Page 5 of 94
Industry Definition
The Indian pharmaceutical industry is a success story providing employment for millions
and ensuring that essential drugs at affordable prices are available to the vast population of
this sub-continent.
Richard Gerster
The Indian Pharmaceutical Industry today is in the front rank of 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 Gross Domestic Product (GDP):
Indian Pharmaceutical Industry ranks fourth in the world, pertaining to the volume of
sales.
The estimated worth of the Indian Pharmaceutical Industry is US$ 6 billion.
The growth rate of the industry is about 13% per year.
Almost most 70% of the domestic demand for bulk drugs is catered by the Indian
Pharma Industry.
The Pharma Industry in India produces around 20% to 24% of the global Generic
drugs.
The Indian Pharmaceutical Industry is one of the biggest producers of the Active
bulk drugs.
The Indian Pharma Industry includes small scaled, medium scaled, large scaled
decade.
The multinational companies, investing in research and development in India may
counterpart.
Page 6 of 94
The manufacturing cost of pharmaceutical products in India is nearly half of the cost
incurred in US.
The cost of performing clinical trials in India is one tenth of the cost incurred in US.
The cost of performing research in India is one eighth of the cost incurred in US.
Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the
drugs and pharmaceutical products has been done away with. Manufacturers are free to
produce any drug duly approved by the Drug Control Authority. Technologically strong and
totally self-reliant, the pharmaceutical industry in India has low costs of production, low
R&D costs, innovative scientific manpower, strength of national laboratories and an
increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and
research capabilities, supported by Intellectual Property Protection regime is well set to take
on the international market.
ADVANTAGE IN INDIA
Competent workforce: India has a pool of personnel with high managerial and technical
competence as also skilled workforce. It has an educated work force and English is
commonly used. Professional services are easily available.
Cost-effective chemical synthesis: Its track record of development, particularly in the area
of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It
provides a wide variety of bulk drugs and exports sophisticated bulk drugs.
Legal & Financial Framework: India has a 53 year old democracy and hence has a solid
legal framework and strong financial markets. There is already an established international
industry and business community.
Information & Technology: It has a good network of world-class educational institutions
and established strengths in Information Technology.
Globalization: The country is committed to a free market economy and globalization. Above
all, it has a 70 million middle class market, which is continuously growing.
Consolidation: For the first time in many years, the international pharmaceutical industry is
finding great opportunities in India. The process of consolidation, which has become a
generalized phenomenon in the world pharmaceutical industry, has started taking place in
Page 7 of 94
India.
THE GROWTH SCENARIO
India's US$ 3.1 billion pharmaceutical industry is growing at the rate of 14 percent per year.
It is one of the largest and most advanced among the developing countries.
Over 20,000 registered pharmaceutical manufacturers exist in the country. The domestic
pharmaceuticals industry output is expected to exceed Rs260 billion in the financial year
2002, which accounts for merely 1.3% of the global pharmaceutical sector. Of this, bulk
drugs will account for Rs 54 bn (21%) and formulations, the remaining Rs 210 bn (79%). In
financial year 2001, imports were Rs 20 bn while exports were Rs87 bn.
The above graph shows the percentage of pharmaceutical products export by various
countries.
(SOURCE Competitiveness of the Indian pharmaceutical industry in the new product patent
regime a report by FICCI)
Page 8 of 94
A study by the consulting firm Bain & Company reported that the cost for discovering,
developing and launching (which factored in marketing and other business expenses) a new
Page 9 of 94
drug (along with the prospective drugs that fail) rose over a five year period to nearly $1.7
billion in 2003.
These estimates also take into account the opportunity cost of investing capital many years
before revenues are realized (see Time-value of money). Because of the very long time
needed for discovery, development, and approval of pharmaceuticals, these costs can
accumulate to nearly half the total expense. Some approved drugs, such as those based on reformulation of an existing active ingredient (also referred to as Line-extensions) are much
less expensive to develop. The consumer advocacy group Public Citizen suggests on its web
site that the actual cost is under $200 million, about 29% of which is spent on FDA-required
clinical trials. For me-too-drugs and for generics, the cost are even less.
Calculations and claims in this area are controversial because of the implications for
regulation and subsidization of the industry through federally funded research grants.
others the substance is withdrawn from the market completely. Questions continue to be
raised regarding the standard of both the initial approval process, and subsequent changes to
product labeling (it may take many months for a change identified in post-approval
surveillance to be reflected in product labeling) and this is an area where congress is active.
The FDA provides information about approved drugs at the Orange Book site.] In the UK, the
British National Formulary is the core guide for pharmacists and clinicians.
Orphan drugs
There are special rules for certain rare diseases ("orphan
diseases") involving fewer than 200,000 patients in the United
States, or larger populations in certain circumstances. Because
medical research and development of drugs to treat such diseases is financially
disadvantageous, companies that do so are rewarded with tax reductions, fee waivers, and
market exclusivity on that drug for a limited time (seven years), regardless of whether the
drug is protected by patents.
Industry revenues
For the first time ever, in 2006, global spending on prescription drugs topped $643 billion,
even as growth slowed somewhat in Europe and North America. The United States accounts
for almost half of the global pharmaceutical market, with $289 billion in annual sales
followed by the EU and Japan. Emerging markets such as China, Russia, South Korea and
Mexico outpaced that market, growing a huge 81 percent. US profit growth was maintained
even whilst other top industries saw slowed or no growth. Despite this, "..the pharmaceutical
industry is and has been for years the most profitable of all businesses in the U.S. In
the annual Fortune 500 survey, the pharmaceutical industry topped the list of the most
profitable industries, with a return of 17% on revenue."
Pfizer's cholesterol pill Lipitor remains the best-selling drug in the world for the fifth year in
a row. Its annual sales were $12.9 billion, more than twice as much as its closest competitors:
Plavix, the blood thinner from Bristol-Myers Squibb and Sanofi-Aventis; Nexium, the
heartburn pill from AstraZeneca; and Advair, the asthma inhaler from GlaxoSmithKline.
IMS Health publishes an analysis of trends expected in the pharmaceutical industry in 2007,
including increasing profits in most sectors despite loss of some patents, and new
'blockbuster' drugs on the horizon.
Teradata Magazine predicted that by 2007, $40 billion in U.S. sales could be lost at the top
10 pharma companies as a result of slowdown in R&D innovation and the expiry of patents
on major products, with 19 blockbuster drugs losing patent.
Page 11 of 94
Page 12 of 94
INTRODUCTION TO RANBAXY
COMPANY PROFILE
A company empowered by one mission to place itself on the world map. An
enterprise propelled by one force-that synergizes its energies to charter unexplored
markets. Organizations fuelled by one dream-to transform competition into opportunity.
Ranbaxy Laboratories Ltd. was incorporated in June 1961, in the name of M/S LEPITIT
RANBAXY LABORATORIES LTD and it commenced its business in MARCH 1962, in
technical and financial collaboration with an international company named LEPTIT SPA,
MILAN, ITALY.
Ranbaxy Laboratories Pvt. Ltd. merged with Leptit Ranbaxy Laboratories Pvt. Ltd. in 1962
Ranbaxy and company also merged with this company in 1966. The collaboration
arrangement with M/S LEPTIT was terminated in 1966; after which Indian nationals
acquired the entire share capital of the company.
Page 13 of 94
Therefore the word Leptit was removed from the name of the company. The name is known
as RANBAXY LABORATORIES LIMITED. In 1973 the company issued shares to the
general public and became a full fledged PUBLIC
LIMITED COMPANY.
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 international quality.
The companys drive for Internationalism is guided by the well planned brand strategy that
covers some of the world emerging markets like China, Central Europe and Latin America .
Its position today is in league of the Top Ten Pharmaceutical companies of three world an
decent ranking as the eleventh largest company in the international generics space is the
resounding endorsement of its strategic mind.
It is clear that for a long time, the dominant share of revenues of the company would
continue to come from the ever expanding global generics market. Hence the intent of
Ranbaxy mission is to achieve a sustained growth rate through the continuous pursuit of
innovation phase one trials for pervasion, a compound for treating prosthetic males have been
completed. Phase 1 trials with clafrinast, an asthma compound is an important step towards
research based value creation.
This company also had success with Ciplofloxacine, an ingenious form, created through the
novel drug delivery systems research. As the demand of the bulk drugs inside the country and
abroad was increasingly rapidly a new, plant was set up at Toansa near Ropar in 1987. This
was a higher capacity plant designed to cater to the present and future needs, initially
antibiotics like Ampicillin, Trihydrate and Doxycycline were manufactured.
Later, on the other drugs like Cephalexin monohydrate and Ranitidine were also prepared.
The plant at Toansa was designed to meet the stringent standards set by the Food and Drug
Administration (FDA) of U.S.A. This plant has been approved by FDA and this will open up
American and other newer markets for Ranbaxys products
.
At present Ranbaxy have four plants for the manufacture of bulk drugs two at Mohali, one at
Dewas (M.P) AND Another at Toansa near ROPAR. At present, Ranbaxy is the second most
Indian company engaged in the manufacturing of Pharmaceuticals, Bulk Drugs and Fine
Chemicals.
Page 14 of 94
RANBAXYs vast range of highly pure laboratory reagent and chemicals enjoy a place of
pride in the market. IT trends, has rebuilt As a step towards leveraging information for value
creation using its information backbone around an ERP application, along the focus on
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 accounting for 12% of the industry exports
pharmaceutical substance and dosages forms to over 50 countries with the internationals
sales comprising of 45% of the total turnover.
VISION GARUDA
Page 15 of 94
During the year 2002, the company has evolved a 10-year vision till 2012, for
sustaining significant growth consistent with its mission to be an international
research based Pharmaceutical Company, under the rubric Vision Garuda,
with increasing emphasis on Novel Drug Delivery Systems Research (DDR).
In licensing and out licensing, relationship with other important pharmaceutical
entities, expansion of manufacturing facilities both in India and strategic
overseas locations, revamping of organizational structures to cater to the wider
and more dispersed span of operations, and streamlining and standardizing the
business processes through out the global organization, are other areas that
receive focus and attention of management on priority.
Mission
Page 16 of 94
Aspirations-2012
Aspire to be a$5 billion company
Become a Top 5 global generics player
Significant income from Proprietary products
BRAZIL
CHINA
EGYPT
GERMANY
HONG KONG
INDIA
:
:
:
:
:
:
IRELAND
MALAYSIA
NETHERLANDS
NIGERIA
PANAMA
POLAND
SOUTH AFRICA
THAILAND
:
:
:
:
:
:
:
:
U.K
USA
:
:
VIETNAM
ALLIED BUSINESSES
Page 18 of 94
Page 19 of 94
The company has also witnessed significant milestones in the area of Novel
Drug Delivery Systems (NDDS). The company has entered into strategic
business arrangements with companies such as Bayer AG, Glaxo-Wellcome,
Eli-Lilly etc. for production and co-marketing operations. Many innovative
developments have been taking place in recent times. The 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, where 25 filings were
undertaken in a span of 2-3 months.
The company has planned to build and protect intellectual property with the
help of IPC, which addresses all matters pertaining to patents. CQA supervises
the implementation of standard operating procedures (SOP) and ensures
compliance to corporate quality assurance policy in all technological operations
of the organization. The company is committed to invest 6% of the sales in R
and D by 2003, of which 7% of the expenditure will be earmarked for research
on New Drug Discovery and Novel Drug Delivery Systems. There will be
continuous emphasis on augmenting R and D performance and productivity
with advanced scientific and technological tools.
Page 20 of 94
Page 21 of 94
Chemical Division
Diagnostic Division
Stan care Division
Curradia Division
International Division
Pharmaceutical Division
Technical Division
Corporate Division
Animal Health Care Division
2000
Ranbaxy files IND Application for Asthma MoleculeRBx4638, 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
2002
2003
In the chemical division, various bulk drugs are manufactured. The chemical
division had three units in Punjab. One is located at Toansa, two are located at
Mohali and one unit is located at Dewas near Indore in Madhya Pradesh, where
Ciprofloxacine is manufactured. In the plant of the chemical division, various
drugs like Antibiotics, Anti-malarial, Antibacterial and Anti-ulcer are
manufactured. One of the older plants of Ranbaxy was closed after the accident
in June 2003.the second one is still working
The 1991, the Toansa plant started functioning in 1992 and the Dewas plant
started functioning in 1999. Various plant heads independently manage all these
plants.
In each unit, separate facilities with respect to the manufacture of drugs, along
with their manufacturing areas have been provided. This is required to reduce
the chances of any cross contamination under the drug laws and to comply with
good manufacturing practices.
At Mohali plant, separate blocks have been provided for the preparation of each
drug .The Toansa, Mohali and Dewas plants are planned in such a way that their
system, facilities, manufacturing practices and standards meet the requirements
of FDA. Mohali Plant also mainly in the manufacturing of Active
Pharmaceutical Ingredients (API). The Plant is divided into two plant areas A8
and A9
Production Department
Page 25 of 94
Page 26 of 94
PRODUCT REVIEW
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% of the 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 top products of Ranbaxy, Sporidex
(Cephalexin) was the Number 1 brand, closely followed by Cifran
(Ciprofloxacin).
Anti - Infectives
Anti- infective has been the main driver of 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 of Ciprofloxacin once a day has been an important landmark
achieved by Ranbaxy. The product has been licensed to Bayer. Cifran continues
to be a dominant player in the quinolones market in India, China and Russia.
Sporidex is another leading brand in Ranbaxys product portfolio with
worldwide annual sales of US $ 35 Mn. It is available in eight different dosage
forms including capsules, dry powder for suspension, redimix, dispersible
tablets, paediatric drops, soft gelatin capsules, sachet and advanced formulation
for twice-daily administration. It is currently marketed in 15 countries. In India,
Sporidex is the leading brand with a market share of 36% of the Cephalexin
segment.
Keflor is available in seven different dosage forms and is the third-largest
selling brand for Ranbaxy worldwide. The dosage forms list includes capsules,
dry syrup, modified release tablets, dispersible tablets, drops and redimix.
Enhancin is expected to be the leading product in 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
Nutritonals
Page 28 of 94
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 would be soon required (Current Liabilities).
Current Assets are the resources which are in cash or will soon be converted into cash in
ordinary course of business. The faster a business expands the more cash it will need for
working capital and investment.
Good management of working capital will generate cash, help to improve the profits, solidify
the relationships with suppliers and customers, and reduce risks.
This project was undertaken to analyze the working capital policies, working capital
management of the company and to reduce down their problems and finding the solutions
with respect to the working capital management of the company.
Working in an organization, especially with a brand like RANBAXY the main objective is to
learn maximum from the intellectually stimulating mentors and multi-dimensional colleagues
in the organization.
Page 30 of 94
Stock - stocks of raw materials, partly completed production and finished goods
awaiting sale.
respect of sales
Increase in debt capacity and goodwill: Adequate working capital represents the
financial soundness of the company. If one company is financially sound it would be
able to pay its creditors timely and properly. It will increase companys goodwill.
Thus a firm with adequate working capital can raise requisite funds from market,
borrow short-term credit from banks, and purchase inventories of raw materials, etc.,
for the smooth operation of its business.
Increase in production efficiency: With adequate working capital the firm can
smoothly carryout research and development activities and thus adds to its production
efficiency.
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.
Solvency and efficiency of fixed assets: It helps to maintain the solvency of the
company, so that payments could be made in time as and when they fall due.
Page 34 of 94
Loss of goodwill and creditworthiness: As the firm fails to honor its current
liabilities it loses it goodwill and creditworthiness among its creditors.
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 of
favorable opportunities but also stagnate its growth.
Adverse effects of credit opportunities: The firm also fails to avail the attractive
credit opportunities but also stagnate its growth.
Operational inefficiencies: It leads the company to operating inefficiencies, as dayto-day commitments cannot be met.
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.
Page 35 of 94
Areas of working capital has different problems and these are discussed separately in the
following sections:
Page 36 of 94
1. Stock control
Problem
If too much stock is held, the organisation wastes money through a variety of
factors:
Money is tied up in stock when it could be put to better use.
There are superfluous warehousing and storage costs.
Stock may deteriorate.
There is a potentially greater risk of theft.
On the other hand, too little stock can lead to stock-outs which can:
Halt activity
Lose income
Cause discomfort or distress to clients
However, finding the correct level of stock for any one particular item is
complex. This is because there are many influencing factors including the
anticipated demand for the items and the cost-efficient use of the organisation's
resources. The aim is to find the right balance.
2. Debtor Control
Problem
It is better to have cash in your bank account
than in your customers
If you get the money in quickly you can use it for other purposes which
will advance the organisation's objectives.
Page 37 of 94
3. Cashflow Management
4. Creditor control
Creditor control is managing your relationship with organisations or people you owe
money to, such as suppliers. It forms part of working capital management.
It is, unfortunately the area over which not-for profit organisations have least control.
If you are dealing with an industrial giant or a big local authority, they generally
dictate the terms of trade.
LITERATURE REVIEW
Working capital policy refers to the firm's policies regarding
Page 38 of 94
1) target levels for each category of current operating assets and liabilities, and
2) how current assets will be financed.
Generally good working capital policy (i.e. under conditions of certainty) is considered to be
one in which holdings of cash, securities, inventories, fixed assets, and accounts payables are
minimized. The level of accounts receivables should be used as a means of stimulating sales
and other income. Previous literature on working capital management has found a negative
association, overall, between level of working capital and operating performance as
measured by operating returns and operating margins (Peterson and Rajan, 1997). Under
conditions of certainty (i.e. sales, costs, lead times, payment periods, and so on, are known),
firms have little reason to hold more working capital than a minimum level. Larger amounts
would increase the level of operating assets, increase the need for external funding, resulting
in lower return on assets and a lower return on equity, without any increase in profit.
However the picture changes when uncertainty (i.e. uncertain growth) is introduced
(Brigham and Houston, 2000). Larger amounts of cash, securities, accounts receivables,
marketable securities, inventories, and fixed assets will be needed to support increased sales
Required levels will be based on expected sales levels and expected order lead times.
Additional holdings may be needed to enable the firm to deal with departures from the
expected values. Further, firms will also attempt to increase their accounts payable balances
as a means of financing increased levels of current operating assets. Firms which are in high
growth stages will face the challenge of maintaining the necessary level of operating assets to
support subsequent growth, while at the same time attempting to maintain adequate
performance indicators.
This study focuses on understanding how IPO companies manage their working capital and
other balance sheet items to support subsequent growth. This study supports the existing
literature on working capital and contributes to the existing literature by examining a sample
of firms (i.e. recent IPO firms) which have a wider range of growth levels than non-IPO
firms. Our study examines the impact of working capital management on the operating
performance and growth of new public companies. The study also examines these
relationships under three categories of growth (i.e. negative growth, moderate growth, and
high growth). The study also examines other selected firm characteristics in light of working
capital management: firm operating and financial risk, amount of debt, firm size, and
industry.
An underlying theme of this study is that high growth certainly does not ensure high
operating performance. Consistent with prior research (Peterson and Rajan, 1997) this study
provides further evidence that good working capital management is positively associated
with better operating performance. Higher levels of accounts receivable are associated with
higher operating performance, in all three of the growth rate categories. The study also finds
that maintaining control over levels of cash, securities, inventory, fixed assets, and accounts
payables is associated with higher operating performance. We find that firms which are
experiencing very high growth will hold higher levels of cash, securities, inventory, fixed
assets, and accounts payable to support the high growth. The study suggests that these firms
are sacrificing operating performance (accepting lower operating returns) to support the high
growth. This, in turn, increases financial and operating risk for these firms. Perhaps IPO
firms should stay more focused on their operating performance, while maintaining more
moderate growth levels
Page 39 of 94
Another aspect of this study is that it fills a void in the initial public offerings literature.
Recent literature finds that new public companies underperform the market after going
public. Ritter in his 1991 paper reports substantially lower stock returns for IPO firms
between 1975 and 1984 than for a size-and-industry-matched sample of seasoned firms.
Since then there is a growing literature explaining IPO underperformance as related to
agency cost (Smith, 1990), institutional holdings (Field, 1995), venture capital (Jain and
Gompers, 1997; Jain and Kini, 2000), market timing of IPO (Benninga, 2004), and earnings
management (Teho et al., 1998; Ahmad-zaluki et al., 2008). However, there is no study
linking the working capital management and post-IPO performance. Our paper tries to fill the
void. The findings of this study would be interesting to investors and creditors of new public
companies.
METHODOLOGY
A study by analyzing the trends of working capital of the firm and to examine the possible
causes for any significant differences. The data has been collected from the financial
statements. For the purpose of this study, profitability is measured by Return on Total Assets
(ROTA), which is defined as profit before interest and tax divided by total assets.
Page 40 of 94
Collection of financial data of RANBAXY 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.
Page 41 of 94
Page 42 of 94
Though the Sales of the company had been on a constant increase over the last 10 years,
there was a sudden fall in the Profit After Tax (PAT-Profit available to the Equity holders and
the organization itself) in 2005, 2006 and 2008. The key reason for the sudden fall in PAT can
be attributed to the sudden hike in the R&D expenditure in 2005.
In 2008, there was an unprecedented economic downturn across all markets globally and the
fluctuating financial and Forex environment created a substantial negative impact on
profitability. Further prohibition on drugs by the US Food and Drug Administration and
pricing stress has acted as a wet blanket in the periodical figures of the company. The trend
line shows the reason behind the fall in profitability.
Page 43 of 94
Current Ratio and Quick Ratio and further Profitability of Ranbaxy viz-a-viz other
companies have been compared by considering Return on Capital Employed and Earnings
per share.
Liquidity Ratios
The liquidity refers to the availability of cash and cash convertible assets with an
organization to meet its short-term obligations i.e. creditors and other Current Liabilities.
Any company's liquidity may vary due to seasonality, the timing of sales, and the state of the
economy. But liquidity ratios can provide small business owners with useful limits to help
them regulate borrowing and spending. Some of the best-known measures of a company's
liquidity include:
over a given period. This provides some useful information as to how effectively a company
is using its working capital to generate sales.
A company uses working capital to fund operations and purchase inventory . These
operations and inventory are then converted into sales revenue for the company . The
working capital turnover ratio is used to analyze the relationship between the money used to
fund operations and the sales generated from these operations. In a general sense, the higher
Page 45 of 94
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.
From the Industry comparison, it is apparent that Ranbaxy is way above the Industry
standards in 2008 which implies that the sales generated by Ranbaxy Laboratories has always
been much higher than the cost incurred to generate those sa les as compared to other
Pharmaceutical giants in the Industry.
2. Current Ratio
The current ratio of Ranbaxy has been compared with the Top five Pharmaceutical organizations
for the year 2008. A Current ratio measures the ability of an entity to pay its near-term
obligations. Though the ideal current ratio depends to some extent on the type of business, a
general rule of thumb is that it should be at least 2:1. The higher the current ratio, the greater the
"cushion" between current obligations and a firm's ability to pay them. A lower current ratio
means that the company may not be able to pay its bills on time, while
a higher ratio means that the company has money in cash or safe investments that could be put to
better use in the business.
The ideal Current ratio to be maintained by the pharmaceutical cannot be accurately assessed
because the scale of operations and the inventory size has been different for all the concerns in
the Industry. According to CMIE Industry Standards the current ratio for 2008 is 1.535.
Page 46 of 94
As per the above graph, the Current ratio maintained by Ranbaxy in 2008 is way below the
normal industry standards. The reason for a lower Current Ratio is the heavy amount of
Current liabilities incurred mainly due to huge loss on derivative valuations. Ban in U.S
market for more than 30 generic drugs and depreciation in several currencies were other
factors for Ranbaxys dismal performance in 2008.
3. Quick Ratio
Quick Ratio also known as Acid Test Ratio is an even conservative measure of liquidity.
The ratio expresses the degree to which a company's current liabilities are covered by the
most liquid current assets. Here Quick assets include all current assets except inventories.
Page 47 of 94
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.
Page 48 of 94
Profitability Ratios
Profit is the difference between revenue and expenses over a period of time. The profitability
ratios are calculated to measure the operating efficiency of the company.
As compared to other Pharmaceutical rivals in the Industry, Ranbaxy has a negative return on
Capital employed and way below the Industry standards of 8.06% for the year 2008. This
means that the Profit before Tax (PBT) of the company is heavier on the Total Assets which
is dragging down the Return on Capital Employed. This is mainly because of the forex
decline due to global economic downturn and ban on generic products in the U.S market.
Page 49 of 94
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.
From the Industry comparison, it is clear that the earnings per share for the Equity
Shareholders of Ranbaxy are negative. The main reason for the figure of EPS being negative
is the drastically low Profits it has incurred in the year 2008.
Page 50 of 94
LIQUIDITY ANALYSIS OF
RANBAXY LABORATORIES LIMITED
Liquidity of any company is the indicator as to how the company is placed with reference to
its capacity to meet its current financial obligation. This means that here we have to consider
the current assets which can be easily converted into cash to meet its immediate financial
obligations or dues. Liquidity position of Ranbaxy Laboratories Limited has been analyzed in
the following paragraphs based on different measures.
Current Assets
Ranbaxy has a growth of around 318.23% in current assets over the period of ten years. From
Rs 12310.24 Million in 1998-99, The Company has increased its current assets to Rs
51485.24 Million. Coefficient of variation for this period has been 49.11 which indicate that
the growth of current assets during the period under consideration has been sustainable
except for the year 2007-08 which shows a sharp increase in current assets which is largely
due to increase in cash and bank balances which has increased more than ten times as
compared to 2007.
Liquid Assets
Page 51 of 94
Company has also witnessed significant increase in liquid assets. From Rs 8382.22 M in
1998-99 to Rs 39500.05 M in 2007-08, there has been a growth of 371.24% in ten years. As
it is clear from the above mentioned data, liquid assets growth has been slightly more than
the growth of current assets. Standard deviation and coefficient of variation for this period
has been Rs 9079.38 M and 57.81% respectively.
Current Liabilities
From 1998-99 to 2007-08, current liabilities for Ranbaxy Laboratories have increased from
Rs 4152.78 M to Rs 42725.97 M with average current liabilities over this period being Rs
13067.47 M. As we see here, growth rate for current liabilities in this period has been
928.85% which is much higher than the growth for current and liquid assets which shows
that current liabilities have increased at a higher pace than its corresponding assets. Further,
coefficient of variation for this period is 84.91 which also reflect more flexibility in current
liabilities during this time. Current liabilities increased more than four times from 2007 to
2008 primarily because of huge loss on derivative valuations. Ban in U.S market for more
than 30 generic drugs and deprecation in several currencies were another factors for
Ranbaxys dismal performance in 2008.
Page 52 of 94
Working Capital
Net working capital is an important measure which itself indicate margin of safety or cushion
of protection provided to the creditors. As the following diagram shows, the company has all
over positive net working capital. The greater the amount of net work ing capital, the greater
the liquidity of the firm. NWC of the company increased from Rs 8157.46 M to Rs 8759.27
M i.e. overall growth of 7.38% only. Coefficient of variation for the NWC is also 20.99%
which is also less as compared to current assets or current liabilities. There is a decrease in
Net working capital in the year 2008.Even though there is an increase in current asset and
current liabilities however increase in current liabilities is much more which has let to decline
in Net working capital. There is a decrease in Net working capital in the year 2008.Even
though there is an increase in current asset and current liabilities however increase in current
liabilities is much more which has let to decline in Net working capital.
Page 53 of 94
Page 54 of 94
Page 55 of 94
Page 56 of 94
Page 57 of 94
definitely affects the profitability of the company except for the year 2008 which was high
due to increase in deposit accounts of scheduled banks.
Page 59 of 94
Page 60 of 94
Ratio Analysis
Even though above analysis based on composition provide some indicator to the liquidity
position of the company, these do not show the extent of margin of safety provided for
current creditors. For this, ratio analysis has been done as follows:
Current Ratio
Relationship between current assets and current liabilities is shown by current ratio. It
basically measures 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 norm of 2:1 is supposed to be a good current ratio and if the current ratio for the
company is less than that, the solvency or liquidity of the company becomes questionable.
As it is evident from the following table and the graph, the company had an average current
ratio of 1.87 over the period of seven years from 2002 to 2008. However, as it is clear from
the data that it varied from 2.19 to 1.21 which shows a variation over the years. Further, a
current ratio of less than 2 is normally not supposed to be good as such it can be considered
the company passed through a difficult phase of liquidity in 2004 and 2008.
Page 61 of 94
However, over all for this period, the company was sound as far as its liquidity was
concerned and it had liquidity facilities available for the creditors. The performance standards
of the Indian Pharmaceutical Industry for 2002-2008, as published by Centre for Monitoring
Indian Economy (CMIE) are 1.51 to 1.54.The current ratios are always above the standards
during the study period indicating a comfortable liquidity position for the company except
for 2008. The average was also higher than the standard set by the CMIE. However, current
ratio considers the quantity of current assets only and not its quality. So a more in-depth
analysis is required for definite inference to be drawn for the companys liquidity.
Page 62 of 94
Page 63 of 94
Above data for Ranbaxy Laboratories indicates that Acid Test Ratio for the period under
study has consistently been above 1 except for 2008 where it was lowest of 0.92 and an
average of 1.23. It shows that the company has a healthy liquidity position in this period. As
per the set standards according to Indian Pharmaceutical Industry, norm for Acid Test Ratio is
1.07 to 1.19 and as such, considering the above data, it can be said that companys immediate
payment position was satisfactory and its liquid assets were adequate to meet its short term
obligations.
Page 64 of 94
Above data indicates that absolute liquidity ratio of cash position ratio of the company has
been consistently very low compared to the industry norm except for the year 2007- 2008
where it rose to 0.45. It varied from a lowest of 0.03 to highest of 0.45. Over the period of
time, its average has been only 0.14. This shows that company has followed a policy of not
maintaining a high cash position ratio and rather focused more on utilization of cash
resources. However, from a creditors point of view, cash position ratio for the company was
not acceptable for the said duration. As compared to Industry standards of CMIE, the average
was much lower than the acceptable norm.
an indicator for the liquidity of the concern as it will reflect the rate at which inventories are
being converted into sales and subsequently cash. A higher inventory to sales ratio will show
higher efficiency on the part of the management and vice versa.
Following table shows that Inventory Sales Ratio varied from 3.78 in 2001-02 to 4.38 in
2007-08. On an average, the value of Inventory Sales Ratio remained 3.82 for this period.
Further, it is also evident from the table and the graph, that from 2001-02, efficiency of
management has improved as far as conversion of inventory into sales was concerned. As per
the industry norm, normally an inventory sales ratio of more than 2 to 2.5 is considered
acceptable. As during this time, average of inventory turnover ratio in Ranbaxy was higher
than the Industry standard of CMIE, the inventory management of the company can be said
to be satisfactory from 2001-02 to 2007-08.
Page 66 of 94
Page 67 of 94
There is a close relationship between sales and the working capital and the working capital
turnover ratio is an indicator of that. This ratio is computed by dividing the net sales by the
net working capital. It basically helps to understand the efficiency with which net working
capital is being utilized. The higher the turnover, the greater is the efficiency and the larger is
the rate of profit earned. However, a very high working capital turnover ratio is also
indicative of over trading and lack of working capital. In other words, if the working capital
turnover ratio is very less, it means that working capital has not been efficiently utilized.
In the table below, Ranbaxy has successfully improved its performance with reference to
relationship between working capital and sales as is evident from the fact that Working
Capital Turnover Ratio has improved from 2.95 in 2001-02 to 5.12 in 2007-08. For the
duration of seven years, average ratio has been 3.46. It also means that for generating a sale
of Rs 1, the company invested Rs 0.29. This shows that the management was active to take
assume risk and tended to reduce the size of working capital in relation to sales volume over
the period of time. The average of working capital turnover ratio for the company was higher
than the standard set by CMIE.
Page 69 of 94
Page 70 of 94
Page 71 of 94
Table above shows that current assets to total assets ratio was 0.63 in 2001-02 which came
down to 0.44 in 2007-2008. Over the period of seven years under consideration, average
current assets to total assets ratio has been 0.5 with standard deviation of 0.13 and coefficient
Page 72 of 94
of variation as 25.47%. Higher investment in current assets shows that the firm had a better
liquidity in the beginning however it also shows that profitability was less as higher liquidity
normally results in lesser profitability. The average of working capital turnover ratio for the
company was lower than the standard set by CMIE
Liquidity Ranking
Liquidity position of the company is affected by the composition of working capital. In order
to evaluate the overall liquidity position, Motaals comprehensive test has been applied. In
Page 73 of 94
this test, a method of ranking has been applied to arrive at a more comprehensive assessment
of liquidity in which four different factors viz inventory to current assets ratio, sundry
debtors to current assets ratio, cash & bank to current assets ratio and loans & advances to
current assets ratios have been computed and combines in a points score. To calculate that, a
high value of sundry debtors to current assets ratio, cash & bank to current assets ratio and
loans & advances to current assets ratios shows a relatively favorable liquidity position and
ranking has been done in that order. Contrary to this, a low inventory to current assets ratio
indicates more favorable liquidity position and hence, ranking has been done accordingly.
Final ranking has been done on the basis that the lower the total of the individual ranks, the
more favorable is the liquidity position of the company and vice versa.
A comprehensive calculation sheet is attached at Annexure D which resulted in following
results.
Above table shows that the Ranbaxy had the most sound liquidity position during the year
1998-1999 and 2006-2007. On the contrary, 2003-2004 was the weakest year as far as the
liquidity position was concerned.
Page 74 of 94
To do this analysis, liquidity indicator has been taken to be the ratio of current assets to total
assets. Ratio of return on capital employed has been taken as the indicator for profitability. A
detailed calculation has been done in the excel table which has resulted in the following:
Rank correlation coefficient between the liquidity and profitability of the company has been
calculated as 0.452562. To study the significance of the computed value of correlation
coefficient, the t-test has been applied as:
H0: Null Hypothesis There exists no significant correlation between the liquidity and
profitability of Ranbaxy Laboratories Limited.
H1: Alte rnative Hypothesis There exists a significant correlation between the liquidity
and profitability of Ranbaxy Laboratories Limited.
Say 5 % level of significance, = 0.05
Critical Value of t for 5 % level of significance = 2.306
Page 75 of 94
In above case, t has been calculated in above table itself which comes out to be 2.571 which
is greater than the critical value of t i.e.2.262 which shows that the null hypothesis may be
rejected which means that there is significant relationship between liquidity and profitability.
As is evident from the above table, during 1998-99, % of long term finance used for working
capital requirement was 38.02% which has seen an overall decline in the period under
consideration to 7.48% in 2007-08. It has reached the maximum in 1998-99 to 38.02%. There
is a clear indication that company has with passage of time shifted its preference towards
short term financing (aggressive policy) which might be primarily because of the uncertain
and short term nature of the pharmaceutical market.
Page 76 of 94
It is evident from the above table that working capital has increased over the period of time
from Rs 8157.46 M in 1998-99 to Rs 8759.27 M in 2007-08. It had an increasing trend
Page 77 of 94
except in the year 200-01, 2003-04 and 2007-08 where the working capital had actually
declined.
CREDIT ANALYSIS
Besides establishing credit standard, a firm should develop procedures for evaluating credit
applicants. The second aspect of credit policy of a firm is credit analysis and investigation.
There are two steps involved in the credit investigation.
Obtaining Credit Information
Analysis of Credit Information
Obtaining of credit information
Page 78 of 94
The first step in credit analysis is obtaining credit information on which to the base
evaluation of a customer. The sources of information are:
Internal Sources: Usually company requires their customers to fill various forms and
documents giving details about financial operations. Some times company also asks for
references. Another source of internal information is the records of the firm contemplating an
extension of credit.
External Sources: Some of the external sources of information are
Financial Statements
Bank References
Trade References
Credit Bureau Reports
Analysis of credit information
Once the credit information has been collected from different sources, it should be analyzed
to determine the credit worthiness of customer. The analysis should cover two aspects.
Quantitative Analysis The assessment of the quantitative aspects is based on the factual
information available from the financial statements, past records of the firm and so on.
First step in this assessment is to prepare an aging schedule to calculate average age of
accounts payable. Another method is ratio analysis, i.e. calculation of liquidity, profitability
and debt capacity ratios, of the applicant. These ratios will help to find out financial strength
of applicant.
CREDIT TERMS
Other important decision in receivables management is related to terms of credit. The
stipulations under which goods are sold on credit are referred as credit terms. These are
relates to the repayment of the amount under the credit sale.
Credit terms have three components:
Credit Period
Cash Discount
Cash Discount Period
Credit Period
Page 79 of 94
It is the duration of time for which trade credit is extended during this period the overdue
amount must be paid by the customer.
Cash Discount
This is the amount for which the customer can take advantage of by making early payment.
Sometimes company offer its customer a condition that if they will pay amount early than the
scheduled the time than they will get some discount. This is called cash discount. Cash
discount provided by the company can affect the sales volume, average collection period and
profits of the company.
Cash Discount Period
It refers as duration during which the cash discount can be availed of. It is directly related to
sales generally. For instance, if company increases its cash discount period than its average
collection period will also increase. With the increase in average collection period sales level
is also increases.
CREDIT POLICIES
Collection policies refer to the procedures followed to collect the account receivables when,
after the expiry of the credit period they become due. It includes two aspects:
(i) Degree of collection efforts and
(ii) Type of collection efforts.
Degree of Collection efforts
Page 80 of 94
It refers what degree of efforts; company is using to collect its receivables. If company use
strict efforts than bad debts costs will decline, and average collection period will also reduce.
But cost involved in this kind of strategy is comparatively high. Also sales volume can be
decline with this policy. On the other hand, lenient efforts are just opposite to strict efforts.
So company has to decide that method in which overall cost is low and revenue is high.
Type of collection efforts
The methods available are
Telephone calls for personal contacts
Letters including reminders
Personal Visits
Help of Collection agencies
Legal Action
management). Company also doesnt plan for any bad debts losses, but if any bad debt
happen than it has to be written off fully.
For obtaining information related to the new applicants only internal sources are used. As
company generally deals with blue chip companies or old customers, it is not a difficult job
to obtain information about them. No external source is used by Ranbaxy.
And for the analysis part, company use both qualitative and quantitative tools. As per
qualitative tool, company generally go for market reputation and past record of customer and
for quantitative tool, company use the size of order, financial position of customer etc.
As far as collection efforts are concerned, company generally uses lenient efforts. But in
some cases company also go for strict methods. Ranbaxy normally uses all types of
collection efforts like letters including reminders, telephone calls, personal visits & legal
actions. But company doesnt take help of collection agencies.
The collection cost is very nominal in domestic sales and difficult to determine. Whereas
capital cost is equal to the cost of working capital which is not determined because of
confidentiality.
For Export Sales: From the sale data of Ranbaxy it was found that around 66% of sales are
based on exports. Therefore it is very important area for planning. Exports are based on letter
of credit. A foreign company who want to purchase the material from Ranbaxy sent an LC
first. Than on the basis of that LC, export order is made. Copy of that order is sent to
corporate office and head office at Gurgaon and New Delhi respectively.. From the
manufacturing plants, the material is dispatched as per the export order and LC is sent to
bank for collection. Banks collects the amount and transfers it to Ranbaxys account. No
other credit policy is present for export sale of Ranbaxy.
Collection cost is around 0.5 1 % of export order. Capital cost is here also equal to the
working capital cost.
CASH MANAGEMENT
Cash flows in a cycle into, around and out of a business. It is the business's lifeblood and
every manager's primary task is to help keep it flowing and to use the cash flow to generate
profits. If a business is operating profitably, then it should, in theory, generate cash surpluses.
If it doesn't generate surpluses, the business will eventually run out of cash and expire. The
faster a business expands the more cash it will need for working capital and investment. The
cheapest and best sources of cash exist as working capital right within business.
The goal is to receive cash as soon as possible while at the same time waiting to pay out cash
as long as possible. Even profitable companies fail if they have inadequate cash flow.
Liabilities are settled with cash not profits. Here a firm already is holding the cash so the goal
Page 82 of 94
is to maximize the benefits from holding it and wait to pay out the cash being held until the
last possible moment. The primary objective of working capital management is to ensure that
sufficient cash is available to:
Cash is both the balancing figures between debtors, stock and creditors, and also the control
element. It is not possible to extend credit, order stock or pay creditors if there is not the cash
available to meet working capital demands.
Here the liquidity, risk and return of investments must all come into play with the length of
time before funds are needed playing an important role.
More fundamental than this is cash flow control making sure funds are available when
needed. In the short term this is best achieved by preparation of weekly or monthly forecasts
for comparison with actual results.
Reason for firms holding Cash:
The finance profession recognizes the three primary reasons offered by economist John
Maynard Keynes to explain why firms hold cash. The three reasons are for the purpose of
speculation, for the purpose of precaution, and for the purpose of making transactions. All
three of these reasons stem from the need for companies to possess liquidity.
Speculation:
Here company holding cash as creating the ability for a firm to take advantage of special
opportunities that if acted upon quickly will favor the firm. An example of this would be
purchasing extra inventory at a discount that is greater than the carrying costs of holding the
inventory.
Precaution:
Holding cash as a precaution serves as an emergency fund for a firm. If expected cash
inflows are not received as expected cash held on a precautionary basis could be used to
satisfy short-term obligations that the cash inflow may have been bench marked for.
Transaction:
Firms hold cash in order to satisfy the cash inflow and cash outflow needs that they have.
The firm needs cash primarily to make payments for purchases, wages and salaries, other
operating expenses, taxes, dividends, etc. The need to hold cash would not arise if there were
perfect synchronization between cash receipts and cash payments.
Page 83 of 94
Cash Planning
Cash planning is a technique to plan and control the use of cash. It helps to anticipate the
future cash flows and needs of the firm and reduces the possibility of idle cash balances and
cash deficits. Cash planning protects the financial condition of the firm by developing a
projected cash statement from a forecast of expected cash inflows and outflows for a given
period. Cash planning may be done on daily, weekly or monthly basis. The period and
frequency of the planning generally depends upon the size and nature of business of
company.
Types of cash planning:
Methods
The receipts and disbursement method:This method is generally employed to forecast for limited periods, such as a week or month.
Cash flows in and out in most companies on a continuous basis. The prime aim of this
method is to summarize these flows during a predetermined period. Three broad sources of
cash inflows can be identified as
(i)
(ii)
(iii)
operating,
non-operating
Financial.
Cash sales and cash received from debtors come under operating cash flows. Non operating
income includes sale of fixed assets, dividends & interest income. Issue of shares & loans
etc. considered as financial inflows.
The next step is to determine cash outflows. Cash outflows include:
(i) Operating outflows: cash purchase, payments of payables, advances to suppliers,
wages & salaries etc.
(ii)
Capital expenditure,
(iii)
Contractual payments: repayment of loan, interest & tax payments etc.
(iv) Discretionary payments: ordinary and preference dividend.
Page 85 of 94
The corporate office provides cash to manufacturing units but there most function is
controlled in unit itself. All the need related to inventory is met through corporate office as
well as individual efforts of unit.
Fund Allocation:
Here the initial allocation for manufacturing units is done by corporate office and all
supplementary requirements are to look upon by Commercial department.
Fund Utilization:
Company operates an annual Cash Budget and a rolling Cash Plan drawn up every month.
Although specific forecasting technique is used, funds are deployed to different departments
as per their requirements. Daily reports on cash transaction are prepared by Procurement
department to keep a track of all payments made in the days work. Every month cash
transaction report is sent to Finance department in the corporate office showing all the
transaction of cash, (inflow and outflows) actual utilization of cash and allocation of fund is
compared. If the utilization of cash is more than the allocation of fund, then the plant has to
justify its more utilization.
To meet the requirement of cash company approach to bank and present the required detailed
by the bank. RLL kept less cash in hand to meet the entire cash requirement it depends on
financing process.
LIMITATIONS
Availability of the financial data was very limited which is not disclosed due to
sensitive nature for the company.
The year ended for Ranbaxy is December, and that of Dr Reddys is March. So figures
taken are past 4 years but 3 months difference is there in the corresponding figures of
RLL & DRL.
Page 86 of 94
The main component of working capital is cost of capital, which is not described in
the project because of confidential nature.
External environment influence was not considered while doing the theoretical
standard rather than the industrial standard because of unavailability of any such
specific standard.
Efficiency falls to a great extent due the technical errors in the system. These errors refer
to the following:
The SAP server goes low due to the exhaustive load on a single server.
There is lack of machines at disposal because of which the speed of work
goes down.
The hardware provided to the staff is not up to the mark which adversely
affects the efficiency to a great extent.
SUMMARY OF FINDINGS
As far as components of working capital are concerned, on the domestic front, sales
have increased as well as the finished goods inventory has also increased.
The increase in the current ratio of 2001 as compared to that of the previous year
indicates that the liquidity position of the company is improving. The inventory
turnover ratio of the company is not very high. It should try to achieve a quicker
movement of stock into sales. There is an inverse relationship between sales and
working capital at Ranbaxy Laboratories Limited.
In general higher the ratio, more efficient is the management. Since Ranbaxy
Laboratories Limited has a low working capital ratio, it should look carefully into this
area to ensure its effective utilization.
After analysis of the debtors turnover ratio, it was found out that Ranbaxy
Laboratories Limited has a low debtors turnover ratio, which may be a result of a
liberal and inefficient credit and collection policy. This involves the risk of bad debts
and the burden of high interests. This is another area that should be looked into.
After analysis of this ratio, we can conclude that Ranbaxy Laboratories Limited is
holding an unfavorable quantity of inventory. Since, the inventory turnover ratio is
not very high, we can conclude that the management of inventory is not very efficient
because the stocks are not sold very frequently, as a result of which a large amount of
money is required to finance the working capital requirement.
QUICK RATIO
Ranbaxy has a satisfactory liquidity position.
CURRENT RATIO
There exists a negative correlation between the two, which indicates that the sales are
low and this has led to an accumulation of stock.
Sales and net working capital have a negative correlation, which implies that there is
an inverse relationship between sales and net working capital. It shows that the sales
are low and this has led to an accumulation of stock.
Profitability ratios of Ranbaxy are low as compared to industry ratios it means that
company is investing a lot in its operations to compete with its competitors and is
expecting to reap profits in its coming years.
The return ratios are not showing an increasing trend which is not a good sign for the
companys growth. But return of working capital is increasing which means that
company is doing more sales with less working capital.
Gearing ratio is low which shows that it is less levered firm, which is a good sign for
company and moreover its liquidity position is very strong.
The overall liquidity position is very strong. The companys current ratio is approx.
3.5 from last many years which mean that company can manage any sort of financial
contingencies.
Ranbaxys Raw Material holding period is decreasing due to which its Raw Material
turnover is increasing, which is a positive sign.
As far as Receivables are concerned co.s credit policy varies from party to party and
according to the nature of the business & one can say that this policy is good for a
pharma company. Most of the domestic sales of Ranbaxy are based on advance
payment. Some part of contract money is received in advance and then sale is made
Ranbaxys total exports accounts for 66% & the balance 33% represent sales in India.
The Inventory Holding Period (IHP) is almost constant due to this their Net Working
Capital cycle is also not showing a significant change.
The financial policy of working capital management policy of the company has to be
revised. The firm follows an aggressive policy as far as working capital management
is concerned. According to this policy, Risk and Profitability should be increased and
the liquidity should be reduced. Though the company has increased risk and reduced
liquidity, the profitability has not increased. This is an area into which the
management needs to look. Future forecasts of cash should also be made effectively
in order to meet unexpected requirements.
As far as the inventory position is concerned, the company doesnt have a sound
position. Better the quality, lesser would be the work-in-process. The rejected stock
has to go through further modifications until the quality department approves it. This
therefore remains as work-in-process and increases the value of the work-in-process.
Speeding up the quality checks can reduce the holding time of finished goods.
Efforts should be made to keep the norms up to date. Thus a quarterly review is
suggested. Norms should be as realistic as possible as to give a correct estimate of the
inventory levels. The firm should make consistent efforts to increase its earnings in
order to move towards the path of growth.
It is suggested that the firm should neither have too high nor too low debtor turnover
ratio.
There is an increase in the current ratio suggesting that there may be idle funds with
the company. It is therefore recommended that the company should invest the excess
cash in marketable securities. This would be more profitable than holding idle cash.
It may also be mentioned that there is no rule of thumb or standard ratio. The norms
may be different depending upon the nature of the industry and business condition.
Companys return ratios also need a check. Turnover ratios are decreasing but not up
to that extent. Dr.Reddys, its nearest competitor have better turnover ratios which
mean that Ranbaxy has scope to lower down its assets to maintain the same level of
sales or increase its sales on the same level of assets.
As it was clear that company have high liquidity in its capital structure, it means a
close observation is required for the benefits of share holders. It should chanalize its
investments towards those areas where returns would be higher.
The company should try to reduce its inventory holding to lower down the holding
cost & increase its Raw Material Turnover. It can also help in lower down the
operating cycle.
Page 90 of 94
The company should also try to reduce its Average collection period to It can also
help in lower down the operating cycle.
Company can make some improvements in their credit policy. Currently they take
advance before delivering the consignment. They can increase the credit period as
well, currently it is 45 to 120 days depending upon different parties and their
creditworthiness.
As far as the cash management is concerned, its difficult to suggest anything because
I believe that companys cash planning is very good. All the time company looks for
new investment opportunities in the market on a reasonable rate of return.
As companys international sales are high (66%) and company should focus the
domestic markets as well, as demand for healthcare products is increasing in Indian
market. Also it is their social responsibility to provide maximum benefits to its
domestic customers.
Besides improving the working efficiency of the employees, it is important that the
morale of the employees at work should be kept up through the following methods:
They could be provided with rigorous training periodically so that they can be
well versed with the technology rather than confining their knowledge to their
domain only.
They could be provided with regular incentives both monetary and nonmonetary so that they have a positive attitude towards their work. On the
contrary, this negative attitude becomes a bottleneck for the employees and
the swiftness of the system as a whole.
Employees are required to give output rather than putting in time at their
workplace. Measures should be adopted to measure their performance rather
than measuring their work hours. They can be given deadlines both for a work
and the time. For this, timings could be made flexible.
Page 91 of 94
It is the inter-dependency of the employees which makes their working rigid and lowers their
efficiency. This could be removed or at least minimized by regular training and improving the
working conditions for the staff.
Pertaining to Technology:
The following changes need to be inculcated in the provision of technology to the employees:
The machines provided to the employees are not up to the mark. There is no
uniformity in the speed and compatibility of systems. The systems should be
regularly upgraded. This would have an impact on the working efficiency of the
employees.
The number of machines on the floor at accounts department needs to be increased
because the existing systems are not able to do the needful.
The SAP system is over-loaded due to exhaustive usage. This needs to be corrected
by taking the required measures. It can be rectified by changing or adding a server for
supporting SAP in Ranbaxy.
REFERENCES
Page 92 of 94
WebPages
www.pharmaceutical-business-review.com
http://www.ranbaxy.com
http://www.cipla.com
http://www.google.com
http://www.wikipedia.com
http://www.drreddy.com
http://www.lupingroup.com
http://www.sunpharma.com
http://www.moneypore.com
www.bizstats.com
www.reuters.com
www.economictimes.com
www.dereddys.com
www.bloomsberg.com
www.livemint.com
www.studyfinance.com
www.bized.com
www.bpubs.com
Page 93 of 94
Page 94 of 94