financial analysis of pharma industry
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CHAPTER-1
INDUSTRY OVERVIEW
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Industry overview
The pharmaceutical industry is an exciting industry worldwide with growth rate of 8%
and a turnover of around US$ 650 billion. In terms of value, the major constituents are the
United States (US) (48% share), European Union (EU) (30%share) and Japan with a share of
9%, and the rest of the world, including India, contributes around 13%. However, in terms of
volume, the share of the rest of the world is approximately three times larger. An example in this
regard, is India, which ranks 4th in terms of volume with a share of 8% in the world
pharmaceutical market and only 13th in terms of value. The annual turnover of the Indian
pharmaceutical industry is approximately, US$ 20 billion according to Economic Survey Report
of 2009-10.
India now ranks 4th worldwide in volume and 13th in value. India exported drugs worth
around US$ 8 billion in 2008-09, most of which to the US and Europe, followed by Central and
Eastern Europe, Latin America and Africa and its drug exports have been growing 30 percent
annually . Indian pharmaceutical industry is entering an era in which it is becoming a global hub
for R&D activities, which may be in the area of new drug discovery. Indian pharmaceutical
industry has also been increasing the R&D expenditure significantly in the recent years.
Top Players:
The top 10 big players in the market together occupy approximately 36% of the total
market share. The Indian Pharmaceutical sector is highly fragmented with more than 20,000
registered units. It has expanded drastically in the last two decades. The leading
250 pharmaceutical companies control 70% of the market with market leader holding nearly 6 %
of the market share. It is an extremely fragmented market with severe price competition and
government price control. Cipla the biggest pharmaceutical company (in terms of sales) is
followed by Ranbaxy with market shares of 5.42 % and 5.09% respectively.
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1. Cipla
2. Ranbaxy
3. GSK(India)
4. Piramal Healthcare
5. Zydus Cadila
6. Sun Pharma
7. Lupin Laboratories
8. Alkem
9. Sanofi-Aventis(India)
10. Mankind Pharma
ROLE OF PHARMACEUTICAL INDUSTRY IN INDIA:
The Pharmaceutical Industry in India is one of the largest in the world of which 40% of
the total pharmaceutical produce in India is exported to other countries.
As of 2008, pharmaceutical sales comprised 1.22% of GDP.
55% of the total exports constitute of formulations and the other 45% comprises of bulk
drugs.
Pharmaceutical Industry in India produces around 20% to 24% of the global generic
drugs.
Sales of the Indian Pharmaceutical Industry would worth US$ 43 billion within the next
decade.
This sector is one of the major foreign direct investments encouraging sectors.
The Indian Pharmaceutical sector is also expected to be among the top ten
Pharmaceutical based markets in the world in the next ten years.
The Indian Pharmaceutical Industry is one of the biggest producers of the active
pharmaceutical ingredients (API) in the international arena.
The Indian Pharmaceutical sector leads the science-based industries in the country.
The pharmaceutical sector in India has the capacity and technology pertaining to complex
drug manufacturing facilities.
The Indian Pharmaceutical Industry includes small scaled, medium scaled, large scaled
players, which totals nearly 300 different companies.
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Future Prospects of the sector
Indian pharmaceutical market, which is currently valued at USD 20 billion, could see the figure
almost double in next 5 years majorly propelled by the steady growth in the domestic segment.
The domestic market which is growing at almost 10 to 14 per cent at present itself will provide
US$ 20 to 24 billion in 2015 and the exports and contract manufacturing business, which are
growing at 10 per cent per annum, will contribute to achieve the predicted growth. Contract
manufacturing business, which registered US$ 4 billion in 2007, is expected to reach 10 billion
in 2015, with a 25 per cent growth rate. Contract manufacturing opportunity for India including
for the international generic business is forecast to the level of US$ 18 to 20 billion. Contract
manufacturing of core products of multi nationals in India is another opportunity for domestic
companies as that business itself could add US$ 7 to 8 billion by 2015.India’s potential in R&D
will be between US$ 8 to 10 billion by 2020.
By 2015, the manufacturing opportunity in India including for the international generic business
and the contract manufacturing business will be at US$ 18 to 20 billion. Indian companies should
shift their focus from market capture to market creation, by entering into rural or unexplored
areas. The companies should also customize the India business model and should explore global
scale partnerships with capable firms for future growth.
SWOT Analysis:
Strengths
Capital Investment in Technology: Owing to the availability of advanced technology at
low costs, the companies can produce drugs at lower costs.
Cost Effective: The filing cost of ANDAS and DMFs is comparatively low for the Indian
companies.
Manpower: There is a large pool of technical experts available at modest salaries.
Contract Research & Contract Manufacturing: There is a good scope for contract
research and contract manufacturing.
Infrastructure: There is a well-developed infrastructure for the pharmaceutical industry.
Generic Drugs: In the last few years, the generic drug-manufacturing segment has
received huge investments, in the process making it more competitive and efficient.
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Weakness
Failure of the new patent system: Prerequisites associated with Sec 3(d) of the
Patent (Amendment) Act 2005 restrict the copyright of an existing drug. Moreover,
mandatory licensing permits Indian companies to keep producing generics of
copyright products for overseas selling to underdeveloped nations.
Lack of proper infrastructure: Issues associated with regular power cuts and lack
of suitable transport infrastructure will decelerate the expansion of the sector.
Inadequate funds: Restricted funding from FIs, venture capitalists and the
government may decelerate the expansion of biotechnology sector in India.
Regulatory impediments: Rising of due meticulousness and conformity with
product standards leads to high costs and interruption in the launch of new products.
Severe competition: Low margins and restricted capital to assist R&D is the result of
intense pricing competition among local producers. This rivalry will further deepen
from the joining in of the big drug companies in the Indian market to control the cost
benefit and large reserve sources.
Opportunities:
The main opportunities for the Indian pharmaceutical industry are in the areas of:
Generics (including biotechnology generics)
Biotechnology
Outsourcing (including contract manufacturing, information technology (IT)
and R&D outsourcing).
India is considered a highly promising outsourcing IT and clinical data management
destination because of its rich talent pool, technological innovation, creditable quality,
Operational flexibility, cost effectiveness, time-to-market and competitive advantage.
India's Other Advantages for off shoring
Low-cost skill base
Current Good Manufacturing Practice (CGMP) and U.S. FDA compliance levels
High visibility in generics
High-quality, compliant manufacturing
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Strong financial position with ability to scale up
Manufacturing capacity
Access to new technologies
Cost efficiency and track record
Industry position
Recognition of product patents
Challenges:
Patents and Intellectual property rights
Pricing issues
Regulatory reforms
R&D spending
The domestic industry is still spending far too little on R&D, which must change
quickly if it is even to begin to address these new opportunities and challenges.
INDUSTRY STRUCTURE
NUMBER OF PLAYERS
There are about 15 companies which are market leaders in global pharmaceutical industry
The “organized” sector of India's pharmaceutical industry consists of 250 to 300
companies.
The total sector has nearly 20000 companies
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MARKET SIZE
The Indian pharmaceutical industry is worth US$ 20 billion according to Economic
Survey Report of 2009-10.
It is estimated to be US$ 40 billion industry by 2015with a CAGR of 13.5% according to
Mckinsey research.
STRUCTURAL CHANGES
The global pharmaceutical industry is undergoing consolidation by M&A, strategic
alliances and joint ventures.
Reasons for consolidation:
– Competition
– Economies of scale
– Diversifying drug portfolio
– High R&D investments
– Enter new markets
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Distribution:
Pricing:
The prices and the margins of drugs for the wholesaler and retailers are largely decided by the
National Pharmaceutical Pricing Authority (NPPA), which varies depending on whether the
active constituent of the product is a scheduled drug or a non-scheduled drug. Wholesalers and
retailers are also compensated with additional trade offers. Hospitals and large institutions
sometimes directly negotiate with the manufacturing company and get the drugs in their
pharmacy at lower costs.
Promotion:
The Organization of Pharmaceutical Producers of India (OPPI), which is a premier organization
of pharmaceutical manufacturers in India, has revised its model code on standards of promotion
activity to medical practitioners. This model code aims to restrict pharmaceutical companies
from providing ‘freebies’ to medical practitioners so as to reduce influence on prescribing drugs
of a particular company. The OPPI has a nobel intention that there should not have any influence
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on the medical professional by any company for prescribing their product so as to benefit the
patient.
PEST ANALYSIS:
Technological advancements, tighter regulatory-compliance overheads, rafts of patent expiries
and volatile investor confidence have made the modern pharmaceutical industry an increasingly
tough and competitive environment. Below is an analysis of the structure of the pharmaceutical
industry using the PEST (political, economic, social and technological) model?
Increasing Political Attention: Over the years, the industry has witnessed increased political
attention due to the increased recognition of the economic importance of healthcare as a
component of social welfare. Political interest has also been generated because of the increasing
social and financial burden of healthcare. Examples are the UK’s National Health Service debate
and Medicare in the US.
Economic Value Added: In the decade to 2003 the pharmaceutical industry witnessed high
value mergers and acquisitions7. With a projected stock value growth rate of 10.5% (2003-2010)
and Health Care growth rate of 12.5% (2003-2010), the audited value of the global
pharmaceutical market is estimated to reach a huge 500 billion dollars by 2004.
The Social Dimension: Good health is an important personal and social requirement and the
unique role pharmaceutical firm’s play in meeting society’s need for popular wellbeing cannot
be underestimated. In recent times, the impact of various global epidemics e.g. SARS, AIDS etc
has also attracted popular and media attention to the industry. The effect of the intense media and
political attention has resulted in increasing industry efforts to create and maintain good
government-industry-society communications.
Technological Advances: Modern scientific and technological advances in science are forcing
industry players to adapt ever faster to the evolving environments in which they participate.
Scientific advancements have also increased the need for increased spending on research and
development in order to encourage innovation.
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Legal Environment: The pharmaceutical industry is a highly regulated and compliance
enforcing industry. As results there are immense legal, regulatory and compliance overheads
which the industry has to absorb. This tends to restrict it’s dynamism but in recent years,
government have begun to request industry proposals on regulatory overheads to so as not to
discourage innovation in the face of mounting global challenges from external markets.
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CHAPTER-2
COMPANY OVERVIEW
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Company profile:
Hetero Drugs Limited was incorporated on 6th April 1993 under companies act 1956 with
a clear concept to manufacture value added bulk drugs. Hetero is a research based global
pharmaceutical company focused on development, manufacturing and marketing of Active
Pharmaceutical Ingredients (APIs), Intermediate Chemicals & Finished Dosages. Ever since its
establishment in 1993, Hetero showed a tradition of excellence and deep sense of commitment in
developing cost effective processes to offer wide range of affordable drugs.
Hetero is building on the strengths of vertical integration in discovery research, process
chemistry, API manufacturing, formulation development and commercialization. Hetero is a
leading international supplier with a rich portfolio of over 200 products from wide range of
therapeutic categories both in active pharmaceutical ingredients and finished dosages.
Founder:
Dr. Bandi Parthasaradhi Reddy, Chairman & Managing Director of Hetero group is
academically endowed with a Post Graduate and Doctoral degrees with distinction in the field of
synthetic chemistry. Prior to founding of Hetero Drugs Limited, Dr. B.P.S Reddy had a stint in
leading pharmaceutical companies as the head of the Research & Development division.
A visionary the world knows as Dr. B.P.S.Reddy, is the driving force behind this growing
pharmaceutical phenomenon called “HETERO”. Dr.B.P.S.Reddy’s dream child, Hetero was
born in the year 1993 as a small API unit. Today, 17 years later, the name is synonymous with
leadership in pharmaceuticals with more than 18 manufacturing units and 8000 employees. This
is an entity that is grown in stature by virtue of its combined strength in research, manufacturing
and marketing.
Dr. B.P.S.Reddy is now focusing on giving new dimensions to Hetero in terms of research and
innovation programs in discovery research to take the company to greater heights.
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Organisation structure:
This include
Chairman and managing director
Executive director
Director – Finance
Director – Corporate Technology
Director – Quality control
Director – Production
The crew of Hetero Drugs Ltd include manpower that fall into various categories like
Scientists
Research and development chemists
Manufacturing chemists and engineers
Quality control and assurance professionals
Marketing dept staff
Finance dept staff
Purchase dept staff
Administrative dept staff
MCKINSEY 7’S FRAMEWORK:
The McKinsey 7S model involves seven interdependent factors which are categorized as either "hard" or "soft" elements:
Hard Elements Soft Elements
Strategy
Structure
Systems
Shared Values
Skills
Style
Staff
"Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems.
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"Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful.
Strategy: the plan devised to maintain and build competitive advantage over the
competition. The company manufacturers various API’s and finished dosage forms.
Structure: the way the organization is structured and who reports to whom. It is a non-
listed company. It has a chairman, board of directors and a director for each field like
finance, marketing, operations and human resources. Staff in each department reports to
their next higher authority till director.
Systems: the daily activities and procedures that staff members engage in to get the job
done. Hetero has one registered office, an unit for research and development and 9 units
for manufacturing.
o Manufacturing – operating dept staff
o Marketing & indentifying opportunities - marketing dept staff
o Accounts & finance works – finance dept staff
o Recruiting & managing human resources – HR dept staff
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Shared Values: called "superordinate goals" when the model was first developed, these
are the core values of the company that are evidenced in the corporate culture and the
general work ethic.
Style: the style of leadership adopted. The chairman, Mr. B.Partha Sarathy Reddy takes
all the major decisions. The director, Mr. M. Srinivas Reddy is at the top of hierarchy
and manages all the departments.
Staff: the employees and their general capabilities. Hetero is managed by professionals.
All the concerned departments have highly qualified professionals.
Skills: the actual skills and competencies of the employees working for the company.
Hetero is known for developing various cost-effective processes for manufacturing. It had
wide manufacturing facilities to manufacture around 200 different products.
Research- the key to success:
With the success in developing novel processes for several API’s and finished dosages
Hetero is now committed to continual process of consolidation of its research base, strengthening
its manufacturing and marketing capabilities for many products, that are going to be off-patent
in the very near future. Hetero is also in the process of carrying out basic research and entered
the field of developing new chemical entities to cater to the changing therapeutic needs.
Apart from the research for development of processes for the producing going off patent, Hetero
is providing facilities for customer synthesis of several high value intermediates and Active
Pharmaceutical Ingredients for internationally renowned Pharmaceutical Companies.
Hetero’s full-fledged Research Facility “the Hetero research Foundation” started with an initial
investment of approximately 2 Mn US Dollars. The foundation is planned to avail the services of
about 100 more scientists in different areas of research of new drug discovery.
Awards and Recognitions:
The efforts of Hetero towards achieving the recognition as an organization to reckon with in the
Pharmaceutical sector have yielded results crossing numerous milestones, in its journey to
success. Hetero was awarded “The National award for best efforts in Research and
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Development” by the department of Scientific and Industrial research, Ministry of Science and
technology, Government of India.
A track of few events that saw Hetero reaching its Zenith of glory are :
2009
Top Pharmexcil Gold Patent award.
Top Pharmexcil Outstanding Export Performance award in Drugs and Pharmaceuticals.
2006
Chemexil Trishul export award for outstanding export performance 2001 Excellence &
National Integration award in recognition of the efforts for excellence with affairs
connected with educational specialties and creating teaching skills besides promoting
harmony at all levels in the college.
1999
Highest exporter award against stiff competition from internationally recognized
domestic competitors.
1998
Top Chemexil award for Exports.
1996
National award for "Best Efforts in Research and Development" from the Department of
Scientific and Industrial Research, Ministry of Science and Technology, Government of
India, in the year 1996.
Global presence:
Having earned a foothold in the international Pharmaceutical marketing particularly in South
America, Latin America, Asian and East European Countries, Hetero is now in the process of
making an advent into more competitive and tough pharmaceutical markets of untied states,
Canada, Europe, and Japan. Hetero has already made a starting towards this side beginning with
the marketing of its APIs’ in Canada and Japan. Hetero exports its products across different
regions – USA, Canada, Europe, Japan, Latin America, Africa, Middle East, Far East, Australia,
Russia & CIS, in the world and is catering to the requirements of around 138 countries in the
world.
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Company’s vision on Global Markets:
Having defined its goals and set up its mission to be a global player in the field of
Pharmaceutical industry, Hetero is in search of strategic alliances and joint ventures for
days ahead.
Hetero plans to have tie ups with eminent companies in pharmaceutical industry for the
manufacture and supply of Active pharmaceutical ingredients.
Hetero also intends to supply Intermediate chemicals for several Active ingredients being
manufactured by notable companies.
Hetero has plans to work towards contract research with some well known companies.
With abilities in the fields of Research and development, Hetero wishes to enter the field
of Custom Synthesis which it already has begun for few companies.
Hetero has the capabilities for the transfer of technologies, processes, impurity profiles
and formulating procedures for different products.
Hetero is ready to share its expertise with pharmaceutical companies o develop cost-
effective manufacturing processes in the changing scenario where there is a stiff
competition in terms of both cost and quality
“With untiring efforts and contributions towards becoming a leader in the manufacture
and marketing of the pharmaceuticals, hetero is inclining itself towards the zenith of
success and is now a force to reckon with”
Quality Assurance:
The company has recognized the fact that the driving force for the organization to run its
business is customer satisfaction, a factor that is ultimately linked to product quality. Hetero
recognizes quality not only as the one that is related to the product but also to the organization as
a whole. This has led the organization to implement the quality systems in all its wings right
from the Research and development to marketing of the product. The organization has obtained
the ISO 9002 quality systems certification for the manufacture and marketing of the APIs’ and is
in the process of including the research and development activity under the certification.
To meet the quality norms for the product both regulatory and customer related, the organization
has established state of art quality control laboratories at its manufacturing facilities, where the
most advanced analytical equipment are used for the testing and release of the product. In
addition, the organization has also established a Corporate Analytical Research wing for the
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purpose of establishing the in house specifications for all its products being developed and
commercialized.
Social Responsibility Initiatives
Hetero recognizes its obligations towards the society and as a socially responsible
organization, we strive to take care of the less privileged sections of our society. We extend our
expertise to transform the lives of our people and make a difference to the society. In this
initiative, Hetero has adapted few villages for their overall development.
Education
Hetero assists in setting up of schools where there is no access to education facilities, providing
financial assistance to the poor students who have promising academic record, adapting schools.
Sports
Hetero sponsers athletics from various educational institutions to participate in National and
International level competition.
Medical
Hetero conducts periodical medical camps at various locations in socially backward areas to
provide timely medical assistance to the needy. Hetero has liberally donated medicines to the
Government of India, Government of A.P. and to various Hospitals.
Hetero’s Manufacturing Facilities:
With the increase in its technical capabilities and evolution of the processes for a number of
drugs, hetero has also expanded its manufacturing facilities to cater to the growing demand for
the Active Pharmaceutical Ingredients of a wide range of therapeutic categories. The company is
having manufacturing facilities in and around Hyderabad city. The units are located at the
following places.
API Facilities
Unit – I (Bonthapally):
API Manufacturing Facility for Regulatory Markets – USFDA Approved
Unit – IV (Bonthapally):
API Manufacturing Facility for Non-Regulatory & Domestic Markets
Unit VI (Vizag Non SEZ):
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API Manufacturing Facility for Domestic Market & Semi-Regulatory Market
Unit VIII (Bonthapally - EOU):
API Manufacturing Facility - EOU
Unit IX (Vizag SEZ):
API Manufacturing Facility for Semi- Regulatory & Regulatory Markets
Formulation facilities.
Unit – II (Gandhinagar):
Finished dosage manufacturing facility.
Unit – IIIA (Jeedimetla):
Finished dosage manufacturing facility for semi-regulatory markets – WHO Approved
Unit – IIIB (Jeedimetla):
Finished dosage manufacturing facility for regulatory markets – USFDA Approved
Unit – V (Baddi):
Finished dosage manufacturing facility for Indian market
Products of Hetero :
Products of Hetero Drugs Ltd are divided into various categories as follows
Antihypertnesives
Antithrombotics
Antihyperlipoproteinomics
Antiulceratives
Antidepressants
Anticonvulsants
Antiparkinsonians
Antidiabetics
Antihistaminics
Antibacterials
Cephalosporins
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Antiretrovirals
Antivirals
Antifungals
Antirheumatics
Erectile dysfunction
Antidiarrheals
Antimalarials
Diuretics
Various finished dosage forms are present under the above categories which are the products of
Hetero Drugs Ltd. These products are present in the form of different formulations like tablets,
capsules, sustained release tablets, injections, solutions, suspensions and syrups.
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CHAPTER-3
OBJECTIVES, METHODOLOGY &
THEORITICAL FRAMEWORK
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Purpose of the study
The purpose of this particular study is to analyse the financial and operational
performance of Hetero Drugs limited based on financial statements or annual reports. This will
help to management to make appropriate decisions on the basis of result.
Objectives
The main objectives of this study are:
To understand various policies and organization structure of the company
To conduct both qualitative and quantitative study of the performance of the company
To analyse the company’s competitive position in Indian Pharmaceutical Industry
Data collection
The study is an empirical one. It uses both primary and secondary source of data. The two
main sources of data for this study are primary data through personal interaction with the finance
officials in the company and secondary data which is based on published annual reports of the
company. The proposed methodology is to find out the proportion of each item and their impact
on working capital. Secondly to assess the liquidity position of the company through a detailed
ratio analysis and focus will also be laid on receivables management and cash management.
This study was proposed to conduct for a period of two months which includes data
collection, analysis of data, research work and report presentation. The recommendations and
findings were drawn based on the liquidity and financial position results of the company. This
will help in formulating policies and standards to maintain better financial position of the
company in the future.
Period of analysis
A five year period from 2003-2008 has been taken for the study.
Tools used for analysis
Ratio Analysis
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Trend analysis
Analysis of components of working capital
Schedule of changes in working capital
Ratio analysis
Ratio analysis is a widely used tool of financial analysis. It can be used to compare the
risk and return relationship of firms of different sizes. It is defined as the systematic use of ratio
to interpret the financial statements so that the strengths and weakness of a firm as well as its
historical performance and current financial condition can be determined. The term ratio refers to
the numerical or quantitative relationship between two items / variables. It should be noted that,
computing the ratios does not add any information not already inherent in the figures of profits
and sales. These ratios reveal the relationship in a more meaningful way so as to enable equity
investors; management and lenders make better investment and credit decisions.
The rationale of ratio analysis lies in the fact that it makes related information
comparable. A single figure by itself has no meaning but expressed in terms of a related figure, it
yields significant inferences.
The ratio analysis involves comparison for useful interpretation of the financial
statements. The easiest way to evaluate the performance of a firm is to compare its current ratios
with past ratios. When financial ratios over a period of time are compared it is known as the time
series or trend analysis. It gives an indication of direction of change and reflects whether the
firm's financial performance has improved, deteriorated or remained constant over time. The
cause for the change also should be understood. The change may be affected by changes in the
finish program.
Management can use the ratio analysis of working capital as means of checking upon the
efficiency with which working capital is being used in the enterprise. The most important ratios
for the working capital management are;
♦ Turnover of working capital management
♦ Current ratio
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The turnover of net working capital ratio measures the rate of working capital utilization.
The ratio shows how many times turnover in trading transaction. A company showing a turnover
in excess of industry may be in need of additional working capital to be supplied by owners
through reinvested earnings or the sale of additional shares. Excess of investment in net working
capital is suggested by a concern with lower than average ratio. An increasing ratio indicates that
working capital is more active than it has been in the past i.e. working capital is being utilized
more intensively than in the past.
The current ratio measures the relative ability of a firm to pay its short-term debts. It
measures the firm's liquidity.
Nature of Ratio Analysis
Ratio analysis is a technique of analysis and interpretation of financial statement. It is the
process of establishing and interpreting various ratios which help in making certain decisions.
Four steps involved in ratio analysis are:
Selection of relevant data from the financial statement of depending upon
Objective of analysis.
Calculation of appropriate ratios from the above data.
Comparison of the calculated ratios with the ratios of the same firm or ratios of some
other firm or comparison with ratios of this industry to which this firm belong.
Interpretation of ratios
Advantages of Ratio Analysis
Helpful in forecasting
The ratios can be used by financial managers for future financial planning. Ratios
calculated for a number of years work as a guide for the future.
Useful in co-ordination
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Ratios are useful in coordinating which is very much needed in business. The efficiency
and weakness of an enterprise if communicated properly will establish a better co-ordination
among areas of appreciation and control.
Helpful in control
The most important aspect of ratio analysis is that it is very useful in controlling the areas
of inefficiencies or weakness. It can be useful by the management as a technique of correction.
Helpful in communication
Ratios are used for communication of weak and good points to the concerned parties.
Helpful in efficiency
Appraisal
Ratios are the scale of comparison; here the variations in financial statements .If they
need appreciation are brought to limelight. For example: better solvency ratio speaks about good
financial position.
Helpful in evaluation of financial position
The ratio analysis is useful for financial diagnosis of an enterprise
Helpful to inventories, financial institutions position
The ratios are economic barometer useful to all mentioned above as they can know good
and bad position of a company by making comparative study of financial statement.
Liquidity ratios or Working capital ratios:
Meaning of working capital
Capital required for a business can be classified under two main categories viz
1) Fixed capital and
2) Working capital
Every business needs funds for two purposes-for it establishment and to carry out its day-
to-day operations. Long term funds are required to create production facilities through purchase
of fixed assets such as plant and machinery, land, building, furniture etc. Investments in these
assets represent that part of firm's capital which blocked on a permanent or fixed basis and it is
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called fixed capital. Funds are also needed for short term purposes for the purchase of raw
materials, payment of wages and other day-to-day expenses etc. these funds are known as
working capital. In simple words, working capital refers to that part of firm's capital which is
required for financing short term or current assets such as cash, marketable securities, debtors
and inventories. Funds, thus, invested in current assets keep revolving fast and are being
constantly-into cash and this cash flow out again in exchange for other current assets. Hence, it is
also known as revolving or circulating capital or short-term capital.
In the words of Shubin, "Working capital is the amount of funds necessary to cover the
cost of operating the enterprise".
Concepts of working capital
1) Gross working capital
2) Net working capital
Gross working capital:
In the broad sense, the term working capital refers to the gross working capital and
represents the amount of funds invested in current assets. Thus, the gross working capital is the
capital invested in total current asset of the enterprise. Current assets are those assets which in
the ordinary course of business can be converted into cash within a short period of normally one
accounting year.
In narrow sense, the term working capital refers to the net working capital. Net working
capital is the excess of current asset over current liabilities, or say:
Net working capital= current assets-current liabilities
Net working capital may be positive or negative. When the current assets exceed the current
liabilities the working capital is positive and the negative working capital results when the
current liabilities are more than the current assets. Current liabilities are those liabilities which
are intended to be paid in the ordinary course of business within a short period of normally one
accounting year out of the current assets or the income of the business.
Classification or kinds of working capital
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Working capital may be classified in two ways:
a) On the basis of concept
b) On the basis of time
On the basis of concept
On the basis of concept, working capital is classified into gross working capital and net
working capital.
1) Gross working capital: gross working capital refers to the firm's investment in current
assets. Current assets are the assets which can be converted into cash within an accounting year
(or operating cycle) and include cash, short-term securities, debtors, (accounts receivable or book
debts) bills receivable and stock (inventory).
2) Net working capital: net working capital refers to the difference between current
assets and current liabilities. Current liabilities are those claims of outsiders which are expected
to mature the payment within an accounting year and include creditors (account payable), bills
payable, and outstanding expenses. Net working capital may be positive or negative. A positive
net working capital arise when current asset exceed current liabilities. A negative net working
capital occurs when current liabilities are in excess of current assets.
On the basis of time
On the basis of time, working capital may be classified into permanent or fixed working
capital and temporary or variable working capital.
Permanent or fixed working capital:
Permanent working capital represents that part of the capital which is permanently locked in
current assets to carry out the business smoothly. There is always a minimum level of current
assets which is continuously required by the firm to carry on its business operations. This
minimum level of current assets is referred to as permanent or fixed working capital.
Temporary or variable working capital:
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Temporary or variable working capital is the amount of working capital which is required to
meet the seasonal demands and some special exigencies. Variable working capital can be further
classified as seasonal working capital and special working capital. The capital required to meet
seasonal needs of the enterprise is called seasonal working capital. Special working capital is that
part of working capital which is required to meet special exigencies such as launching of
extensive marketing campaigns for conducting research etc.
Determinants of Working Capital
There are no set rates or formulate to determine the working capital requirements of
firms. A large number of factors, each is having a different importance, influence working needs
of firms. Also, the importance of factors changes for a firm over time. Therefore an analysis of
relevant factors should be made in order to determine total investment in working capital. In
order to determine the proper amount of working capital of a concern, the following factors
should be considered carefully.
Nature of business
Working capital requirements of a firm are basically influenced by the nature of the
business. Trading and financial firms have a very small investment in fixed assets, but require a
large sum of money to be invested in working capital. In concerns where the cost of raw material
to be used in the manufacture of a product is very large in proportion to its total cost of
manufacture requirements of working capital will be very large. Some manufacture businesses
also have to invest substantially in working capital and a nominal amount in fixed assets.
Working capital requires most of the manufacturing concerns to fall between two extremes
requirements of trading firms and public utilities. Such concerns have to make adequate
investment in current assets depending upon the total assets structure and other variables.
Size of business
Size of the business unit is also a determining factor in estimating the total amount of
working capital. The general principle in this regard is that the bigger the size, the large will be
the amount of working capital required as because the larger business units are required to
maintain big inventories for the flow of the business. Large units have to spend more in carrying
out the business operations smoothly.
28
Business cycle
Business cycle affects the requirements of working capital. At times, when prices go up
and up and up boom conditions prevail, the tendency management is to pile up a big stock of raw
materials and to maintain a big stock of finished goods with an expectation to earn more profits.
The expansion of business units caused by the inflammatory conditions creates demand for more
and more working capital.
Sales growth
The working capital needs of the firm increase as it sales grow. A growing firm may need
to invest funds in fixed assets in order to sub stain its growing production and sales. This will in
turn, increase investment in current assets to support enlarged scale of operations. It should be
realized that a growing firm needs fund continuously. It uses external sources as well as internal
sources to meet increasing needs of funds. Such a firm faces further financial problems when it
retains substantial portion of its profits.
Price level changes
The increasing shifts in price level make functions of financial manager difficult. He
should anticipate the effect of price level changes on working capital requirements of-the firm.
Generally, rising price levels will require a firm to maintain higher amount of working capital.
Some levels of current assets will need increased investment when prices are increasing.
However, companies which can immediately revise their product prices with rising price levels
will not face a severe working capital problem. Thus, effect of rising prices will be different for
different companies.
Firm's credit policy
The credit policy of the firm affects the working capital by influencing the level of
debtors. The credit terms to be granted to customers may depend upon the norms of the industry
to which the firm belongs. But a firm has the flexibility of shaping its credit policy within the
constraint of industry norms and practices. In order to ensure the unnecessary funds are not tied
in debtors, the firm should follow a rationalized credit policy based on the credit standing of
29
customers and other relevant factors. The firm should evaluate the credit standing of new
customers and periodically review the creditworthiness of the existing customers.
Availability of credit
The working capital requirements of a firm are also affected by credit terms granted by
its customers. A firm will need less working capital if liberal credit terms are available to it.
Similarly, the availability of credit from banks also influences the working capital needs of the
firm. A firm, which can get bank credit easily on favourable conditions, will operate with less
working capital than a firm without such a facility
Few commonly used liquidity ratios are
1. Current Ratio
2. Quick Ratio
3. Absolute Liquid Ratio.
4. Working Capital turnover Ratio
30
CHAPTER-4
DATA ANALYSIS
31
1) Current Ratio: Current ratio express the relationship between current assets (cash,
marketable securities, accounts receivables and inventories) and current liabilities (accounts
payable, short term notes payable, current maturities of long term debt, accrued income taxes and
other accrued expenses especially wages).
A current ratio of 2:1 is considered as an ideal ratio i.e. if the actual current ratio is less
than the standard; it shows inaccuracy of the working capital. 2:1 indicates a highly solvent
position.
Current ratio= current assets/ current liabilities.
Table No: 1
Statement Showing Current Ratio
(Rs. In Lakhs)
Year Current Assets Current Liabilities Current ratio
2004-05 24659.89 7235.75 3.41
2005-06 40416.09 16047.35 2.52
2006-07 45035.09 16726.8 2.69
2007-08 53219.61 14921.18 3.57
2008-09 72163.7 29967.98 2.41
32
Chart No: 1
Graph Showing Current Ratio
The average current ratio for pharmaceutical industry is 1.73
Interpretation:
A higher current ratio means that the company will be able to pay its debts maturing
within a year. On the other hand, a low current ratio points to the possibility that a firm may not
be able to pay its short term debts. A low ratio would mean inadequacy of working capital which
may deter smooth functioning of an enterprise.
In the beginning year current ratio is a highly satisfactory one. From 2005 onwards there
is a decrease in the current ratio. In the year 2007-08, there is a high improvement in the current
ratio i.e. current ratio is nearly 3.5. The trend clearly points out the adequacy of working capital
in the firm.
The current ratio of hetero drugs ltd is very high when comapared with industry average
of 1.73. This suggests that this company has higher credit worthiness in the industry.
33
2. Quick Ratio
Quick ratio is a measure of judging the immediate ability of a firm to pay off its current
obligations. It is obtained by dividing quick current assets by current liabilities. Thus quick
current assets consist of cash, marketable securities and accounts receivable. Inventories are
excluded from quick assets because they are slower to convert into cash.
Quick ratio = Liquid assets /Current Liabilities
Liquid assets= Total current assets – inventory
Table No: 2
Statement Showing Quick Ratio
(Rs. In Lakhs)
YearLiquid Assets=CA-
Inventory Current Liabilities quick ratio
2004-05 15218.8 7235.75 2.10
2005-06 27745.06 16047.35 1.73
2006-07 30752.98 16726.8 1.84
2007-08 35714.22 14921.18 2.39
2008-09 49721.64 29967.98 1.66
Chart No: 2
Graph Showing Quick Ratio
34
Interpretation:
Usually, a high ratio indicates the firm's liquidity and it’s liable to meet its current
liabilities. Since 2004-05, the quick ratio has been satisfactory and is more than the standard ratio
i.e. 1:1 clearly indicating that the firm's quick assets are increasing year by year resulting in the
adequacy of working capital. However in the year 2008-09, there is decrease in quick ratio
though maintaining above standard ratio.
3. Absolute Liquid Ratio
It is also called super quick ratio or cash ratio. The absolute liquid ratio shows how much
cash is available to the current obligation maturing immediately. Absolute liquid assets include
cash in hand, cash at bank and short term marketable securities. The accepted form for this ratio
is 1:2. The standard ratio is 1:1
Absolute liquid ratio= cash and cash equivalents/ current liabilities
Table No: 3
Statement Showing Absolute Liquid Ratio
(Rs. In Lakh)
Year cash & cash Equivalents Current Liabilities Absolute liquid ratio
2004-05 971.54 7235.75 0.13
2005-06 827.42 16047.35 0.05
2006-07 954.68 16726.8 0.06
2007-08 448.27 14921.18 0.03
2008-09 109.44 29967.98 0.00
35
Chart No: 3
Graph Showing Absolute Liquid Ratio
Interpretation:
The accepted standard cash position ratio is 1:1. Here in the table we see that the ratio is
decreasing drastically year by year and it was almost negligible in the year 2008-2009. It
indicates the inefficiency of the absolute liquid assets showing that the firm is unable to pay its
current obligations.
4. Net Working capital Ratio
Net Working Capital is used as a measure of a firm’s liquidity. Higher the Net Working
Capital, greater the company’s ability to meet its current obligations. NWC, measures the firm’s
potential reservoir of funds. It can be related to net assets.
Net Working Capital Ratio= Net Working Capital/Net Assets
Net Assets= Net Fixed Assets + Net Current Assets
36
Table No: 4
Statement Showing Net Working Capital ratio
(Rs. In Lakhs)
Year Net Working Capital Net AssetsNet Working Capital Ratio
2004-05 7688.88 29361.57 0.262005-06 10817.26 42570.58 0.252006-07 12130.92 54146.1 0.222007-08 17738.56 76623.81 0.232008-09 20074.22 93810.38 0.21
Chart No: 4
Statement Showing Net Working Capital ratio
Interpretation:
Here in the table we see that the ratio is decreasing slightly year by year and it reached
0.21 in the year 2008-2009. It indicates the efficiency of the firm to be able to pay its current
obligations is not highly satisfactory
37
LEVERAGE RATIOS
1. Proprietary Ratio
This ratio establishes the relationship between net worth and total assets. It indicates the
proportion of total assets financed by the shareholders.
Proprietary ratio = (Net worth/ Total assets)*100
This ratio is usually expressed in percentage. This relation reflects the general financial
strength of the company. It encases creditors to find out the proportion of assets. A high
Proprietary ratio indicates a relatively favourable position to creditors' in respect of liquidly
position of the company. A low ratio indicates a higher risk to creditors.
Table No: 5
Statement Showing Proprietary Ratio
(Rs. In Lakhs)
Year Net Worth Total Assets Proprietary ratio
2004-05 14352.3 29361.57 48.88
2005-06 19000.88 42570.58 44.63
2006-07 26505.81 54146.1 48.95
2007-08 33382.05 76623.81 43.57
2008-09 41614.08 93810.38 44.36
Chart No: 5
38
Graph Showing Proprietary Ratio
Interpretation:
A high proportion ratio indicates a favourable position to the creditors in terms of the
liquidity position of the company and vice versa. Here in this table we can see that the
Proprietary ratio is showing almost constant trend. Proprietary ratio shows that shareholders
funds constitute about half of the total assets continuously which indicates that the financial
strength of the company is satisfactory.
2. Debt Equity Ratio
Several debt ratios may used to analyze the long term solvency of the firm. The firm may
be interested in knowing the proportion of the interest bearing debt in the capital structure. Total
debt include short and long term borrowings from financial institutions, debenture/bonds,
deferred payment arrangements for buying capital equipments, and bank borrowings, public
deposits and any other interest bearing loan. The relationship describing the lender's contribution
for each rupee of the owner's contribution is called Debt-Equity Ratio.
Debt Equity Ratio = Outsiders Fund / Shareholders Fund
Table No: 6
39
Statement Showing Debt Equity Ratio
(Rs. In Lakhs)
Year Creditors funds Shareholders’ funds Debt Equity ratio2004-05 15009.27 14352.3 1.052005-06 23569.7 19000.88 1.242006-07 27640.29 26505.81 1.042007-08 43241.76 33382.05 1.302008-09 52196.3 41614.08 1.25
Chart No: 6
Graph Showing Debt Equity Ratio
The average debt-equity ratio for this industry is 0.26
Interpretation:
The debt equity ratio of the Hetero shows a constant trend. During the year 2003-04 the
ratio was 1:1, which increased to 1.2 during 2008-09. While in the years of study debt equity
ratio showed similar trend, i.e., lender's contribution is slightly more than the owner's
contribution which means slight increase in the use of long term debt.
40
The company’s debt-equity ratio when compared with industry average of 0.26 gives idea
that it is a highly levered company.
Coverage Ratio:
Debt ratios are static in nature and fail to indicate the firm’s ability to meet interest obligations.
The interest coverage ratio or the times-interest earned is used to test the firm’s debt-servicing
capacity. The interest coverage ratio is computed by dividing earnings before interest and taxes
(EBIT) by interest charges.
Interest Coverage =EBIT/Interest
Table No: 7
Statement Showing Interest Coverage Ratio
Year EBIT Interest Interest Coverage2004-05 3553.4 809.74 4.392005-06 6104.14 1370.94 4.452006-07 7575.74 1725.81 4.392007-08 6948.89 2482.99 2.802008-09 8304.69 4902.68 1.69
Chart No: 7
Graph Showing Interest Coverage Ratio
41
The average interest coverage ratio for this industry is 7.31
Intepretation:
This ratio indicates the extent to which earnings may fall without causing any embarrassment to
the firm regarding the payment of the interest charges. A higher ratio is desirable.In case of
Hetero this ratio is showing decreasing trend. The firm should make efforts to improve the
operating effeciency or to retire debt to have a comfortable coverage ratio.
Hetero’s interest cover ratio is far less than the industry of 7.31. this indicates that hetero’s cover
of earnings for interest is very less.
Profitability Ratios
The purpose of study and analysis of profitability ratios is to help assessing the adequacy
of profits earned by the company and also to discover whether profit ability is increasing or
decreasing. Profitability ratios show the combined effects of liquidity, asset management and
debt management on operating results. Profitability ratios are as the matter of facts, best
indicators of overall efficiency of a business concern because they compare return on value over
and above the values put into a business with sale or service carried on by the firm with the help
of assets employed
1. Gross Profit Ratio
42
This ratio measures the gross profit margin on the total net sales made by the company.
The ratio measures the efficiency of the company's operations and this can be compared with
previous year's result to ascertain the efficiency partners with respect to previous years.
Table No: 8
Statement Showing Gross Profit Ratio (Rs. In Lakhs)
Year Gross Profit Sales Gross Profit ratio
2004-05 6334.48 42710.56 14.83
2005-06 17673.02 76343.39 23.15
2006-07 19426.19 79562.24 24.42
2007-08 19532.71 83642.45 23.35
2008-09 24028.4 120450.55 19.95
Graph No: 8
Graph Showing Gross Profit Ratio
Interpretation:
A high ratio is an indication of good management or a high selling price of the product or
low cost of production. A relatively low margin is certainly a danger signal, warranting a careful
43
and detailed analysis of factors responsible for it. Here, the ratio has been increasing year by year
indicating a good signal as the gross profit is increasing compared to sales.
2. Net Profit Ratio
This ratio measures the relationship between net profit and sales of the firm and is
obtained by dividing net profit by sales. It shows per rupee profit generating capacity of sale.
This ratio is calculated as follows;
Net profit ratio = (Net profit after tax/ sales)*100
The net profit ratio indicates the management's ability to earn sufficient profits on sales
not only to cover all revenue operating expenses of the business, the cost of borrowed funds etc
but also to have a sufficient margin to pay reasonable compensation to shareholders on their
contribution to the firm. Higher the ratio better it is.
Table No: 9
Statement Showing Net Profit Ratio
(Rs. In Lakhs)
Year Net Profit Sales Net Profit ratio
2004-05 3553.4 42710.56 8.32
2005-06 6104.14 76343.39 8.00
2006-07 7575.74 79562.24 9.52
2007-08 6948.89 83642.45 8.31
2008-09 8304.69 120450.55 6.89
Chart No: 9
Graph Showing Net Profit Ratio
44
Interpretation:
A high ratio ensures adequate return as well as to enable a firm to withstand adverse
economic conditions. A low margin has an opposite implications. In 2006-07 the net profit was
10% recording highest during period of study. The net profit margin got reduced because of the
increase in administrative, selling expenses and other interest and finance charges during 2007-
2009.
3. Return on Capital Employed or Return on Investment
It establishes the relationship between net profits and capital employed. Capital employed
refers to the funds provided by long term creditors and the owners.
Return on capital employed = Net profit / capital employed * 100
Table No: 10
45
Statement Showing Return on Capital Employed
(Rs. In Lakhs)
Year Net Profit Capital EmployedReturn on Capital Employed
2004-05 3553.4 29361.57 12.10
2005-06 6104.14 42570.58 14.34
2006-07 7575.74 54146.09 13.99
2007-08 6948.89 76623.81 9.07
2008-09 8304.69 93810.38 8.85
Chart No: 10
Graph Showing Return on Capital Employed
Interpretation:
46
This ratio measures the overall performance of the firm and may be useful in comparing
the firm's efficiency with that of similar firm with industry. The higher is the ratio, the efficiently
the funds are used. The above table showed that the return on investment was satisfactory in the
year 2005-07. During the period 2007-09 returns were reducing as the company has focused on
employing its capital in setting up of new production units. So returns are expected in the coming
years.
4. Return on Net Worth/ Return on Shareholder's fund
This ratio expresses the net profit in terms of the equity shareholder's funds. This ratio is
useful in measuring the rate of return as a percentage of the book value of shareholders equity.
This ratio is an important yardstick of performance for equity shareholders since it indicates the
return on the funds employed by them.
Return on net worth = (Net profit/ Net worth)*100
Table No: 11
Statement Showing Return On Net Worth
(Rs. In Lakhs)
Year Net Profit Net worth Return on Net worth
2004-05 3553.4 14352.3 24.76
2005-06 6104.14 19000.88 32.13
2006-07 7575.74 26505.81 28.58
2007-08 6948.89 33382.05 20.82
2008-09 8304.69 41614.08 19.96
Chart No: 11
47
Graph Showing Return on Net Worth
Interpretation:
The higher the ratio, better are the results. Here, the return on shareholders’ funds ratio
showing decreasing trend because the company is in expansion phase investing in new
production units increasing production volumes which increases administrative expenses and
other finance charges
5. Return on Assets
The profitability of the firm is measured by establishing relation of net profit with total
assets of the organization. This ratio indicates the efficiency of utilization of assets in generating
revenue.
Return on assets = Net profit after tax/ Total assets.
Table No: 12
48
Statement Showing Return On Assets
(Rs. In Lakhs)
Year Net Profit Total Assets Return on Assets
2004-05 3553.4 29361.57 12.10
2005-06 6104.14 42570.58 14.34
2006-07 7575.74 54146.1 13.99
2007-08 6948.89 76623.81 9.07
2008-09 8304.69 93810.38 8.85
Chart No: 12
Graph Showing Return on Assets
Interpretation:
The ratio of return on assets shows that how much the company earn on their total assets.
In 2004-05, 2005-06 and 2006-07 there was increasing trend. During 2007-08 and 2008-09 the
firm showed a decreasing trend. It is because of the investments in new production units which
increased selling and administrative expenses.
Trend analysis
49
Effective use of financial ratios can be put by observing the behaviour of ratios over a
period of time. This is trend analysis depicting trends in the operation of the enterprise.
Whenever the comparison is to be made for a longer period, the comparative financial statements
may not serve purposefully, since the data become too cumbersome. The best course, in such a
case, is to compare the figures with the help of index number. Index number can be computed by
taking a common base. The figures of the initial years, for which data are available, by choice or
otherwise can take as 100 and the figures of all the later years can be converted into index
numbers. This process set longer terms comparison. The trend percentages may be computed
only in respect of certain important items only
Table No: 21
Trend Analysis of Current Assets
(Rs. In Lakhs)
Year Current assets Trend Percentage
2004-05 24659.89 100.00
2005-06 40416.09 163.8940401
2006-07 45035.09 182.6248617
2007-08 53219.61 215.8144663
2008-09 72163.7 292.6359363
Chart No: 21
50
Trend Analysis of Current Assets
Interpretation:
From the table we can understand that current asset is showing increasing trend. The year
2003-04, is taken as the base year and trend percentage shows a highest trend above 100%
i.e.300% in the year 2008-2009.This shows good sign for the company about its performance
over the years.
Table No: 22
Trend Analysis of Current Liabilities
(Rs. In Lakhs)
Year Current Liabilities Trend Percentage2004-05 7235.75 100.002005-06 16047.35 221.77866842006-07 16726.8 231.16884912007-08 14921.18 206.21469792008-09 29967.98 414.1654977
Chart No: 22
51
Trend Analysis of Current Liabilities
Interpretation:
From table we can see that trend of current liabilities is increasing and decreasing year by
year. During years 2004-2007 the trend was increased at its maximum of 231 % and then
decreased in 2007-08. However in the next year it went to all time highest to 400% which can be
justified with increase in fixed and current assets.
Table No: 23
Trend Analysis of Fixed Assets
(Rs. In Lakhs)
Year Fixed assets Trend Percentage2004-05 10565.17 100.002005-06 18261.33 172.84463952006-07 23780.6 225.0848782007-08 34566.16 327.17088322008-09 46963.41 444.5116359
Chart No: 23
52
Trend Analysis of Fixed Assets
Interpretation:
The table showing trend of fixed assets is on a increasing trend by year by year. In the
last year it reached up to a percentage of 400, which indicates that the company’s performance is
in good shape over the years.
Table No: 24
Trend Analysis of Working Capital
(Rs. In Lakhs)
Year Net Working Capital( CA-CL) Trend Percentage2004-05 7688.88 100.002005-06 10817.26 140.68707022006-07 12130.92 157.77226332007-08 17738.56 230.70408172008-09 20074.22 261.0811978
Table No: 24
53
Trend Analysis of Working Capital
Interpretation:
The trend of working capital is also showing increasing trend. The trend percentage is attributed
in constant increasing in production volumes with increase in production units. Hence, the
working capital shows a better position.
Table No: 25
Trend Analysis of Sales
(Rs. In Lakhs)
Year Sales Trend Percentage2004-05 42710.56 100.002005-06 76343.39 178.74593542006-07 79562.24 186.2823622007-08 83642.45 195.83552642008-09 120450.55 282.0158528
Chart No: 25
54
Trend Analysis of Sales
Interpretation:
The table showed the trend analysis of net sales. It shows an increasing trend from the year 2004-
05 to 2008-09 and it was at its maximum with 280%. This is good sign for the company.
55
ANALYSIS OF COMPONENTS OF WORKING CAPITAL
TABLE N0: 1
STATEMENT SHOWING NET WORKING CAPITAL
Current Assets (Rs in Lakhs)
Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Inventories 9441.09 12671.03 14282.1 17505.39 22442.06
Sundry Debtors 10745.35 22295.06 22770.2 24671.93 36529.59
Cash and bank balances 971.53 827.42 954.68 448.27 109.44
Loans and advances 3501.91 4622.57 7028.09 10594.01 13082.59
Total current assets 24659.88 40416.08 45035.07 53219.6 72163.68
Current Liabilities
Liabilities 6480.91 14887.93 15666.29 13770.84 27957.93
Provisions 1100.81 1954.09 1339.7 1150.33 2010.04
Bank Borrowings 9735.26 13551.48 16177.37 20559.88 22121.49
Total current liabilities 17316.98 30393.5 33183.36 35481.05 52089.46
Net working capital 7342.9 10022.58 11851.71 17738.55 20074.22
ANALYSIS OF CHANGES IN WORKING CAPITAL
TABLE NO: 2
56
STATEMENT OF CHANGES IN WORKING CAPITAL
(Rs. In Lakhs)
Particulars 2004-2005 2005-2006 Increase Decrease
Current assets
Inventories 9441.09 12671.03 3229.94
Sundry Debtors 10745.35 22295.06 11549.71
Cash & Bank 971.53 827.42
144.11
Loans and advances 3501.91 4622.57 1120.66
Total 24659.88 40416.08 15756.2
Current liabilities
Liabilities 6480.91 14887.93 8407.02
Provisions 1100.81 1954.09 853.28
Bank Borrowings 9735.26 13551.48 3816.22
Total 17316.98 30393.5 13076.52
Working capital 7342.9 10022.58 2679.68
TABLE NO: 3
STATEMENT OF CHANGES IN WORKING CAPITAL
(Rs. In Lakhs)
57
Particulars 2005-2006 2006-2007 Increase Decrease
Current assets
Inventories 12671.03 14282.1 1611.07
Sundry Debtors 22295.06 22770.2 475.14
Cash & Bank 827.42 954.68 127.26
Loans and advances 4622.57 7028.09 2405.52
Total 40416.08 45035.07 4618.99
Current liabilities
Liabilities 14887.93 15666.29 778.36
Provisions 1954.09 1339.7 614.39
Bank Borrowings 13551.48 16177.37 2625.89
Total 30393.5 33183.36 2789.86
Working capital 10022.58 11851.71 1829.13
TABLE NO: 4
STATEMENT OF CHANGES IN WORKING CAPITAL
(Rs. In Lakhs)
58
Particulars 2006-2007 2007-2008 Increase Decrease
Current assets
Inventories 14282.1 17505.39 3223.29
Sundry Debtors 22770.2 24671.93 1901.73
Cash & Bank 954.68 448.27 506.41
Loans and advances 7028.09 10594.01 3565.92
Total 45035.07 53219.6 8184.53
Current liabilities
Liabilities 15666.29 13770.84 1895.45
Provisions 1339.7 1150.33 189.37
Bank Borrowings 16177.37 20559.88 4382.51
Total 33183.36 35481.05 2297.69
Working capital 11851.71 17738.55 5886.84
TABLE NO: 5
STATEMENT OF CHANGES IN WORKING CAPITAL
(Rs. In Lakhs)
59
Particulars 2007-2008 2008-2009 Increase Decrease
Current assets
Inventories 17505.3922442.06
4936.67
Sundry Debtors 24671.9336529.59
11857.66
Cash & Bank 448.27109.44
338.83
Loans and advances 10594.0113082.59
2488.58
Total 53219.6 72163.68 18944.08
Current liabilities
Liabilities 13770.8427957.93
14187.09
Provisions 1150.332010.04
859.71
Bank Borrowings 20559.8822121.49
1561.61
Total 35481.05 52089.46 16608.41
Working capital 17738.55 20074.22 2335.67
60
CHAPTER-5
FINDINGS FROM THE STUDY
Findings from the study:
61
The net profit ratio showed increasing trend for the first half of period under study and
then decreased for the last half. The net profit margin got reduced because of the increase
in administrative, selling expenses and other interest and finance charges during 2007-
2009. This may be attributed in increase in production units.
The return on capital employed is also decreasing according to the changes in net profit.
The results showed that the return on investment was satisfactory in the year 2005-07.
During the period 2007-09 returns were reducing as the company has focused on
employing its capital in setting up of new production units expecting returns in the
coming years.
Current ratio of the company shows a highly satisfactory sign. An ideal current ratio is
2:1. The company is showing above ideal ratio throughout all the years under study.
Company’s quick ratio for the last five years is showing a fluctuating trend. The standard
norm fixed for quick ratio is 1:1. It shows that the company’s liquidity position is
satisfactory as it is well above the standard norms.
The absolute liquid ratio is highly deteriorating for the company. The acceptable ratio is
1:2. This shows that company’s financial position is not satisfactory and it indicates the
inefficiency of the absolute liquid assets showing that the firm is unable to pay its current
obligations.
Net working capital ratio of the company indicates the efficiency of the firm to be able to
pay its current obligations is not highly satisfactory
Proprietary ratio is showing almost constant trend. Proprietary ratio shows that
shareholders funds constitute about half of the total assets continuously which indicates
that the financial strength of the company is satisfactory.
Debt-Equity ratio for the year 2003-04 was 1:1, which increased to 1.2 during 2008-09.
Throughout the years of study debt equity ratio showed similar trend, i.e., lender's
contribution is slightly more than the owner's contribution which means slight increase in
the use of long term debt.
62
Interest Coverage ratio is showing decreasing trend showing a caution for the company.
The firm should make efforts to improve the operating effeciency or to retire debt to have
a comfortable coverage ratio.
Trend analysis of current assets, fixed assets and sales show an increasing trend over year
by year.
The volume of current liabilities increased in the last year and that can be attributed to
increasing trend of above factors like current and fixed assets.
63
CHAPTER-6
RECOMMENDATIONS
Suggestions:
64
The company’s liquidity position is also not satisfactory, so it should try to maintain
better liquidity position. A relatively low margin is certainly a danger signal, warranting a
careful and detailed analysis of factors responsible for it.
The company should make efforts to improve the operating effeciency or to retire debt to
have a comfortable coverage ratio.
The company should take necessary steps to check the increase in current liabilities.
The company’s net profit ratio is decreasing over last two years because of increasing
operating cost. Therefore measures should be taken to reduce the operating costs.
The company should monitor its operating expenses and take corrective measures to have
control on them.
Adequate working capital should be needed for the firm its smooth operation. So that
proper balance between current asset and current liabilities should be maintained.
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CHAPTER-7
LIMITATIONS & CONCLUSION
66
Limitations of the Study:
The period of the study was very limited.
The study involves use of ratio analysis which have its own limitations.
The reliability and accuracy of calculations and interpretations depends very much on the
information supplied in the form of annual reports and other records.
In this short period of time the research could not go through all the aspects of working
capital management.
Conclusion:
In this study an attempt is made to analyse the working capital position of the
company. The study shows that the overall performance of the company is satisfactory. The
analysis and interpretation of various data relating to working capital management helped to
reach a conclusion that the efficiency of working capital and profitability position is in good
shape since there is increase in working capital and profit over the years. But it reveals that the
company is not having satisfactory liquidity position as its cash reserves are deteriorating shape.
The company should focus on this and analyze the factors responsible for it
The overall success of any company depends upon its working capital position.
So it should be handled properly because it shows the efficiency and financial strength of the
company. Therefore the company should continue to enforce strict and possible measures in
every sphere of its activity to maintain the company in sufficient working capital position and
improve its financial performance for better prospects in the coming days which again requires
better short term fund and long term fund management.
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CHAPTER-8
LEARNING OUTCOME
68
LEARNING OUTCOME:
Broadly, I had a very good exposure to the corporate culture. The two most important
things that I understood during this two month internship period are the importance of
commitment and punctuality in the corporate world.
During the analysis I learned the necessity of a corporate to be proactive for grabbing the
market opportunity. Hetero drugs ltd got patent rights for Swine Flu drug called Tamiflu which
increased its revenue by 40% in just one year.
Also I learned various ways in which a company’s financial performance can be gauzed
and how conclusions are drawn from the ratio analysis.
69
CHAPTER-9
BIBLIOGRAPHY
70
Bibliography:
Books:
Financial Accounting for Management, N Ramachandran, Ram Kumar kakani, Second Edition, McGraw-Hill Company.
Financial Management, I.M Pandey, Vikas Publishing House
Research Reports/Journals:
Pharmaceuticals and Medical products practice, Indian Pharma 2015- Unlocking the potential of the Indian Pharmaceuticals Market.
Deutsche Bank Research Report on India’s Pharmaceutical Industry on course of Globalisation.
KPMG Research on Indian Pharma Outlook. Top 10 pharmaceutical companies in India – A report by Business Insights. What makes India, the preferred outsourcing destination – A report by Asia life science
services.
Websites:
www.heterodrugs.com
www.pharmabiz.com
www.phrma.org
71
CHAPTER-10
ANNEXTURE
72
73
74
Fortnightly Status Report
Sl.N0: 1 Date : 30-04-2010
Name of the Student: Sudheer GadeyReg. No: 09PG113 Submitted to : Dr Rekha Title of Dissertation Work: Performance Analysis of Hetero Drugs Ltd. Hyderabad.
Summary of Previous Fortnight(s) report Previous report consists of IIP Proposal and other information like objectives, methodology and scope of work. The proposed time frame with respect to the work was mentioned.
Work carried out during the fortnight under report :
a. Books / Chapters read / procured :
Financial Accounting for Management, N Ramachandran, Ram Kumar kakani, Second Edition, McGraw-Hill Company.
Financial Management, I.M pandey, Vikas Publishing House
b. Research Papers / Articles read / procured / downloaded :
An Outlook of Indian Pharmaceutical Industry by KPMG
“Trend in Working Capital Management and its impact on Firm’s performance: Intenational Review of Business Research Papers.
c. Visits to Institutions / Libraries / Companies, if any : Gurunank College of Engineering and
Management, Patancheru, Hyderabad.d. Internet Searching results, if any:
Information about the company was acquired from the company website ie www.heterodrugs.com
Various pdf files were downloaded to get the overview of the Indian Pharmaceutical industry
e. Meeting with target group members, if any:
75
Conversation with Mr Veera Reddy, Manager Finance Department once in two days and other deparment people as and when required.
f. Problems encountered, if any :
The main problem that I am facing is regarding the collection of primary data and some information was not revealed due to confidentiality. Also, the company doesnt have the procedure of preparing reports for the work carried.
g. Proposed steps during the next fortnight:
After collection of relevant data, the analysis shall be done by calculation of various ratios.
76
Fortnightly Status Report
Sl.N0: 2 Date : 14-05-2010
Name of the Student: Sudheer GadeyReg. No: 09PG113 Submitted to : Dr Rekha Title of Dissertation Work: Performance Analysis of Hetero Drugs Ltd. Hyderabad.
Summary of Previous Fortnight(s) report Previous report consists of the details of various books referred, the information gathered through internet and through personal enquiry of people at the industry. The basic information about the company was collected from annual reports and through website and the pharmaceutical industry overview was known through various sources like journals and internet.
Work carried out during the fortnight under report :
h. Books / Chapters read / procured :
Financial Accounting for Management, N Ramachandran, Ram Kumar kakani, Second Edition, McGraw-Hill Company.
Financial Management, I.M pandey, Vikas Publishing House
i. Research Papers / Articles read / procured / downloaded :
Indian pharma 2015, a report by McKinsey & company. India’s pharmaceutical industry on course of globilisation, Deutsche bank research.
j. Internet Searching results, if any:
Information about the company was acquired from the company website ie www.heterodrugs.com
Methodology and elements of McKinsey’s 7 S framework was collected from internet.
Sun pharma analysis report.
k. Meeting with target group members, if any:
77
Conversation with Mr Veera Reddy, Manager Finance Department once in two days and other deparment people as and when required.
l. Proposed steps during the next fortnight:
The details of the company shall be streamlined into various categories and some of the calculated ratios will be analysed based on their trends.
78
Fortnightly Status Report
Sl.N0: 3 Date : 28-05-2010
Name of the Student: Sudheer GadeyReg. No: 09PG113 Submitted to : Dr Rekha Title of Dissertation Work: Performance Analysis of Hetero Drugs Ltd. Hyderabad.
Summary of Previous Fortnight(s) report Previous report consists of work done regarding the calculation of financial ratios and details of various books referred and download results from the internet. Also, the methodology for preparation of Mckinsey 7’s framework and SWOT analysis was acquired from online resources.Work carried out during the fortnight under report :
m. Books / Chapters read / procured : Financial Accounting for Management, N Ramachandran, Ram Kumar kakani,
Second Edition, McGraw-Hill Company. Financial Management, I.M pandey, Vikas Publishing House
n. Research Papers / Articles read / procured / downloaded :
Top 10 pharmaceutical companies in India – A report by Business Insights. What makes India, the preferred outsourcing destination – A report by Asia life
science services.
o. Internet Searching results, if any: Information about the company was acquired from the company website ie
www.heterodrugs.com Sun pharma analysis report.
p. Meeting with target group members, if any:Conversation with Mr Veera Reddy, Manager Finance Department once in two days and other deparment people as and when required.
q. Proposed steps during the next fortnight: Various ratios that are calculated will be analysed based on trends and comparitive methods and also conclusions about the company’s performance shall be stipulated.
79
Fortnightly Status Report
Sl.N0: 4 Date : 16-06-2010
Name of the Student: Sudheer GadeyReg. No: 09PG113 Submitted to : Dr Rekha Title of Dissertation Work: Performance Analysis of Hetero Drugs Ltd. Hyderabad.
Summary of Previous Fortnight(s) report Previous report consists of analysis of various financial ratios and various findings that are possible from the ratios. Also, the details of various resources that helped in gathering the information.Work carried out during the fortnight under report :
r. Books / Chapters read / procured :
Financial Accounting for Management, N Ramachandran, Ram Kumar kakani, Second Edition, McGraw-Hill Company.
Financial Management, I.M pandey, Vikas Publishing House
s. Research Papers / Articles read / procured / downloaded :
Indian patent law and pharma industry by Dr Gopakumar G Nair.
t. Internet Searching results, if any: Information about the company was acquired from the company website ie
www.heterodrugs.com
u. Meeting with target group members, if any:Conversation with Mr Veera Reddy, Manager Finance Department once in two days and other deparment people as and when required.
v. Proposed steps during the next fortnight: During the next few days various conclusions shall be drawn about the company’s financial position and give recommendations to the company. Also, the draft report shall be compiled.
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