financial analysis of pharma industry

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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http://www.pharmaceutical-drug-manufacturers.com/pharmaceutical-industry/

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


(Rs. In Lakhs)

57


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


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


(Rs. In Lakhs)

58


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


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


(Rs. In Lakhs)

59


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.

65

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

http://www.pharmabiz.com/

http://www.heterodrugs.com/

CHAPTER-10

ANNEXTURE

72

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 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


Sl.N0: 2 Date : 14-05-2010


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 :



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


Sl.N0: 3 Date : 28-05-2010


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


Sl.N0: 4 Date : 16-06-2010


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 :



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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financial analysis of pharma industry

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