Mba Aanal Report

Summer Internship Program

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A Report

On

At

CADILA HEALTHCARE LTD

Submitted to:

Faculty Guide: Company Guide: Prof. Pankaj Madhani Mr. Jyotindra Gor Faculty of Finance Chief Accounts Officer ICFAI BUSINESS SCHOOL-AHMEDABAD CADILA HEALTHCARE LTD.

Submitted by: Aanal Dhruv

08BS0000041 – Batch 2010 ICFAI Business School – Ahmedabad

Contact no: +91-9904156461 Email ID: [email protected]

mailto:[email protected]


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ACKNOWLEDGMENT

The spirit of summer internship program lies in not merely doing the project but to get a firsthand

experience of the industry and to prepare ourselves for tomorrow’s managerial needs. But this experience cannot come without better efforts, and the later cannot come without proper guidance.

With an overwhelming sense of pride and obligation, I bestow my gratitude to my company guide,

Mr. Jyotindra Gor and also to my faculty guide, Mr. Pankaj Madhani for their able guidance, constant encouragement, constructive and critical appraisal, generous help and vital suggestions. It was acumen of their supervision that saved me from the taste of several errors and placed me in right place at right times.

I extend my profound sense of gratitude to Mr. Jayesh K. Patel for his valuable and constant suggestions and guidance during the course of this project. I am even thankful to

Mr. D H. Rathod Mr. Mitesh Pandya Mr. Manan Shah Mr. Manoj Tiwari Mr. Kalpesh Patel for providing me with factual information, technical notes and moral support.

On a personal note I would like to thank Ms. Komal Ladha and Ms. Vinita Shukla, my batch mate and colleague in Cadila Healthcare Ltd. for their co-operation and also to my senior mate, Mr. Sagar Vora for his valuable inputs during this summer training.

Last but not the least, I thank all those who knowingly and unknowingly, directly or indirectly have helped me in the fulfillment of this project.


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ABSTRACT

Financial analysis is an aspect of the overall business finance function that involves examining historical data to gain information about the current and future and financial health of a company. The financial function in business organizations involves evaluating economic trends, setting financial policy and creating long range plans for business activities. For the smooth functioning of all the above functions, proper handling of cash is of utmost importance. So we can say that cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).

So the project undertaken by me at CADILA HEALTHCARE LIMITED is “THE STUDY OF WORKING

CAPITAL MANAGEMENT” for the duration of 14 weeks. Working capital management refers to all management decisions and actions that ordinarily influence the size and effectiveness of the working capital. It is concerned with the most effective choice of working capital sources and the determination of the appropriate levels of the current assets and their use.

The main areas that will be covered under this project are divided into six phases. The first phase is to determine the net working capital (operating) cycle that is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The second phase is to study the Inventory management that will have the emphasis on learning the methods which are used by the company for the ordering and purchase of inventory. Finally, inventories are held to obtain an optimum utilization of people, place, time and equipments.

The third phase is to study about the Receivables management which is a tool that acts as a bridge

for the movement of goods through production and distribution stages to customers. The fourth phase is to study about the Cash management, to accomplish various tasks of cash collection, payment of outstanding and arranging for deficit funding or surplus investment at a minimum cost or it should be at maximum returns. It assumes more importance than other assets because cash is the most significant and least productive asset that a firm holds. It aims to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way.

The fifth phase was of financial analysis that can be applied in a wide variety of situations to give

business managers the information they need to make critical decisions. While Ratio Analysis is the main part of financial analysis which will help to compare the company with the other main players of the industry, in order to get an idea of its position in the industry.

The sixth phase is to learn about the following activities: 1.) To get an idea about the business

processes by learning SAP R/3 – Finance module, 2.) Also to learn about a software Vision21 used by Dial for Health Ltd. (Subsidiary of Zydus), 3.) To learn about few topics in brief like sales tax, service tax, treasury control management, foreign exchange, supply chain management etc. as per the permission granted by the authorities.

http://www.investopedia.com/terms/c/cashflow.asp


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Table of Contents Sr. No. Particulars Page no

1. Acknowledgement 2

2. Abstract 3

3. Introduction:

Objective 5

Description of the project 6

Methodology 7

Limitation 8

Schedule 8

4. Industry Profile

The Global Pharma Market 9

The Indian Pharma Market 12

5. Company Profile 18

6. Working Capital Management 24

7. Phase I: Net Operating Cycle 30

8. Phase II: Inventory Management 38

9. Phase III: Receivable Management 49

10. Phase IV: Cash Management 67

11. Phase V: Ratio Analysis 79

12. Additional Learning: 158

i. Practical Work: 159

a) SAP R/3 – Financial Module Software 159

b) VISION 21 - Software 172

ii. DuPont Analysis 178

iii. Sustainable Growth Rate 186

iv. Economic Value Added 188

13. Learnings 191

14. Recommendations 192

15. Conclusion 193

14. References 198


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INTRODUCTION

1. Objective of the Project:

My main objective under this project:

To do ratio analysis of the company, its subsidiaries and also the competitors for

comparative analysis and thereby give required suggestions.

To study about the liquidity position of the company with the help of various ratios and

examine whether the current assets – which can be easily converted into cash, are

enough to meet the current liabilities – which requires fast cash settlement.

To estimate the working capital requirement of the company, which will help me to

learn how the company manages its working capital and also about the actions taken to

manage it efficiently.

This project will help me in gaining knowledge of different steps of raising the short

term funds and there effective management so as to ensure adequate availability of

funds.

As Working capital refers to the amount of cash that a business requires for day-to-day

operations, or, more specifically, for financing the conversion of raw materials into

finished goods, which the company sells for payment, so I will be able to learn about the

production cycle and also do analysis to give recommendations regarding any changes

required in the company.

Among the most important items of working capital are levels of inventory, accounts

receivable, and accounts payable. So it is very important to study about the debtor’s

management, inventory management and cash management in detail and also give

suggestion accordingly.

http://www.investopedia.com/terms/w/workingcapital.asp


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2. Description of the Project: To get the basic idea about the working, its achievements, organization structure of the

company and its subsidiaries.

To analyze the financial statements of the company for the year 2007-08, 2006-07, 2005-06

and other competitors companies like Glaxo, Ranbaxy, Cipla, Dr. Reddy and Sun Pharma for

the year 2007-08.

To compare the company’s position with its competitors with the help of Ratio Analysis and

to suggest the company, how to improve its position over its competitors.

To gain proper practical knowledge of the working capital management which includes:

Inventory management

Cash management

Debtors management

To understand the policies adopted by the company for working capital management.

To get an idea of the financial system of the company by working with the software SAP R/3

implemented recently by the company and also its subsidiary – Carnation Nutra Analogue

Pvt. Ltd..

To get an idea about the software VISION 21 , used by Dial for Health - the subsidiary of

Zydus Cadila Health Care ltd.

To get few insights about the business process of the company.


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3. Methodology:

For Introduction:

Proper reading of the annual reports to know about the history of the company, its

achievements, its subsidiaries and also about its working.

For Ratio Analysis:

To read the financial statements thoroughly.

Calculation of ratios of the company- Standalone and Consolidated

To interpret each ratio and give recommendations about it to the company, for its

better functioning in the future.

For Industry Analysis:

Selection of top five competitors of the company under the guidance of company

mentor.

To read the financial statements of all the five competitors.

Calculation of ratios for all the competitors for the standalone company.

To interpret each ratio and do comparative analysis.

For Working Capital Cycle:

To study about the inventory management by visiting the plant of the company as per

the guidance and permission given by the company mentor.

To study about the debtor’s management by getting proper data about the average

collection period, details of various debtors and also about the credit facilities provided

to them etc. that are available from the finance department.

To study about the Cash management by getting proper data about the cash inflows and

outflows from the finance department.

To calculate the net operating cycle after considering the above parameters.

For Practical Work:

As per the guidance of the company mentor, to work with software– SAP R/3- Finance

Module, this is recently being implemented in the company and also its subsidiary –

Carnation Nutra Analogue. Following work is being done by me in this software:

Entries for other expenses

Entries for Credit notes

Entries for Debit notes


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Even to work with the software VISION 21 , used by Dial for Health for the following

purpose:

Entries for other expenses

Entries for Debit note

Entries of Payment for expenses and also made the mode of payment

Entries of Purchase of goods

Compilation of Assets Purchased during the last three financial years in Excel Sheet

4. Limitation of the study: The study and analysis will be based on the figures available in the Annual report of the

organized and published by the company. No figures which are used by the different

departments will be made available as they are confidential and cannot be provided by the

organization. Thus, lack of proper secondary data.

5. Schedule for the Project:

Sr no. Activity Duration

1. Introduction of the company 23/02 to 28/02

2. Ratio Analysis of the company 02/03 to 08/03

3. Ratio Analysis of the Industry 09/03 to 15/03

4. Practical Work in SAP R/3 and Vision21 16/03 to 04/04

5. Inventory Management 06/04 to 12/04

6. Working Capital and other Topics 13/04 to 03/05

7. Cash Management 04/05 to 10/05

8. Receivables Management 04/05 to 15/05

9. Business Process and others 16/05 to 18/05


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INDUSTRY PROFILE

THE GLOBAL PHARMA INDUSTRY

A pharmaceutical company, or drug company, is a commercial business, whose focus is to research, develop, market and/or distribute drugs, mostly in the context of healthcare. They can deal in generic and/or brand medications. They are subject to a variety of laws and regulations regarding the patenting, testing and marketing of drugs. The major stages of the pharmaceutical value chain comprise drug discovery, drug development, manufacturing, distribution, and sales and marketing. Improving efficiency for a speedy ROI in every stage has become a critical factor to ensure the success of the company.

Pharmaceutical is one of the most intense “Knowledge Driven” industries, which is continually in a

state of dynamic transition. Human, animal and environmental health is priority concerns of society. Diversities in life forms and diseases pose stiff challenge to the design of specific and targeted solutions. The process of “drug discovery/invention” is elaborate requiring on an average 8-10 years at a cost of US$ 300 million to reach a new drug to the market. The long gestation period between “learning”, “knowledge generation” and its transformation to “value added knowledge” necessitates the creation of “Proprietary Knowledge” which is of paramount importance in establishing and sustaining a global competitive posture.

Patents build fortresses around inventions, trademarks establish and identify brands, Copyrights

provide protection to accompanying literature, and Designs Registrations cover novelties in shapes, forms and ornamentation which visually impact consumers. Globally, these tools of Intellectual Property Rights (IPR) are key components of strategy formulation and implementation by Pharmaceutical Corporations. Protected intellectual assets preserve exclusive markets, maintain profit margins, provide market access and give freedom to operate. IPR portfolio has now become an effective platform for benchmarking of intellectual assets and innovative capabilities of corporations, business entrepreneurs and researchers. This is extensively being used in today’s world of mergers, acquisitions, strategic alliances, and collaborations, licensing arrangements and Venture Capital Funding in Pharmaceutical and Allied Industries. Of the top 50 pharmaceutical companies, 18 are with their head offices in the USA, 21 in Europe, and the other 11 in Japan. Worlds patenting activities are also most intense in these regions.


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Expected Growth in the year 2009:

Global pharmaceutical sales will rise 4.5%-5.5% this year to top $820 billion, but the US market will grow by no more than 4% to reach $292-$302 billion, says the US National Association of Pharmaceutical Representatives (NAPRx). Initial expectations for growth in the US market of 4%-6% have been revised downward to grow by 1% - 2% percent to $287 - $297 billion because of the economic climate, and also reflect continuing patent expiries and fewer new product launches this year, which appears to be having an impact on doctor visits and pharmaceutical sales. Nevertheless, the healthcare industry “continues to be a star in the US economy,” says NAPRx, which is the largest US trade association for pharmaceutical salespeople.

The top five European Union (EU) countries - France, Germany, Italy, Spain and the UK - will grow

3%-4% this year, reaching sales of $162-$172 billion, it forecasts. EU-wide growth will be driven by the

aging population and rising demand for preventive care but tempered by the increased impact of Health

Technology Assessments (HTAs), the use of contracting by payers as a means of controlling costs and the

decentralization of government healthcare budgets. While Japan, the world's second-largest market, will

see higher growth, at 4%-5% to $84-$88 billion, boosted by approvals for new anti-cancer agents, disease

prevention programs and the absence this year of the government's biennial price cuts. Moreover,

government efforts to promote the use of generics will have only a modest impact on the market in 2009,

the association forecasts.

The “pharmerging” markets - China, Brazil, India, South Korea, Mexico, Turkey and Russia - are

expected to grow at a combined rate of 14%-15%, producing overall sales of $105-$115 billion. Along with

the pharmaceutical industry's growing focus on these high-growth markets, they are benefiting from

increased government spending on healthcare and broader public and private healthcare funding, which is

driving greater access to and demand for innovative medicines, it says.


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Economic Downturn and Experts Comment on it:

Economic conditions will be a complicating factor impacting the worldwide pharmaceutical market

in 2009. In the U.S., the correlation between economic factors and pharmaceutical growth is stronger in

the current slowdown than in previous downturns, given the continued shift of drug-related costs to

patients.

An additional $24 billion of branded products, including anti-epileptics, proton pump inhibitors

and anti-virals, will lose their market exclusivity in the top eight markets in 2009. This will contribute to

generics sales of more than $68 billion next year, and a 5 - 7 percent growth rate - similar to 2008 and

lower than the levels experienced in 2006 and 2007. The decline is being driven by growth slowdowns in

the U.S. and U.K., where many competitors in large therapy areas are creating a fierce price war and

cutting margins for generics manufacturers. Other countries are striving to increase the use of generics

through various government efforts.

"In many respects, 2009 will reflect the new shape of the global pharmaceutical market, as the

result of market factors that have gained momentum over the past several years," said Murray Aitken,

senior vice president, Healthcare Insight, IMS. "Pharmaceutical growth next year will hold steady at 2008

levels. The market will continue to contend with a number of forces - among them, the shift in growth

from developed countries to emerging ones, specialist-driven products playing a larger role, blockbuster

drugs losing patent protection, and the rising influence of regulators and payers on healthcare decisions.

Layered on top is the uncertainty in the global economic environment and its effect on demand."

Further he added that, "Biopharmaceutical companies can still find avenues of growth by focusing

on emerging markets, specialist-driven products and biologics, by uncovering pockets of unmet need and

underutilization in primary care markets, by demonstrating the superior value of their medicines, and by

re-invigorating their established brands. The growth is not where it used to be, and it may not be as easy

to come by, but it is out there. The key to success in this new environment will be in adapting the

pharmaceutical industry's commercial models to accommodate these new developments."


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THE INDIAN PHARMA MARKET

“…More and more innovator and generic companies are either setting up their own operations in India or are resorting to heightened outsourcing,” says Ajit Kamath, Chairman and Managing Director, Arch Pharmalabs. (Source: www.moneytoday.in 29th Jan., 2009)

The pharmaceutical industry, which is a subset of the healthcare industry, is the lifeline industry in

any economy. Its contribution towards the growth and development of the economy, and towards building a strong human capital and intellectual property rights in a country cannot be undermined.

“The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent”.

Currently, the Indian pharmaceutical industry is one of the world's largest and most developed,

ranking 4th in volume terms and 13th in value terms. The country accounted for 8 per cent of global production and 2 per cent of world markets in pharmaceuticals. But the India's pharmaceutical companies are gearing up to become a major global player, not only in producing low-price generic medicines but also as innovators in drugs and vaccines by breaking new grounds in medicine research worldwide, according to a study. The costs are considerably lower for companies operating in India, the study published in the April 9 issue of the journal says, citing as an example the way the 1997 launch of an Indian hepatitis B vaccine cut prices to one-thirtieth.

"India is innovating its way out of poverty," said Nature Technology study co-author Peter Singer of the McLaughlin-Rotman Centre for Global Health in Toronto. India could revolutionize biotechnology on the basis of its large and increasingly well-educated workforce, just as it did information technology, Singer believes.

Expected Growth in this sector:

The Indian domestic pharmaceutical market is estimated to be US$ 10.76 billion in 2008 and is expected to grow at a high compound annual growth rate (CAGR) of 9.9 per cent till 2010 and thereafter at a CAGR of 9.5 per cent till 2015. The Indian pharmaceutical off shoring industry is slated to become a US$ 2.5 billion opportunity by 2012, thanks to lower R&D costs and a high-talent pool in India. The Indian vaccine market was worth US$ 665 million in 2007-08 and is growing at over 20 per cent. Exports contribute over US$ 360 million, while the domestic market for vaccines is US$ 300 million.


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Exports Trend: India exported drugs worth US$ 7.2 billion in 2007-08 to the US and Europe, followed by

Central and Eastern Europe, Latin America and Africa. A report by industry research firm, RNCOS forecasts that pharmaceutical exports will grow at a CAGR of 18.5 per cent between 2007-08 and 2011-12. This growth will be fuelled by multi-billion dollar patent expirations and growth in the global generics market. Pharmaceuticals exports (valued in US dollar terms) registered an impressive growth rate at 30.7 per cent during April-October 2008 compared to the corresponding period last year.

Pharmaceutical Retail: India has 5.5 million chemists and druggists, and the organized retail market accounts for

just 2 per cent of the industry but is posting a year-on-year growth of 30-40 per cent. The country's pharmaceutical retail market is expected to cross the US$ 10 billion mark in 2010 and be worth an estimated US$ 12 billion- US$ 13 billion by 2012.

Generics: According to a report by IMS Health, the Indian generic manufacturers will grow to more

than US$ 70 billion as drugs worth approximately US$ 20 billion in annual sales faced patent expiry in 2008. With nearly US$ 80 billion worth of patent-protected drugs to go off patent by 2012, Indian generic manufacturers are positioning themselves to offer generic versions of these drugs.

Government Initiative: The Government has taken various policy initiatives for the pharmaceutical sector

Government has offered tax-breaks to the pharmaceutical sector. Units are eligible for weighted tax deduction at 150 per cent for the R&D expenditure incurred.

Steps have been taken to streamline procedures covering development of new drug molecules, clinical research etc.

Government has launched two new schemes—New Millennium Indian Technology Leadership Initiative and the Drugs and Pharmaceuticals Research Program—specially targeted at drugs and pharmaceutical research.

Investment: According to Ministry of Commerce, domestic investment in the pharmaceutical sector is

estimated at US$ 6.31 billion. The drugs and pharmaceuticals sector has attracted FDI worth US$ 1.43 billion from April 2000 to December 2008.

Road Ahead: The Indian pharmaceutical industry will see tremendous growth in the coming years as

consumer spending on healthcare is increasing in India. Consumer spending on healthcare is expected to increase from 7 per cent of GDP in 2007 to 13 per cent of GDP by 2015.


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Major Indian Pharma Player: The following table shows the top 10 Indian Pharma companies on the basis of their turnover:

Sr. No. COMPANY TURNOVER 2007-08 (Rs. Bn.)

1 Ranbaxy 41.989

2 Dr. Reddy’s Lab. 41.622

3 Cipla 37.637

4 Sun Pharma Ind. 24.635

5 Lupin Labs 22.155

6 Aurobindo Pharma 20.801

7 GlaxoSmithKline Pharma 17.734

8 Cadila Healthcare 16.13

9 Aventis Pharma 9.838

10 Ipca Labs. 9.804

Source: http://specials.rediff.com/money/2008/jun/11sld01.htm

INDIAN PHARMA CO. STOCKS AND SENSEX

There has been a general positive sentiment for the Pharma industry in the Indian Stock Market. With availability of cheaper drugs, lower R&D costs and outsourcing, Indian Pharma industry still has a robust growth. For an industry like the Pharma where in the demand is inelastic, the industry does not seem to be affected much by the recession. During the previous bear phase (February 2001 to July 2003), the BSE Healthcare Index gained 21%, while the Sensex lost 11%. While in the past year where in Sensex lost more than 50%, Pharma stocks lost around 33% only. The above graph is more than justifying this claim.

(Source: Bloomberg)


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Role of the Pharmaceutical industry in Indian GDP: The Indian Pharmaceutical industry currently tops the chart amongst India's science-based

industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly

organized sector, the Indian pharmaceutical industry is estimated to be worth $ 4.5 billion, growing at

about 8 to 9 percent annually. It ranks very high amongst all the third world countries, in terms of

technology, quality and the vast range of medicines that are manufactured.

Facts about the Role of Pharmaceutical Industry in Indian Gross Domestic Product

(GDP):

Indian Pharmaceutical Industry ranks fourth in the world, pertaining to the volume of sales.

The estimated worth of the Indian Pharmaceutical Industry is US$ 6 billion.

The growth rate of the industry is about 13% per year.

Almost most 70% of the domestic demand for bulk drugs is catered by the Indian Pharma Industry.

The Pharma Industry in India produces around 20% to 24% of the global Generic drugs.

The Indian Pharmaceutical Industry is one of the biggest producers of the Active Pharmaceutical

Ingredients (API) in the international arena.

The Indian Pharma sector leads the science-based industries in the country.

Around 40% of the total pharmaceutical produce is exported.

55% of the total exports constitute of formulations and the other 45% comprises of bulk drugs.

The Indian Pharma Industry includes small scaled, medium scaled, large scaled players, which totals

nearly 300 different companies.

As per the present growth rate, the Indian Pharma Industry is expected to be a US$ 20 billion

industry by the year 2015.

The Indian Pharmaceutical sector is also expected to be among the Top Ten Pharma based markets

in the world in the next ten years

The sales of the Indian Pharma Industry would worth US$ 43 billion within the next decade.

The multinational companies, investing in research and development in India may save up to 30%

to 50% of the expenses incurred

The cost of hiring a research chemist in the US is five times higher than its Indian counterpart.

The manufacturing cost of pharmaceutical products in India is nearly half of the cost incurred in US.

The cost of performing clinical trials in India is one tenth of the cost incurred in US.

The cost of performing research in India is one eighth of the cost incurred in US.


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SWOT ANALYSIS OF PHARMACEUTICAL INDUSTRY:

It is often said that the Pharma sector has no cyclical factor attached to it. Irrespective of whether

the economy is in a downturn or in an upturn, the general belief is that demand for drugs is likely to grow

steadily over the long-term. It is true in some sense. But are there risks and therefore I have tried to do the

SWOT analysis (Strength, Weakness, Opportunity, Threat).

The SWOT analysis of the industry reveals the position of the Indian Pharma industry in respect to its

internal and external environment.

Strengths: 1. Indian with a population of over a billion is a largely untapped market. In fact the

penetration of modern medicine is less than 30% in India. To put things in perspective, per capita expenditure on health care in India is US$ 93 while the same for countries like Brazil is US$ 453 and Malaysia US$189.

2. The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centers. This opens a huge market for lifestyle drugs, which has a very low contribution in the Indian markets.

3. Indian manufacturers are one of the lowest cost producers of drugs in the world. With a

scalable labor force, Indian manufactures can produce drugs at 40% to 50% of the cost to the rest of the world. In some cases, this cost is as low as 90%.

4. Indian pharmaceutical industry possesses excellent chemistry and process reengineering

skills. This adds to the competitive advantage of the Indian companies. The strength in chemistry skill helps Indian companies to develop processes, which are cost effective.

Weakness: 1. The Indian Pharma companies are marred by the price regulation. Over a period of time,

this regulation has reduced the pricing ability of companies. The NPPA (National Pharma Pricing Authority), which is the authority to decide the various pricing parameters, sets prices of different drugs, which leads to lower profitability for the companies. The companies, which are lowest cost producers, are at advantage while those who cannot produce have either to stop production or bear losses.

2. Indian Pharma sector has been marred by lack of product patent, which prevents global Pharma companies to introduce new drugs in the country and discourages innovation and drug discovery. But this has provided an upper hand to the Indian Pharma companies.

3. Indian Pharma market is one of the least penetrated in the world. However, growth has been slow to come by. As a result, Indian majors are relying on exports for growth. To put things in to perspective, India accounts for almost 16% of the world population while the total size of industry is just 1% of the global Pharma industry.


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4. Due to very low barriers to entry, Indian Pharma industry is highly fragmented with about

300 large manufacturing units and about 18,000 small units spread across the country. This makes Indian Pharma market increasingly competitive. The industry witnesses price competition, which reduces the growth of the industry in value term. To put things in perspective, in the year 2003, the industry actually grew by 10.4% but due to price competition, the growth in value terms was 8.2% (prices actually declined by 2.2%)

Opportunities:

1. The migration into a product patent based regime is likely to transform industry fortunes in the long term. The new patent product regime will bring with it new innovative drugs. This will increase the profitability of MNC Pharma companies and will force domestic Pharma companies to focus more on R&D. This migration could result in consolidation as well. Very small players may not be able to cope up with the challenging environment and may succumb to giants.

2. Large number of drugs going off-patent in Europe and in the US, between 2005-2009 offers a big opportunity for the Indian companies to capture this market. Since generic drugs are commodities by nature, Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world.

3. Opening up of health insurance sector and the expected growth in per capita income are

key growth drivers from a long-term perspective. This leads to the expansion of healthcare industry of which Pharma industry is an integral part.

4. Being the lowest cost producer combined with FDA approved plants; Indian companies can

become a global outsourcing hub for pharmaceutical products.

Threats:

1. There are certain concerns over the patent regime regarding its current structure. It might be possible that the new government may change certain provisions of the patent act formulated by the preceding government.

2. Threats from other low cost countries like China and Israel exist. However, on the quality front, India is better placed relative to China. So, differentiation in the contract manufacturing side may wane.

3. The short-term threat for the Pharma industry is the uncertainty regarding the

implementation of VAT. Though this is likely to have a negative impact in the short-term, the implications over the long-term are positive for the industry.


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COMPANY PROFILE

Founder of Zydus Cadila

The life and times of our Founder Chairman Late Mr. Ramanbhai B. Patel

Zydus Cadila, "dedicated to life" is among the top companies in the Indian Pharmaceutical Industry.

The founder, Late Mr. Ramanbhai B Patel established Cadila Healthcare Ltd. in 1952. But later in 1995, it set up under the control and direction of Zydus Group and started to known as "Zydus Cadila". Spearheading the combined activities of the group as a whole new identity, 'Zydus', a phonetically powerful word, the name combines the ethos of the Greco-Roman God Zeus and the dawn of a new era. Zydus like Zeus also symbolizes the group's aspirations to contribute to the welfare of the people and to society at large.

Due to his effort to growth, today it is enjoying a coveted distinction in the largest Pharma group in

the country. It provides total healthcare solutions ranging from formulations, active pharmaceutical ingredients, biological, herbals, and animal healthcare products to cosmeceuticals. Headquartered in Ahmedabad, the group is spearheaded by Chairman and Managing Director, Mr. Pankaj R. Patel.

Established in 1952, as Cadila Laboratories, the group's association with the industry spans over

five decades. Founded by the Late Mr. Ramanbhai B. Patel, Cadila grew to become the second largest Indian pharmaceutical company in the 1990s. In 1995, the group restructured its operations and emerged with a new identity under the aegis of the Zydus group. From a Rs. 2 billion start-up company in 1995, today, Zydus Cadila is an integrated player in the industry with a turnover exceeding Rs. 15 billion.

The key to the group's success has been in its commitment to accelerate growth, globalize business

operations and lead in a highly competitive environment. The new product launches coupled with therapy management and brand management skills have helped sharpen Zydus Cadila's competitive edge in the Indian pharmaceutical industry. The group's strategic focus has been on fast growing therapeutic segments such as cardiovascular, gastrointestinal, women's healthcare, respiratory, pain management, anti-infective, biological and CNS. In the participated segments, Zydus Cadila holds a commanding position in the Indian


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Pharma industry sweepstakes. It is the leading player in the cardiovascular, gastrointestinal and women's healthcare segments. It is No. 2 player in the respiratory segment with considerable strengths in the anti-infective and pain management segments in India. Zydus Cadila also has an extensive marketing network with one of the strongest distribution networks in the industry.

The group has a global presence of in over 43 countries. It has operations in U.S., Europe and Latin

America through its subsidiaries Zydus Pharmaceuticals (U.S.A.) Inc., Zydus Healthcare LLC, Zydus France SAS and Zydus Healthcare Brazil Limited. With commitment to partners, the group has also forged win-win alliances with several global Pharma majors such as Altana Pharma, Mayne Pharma, Mallinckrodt, Schering AG, Boerhinger Ingelheim, Zambon, Berna Biotech, to mention a few.

Successful operations in the domestic and international market and strengths in research are backed by a strong infrastructure network. The group has eight state-of-the-art vertically integrated manufacturing facilities spread across 4 states. The formulation manufacturing plant at Moraiya about 15 kms from Ahmedabad is the largest of its kind at a single location in Asia and has been approved by the USFDA and other leading global regulatory bodies of the world. The group also has USFDA approved API plants at Dabhasa near Vadodara and Ankleshwar in Gujarat.

Zydus Cadila has a team of over 500 research professionals spearheading its research program at

the Zydus Research Centre. At the Zydus Research Centre, the dedicated research arms of the group of more than 200 scientists are engaged in the NCE research. The Zydus Research Centre is also working in the areas of New Chemical Entities, New Drug Delivery Systems and Biotechnology.

The company's vision is to be a global research driven company by 2020. It plans to achieve sales of $400 million by 2006 and be a top ten global generic company with a strong R&D pipeline and sales in excess of $1 billion by 2010.

In its pursuit of these goals, the group is supported by a team of 6000 people comprising professionals, research scientists, medical advisors and workers. Poised for a higher growth and more success in the coming years, Zydus Cadila draws confidence from its proven track record which both prescribes and projects a vibrant and soundly based future.


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COMPANY’S MISSION

We are dedicated to life… in all its dimensions. Our world is shaped by a passion for innovation,

commitment to partners and concern for people in an effort to create healthier communities, globally.

COMPANY’S VISION

Zydus shall be a leading global healthcare provider with a robust product pipeline and sales of over $1 bn by 2010;

we shall achieve sales of over $3 bn by 2015 and be a research-based pharmaceutical company by 2020.

In our values and core belief: “We believe in offering products of highest quality and supporting the hands that heal with innovative contribution in patient-care.”

We are…… dedicated to life…

VALUE - “CARE”

C – Competence Building A – Adapt to new environment R – Respect human values E – Empower, Enrich, Excel


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BOARD OF DIRECTORS

(Chairman & Managing Director)

(Non Executive and Independent Director)


(Non Executive and Director)



Pankaj R. Patel

Mukesh M. Patel

Pranlal Bhogilal

Sharvil P. Patel

Apurva S. Diwanji

Humayun Dhanrajgir


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MILESTONE ACHIEVED BY ZYDUS CADILA YEAR AFTER YEAR: Founded in 1952. In 1957, company introduced Isopar, a rational formulation of INH & PA S for the

treatment of tuberculosis. In 1959 introduced Neuroxin-12-a-first - of - its kind product, where incompatible neurotropics-B1,

B6, and B12 were made compatible in a vial. A full -fledged R&D centre was set up in 1969 with recognition from the Department of

Science and Technology, Govt. of India. Cadila received the National Award for import substitution in 1973. Develops the

process technology for the anti -diabetic drug Glibenclamide. Launched Dexona -20 for the first time in India in 1977 to provide Dexamethasone in

concentratedform for the treatment of shocks. Receives the Award from Chemexcil for its export performance and in Quality from Indian Drug

Manufacturers' Association in 1985. Restructured in 1995 to become the Zydus Cadila Group. In 1996 Cadila Healthcare launched

Falcigo in strategic alliance with Guilin Pharma of China. Registers the fastest growth amongst the top 80 Indian

pharmaceutical companies in 1997. Acquires formulation business of Recon Ltd, in May 2000. Cadila acquires German Remedies Ltd., in 2001, in what was the

largest M&A in the Indian Pharmaceutical Sector. In 2002 Mega Merger of German Remedies, Recon HealthCare, Zoom Properties and Zydus

Pathline with Cadila Healthcare Limited. Emerged as a 'Partner of Choice' for Schering AG, a leading global pharma

player in women's healthcare segment in 2003. Entered into a strategic alliance with Zambon of Italy to op en new avenues in

contract manufacturing in 2004 Entered into a joint venture with Mallinckrodt pharmaceuticals Generics, the 7th largest pharmaceutical company in the U.S in 2005.

In 2006 operations launched in Brazil and South Africa. Agreement with Evolupharm, France giving access to 2250 pharmacies across France.

In 2007, 39 new products were launch out of which 8 were 1st to launch. In 2007, acquired Nippon Universal Pharmaceutical Ltd. of Japan. In the year 2006 - 2007 achieved the sales of $400 million.

Target of $1 billion sales by the year 2010 – 2011.


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WORKING CAPITAL MANAGEMENT

INTRODUCTION:

Working capital management refers to all management decisions and actions that ordinarily influence the size and effectiveness of the working capital. It is concerned with the most effective choice of working capital sources and the determination of the appropriate levels of the current assets and their use.

Working capital management involves the relationship between a firm’s short-term assets

and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.

Working capital management entails short term decisions - generally, relating to the next one

year period - which is "reversible". These decisions are therefore based on cash flows and / or profitability. One measure of cash flow is provided by the cash conversion cycle - the net number of days

from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes the inter-relatedness of decisions relating to inventories, accounts receivable and payable and cash explicitly. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making.

MEANING:

The term working capital refers to the amount of capital, which is readily available to a company. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities). Current Assets are the resources, which are in cash or will soon be converted into cash in

“the ordinary course of business”. Current Liabilities are commitments, which will soon require cash settlements in “the

ordinary course of business”.

http://www.answers.com/topic/asset

http://www.answers.com/topic/profit

http://www.answers.com/topic/market-liquidity

http://www.answers.com/topic/cash-conversion-cycle

http://www.answers.com/topic/material

http://www.answers.com/topic/return-on-capital

http://www.answers.com/topic/cost-of-capital


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Thus,

Working Capital = Current Assets – Current Liabilities

Working Capital signifies funds required for day to day operations of the firm. In financial

literature there exist two concepts of working capital:

• GROSS CONCEPT: According to gross concept, working capital refers to current assets which can be converted

into cash within an accounting year (or operating cycle) viz. cash, marketable securities, inventories of raw materials, debtors, bills receivable (accounts receivable or book debts) work in process, finished goods and receivables.

• NET CONCEPT:

According to net concept, working capital refers to the difference between current assets and current liabilities. Current Liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable and outstanding expenses.

Net working capital can be positive or negative. A positive net working capital arises when

current assets exceed current liabilities. This indicates that the business is always in the position to avail advantages of any favorable opportunity either to buy raw materials or to implement a special order or to wait for enhanced market status. A negative net working capital occurs when current liabilities are in excess of current assets. This indicates that the company may lack the funds necessary for growth.

NATURE OF WORKING CAPITAL

Working capital management is concerned with the problems that arise in attempting to manage the current asset, the current liabilities and the interrelationship that exists between them. The goal of working capital management is to manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. This is so because if the firm can’t maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be manage efficiently in order to maintain the liquidity of the firm while not keeping too high a level of any one of them. The interaction between current assets and current liabilities is, therefore, the main thing of the theory of working management.


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Dimensions of Working Capital Management:

WCM is concerned with all the aspects of managing current assets and current liabilities. The significant dimensions which require the attention of financial executive’s are- • Managing investment in current asset. • Financing of working capital. • Inter-relatedness. • Volatility and reversibility.

The amount of investment in any current asset ordinarily varies from day to day; the average amount or level over a period of time can be used in determining the fluctuating and permanent investment in current assets. This distinction is of great importance in devising appropriate financial strategies. Besides, the levels of investment, the type of current assets to be held are equally important decision variables. The mix of the finance for working capital which may be a combination of spontaneous, short-term and long-term sources is another important dimension of WCM. Trade credit and other accounts payable that arise spontaneously in the firms day to day operations constitute spontaneous sources of financing. Bills payable, short term bank loans, inter-corporate loans, commercial paper are the most common example of short term working capital finance. Term loans, debentures, equity and retained earnings constitute long term sources of working capital finance.

Inter-relatedness is the most distinguishing characteristic of working capital dimensions. Any business decision that results in increased sales and collections for the firm is likely to mean that lower average cash balances will be needed or that a new cash management system will be desired. Thus all the current assets decisions are inter-related. Inventory decisions are linked to trade credit decisions. It is important to pay attention to the inter-related nature of current assets and current liabilities and take into account major interactions that influence the working capital investment and financial decisions.

Volatility is the reversibility feature of current assets and current liabilities, which mean that

the cash flow related to these, could be readily reversed. The level of investment in current assets is influenced by a variety of factors, which may be as erratic as labor unrest or flooding of the plant. Seasonal and cyclical fluctuations in the demand are a common cause of rapid changes in investment in current assets and the financing required.

NEED:

To maximize shareholders wealth: It is necessary to generate sufficient profits, which in turn depends magnitude of the sales. The sales may not convert into cash immediately and there is a time lag. There is a need for working capital in the form in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods and hence sufficient working capital is necessary to maintain level of activities.


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Calculation of Working Capital: The trend of working capital for Cadila Healthcare Limited - Standalone for the last five years (including current year):

Particulars A) CHL- Standalone

INR-MILLIONS

a. Current Assets 2004-05 2005-06 2006-07 2007-08 2008-09

Inventories 1939 2128 3287 3310 3490

Debtors 1088 1851 2386 2825 3819

Cash & Bank 264 23 124 190 256

loans & advances 1372 2086 2273 3355 2409

Total 4663 6088 8070 9680 9974

b. Current Liabilities

Liabilities 1844 1999 3764 2776 2935

Provisions 575 597 743 983 1053

Total 2419 2596 4507 3759 3988

Working Capital (a-b) 2244 3492 3563 5921 5986

Graphical Presentation for the Working Capital Requirement:

Interpretation: In case of CHL, we can observe that working capital requirement is easily met and has a

sound financial position. For the year 2008-09, it can be said the company has high liquidity as the current assets are almost 2.5 times of current liabilities. When compared to last year, the working capital requirement has increased to negligible amount. But last year it increased rapidly as the liabilities decreased and assets increased. Therefore we can say that company maintains high liquidity, which is not needed, and because of which funds are underutilized and thus it affects the profitability of the company which is not a good sign for the company.


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The trend of working capital for Cadila Healthcare Limited - Consolidated for the last five years (including current year):

Particulars

B) Consolidated

INR-MILLIONS

a. Current Assets 2004-05 2005-06 2006-07 2007-08 2008-09

Inventories 2221 2475 3896 4729 6012

Debtors 1235 1990 2784 3555 2517

Cash & Bank 612 438 990 926 4845

loans & advances 924 1588 2201 2013 2237

Total 4992 6491 9871 11223 15611

b. Current Liabilities

Liabilities 2060 2404 4588 4138 5729

Provisions 606 605 858 913 1186

Total 2666 3009 5446 5051 6915

Working Capital (a-b) 2326 3482 4425 6172 8696

Graphical Presentation for the Working Capital Requirement:

Interpretation: In this case we can observe that the working capital requirement for the company is increasing rapidly 40% in both years 2007-08 and 2008-09, which means that it has sound financial position. This can easily attract the investors. But this leads to underutilization of funds as the amount of Cash & Bank maintained by the company is very high, that means the funds are remaining idle and thus reducing the profitability. Thus the company should plan out to utilize the funds efficiently and earn high profits.


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FIVE MAIN PHASES COVERED UNDER WORKING CAPITAL MANAGEMENT:

I. Net working capital (operating) cycle: Operating cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a company involves three phases:

Acquisition of resources such as raw material, labor, power etc. Manufacturing a product which includes conversion of raw materials into work-in-

progress into finished goods. Sale of the product either for cash or on credit. Credit sales create accounts receivable

for collection.

II. Inventory management: The prime objective of maintaining proper inventory is to avoid unnecessary investment, loss of sales, loss of profit and reduction in costs. It can further reduce the chances of loss of liquidity. Finally, inventories are held to obtain an optimum utilization of people, place, time and equipments.

III. Receivables management: The main objective of receivables management is to increase sales

because when a company sells goods on credit, it will be in a position to sell more goods and thereby increase profits. It is a tool acting as a bridge for the movement of goods through production and distribution stages to customers.

IV. Cash management: The main objective of cash management is to accomplish various tasks of cash collection, payment of outstanding and arranging for deficit funding or surplus investment at a minimum cost or it should be at maximum returns. It assumes more importance than other assets because cash is the most significant and least productive asset that a firm holds. It aims to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way.

V. Financial Analysis: Ratio Analysis is the main part of financial analysis which will help to compare

the company with the other main players of the industry, in order to get an idea of its position in the industry.


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PHASE I

NET WORKING CAPITAL

(OPERATING) CYCLE


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Meaning: The operating cycle or the working capital cycle is important part of working capital

management as the normal operations of a manufacturing company starts with cash, go through the successive segments of the operating cycle, viz. raw material storage period, conversion period, finished stock period and average collection period before getting back cash along with profit. Operating cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a company involves three phases: Acquisition of resources such as raw material, labor, power etc. Manufacturing a product which includes conversion of raw materials into work-in-progress into

finished goods. Sale of the product either for cash or on credit. Credit sales create accounts receivable for

collection.

The total duration of all the above segments mentioned above is known as the “Gross operating cycle”. When the average payment period of the company is deducted from the gross operating cycle period the resultant is called net working capital cycle period. It is obvious that shorter the duration of operating cycle period, faster will be the transformation of current assets into cash.

In other words, the operating cycle represents the period during which investment of one unit of money remains blocked in the normal course of operation till recovery out of revenue. The length of operating cycle differs from one undertaking to another.

A short operating cycle is one in which the time between purchasing inventories and recovering the investment is brief. The company recovers its investment and/or realizes profits quickly. With a long operating cycle, cash may be tied up in inventory and/or receivables for an extended period of time before the business is able to recover its initial investment. Investments with a long operating cycle can be sound, as long as the organization has sufficient access to capital to meet its short-term obligations.


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1. Raw

Material

Storage

period

5. Debtor’s

turnover

period

6. Creditors

Turnover

Period

3. Work in

progress

storage period

2. Packing

Material

storage period

4. Finished

Goods Storage

Period


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COST SHEET FOR THE YEAR 2008-09

Particulars INR - MILLIONS

2009

Raw material consumed:

opening stock of raw materials 1188

+ purchases 5730

+ Direct Expenses 2494

- closing stock of raw materials 1503 7909

Packing Materials consumed:

opening stock of packing materials 289

+ purchases 1291

- closing stock of packing materials 408 1172

PRIME COST 9081

Add: Factory overheads

Stores and Spare parts consumed 208

Power and Fuel 499

Processing charges 304

Repairs on P&M 131 FACTORY COST 10223

opening stock of WIP 727

- closing stock of WIP 618 109

COST OF PRODUCTION 10332

Add: Administrative expenses

Personnel Expenses 3109

Insurance 89

Repairs :Buildings 32

Others 41

Rent 126

Rates and Taxes 113

M D's Remuneration 173

Commission to directors 3

Travelling Expenses 546

Legal And Professional Taxes 394 4626

ADMINISTRATIVE COST 14958

opening stock of finished goods 2351

+ purchases 3337

- excise duty 8

- closing stock of finished goods 3272 2408

COST OF GOODS SOLD 17366

Selling and Distribution Expenses 4996

TOTAL COST OF SALES 22362

- Profit(PBIDT) 6262 SALES 28624


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CALCULATION OF OPERATING CYCLE (For Consolidated B/S 2008-09) :

1.) Raw Material Storage Period = Average Stock of Raw Material / Average Daily Consumption Average Daily Consumption = Annual Raw material Consumed/ 365

RAW MATERIAL STORAGE CYCLE Annual Raw Material Consumed 7909

No of days in a year 365

Average Daily Consumption 22

Average Stock of Raw Material 1346

1.) Raw Material Storage Period 62 Days

2.) Packing Material Storage Period = Average Stock of Packing Material / Average Daily Consumption

PACKING MATERIAL STORAGE CYCLE Annual Packing Material Consumed 1172


Average Daily Consumption 3

Average Stock of Packing Material 349

2.) Packing Material Storage Period 109 Days

3.) Conversion (WIP Storage) Period = Average Stock of Work in Progress/ Average Daily Cost of Production Average Daily cost of production = Annual Cost of Production/ 360 Annual Cost of production = Opening WIP+ Raw Material Consumed + Expenses on

Manufacturing – Closing WIP

WIP CONVERSION CYCLE Annual Cost of Production 10332

No of days 365

Average Daily Cost of Production 28

Average Stock of WIP 673

3.) WIP Storage Period 24 Days


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4.) Finished Goods Storage Period = Average Stock of finished Goods / Average Daily Cost of Sales Average Daily Cost of Sales = Annual Cost of Sales / 360 Annual Cost of Sale = Annual Cost of Production + Opening Finished Stock Goods + Indirect

Expenses+ Indirect Taxes- Closing Stock of Finished goods

FINISHED GOODS STORAGE CYCLE Annual Cost of sales 22362


Average Daily Cost of Sales 61

Average stock of finished goods 2812

4.) Finished Goods Storage Period 46 Days

5.) Accounts Receivable Period = (Sundry Debtors + Bills Receivable) * 365 / Annual Credit sales

ACCOUNTS RECEIVABLES PERIOD Debtors 4845


Annual Credit Sales 28625

5.) Accounts Receivable Period 62 Days

6.) Accounts Payable Period = (Sundry Creditors + Bills Payable) * 365 / Annual Credit Purchases

ACCOUNTS PAYABLE PERIOD Creditors 5255


Annual Credit Purchases 10358

6.) Accounts Payable Period 185 Days

NET WORKING CAPITAL (OPERATING) CYCLE:

NET WORKING CAPITAL CYCLE 1. Raw Material Storage Period 62 Days

+ 2. Packing Material Storage Period 109 Days

+ 3. Work-In-Progress Storage Period 24 Days

+ 4. Finished Goods Storage Period 46 Days

+ 5. Accounts Receivable Period 62 Days

- 6. Accounts Payable Period 185 Days

Working Capital Cycle 117 Days


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INTERPRETATION: 1. Raw material storage period is of 62days i.e. for almost 2 months it is store in the

warehouse and then used for production. So this means that the company purchases the raw material in advance so that there are no hurdles in the production process. But here the duration should be reduced to one month or so, which will help in increasing the no. of operating cycles per year and reducing the Working Capital Requirement.

2. In this case of packing material will obviously spend more time in warehouse, as the production of goods takes almost 70 days (i.e. 24 days for WIP and 46 days for finished goods). But here also the remaining time period of almost 1 month (39 days) is utilized more by the PM. So it should be reduced by on time purchase of PM.

3. As we can see only 24 days takes place for the product in the WIP stage, which is the lowest among all the other stages of operating cycle. This is a good sign for the production department. So no steps are to be taken for this stage.

4. But in case of finished goods it takes more time, as the medicines and other pharmaceutical product are to be packed in proper shape and in required packing material with utmost care. Then also the company should try to minimize this time period so as to reduce the working capital requirement.

5. The collection period followed by the company is the almost the standard period that is being followed by all the pharmaceutical industry. So no changes are needed here.

6. But in this case, the company should make fast payment. As almost 6 months credit facility is enjoyed by the company which is not a good sign for their credit worthiness. Fast payment will also help in reducing the duration of operating cycle.


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The Working Capital Requirement (WCR) WCR is the balance between the portion of current assets and the portion of current liabilities

which are directly and exclusively associated with the operating cycle. It represents the funds necessary to run the daily operations.

WCR increases with the firm's sales even if there is same inventory turnover, same collection period and same suppliers' credit terms. A firm in a period of growth should expect an increase of its WCR.

If Working capital represents the funds available after we have financed the long term assets, to work in the operating cycle of the company than the Working Capital Requirement measure the funds necessary to finance this operating cycle.

The difference between WC & WCR is the Net Cash Position: NET CASH POSITION = WC – WCR Finally, the WCR change with the seasonal activity of the business.

Number of operating cycles per year = 365 days____ Net Operating Cycle = ______365______ 117 = 3.12 cycle per year

Total Operating Expenses = Cost of Goods Sold = Rs. 17366 millions

Working Capital Requirement = Total Operating Expenses_______

Number of operating cycles per year = 17366 3.12

= Rs. 5560.83 millions

Net Cash Position = Working capital – Working Capital Requirement = 8696 – 5560.83 = Rs. 3135.17 millions.

INTERPRETATION: As per the above calculations, it can be said that the company needs on Rs. 5560.83 millions as working capital while it has Rs. 8698 millions as working capital in the year 2008-09. This means that almost Rs. 3135.17 millions is remaining idle in the company which can be utilized in some new or existing projects where it can earn good rate of return and there by maximize their profits. This will help in distributing high rate of dividend to the shareholders and there it can gain trust and goodwill in the market. So we can say that management of Working Capital is very important for any company to have a smooth running of all the functions.

http://www.ecofine.com/operations/The%20magt%20of%20Inventory%20turnover.htm

http://www.ecofine.com/operations/The%20mgt%20of%20Collection%20Period.htm



http://www.ecofine.com/operations/The%20magt%20of%20Payment%20Period.htm


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PHASE II

INVENTORY

MANAGEMENT


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INVENTORY MANAGEMENT

INTRODUCTION: “Inventory refers to the stockpile of the products a firm is offering for sale and the components

that make up the product.” In other words, inventory management is a process of maintaining the raw materials when entered in the company till it is converted into finished goods.

INVENTORY is defined as the blocked Working Capital of an organization in the form of materials.

As this is the blocked Working Capital of organization, ideally it should be zero. But we are maintaining Inventory. This Inventory is maintained to take care of fluctuations in demand and lead time. In some cases it is maintained to take care of increasing price tendency of commodities or rebate in bulk buying. The importance of keeping the right level of inventory lies in the fact that a maximum proportion of working capital remains blocked in the inventory until it is completely sold off and debtors realized.

ROLE OF INVENTORY IN WORKING CAPITAL MANAGEMENT:

The working capital management refers to the management of working capital, or precisely to the management of current assets. A firm’s working capital consists of its investments in current assets, which includes short-term assets—cash and bank balance, inventories, receivable and marketable securities. Therefore, the working capital management refers to the management of the levels of all these individual current assets. On the other hand, inventory, which is one of the important elements of current assets, reflects the investment of a firm’s fund. Hence, it is necessary to efficiently manage inventories in order to avoid unnecessary investments. A firm, which neglects the management of inventories, will have to face serious problems relating to long-term profitability and may fail to survive. With the help of better inventory management, a firm can reduce the levels of inventories to a considerable degree. The following are some characteristics of inventory which are important in working capital management.

1). Current Asset: Inventories will be converted to cash in the current operating cycle which is

normally one year. 2) Level of Liquidity: Inventories are viewed as source of near cash. The liquidity aspect of

inventory becomes highly important to the manager of working capital in the case of economic slowdown and changes in the market trend. The inventories are to be considered as the least liquid of current assets.

3) Circulating Activity: Inventories are in a rotating pattern with other current assets. They get

converted in to receivables which generate cash and invested again in inventory to continue operating cycle.


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Purpose of Inventory Management:

Maintaining optimum level of inventory has many benefits like:

To gain the market share in key products

To counter the loss of sales and loss of profit and even reduce the chance of loss of liquidity

To avoid higher costs like Item cost (if purchased) Order (or setup) cost Holding (or carrying) cost

Controlling becomes easy

Minimizes production problems

Separate various processes of purchasing, manufacturing, and marketing

Handling seasonal or cyclical fluctuations

Obtain optimum utilization of people, place, time and equipments

Customer Satisfaction

Need For inventory Management:

In the era of industrialization and globalization inventories cover a very wide range. The range of inventory has become larger and more diversified. Inventories are maintained to widen the latitude in planning and scheduling successive operations. So inventories are classified into four main types in the pharmaceutical industry:

1. Raw Material Inventory enables a firm to decouple its purchasing and production activities

to some extent i.e. to make these two functions independent of each other so that delay in procurement of the raw materials do not cause production delay and the firm can satisfy its need for raw materials out of the inventory lying in the stores. These units are transferred to the production department depending upon the requirement. Inventories of raw materials are held to ensure that the production process is not interrupted by the shortage of these materials. It provides flexibility in purchasing and production. The firm can wait for an opportune buying moment without affecting its production schedule. Likewise, the production schedule need not be influenced by the immediate purchasing activity. Raw material inventory also maintained at the formulation and at API units. Raw material means any type of ingredient which is required to prepare formulations and convert the drugs into dosage form. There are basically two types of raw material

a.) Active pharmaceutical ingredients (API) API, are the drugs that works to cure any kind of disease. These drugs are

used by the company to produce pharmaceutical products and are also sold to other pharmaceutical companies in the form of final product without any further processing. It constitutes 85-90% of total raw material inventory.


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b.) Exepient: It consist of other chemical materials used in formulating the drugs like

binding agents, preservatives, colours, etc. these materials are outsource by the company. It consists of 10-15% of total raw material inventory.

2. Packing Material is very important in the Pharma Company as each and every have to be

packed with utmost care and in proper packing. There are two types of packing materials, which are outsourced by the company:

i. Primary packing materials: It consists of capsule, labels, etc. ii. Secondary packing materials: It consists of cartons, labels etc.

There is a packing development department at the factory which makes the sketches, layouts, colours and the entire art-work with specifications and gives it to the outsourced firm.

3. Work - in – Process inventory refers to partially produced goods. It provides flexibility in production scheduling so that an efficient schedule and high utilization of capacity may be attained. The value of work in progress includes the raw material cost, the direct wages and expenses already incurred. The quantity and the value of the work in progress depend upon the length of the operating cycle. Without work –in- process inventory, a bottleneck at any stage in the production process renders idle the machines and facilities at subsequent stages. This type of inventory in Zydus is maintained in its formulation units and at its API (active pharmaceutical ingredient) units.

4. Finished goods inventory enables a firm to decouple its production program and marketing activities, so that desirable results can be achieved on both the fronts. If adequate stock of it is available, the marketing department can meet the needs of customers promptly, irrespective of the quantity and composition of goods following out of the production line currently.These are the goods which are either being purchased by the firm or are produced in the firm. These are ready for sale to the customers. These kinds of inventory are maintained by the firm so that they can meet the customer demand and there is no loss of sale to the company. The basic motive behind finished goods inventory is to uncouple the production and the sales function so that it is not necessary to produce the goods before a sale can occur and therefore sales can be made directly out of inventory. In case of Zydus the finished goods inventory is at the Hubs and at the C&F location.

The four formulation units of Zydus are situated at village Moraiya, Dist. Ahmedabad; Goa; Baddi, and Solan. The two API units are situated at Ankleshwar, Gujarat; and Dabhasa, Dist. Vadodara.


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There are three motives for holding inventories. a) Transaction Motive emphasizes on facilitating smooth production and sales operations. b) Precautionary Motive protects against risk of unpredictable changes in demand and supply forces and other factors. c) Speculative Motive influences the decision of movement of inventory levels to take the advantage of price fluctuations.

Benefits of Inventory Management: 1) Inventory management can remove barriers between manufacturer and retailers and establish a closer relationship between them. 2) It helps in frequent analysis of purchases, sales and inventory records. 3) It gets the complete information about the value of inventory. 4) It gives complete knowledge of the exact size of merchandizing inventory. 5) Organization has full knowledge of its inventory. 6) Simple inventory management software functionality can range from almost free to high end systems costing millions of dollars.

http://www.himalyanindia.com/dir/Business/Retail_Trade/Services/Inventory/


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2. PPMC

DEPT

3.

PURCHASE

DEPT

1. SALES

PROJEC-

TION

9. C & F

AGENT

8. DUTY

PAID

GODOWN

7. BOND

ROOM

6. PRODUC-

TION DEPT

5. QUALITY

ASSURANCE

& CONTROL

DEPT

4. TESTING

10. SALES

INVENTORY

MANAGEMENT

CYCLE

@

CADILA

HEALTHCARE LTD.


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DETAILED EXPLANATION ABOUT THE ABOVE PROCESS:

1. SALES PROJECTION by Marketing Department: The cycle starts with the sales projection, which is done by the marketing department every month

for its existing and new products. It is done after considering the following factors like demand of the product, financial aspects,

economic environment, sales of previous month, current month, marketing feasibility etc. Marketing people have monthly budget fixed and target set to sell the products and in order to

meet the market demand the sales projection that is done by them has to be conveyed to the PPMC department.

2. PPMC Department: The PPMC stands for Production Planning and Material Control which refers to the planning of

production, acquisition, quality control etc. The need for this department exists in order to produce specific medicines, for which raw material

has to be acquired well in advance. It calculates the requirement of the raw material on the basis of the sales projection done and

places an order to the purchase/procurement department. This department plays a very crucial role in coordinating all the activities for proper inventory

management as it is interlinked with all the three main departments i.e. Purchase, production and marketing department.

It also maintains the record of inventory received from all the departments for various types of material.

As pharmaceutical industry is a very sensitive sector, more emphasis is on the quality of material. Department caries stringent quality checks before any material is taken for production. The other

reason may be also that production cannot be started if all the ingredients are not available. Even packing materials like labels is not available, and then production cannot be started, so there

is a great need for PPMC. Now PPMC department gives order to purchase department.

3. Purchase Department: Purchase department places an order to the existing suppliers and as the company says to the

“approved suppliers” on the basis of the credit terms as well as timely delivery of the raw material. If the department thinks to deal with the new suppliers whose credit terms are more favorable to

the existing ones then it first takes the permission from the top management and places a small order to them and if satisfied, they gradually increase the quantum of the order.

This department takes into consideration the information conveyed by the PPMC department for the amount of material to be ordered and also checks the production schedule, in order to verify that whether the quantity of material needed will be procured by them or not. If there is any problem, then this department informs about is to the PPMC department and further it is solved by them.


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4. Testing: After receiving the order from the purchase department, the supplier dispatches the material to

the store department of the company. Than the physical verification of the material received is done. Now the testing process is conceded on the raw material in order to check whether the raw

material is as per the quality prescribed by the company at the time of placing an order. This process is undertaken by the QA & QC Department, which plays a very crucial role in this

pharmaceutical company as all the products are related to health of the people. 5. Quality Assurance and Control Department: This department has an important role to play in all the three stages of inventory i.e. raw material,

work-in-progress and finished goods. As the quality of the material should be checked at every stage of production.

The company follows Batch Production Process where unique batch number and lot number is assigned to each raw material so that, if any problem occurs during the production or any later stage then, the fault can be easily detected.

Quality Assurance department is used to check the quality when the production is going on so that the wastage of material and energy is avoided.

Quality control department is used to examine whether the quality of finished product is as per the standards or not.

After quality assurance and quality control, the product is sent to the packing department and from there to the bond room.

6. Production Department: After the testing of the raw materials by the QA&C department, the production department

converts it into semi-finished or finished goods. Goods Receipt Number is made for each batch of finished goods and then transfer ticket is made as

the product enters into the lobby. Only finished goods with all the above process being completed is transferred to the bond room.

7. Bond Room: Bond room is the centralized store house where finished goods are kept without paying excise duty

till they are executed. If the goods do not reach to the bond room, they are treated as W.I.P., even though they are

finished goods. Only when the goods reach to the bond room, they are treated as finished goods. Physical verification of the stock is done.


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8. Duty Paid Godown: After bond room, the finished goods are transferred to the duty paid godown. Only after paying excise duty, the goods are dispatched from the bond room and send to the C& S

agent. The payment of the excise duty is done on the 5th on next month except March. Here the part of excise ends.

9. C & F Agents: The company selects its C & F agents on the basis of the financial position, past records, location,

etc of them The C & F agents receive the finished goods from the Bond Room of the company. There are 28 centralized C & F agents in almost all the states of the country. There are different base sales for different C & F agents on which the company pays commission of

1.18% on base sales and in case of the sales exceeding the base sales, the company pays a commission of 1% on the excess sales(apart from the base sales).

10. Sales: The last stage in the cycle is done by the sales department of selling the finished good and also

keeps a constant eye on the schedule or the targets made by them. And further continue with the sales projection for the future and thus the cycle goes on.

_______________________________________________________________________________________

After learning about the INVENTORY MANAGEMENT CYCLE AT CHL, given below is the brief description of how the material is being purchased by them. The purchase work is done by GDSO department.

GDSO stands for Global Demand & Supply Organization. It is a separate department within CHL whose main function is to carry out the purchase of different materials. Thus the purchase of raw materials is carried out by GDSO. There are four working groups of GDSO:

i. Demand Planner ii. Supply Planner iii. Procurement iv. Distributor

Each of this department carries out different the various functions which in combination helps CHL

in successful purchase of raw materials. i. Demand Planner: There function is to identify the demand available in the market and thereby

carry out necessary function. This department consists mainly of market representatives (MR) which carries out the necessary survey and thereby identifies the trend prevalent in the market. Thus they identify which Pharma products are most required in the market.

ii. Supply Planner: After the demand had been identified by the demand planners, it is the job of supply planners to identify which necessary materials would be required in order to prepare the


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products identified by the demand planners. They also have to decide the schedule of production along with batches in which this product would be prepared. Thus there function is to decide what would be the ideal combination of raw materials that would be required for preparation of this newly identified product.

iii. Procurement: After necessary steps taken by previous departments for fixing the schedule of manufacturing of these products, the next step that is required to be taken is procurement. Procurement of raw materials follows a cycle that is shown below. First step of procurement cycle starts with fixation of vendor that will provide the raw materials. But for this purpose first of all the quotations from different vendors are taken and finally one vendor is fixed from which CHL decides to purchase the raw materials. After deciding particular vendor, CHL carries out necessary negotiation and finally comes to the purchase price of raw materials. After fixing necessary selling price for procuring raw materials, order of raw materials is made from vendor and than follow-up is made in order to have a time-bound delivery. After the delivery, the financial invoices are made and passed on the finance department for approval. The finance department makes the final payment to the supplier. But however this does not ends the procurement cycle. For conceiving the tax benefits, CHL requires ‘C’ form from the supplier. So after necessary C form is available from the supplier, the procurement cycle ends and after which necessary audit is performed to validate the process. Thus before carrying out purchase, a complete procurement cycle is carried out which helps CHL in purchasing best of the available materials for further manufacturing of products.

The Procurement Cycle


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The procurement group is further divided into 5 categories: Raw Materials (RM): There function is to carry purchase of raw materials that will be directly used

in manufacturing the Pharma products. Package Materials (PM): This group carries out the function of purchasing of package materials

that will indirectly help in packaging of the finished products. Gift & Misc: The function of this group is to make the purchase of promotion materials like certain

gift items that would be provided to the doctors and other free samples which are provided to the distributors.

API- Procurement: This includes the purchase of raw materials that would indirectly help in manufacturing of other raw materials. This means that CHL prepares some API products that would be used by other Pharma companies in development of other finished products.

Capital procurement: This includes the purchase of machineries as well as other necessary tools and equipments that are required for maintenance.

iv. Distributor: Finally after necessary packing of finished products, they are supplied to the distributors after the preparation of their invoices. The applicable VAT and Sales Tax are added in this commercial invoice and the finished goods are dispatched to the distributors. In case of stock transfer, the finished goods are transferred to CHL’s C&F agents and for that purpose stock transfer invoices is prepared in which the VAT is not applied. This complete four-step process ends the complete purchase cycle that is carried out at CHL. Also for making the business profitable, CHL tries to make certain modifications as per their requirements.

_______________________________________________________________________________________

After the finished goods get cleared from the duty paid godown, it gets ready for the company and C&F agent to sell it in the market.

At this point of time the role of receivables management starts, which includes the distribution channel being followed by the company, the credit control policy, order of execution, collection system and claim settlement.

While the collection system itself means the how the cash is being managed by the company and also the procedure being followed after collection of cheques from the C&F agents.


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PHASE III

RECEIVABLES MANAGEMENT


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Introduction:

The receivables is an asset which is certain and inevitable to arise in the ordinary course of business. It represents a claim of the firm against it customers which will realize in future. The receivables represent the credit allowed to the customers, which is a facility to delay the payment for the customers. Thus receivables are a type of loan extended by the seller to the buyer to facilitate the purchase process. When the seller sells the products and services on credit bases the receivables management becomes an area of attention.

Every firm has a set of credit terms and polices under which goods are sold on credit and every policy has a cost and benefit associated with it. Thus the firm attempts as to how to balance the cost and benefit of a credit policy and the measures, which may be taken to get best monetary results. Higher credit sales at more liberal terms will no doubt increase the profit of the firm, but simultaneously also increases the risk of bad debts as well as result in more and more funds blocking in the receivables. So, a careful analysis of various aspects of the credit policy is required. This is what is known as Receivables Management.

Cost of Receivables:

If the receivables are implemented by the company, then it is beneficial to the company, but following are the cost involved in it:

1. Collection Cost:

Costs, which are incurred for collecting receivables from the customers to whom credit sales have been made, are known as collection costs. Collection costs will not be incurred if firms only make cash sales. Basically it is divided in two parts: a.) Creation and maintenance cost like salary, accounting records, stationery cost and postage cost. b.) Cost for acquiring the credit information from internal sources and outside organizations.

2. Capital Cost:

The increased level of account receivables is an investment in an asset. They have to be financed, thereby involving a cost. There is a time lag between the sales of goods to and the payment by the customers. Meanwhile, the firm has to pay its employees and suppliers of raw materials, and thereby implying that the firm should arrange for additional firms to meet its own obligations while waiting for payments from the customer.

3. Delinquency Cost:

This cost arises out of the failure of the customers to meet their obligation when payment on credit sales became due after the expiry of credit period. The main cost is involved due to the blocking-up of the funds for an extended period or cost associated with steps that have to be initiated to collect the overdue such as reminders and other collection efforts, legal charges.


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4. Default cost: The firm may not be able to recover the over dues, because of the inability of the

customers, such debts are treated as bad debts and have to be written off as they cannot be realized. This cost is associated with credit sales and account receivables.

Receivables Management basically includes four main aspects mentioned below:

a. Distribution Channel b. Credit Control Policy c. Collection Policy d. Claims Settlement

a) Distribution Channel:

After the finished goods reach the Bond Room and then the duty paid godown, the goods are ready for sale and there comes the role of marketing and distribution channel of the company. Following diagram shows the basic marketing and distribution channel followed by CHL:

Marketing channel @ Cadila Healthcare Ltd.


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At Cadila Healthcare Ltd. Sales is done through different ways. And each of this type is described below:

Distribution channel @ Cadila Healthcare

Ltd.


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1. Direct Supply: Basically direct supply is done when the size of the company is small in terms of production and

turnover i.e. volume of the company. In CHL this distribution channel is rarely used. For direct supply, orders are generally received and executed at head office. For interstate

supply 4% CST (Central Sales Tax) is applicable. 30 days credit period is allowed for outstation stockiest. Generally the products are directly

supplied to Government Institutions, Nourishing Homes and Hospitals.

Drawback: This channel is not used by large firms as it will become complex to maintain the record of each

party for supply.

2. Super Stockiest: Company has appointed few super stockiest who maintains high stock levels and has to supply

the goods of CHL to all the small stockiest in that particular state. Basically when the company was on small scale this method was used more.

CHL supply the goods from Ahmedabad by charging 4% CST. Super Stockiest is sending their order along with blank undated cheque to HO. Company has allowed 30 days credit period on each supply from the date of Lorry Receipt (LR). Company has to take security coverage by the way of deposits or bank guarantee. Company is not responsible for the outstanding of stockiest for onward sales. Super stockiest

have to recover their dues from the stockiest at their own. Super Stockiest should pass the scheme and products to the stockiest as per the company

norms and all the expired goods are returned by them on monthly basis at Ahmedabad and the company issues the credit note for the goods received.

Drawbacks: Sometimes super stockiest follows monopoly in the market by maintaining large stocks of those

goods which are in high demand and even scarce, so they can sale them at high price. Even they do partiality by not passing on the benefits of schemes and discounts to some of the

small stockiest or retailers.


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3. C&F Agents:

In this system of distribution all the work is done through the C&F agents, who stores the goods and pass it on to the stockiest as per the instructions of the company. Certain amount of commission is given to them for the transaction undertaken by them. They are paid 1.18% service commission on base sales and 1% for additional sales i.e. above base sales. C & F agents has to get the Drug license number and Sales Tax number of the company, then

only all the transactions are made in the name of the company and payment is made in the name of company.

Company is liable for all the Sales Tax liability. It has to obtain “C – Form” from the government. Stock will be transferred as per the market demand and C&Fs requirement. Co. takes security coverage either by the way of Demand Draft or Bank Guarantee. Even it should have proper infrastructure. Co. will not supply the goods to any other stockiest in the area of C&F Agent; infact the latter

will supply the goods to the stockiest as per the norms. Company has allowed 15days credit period on each supply.

Benefits of appointing C&F Agents:

In this case, the stock is transferred to them by the company and not sold. It saves 4% CST as transfer of goods from one premise of the company to other is called stock

transfer, while CST can be levied only when the goods are sold. Fast delivery of goods as and when required, to any remote area from that zones C&F Agent. Ease in distribution, lesser transportation cost and security of goods.

Criteria for selection of C&F Agents:

From all the above selling channels at CHL, C&F Agents plays very important role. Major sales are done through this channel only. So following steps are taken while selecting any C&F agent:

a. The guarantee offered by financial viability along with past records and reputation in the

market. b. Banker Credit worthiness Certificate c. Maintaining information of number of transaction done and value of goods sold in a consistent

manner. d. Relations maintained with other stockiest.


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Security: At the time of appointment, every C&F Agent will give cash deposit equal to 15 day’s projected

sales and an irrevocable Bank Guarantee equal to 15 days’ projected sales before the operation is commenced. Company will pay the interest on that deposit.

All securities of agent to be reviewed every six months & it is decided on the basis of 12 months’ sales.

Scope of Work for C&F Agents:

Execution of orders within 48 hours from the date of order received. Dispatch of goods within 48 hours from the execution orders along with release of Lorry

Receipt with necessary documents. Deposit the cheque as per the company’s collection system. If the cheque returns, the C&F have to note on the same day & follow up the party till the

recovery of company’s due. Timely collection of returned goods, issuing the credit notes, and its settlement. It makes the payment of the freight and other charges to the transporters and obtains the

receipt. The company reimburses the amount. It does not release the goods or any documents without receipt of the demand draft from the

stockiest. It cannot charge any amount on the goods supplied by the company. It has to give the benefits to the stockiest while supplying the goods and thus it cannot follow

monopoly.

Facilities provide by Company: Full insurance coverage for the stock in the stores of C&F Agents. Software training to at least two person’s from CFA’s office. Door to door delivery of goods and advanced payment made. The requisite stationery for the first three months of commencement of operation will be

provided by the company.

Drawbacks: Only one drawback of this system is sometimes very high freight are to be paid when the goods

are sold to some places, and therefore this makes the product costly.


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Name of the C&F Agents of the company:

CODE PLACE C & F AGENTS

0501 Ahmedabad M/S. RIMI DISTRIBUTORS,

0502 Bangalore M/S. PAMPA AGENCIES BNGLORE

0503 Chandigarh M/S. MARKAN DISTRIBUTORS

0504 Cuttack M/S. ESSAR ASSOCIATES,

0505 CLCTS M/S. SHIMANA

0506 CLCTA M/S. ESSAR AGENCIES

0507 CLCTK M/s. K R P AGENCIES

0508 Dehradun RAJ PHARMA

0509 Delhi M/S. D. A. DISTRIBUTORS(P) LTD

0510 Delhi Hub M/s. SHREE LAXMI - HUB (DELHI)

0511 Durg M/S. JINDUTT ENTERPRISES

0512 Ernakulam M/S. MUTHU MEENA ERNA

0513 Ghaziabad M/S. RAJ DRUG AGENCIES

0514 Goa M/S. ANANTA LOGISTICS & W/H

0515 Guwahati M/S. L.B. ENTERPRISES

0516 Ernakulam M/S. WELLCARE

0517 Hyderabad M/S. ABHINAV C&F SERVICES.

0519 Hubli M/S. PAMPA AGENCIES Hubli

0520 Indore M/S. MEDICHEM BUSINESS ASS

0521 Jaipur M/S. SHREE LAXMI ENTERPRISES

0522 Jammu M/S. S.B. MARKETING

0523 Kanpur M/S. AGMORE MEDICARE LTD.

0524 Mumbai M/S. J.K. ENTERPRISES

0525 Chennai SELVA MUTHU MEENA AGENCIES

0526 Nagpur M/S. MEHADIA & SONS

0527 Nagpur M/S. MARKAN ENTERPRISE

0528 Patna M/S. N.N. DRUGS PVT LTD.

0529 PATMP M/S. M.P. & SONS.

0530 Pune M/S. ABBOTT SONS

0531 Jamshedpur M/S. S.S. ENTERPRISES

0532 Vijaywada M/S. S.J. ENTERPRISES

0533 Zirakpur M/S. B.M. PHARMA

0537 Lucknow M/S. MAMTA AGENCIES

0538 Ludhiana M/S. KATARI MEDICAL AGENCIES – LUDHIANA

0539 Nepal M/S M.P. SONS – NEPAL

0540 Ludhiana M/s Ishwaya Meena Agencies

Z540 Ludhiana M/S. SNEHA MEENA AGENCIES

Chandigarh CHANDIGARH HUB


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Stockiest: After the goods are transferred to the C&F Agent, further they are sold to the stockiest at 8% to

10% discounted rate as mentioned in the norms of the company. Here the stock is not transferred to the stockiest but actual sales are made and thus VAT or CST has to be paid depending on the type of transaction i.e. intrastate or interstate respectively. Basically there are two types of stockiest as mentioned below: A. Local Stockiest: Here the transaction is within state and therefore only VAT of 4% or 12.5%

(according to the type of goods mentioned in the SALES TAX ACT) will be charged to the goods sold. After the receipt of goods, 7 days credit period is given to them for the payment.

B. Outstation Stockiest: Here the transaction is undertaken between two states and therefore 2% or 4% CST will be charged on the goods. While they are given 21days credit period for the payment.

4. C&S Agents: In this type of distribution channel, the Consignment & sales Agent (C&S Agent) acts as a

distributor where the goods are not transferred but sold to them. Company has only 1 or 2 C&S agents, which are only for Generics. They further sell it to the local stockiest by charging only local tax and no CST, as all the

transaction are made within state only. Here they don’t have to obtain the drug license no., only the sales tax no. is needed and so the

party has to make payments in the name of C&S Agents and not the company. So the tax liability has to borne by the C&S Agents. Here there is high risk as the payments are received in the name of the agents, so they can do

scam or fraud with the company. They have to obtain “F- Form” from the government.

Drawbacks: Highly risky, as the payments are received in the name of the agent and not the company. If the payments are not received by the agents then the payment to the company is delayed.

5. Depot: Company can arrange their own depot at various locations for smooth distribution of their

products. So no service commission has to be given to them. It has to occupy godown, manpower and sell their products to distributors. All the expenses are to be borne by the company. All the services to supply the goods are to be rendered by the company depot and therefore

there is no chance of doing partially while supplying the goods and also for passing the benefits of various schemes to other stockiest.

The problem of high freight charges in case of C&F Agent is solved in this system.

Drawback: Generally the company with huge turnover can afford to have a Depot as it involve high

establishment cost. There are many chances of scam as the manager is of the company.


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b) Credit Control Policy:

1.) Order execution: Amount of goods ordered is entered in the computer and packing slip is generated. Send the packing slip to the stores and take out materials as mentioned. Invoice is generated on the same day or latest by the next day. Goods are dispatched to the stockiest within 48 hours. Order of goods received from the local parties should be properly sealed and signed. If the goods are to be dispatched outstation, then it has to be duly sealed and signed

accompanied with blank undated cheques that are eligible for execution and all the documents are given to the transporter and LR receipt is obtained.

In the LR receipt following items like consignees name, destination, number of packs and weight date etc. are verified.

If a party has given cheque with the remark i.e. “not over Rs….. (Some amount)” then the order should be executed within the limit of that cheque amount and not more than that.

If supply is done through bank all documents are send to the bank by register post. If any fax or telephonic orders are received during the month, then it should not be

executed. But if the undated cheque is received in advanced before the last date of that month by the C&F Agent, then the order can be dispatched after confirmation with the party. If the confirmation is not received within 48 hours, then C&F Agent have to proceed to raise a “full invoice cancellation” credit note.

C&F Agents should collect certain statutory forms from the stockiest within stipulated time i.e. C – Form should collected quarterly and F – Form should be collected every month and if the forms are not received from the party then it should be kept on hold.

C&F Agents has to ensure that the cheques are drawn on Nationalized Bank only as the cheques drawn on co-operative banks are not acceptable.

Following is the diagram of ORDER EXECUTION:


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Order Placing

Order Entity

Disallow Billing

Allow Billing

Order Execution Area Business

Manager (ABM)

Finance

Department

Head Office (H.O)

Regional Business

Manager (RBM)

Preparation of

Invoice

Order not

executed

Order

executed


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2.) Dispatch of Goods: All the dispatches should be completed within 48 hours from the date of execution. For invoice raised on the last day of the month the dispatched should be completed within

three days from the date of invoice. In case of local parties supply should be made only against cheques. Delivery of goods should not be made without collection of cheque from party. On the receipt of LR, C&F agents should prepare Payment Advice within 24 hours and dispatch

it to the local parties. On 5th of every month not a single claim should be left pending for the settlement of the goods

received by the C&F agents.

3.) Stockiest appointment: The main necessity to appoint the stockiest:

Reputed stockiest for increasing the sales

Need of expansion

Existing stockiest is default Three main items should be provided by the stockiest are annual reports of last 3 years in the

same business, C&F recommendation and No Objection Certificate (NOC) from the association. Criteria for the new stockiest:

For the new stockiest the credit limit starts with Rs. 50000

And if the order is more than Rs. 50000, company asks for the reason for more requirements.

Criteria for existing stockiest:

Stock provided should be two times of the average collection received in the last two months.

No of cheque bounced should be bounced till that date.

Unpaid goods return should not be more than Rs. 5000 or else the stockiest has to be kept on hold till the receipt of H.O. approval.

4.) Credit limit: Credit limit is the time period given by the company to its agents and the different stockiest to

pay the amount due to them. The basic criteria followed in the company for fixing the credit limit is two times on average

collection received in the last two months. It is generally fixed at 21 days for the C&F agents however if any variation required then the HO

has the power to make the necessary changes in it. But for the variations certain things are needed to be checked as mentioned below:

The reason for increasing the credit limit.

Headquarters credit limit is within limit of 2 times of headquarter target. Credit limit should not be increased by exceeding this limit of that H.O.

Past records of the party like number of cheques bounces, returned gods, unpaid interest debit notes, average sales are to be checked.

Credit limit should not be increased for any party whose credit limit was reduced earlier due to any adverse circumstances.


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Credit Days:

7 days to the local stockiest

21 days to the outstation stockiest

30 days to the institution

5.) Collection: The entries of collection are to be passed only for those Demand Drafts and Cheques which are

physically received in advanced at the H.O. The collection should be credited only in the name of the party from whom the payment is

received and in the name of concerned division. After the receipt of DD, PIF (Pay in Form) should be prepared and draft should be deposited

with the bank immediately. C&F agent should be very vigilant in case of advanced payment received against the supply of

goods, as the amount should be adjusted in the account of the stockiest who has paid the amount.

6.) Unrealized Cheque: On daily basis the company receives the report on details of each and every cheque received by

the Bank and reconciliation is done by the company. If certain cheque gets bounced after that the day of reconciliation then the details of all that

cheque is received at the end of every month. If the amount is not realized within 45 days then the party has to be put under hold and further

no transaction is to be made with that company. Further explanation is done in detail in the CASH MANAGEMENT SYSTEM.

7.) Resumption of supply in case of Cheque Bounced Parties: If the cheque bounces for the 1st time and the party issues apology letter for the same, and if it

bounces due to some other mistake by bank, then in both the cases no action will be taken against the party. Only if the mistake is done by the party or there is insufficient balance or some other reason, then only the action will be taken against party.

If the cheque bounces for the 2nd time, then the party will be supplied the goods on advanced demand draft basis for the next two months and the supply is suspended for the two months. After this period gets over, the assurance of the cheque being honored is taken from the C&F agent and the supplier, by the company to get the original credit limit.

If the cheque bounces for the 3rd time, then its supply is stopped for next four months and advanced demand draft is taken for next four months supply. And even the credit limit is reduced to Rs. 50000/-.

Here the no. of occasions will be considered and not the no. of instruments being dishonored. Finance department will inform about this to the marketing department.

In all the above cases, if the cheque is not honored within 30 days of receipt of goods then the company will send legal notice to the party, and if the amount is not received yet, then criminal notice will be send to the party and lastly after 45 days, summon of the court will be send to the party and it will put on hold or in blacklist for further supply of the goods.


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8.) MIS Reports: Every month the C&F Agents should submit the following MIS Reports:

Unmatched transactions of Bank.

Payment advice not given to the party after the supply is made.

Pending Debit and credit note.

Late dispatch of goods.

Late deposition of cheque/demand draft

Advanced cheque amount not recorded

Advanced cheque/ DD not received

Payment not received against the bounced cheques etc. All the MIS report should have proper remarks and explanation of each and every transaction.

c.) Collection System:

At present the collection system used by CHL is through advance cheque / Demand Draft. The whole system is explained in detail in the “CASH MANAGEMENT SYSTEM”.

d.) Claim settlement:

Every company is required to generate the credit notes as per their individual requirements. For Cadila Healthcare Limited (CHL) there are several reasons for which the credit notes are required to be generated. In this company, few credit notes are made manually while few are made automatically in SAP. The reason behind this is SAP has a drawback in making the credit note of some quantity of goods and therefore quantity based credit notes are to be made manually only.


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CLAIM SETTLEMENT

A.) Value Based Credit Notes

B.) Quantity Based Credit Notes

a. Expiry b. Short of goods c. Parts Returned d. Fully invoice

return e. Free Product

1.) Saleable Goods

2.) Non-saleable Goods

3.) Others

i. Octroi ii. Rate Difference

iii. Scheme iv. Interest v. Discount & Special

Discount vi. Special Rebate

vii. Commission viii. Service Charge

ix. ST & CST Claims x. Freight

xi. Reimbursement of Expenses

1.

Product to product

(retail price to retail

price) claim


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Mainly credit notes are of two types:

A.) Value based credit notes: In this type, the credit notes are made for the price of total goods returned by the stockiest.

The Value Based credit notes are made for the following type of goods:

1) Saleable goods:

When the party returns saleable stock, the C&F Agent has to ask for the purchase invoice no and date, as he needs to enter those details in the credit note. If those things are not available then he will take the help of SAP or VISION 21 for its details. Credit note should be issued only after proper authorization. It should be issued after 25th of every month. After credit note is prepared, the company mentions the quantity, amount and the reason of the goods returned on the invoice copy.

2) Non - saleable goods:

Issuing credit note for non-saleable goods is totally different from the issuing credit note for saleable goods. C&S agents are supposed to check the goods that are returned by the party and then GRN (Goods Return Note) is prepared for goods returned. The copy of GRN is to be put in the checked carton. . If those things are not available then he will take the help of SAP or VISION 21 for its details. Credit note should be issued only after proper authorization. It should be issued after 25th of every month on the basis of GRN. Non-saleable goods are sent to distribution department by the C&S agent. Value based credit note is made only in BIOGEN DIVISION. In such cases updating of stock is not done. In the CADILA, ALIDAC, MEDICA etc. quantity based settlements are done which is known as RP to RP (replacement against replacement).

Some of the major reasons are as follows:

a. Expiry: CHL gives the products to its C&F agents for further selling and they take the amount pertaining to these sales from these C&F agents. Now there is possibility that these agents are unable in selling these products and meanwhile these products had expired. So the C&F agent returns these products back to the CHL and the latter will pay that amount back and thus will prepare the credit notes. If the goods are returned within 6 months from the date of purchase along with the Lorry Receipt, 100% value is allowed and if the goods are returned after 6 months of purchase, 0% value is allowed.

b. Short of goods: Similarly if the goods supplied is short then the actual order, the company needs

to make the credit note of the difference amount as the party must have paid full amount in advance through cheque or DD. So credit note of the short of goods will be made.

c. Parts returned: There is every possibility that certain portions of these products are defective i.e.

there is some leakage in syrup bottle or the medicine had come out of strip. In such cases the agent returns these defected products and thus CHL prepares credit notes and thereby pays certain amount to agent.


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d. Full Invoice returned: There are certain chances that complete consignment gets returned because of certain reasons like defects or order cancellation. In such cases credit notes of full amount are prepared to pay the party. The amount required to be paid is decided before carrying out this transaction.

e. Free product: Marketing department requires free samples for promotional purposes. In case of

goods given free of charge with other products, the company incurs cost for those goods given as free. The C&F agents are supposed to make an invoice for such products given free of cost. They will keep the invoice copy and another copy is sent to the head office to maintain record. All the details of the product are to be maintained by them. So the finance department prepares credit notes in order to provide these samples.

3) Other Reasons:

i. Octroi: Octroi charges are different for different states, generally ranging from 1.5 %-2%. Now if CHL in its invoice had levied more Octroi charges for particular agent than CHL have to pay back part of this Octroi for which finance department had to prepare the credit notes.

ii. Rate Difference: CHL provides additional discounts to certain institutions (e.g.: Government

institutions). Now when agents take the products from CHL they have to pay the actual (non-discounted) price of the product. Now if he sells these products to approved institutions at discounted prices then he is eligible to get the additional amount back. So after providing necessary proofs, the agent gets this amount back for which finance department prepares the credit notes. These credit notes are issued from the finance department at the H.O.

iii. Scheme: Occasionally CHL announces the schemes in order to boost up its sales. E.g. If CHL

decides to have a scheme of providing 3 units free for every 10 units. Now the agent has to sell the products according to this scheme to its parties. So the agent in that case gets its money back for every free unit that he had sold. These credit notes are issued from the finance department at the H.O.

iv. Interest: If an agent is able to pay advance Demand draft (DD), then he will receive 1.5% interest

on this advanced amount paid within 60 days. Generally such benefit is given to the C&F Agent in Jammu only.

v. Discount and Special Discount: Every party gets some credit days for making its payment. Now if

the party pays it early i.e. before the credit limit then that particular party gets 8% to 10% discount. While special discount is given when the agent does bulk purchases and avail the benefits of huge discounts.

vi. Special Rebate: Credit notes for special rebate are prepared very rarely. E.g.- CHL introduces a

scheme in which for every 5 empty strips collected and provided to the distributor, the party gets 2 strips of that particular product free. So for every free product sold by distributor, CHL rebates him by providing similar product for free.


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vii. Commission: For the sales, which are made by agents, they get fixed commissions decided on the basis of prescribed norms. So credit notes are prepared for paying the amount of commission paid less to these parties.

viii. Service charge: Similarly, if the service charge paid by the agent is more than the actual amount to

be paid, the company has to make credit note for the amount left to be paid.

ix. ST and CST claims: Generally such types of credit notes are made when the amount of ST and CST is not paid at an actual rate i.e. 3.84% based on MRP and 4% no based without MRP. Thus that amount is to be paid back to the agents, which requires formation of credit notes.

x. Freight: Here the credit notes are made when fewer amounts is paid as freight. As the rate of

freight varies from state to state.

xi. Reimbursement of claims: There are certain expenses that are borne by different department like marketing expenses and distribution expenses for which credit notes are required to be made. Generally certain amount is borrowed by the individual or department in advanced for some purpose, but whole withdrawn amount is utilized and more expense is incurred, in such case credit notes are to be made.

B.) Quantity based notes:

Product to product (Retail Price to Retail Price) claims: If the agent returns certain products to CHL for certain reason than CHL gives same product against the defected products for which credit notes is required to be paid. In case of the party wants to replace the goods for the other products, the amount or cost of the goods i.e. the Retail Price must be the same. The company provides the claim for the boxes and not for the strips. Thus the products which are to be replaced must cost same, so as the replacement transaction is eased. The products that are to be replaced can be different but the cost matters a lot so as to reduce adjustments. All calculations are done at RP, while schemes, sales tax, discounts are not considered.


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PHASE IV

CASH MANAGEMENT

(COLLECTION) SYSTEM


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INTRODUCTION:

“Cash Management refers to management of cash balance, the bank balance and also includes the short term deposits.”

The cash is obviously the most important current assets, as it is the most liquid and can be used to make immediate payments. The term cash may be used in two different ways: It may include currency, cheques, drafts, demand deposits held by a firm. In a broader sense it also includes near cash assets such as marketable securities and short

term deposits with banks.

Efficient cash management processes are pre-requisites to execute payments, collect receivables and manage liquidity. Managing the channels of collections, payments and accounting information efficiently becomes imperative with growth in business transaction volumes. In most of the firms, the financial manager who responsible for cash management also controls the transactions that affect the firm’s investment in marketable securities.

For example, a judicious management of cash, near cash assets and marketable securities allow

the firm to hold the minimum amount of cash necessary to meet the firm’s obligations as and when they arise. As a result, the firm is not only able to meet its obligations, but also is in a position to take advantage of the opportunity of earning a return and also increasing the profitability of the firm.

Cash management does not end here and the financial manager may also be required to identify

the sources from where cash may be produced on a short term basis or the outlets where excess cash may be invested for a short term.

MOTIVES OF CASH MANAGEMENT:

Cash is the most liquid assets but it does not earn any substantial return for the business. Nobody earns any income on the cash balance being maintained, however some interest income may be earned on short term deposits. But still everybody and every firm maintain some cash balance. There are four primary motives for holding the cash which are as follows:

1. Transaction Motive:

Business firms as well as individuals keep cash because they require it for meeting demand for cash flow arising out of day to day transaction. To meet the obligation for cash flows arising in the business, every firm has to maintain adequate cash balance. Interest on borrowing, taxes to government and dividends to shareholders are also payable in cash. However the inflows may not be equal to cash outflows. In case the expected outflows are more than the expected inflows, then the deficiency together with some cash for safety merging must be arranged. The necessity of keeping minimum cash balance to meet payment obligations arising out of expected transactions is known as transactions motive for holding cash.


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2. Precautionary Motive:

The precautionary motive for holding cash is based on the need to maintain sufficient cash to act as a cushion or buffer against unexpected events. In spite of maintain best efforts, the future cash flows cannot be ascertained with 100% accuracy. One never knows about the happening natural calamities or sudden increase in the cost of raw material or any other factor such as strike, lock out etc. such events may seriously interrupt even the best planned financial plans and thus we temporarily make the cash budget ineffective and nonexistent. Therefore a firm should maintain larger cash balance then required for the day to day transactions in order to avoid any enforcing situation arising because insufficient cash.

3. Speculative Motive:

Cash may be held for speculative motives in order to take advantage of potential profit making situations. A firm may come across an unexpected opportunity to make profits, which are not usually available in normal business, routine. Some cash balance may be kept to take advantage of these windfalls. E.g.: an opportunity to purchase raw materials at a heavy discount, if amount is paid in cash. The motive to keep cash balance for this purpose is obviously speculative in nature. The firm desire to keep some cash balance to capitalize an opportunity of making an unexpected profit is known as speculative motive. The speculative motive provides a firm with sufficient liquidity to take advantage of unexpected profitable opportunities that may suddenly appear.

4. Compensating Motive:

The commercial banks require that in every current account, there should always be a minimum cash balance. Presently, this minimum cash balance varies from Rs 3000 to Rs 5000. This amount remains as per permanent balance with the bank so long as the current account is operating. This minimum balance is generally not allowed by the bank to be used for transaction purpose and therefore, it becomes a sought of investment by the firm in the bank. In order to avail the convenience of current account, the minimum cash balance must be maintained by the firm and this provides the compensation motive for holding cash.

OBJECTIVES OF CASH MANAGEMENT:

Financial manager must know as to why the cash management is a necessity. The cash management strategies are generally build around two goals; To provide cash needed to meet the obligation, and To minimise the idle cash held by the firm.

The financial manager has to strike an acceptable balance between holding too much cash and too

little cash. A large cash investment minimises the chances of default but penalises the profitability of the firm. A small cash balance may free the excess cash balance for investment in marketable securities and thereby enhancing the profitability as well as the value of the firm, but increases the chances of running out of cash. The risk return trade off of any firm can be reduced to two prime objectives for the firms’ cash management system, as follows:


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1. MEETING THE CASH OUT FLOWS: The primary objective of cash management is to ensure cash outflows as and when required. The firm should be able to make the payment at different point of time without any liquidity problem, it means that the firm should have sufficient cash to make the payment schedules and disbursement needs. It will help the firm in; a) Avoiding the chance of default in meeting financial obligations, otherwise the goodwill of firm is adversely affected. b) Availing the opportunities of getting cash discounts by making early or prompt payments, and c) Meeting unexpected cash outflows without much problem.

2. MINIMISING THE CASH BALANCE: This objective of cash management is based on the idea that

unused asset earns no income for the firm. The funds locked up in cash balance are a dad investment and has no earning. Therefore whatever cash balance is maintained, the firm is foregoing interest income on that balance.

This objective of cash management seems to be contradictory in nature and hence the

financial manager has to achieve a trade of between them. He has to ensure that the minimum cash balance being maintained by the firm is not affecting the payment schedule and meeting all disbursement needs. The cash management strategies are needed to reconcile these two goals wherever possible. The ideal cash management system will depend on the firm’s products, organisation structure, competition, culture and options available in the firm. The task is difficult, complex and decisions taken can affect important areas of the firm.

Collection System:

The Cash Management System followed by Cadila Healthcare Limited is for the Domestic Market only and not for the foreign market. The turnover of the company achieved in this year 2008-09 is Rs. 1800 crores. Out of which around Rs. 1200 to 1300 crores is the domestic turnover while the rest is from the export business. There are almost 39 C&F agents through which the goods are sold in various parts of the country. They also play an important role in collecting the amount from the various stockiest and to remit all that DD and Cheque to the H.O within the stipulated time period.

For collection of receivables from outstation parties CHL has contract with CITIBANK. The cheque is presented of CITIBANK and the company receives the very next day the amount. It doesn’t matter whether the bank has received it or not but bank transfers total cheque amount in the account of company. For this the company pays higher service commission as per the bank rate. Bank rate differs as per the area. Company has to pay higher bank charges to the bank but it is justifiable, as company needs very less amount as working capital.

The collection system of the company is shown in the following diagram:


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Local Parties

Fast collection

system

7 days

Advance Cheque

System

Cheque on

Delivery

21 days

Cheque

collection

system

Outstation

Parties

System

Credit

Days

Payment

Parties

C&F AGENTS

Indirect selling Direct Selling


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From the above chart we can see that there are basically two types of selling done by the company i.e. Direct and Indirect Selling.

Direct selling: The Company directly sells to the local or outstation stockiest or party through Medical Representatives, Are Business Manager and Regional Branch Manager. Here the goods are dispatched from the bond house to the destination concerned. All goods are dispatched from godown and they reach the concerned destination through roadways. Generally this can be seen in case of hospitals and charitable institutes.

Indirect selling: The company sells the goods through C&F Agents to the local as well as outstation parties. After the C&F Agent, the procedure of collection in both the type of selling to both the type parties, one is for local parties and other is for outstation parties is the same.

The collection from the local parties is on the cheques on delivery and advanced Demand Draft and the system adopted is FCS (fast collection system). In case of FCS the party makes the payment on delivery i.e. cheque on delivery (COD). For local supply due date till 7th day from the date of delivery and the cheque date will also be 7th day from the delivery.

The collection from the outstation parties is on the Demand Draft, pay order or on the advanced cheques and the system adopted is CCS (Cheque collection System). In case of CCS the party gives an advance cheque to C&F agent and hence works on Advance Cheque System. For outstation stockiest due date will be 21st day from the day of LR. Let’s see the various modes of collection.

Modes of Collection:

1) Bank Through Document System: In this method, all the documents like invoice, credit note, debit note, LR copy, Hundi Copy etc raised by the company in the name of the part will be sent to the bank. Then the party will issue the Demand Draft on the bank and also releases all the above documents and the latter clarifies DD and sends it to the C&F Agent.

Drawbacks:

Both the parties have to pay certain service charges to the bank.

Stockiest has to face problem of collecting the documents from the bank.

If the goods are to be returned than there will be problem in receiving the document back and thus the company doesn’t prefer this method any more.

2) Advanced Demand Draft/Cheque: The name itself suggests that order would be executed on receiving the DD/CHeque and over here no credit limit is allowed. Here the invoice is made only after the DD is received and then the goods are sent.


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Drawback:

The major drawback is that the party or stockiest is unable to invest huge amount in the products of the company, as the latter dispatches the goods by considering the selling capacity of the party.

3) Cheque On Delivery (COD) System: In this mode of collection, the party needs to make payment when it receives the invoice

and then only can get the release of goods. Drawback:

Here the party cannot avail the benefit of credit period as the amount has to be paid as soon as the invoice and goods are received.

4) Lorry receipt holding:

Under such mode the stockiest/party is supposed to give the DD to the company directly and collect the LR and then show that LR to the transporter for releasing the goods.

Drawback:

The major problem faced in this mode was the stockiest had relation with the transporter and used to collect goods from him without showing the LR and the company used to get its collection delayed may be for 50 to 50 days.

Sometimes transporters are not ready to hold the goods or are not economically capable for it. Thus our company doesn’t use this method anymore.


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PROCEDURE AFTER COLLECTION

C&F AGENTS (They remit it to H.O.)

Company (It collects from C&F Agent)

CITIBANK Person (He collects from the company)

CITIBANK (Amount is credited in the Company’s Account)

Cheque Accepted (Amount received by bank)

Cheque Dishonored (Amount not received by bank)

Insufficient Funds

Unmatched Sign

Exceed Arrangement

REASONS

Amount paid

by the party

Amount not

paid by party

Legal action

taken

Criminal

Notice sent

Summon of

Police

Recorded as Bad Debts (If the amount not received

after all legal action)

BANK charges service

commission from the company


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As per the above diagram, C&F agents get the sealed and signed Purchase order along with signed

undated blank cheques from stockiest and enter the sales order in the Vision21 / SAP.

C&F prepares the sales invoice and Payment Advice in favour of the stockiest after dispatch of goods and also enters the Lorry Receipt date in the software.

C&F agents fill up the amount and date (7 days after the date of dispatch of goods in case of local sales and 20 days after the date of Lorry Receipt in case of outstation sales) in blank signed cheques as per Payment Advice & passes entry for advance collections.

C&F agent prints two copies of payment advice. Out of which one copy is sent to stockiest along with invoice and the other one is to be filed by him.

Pay in Forms (PIF) is prepared by the C&F agent including the PIF number and division at the back of the cheque so that it can be easily correlated when the cheque gets bounced.

Enter the PIF number against each payment received in the software and sort out the local and

outstation cheques, date wise separately.

In case of local cheques, the cheque date and PIF date should be the same. Local clearing cheques are

handed over to courier agencies a day in advance of the cheque date. Citibank will credit on the date of

cheque.

In case of outstation cheques, cheque date should be one day prior to the date if PIF. Outstation

cheques should be handed over to the courier agencies two working days prior to the date of the

cheque.

One copy of the acknowledged PIF is sent to the HO at the end of the month.

The cheques of local parties are deposited in the Citibank on the 6th day and that of outstation parties are deposited on the 19th day of issuing the Lorry Receipt.

Everyday an employee of Citibank collects all the cheques from C&F agents located at different locations, between 11 a.m. and 12 noon.

All these cheques collected at different locations are transferred to Mumbai branch of Citibank on the same day.

Irrespective of the clearing of the cheques, Citibank will give credit to the cash management account of the company and on next day that amount is transferred to the current account. So the company gets all the funds immediately and can invest in some other areas or can make payments on time.

After getting the opening balance and expected collection for the day from Citibank, the company transfers the amount leaving the balance of certain amount to Bank of Baroda account from the Citibank account.

Bank of Baroda acts as a payment agent for our company, as CITIBANK only collects the amount from the parties account and credit that in our account.


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For transferring the funds the company uses the following two facilities provided by the bank:

1. RTGS (Real Time Gross Settlement): RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a "real time" and on "gross" basis. This is the fastest possible money transfer system through the banking channel. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is taken as final and irrevocable. The RTGS system is primarily for large value transactions. The minimum amount to be remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions.

2. NEFT (National Electronic Fund Transfer): NEFT system is a nationwide funds transfer system to facilitate transfer of funds from any bank branch to any other bank branch. No minimum or maximum stipulation has been fixed for NEFT transactions. NEFT are electronic fund transfer modes that operate on a deferred net settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place at a particular point of time. All transactions are held up till that time. For example, NEFT settlement takes place 6 times a day during the week days and 3 times during Saturdays. Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time.

After transfer the cheques are send for the clearing. There are two types of clearing facility that the bank provides:

High Value Clearing (HCV): In this type, the amount of cheque gets cleared on the same day of depositing it. But minimum of Rs. 1 lakh is required to get this facility. According to the recent amendment, from 1st June this limit is going to be increased up to Rs. 10 lacs.

Normal Value Clearing: In this type of clearing the amount of cheque gets cleared on the next day after depositing.

Company gets the collection files from Citibank on daily basis. One collection file shows the total expected collection for the day. This file is verified with the

collection figure taken from Citibank. Another file is PIF wise collection file of the company. Division wise collection report showing collection

for the day and up to the day of the month is prepared. This is then compared with percentage to find out the target of the month.

The increase or decrease in collection as compared to the same date of the previous month is analyzed.


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The C&F agents are informed by letter regarding the cheques deposited, but if unrealized for more

than 60 days than such parties are kept on hold and this information is sent to the divisional heads and the credit control department.

After preparing debtors outstanding for more than 60 days, all divisional heads take up the matter with their RBMs (regional business managers) and give reasons for the outstanding cheques and the date by which the same would be recovered.

A legal notice is sent to the party within the 30 days of the cheque being bounced for the failure of payment and to make the payment as soon as possible i.e. within next 30 days.

The reasons of cheques being outstanding may be due to bank or due to the party. If it is due to party, the reasons can be like insufficient funds in the account, signature doesn’t match, or the arrangements of payments are not proper etc.

If cheques are outstanding for more than 90 days, then the cheque dishonour entry is to be passed. Hence, the further prosecution of the order is stopped. The same is informed to the divisional heads as well as to the credit control department.

Company gets the information from Citibank regarding the cheque dishonoured for the day based on the file pass entries for cheque dishonoured. The amount of the cheques dishonoured along with the debtors will be debited and deducted from the next payment.

If the bounced cheque amount is up to Rs. 20000, then only legal notices could be issued but criminal complaints cannot be filed.

A criminal notice will be issued to the debtors, if payment is not received even after 45 days of the issuance of the legal notice; the company sends a note in this regard to all the divisional heads for taking up the matter with the stockists through the RBMs.

If the payment is not made, a legal case under section 138 (A) as a criminal is filed and legal department is given intimation about this.

If the outstanding amount is received, then the company inform about it to the legal department to withdraw the complaint, to divisional heads for information and to the credit control department for initiating further supplies.

If the outstanding amount is not received even after criminal notice than a Summon is sent with the police to the party by the court. And even after that the amount is not received than it should be entered into the software as BAD DEBTS.

It can be possible that the amount might be recovered after one year or so, and then the reverse entry of bad debts recovered has to be made. Sometimes such cases are observed.

Charges of CITIBANK: Basically the CITIBANK acts as the collection agent for the company, so its charges are very nominal and it is divided into three main parts: 1. Local Banks:

If the transactions are to be made through local branches of Citibank, then no service commission is charged to the company as there are many branches and even the distance is less.


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2. Corresponding Banks: If the transactions are made through the banks with whom the CITIBANK and the company has its own tie up and certain norms being decided in advance, then approximately 20 paisa / Rs. 10000 is charged by the bank. But the charge varies according to the distance. Generally such type of transaction is undertaken with the outstation parties.

3. No corresponding Banks: If the cheque received from some party is drawn on the bank with whom there is no tie up of Citibank or the company, then Rs. 1 / Rs. 10000 (approximately) is charged by that bank. Generally such type of transaction takes place when there is outstation party and there are no branches of CITIBANK in the nearby area. Here the charges differ according to the distance.

For the collection of cash, CHL collaborates with the Citibank. So the cheques which are collected by

company are deposited in the Citibank. Some reasons for choosing the Citibank are as follows: Collection of money timely from the parties No minimum amount required in account Less commission charged on cheques. For this year, Bank has decided to reduce the services commission by 70% and will charge on 30%

of that they used to charge before. Note: This change is basically because of Core Banking System implemented in all the

banks and other cheaper facilities provided by them, made CITIBANK to take such a step in order to remain in competition and to retain the client.


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PHASE V

RATIO ANALYSIS


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Meaning: Financial ratio analysis is the calculation and comparison of ratios which are derived from the

information in a company's financial statements. The level and historical trends of these ratios can be

used to make inferences about a company's financial condition, its operations and attractiveness as an

investment.

Ratio analysis can also help us to check whether a business is doing better this year than it was

last year; and it can tell us if our business is doing better or worse than other businesses doing and

selling the same things. It is an arithmetical relation between two related or inter-dependent items.

Ratio Analysis is the process of determining and interpreting numerical relationship between figures of

the financial statements. An absolute figure often does not convey much meaning. In other words,

business results and situations are understood properly only when the relevant figures are considered

together. Thus the ratio analysis is an important technique of financial analysis as it is a means of

judging the financial health of the concern.

Classification of Ratios: Financial ratio analysis groups the ratios into categories which tell us about different facets

of a company's finances and operations. An overview of some of the categories of ratios is given

below:

6. Liquidity Ratios which give a picture of a company's short term financial situation or solvency. 7. Profitability Ratios which use margin analysis and show the return on sales and capital employed. 8. Market based ratio (Solvency Ratios) which give a picture of a company's ability to generate cash

flow and pay it financial obligations. 9. Leverage Ratios which show the extent that debt is used in a company's capital structure. 10. Turnover ratio (Operational Ratios) which use turnover measures to show how efficient a company

is in its operations and use of assets.

Importance of Ratio Analysis: Ratio analysis is a powerful tool of financial analysis. So it is important to work upon it. With the help of ratios, one can determine:

The ability of the firm to meet its current obligations.

The extent to which the firm has used its long term solvency by borrowing funds.

The efficiency with which the firm is utilizing its assets in generating sales revenue and

The overall operating efficiency and performance of the firm.


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Intra – Firm Ratio Analysis for the last three financial years

Ratio Standalone Consolidated

2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

1. Liquidity Ratios:

1.1 Current Ratio 2.58 : 1 1.79 : 1 2.35 : 1 2.22 : 1 1.81 : 1 2.16 : 1

1.2 Quick Ratio 1.69 : 1 1.06 : 1 1.53 : 1 1.29 : 1 1.10 : 1 1.33 : 1

1.3 Liquid Ratio 1.69 : 1 1.06 : 1 1.53 : 1 1.30 : 1 1.10 : 1 1.34 : 1

2. Profitability Ratios:

2.1 Gross Profit Ratio 61.69% 71.07% 60.66% 66.81% 72.27% 62.40%

2.2 Net Profit Ratio 14.38% 14.48% 13.24% 11.37% 13.09% 10.54%

2.3 Return on Total Assets 10.31% 10.81% 10.72% 10.11% 11.74% 9.81%

2.4 Return On Capital Employed 17.09% 19.75% 19.89% 19.58% 23.68% 18.96%

2.5 Return on Equity 22.41% 23.20% 22.40% 24.23% 27.45% 21.80%

3.Market Based Ratio:

3.1 Earnings Per Share 18.80 16.30 26.26 20.51 18.61 24.26

3.2 Dividend Per Share 4.50 4.00 6.00 4.50 4.03 6.00

3.3 Dividend Payout Ratio 23.94% 24.54% 22.85% 21.94% 21.64% 24.73%

4.Leverage Ratio:

4.1 Debt Equity Ratio 0.70 0.51 0.59 0.81 0.54 0.64

4.2 Debt Assets Ratio 0.32 0.24 0.28 0.34 0.23 0.29

4.3 Proprietary Ratio 0.46 0.47 0.48 0.42 0.43 0.45

5.Turnover Ratios:

5.1 Total Assets Turnover Ratio 0.72 0.75 0.81 0.89 0.90 0.93

5.2 Stock Turnover Ratio(In times) 5.21 5.55 6.43 5.48 5.89 6.42

5.3 Fixed Assets Turnover Ratio(In times) 1.87 1.78 1.67 1.62 1.83 1.74

5.4 Working Capital Turnover Ratio(In times) 2.77 3.97 3.57 3.67 4.04 4.15

5.5 Sales To Capital Employed 0.96 1.12 1.12 1.26 1.44 1.36

5.6 Debtors Turnover Ratio(In times) 5.81 5.92 6.86 6.37 6.41 7.26

5.7 Creditors Turnover Ratio(In times) 2.60 1.61 2.80 2.17 1.66 2.88

6.Other Ratios:

6.1 Average collection Period (in days) 62.80 61.60 53.17 57.26 56.91 50.26

6.2 Average Payment Period (in days) 140.50 227.04 130.18 168.16 220.19 126.61

6.3 Interest Coverage Ratio 12.87 11.21 8.90 10.83 12.10 8.36


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Inter – Firm Ratio Analysis for the year 2007-08 (Standalone)

Ratios Dr. Reddy

Cipla Glaxo Sun Pharma Ranbaxy CHL

1.Liquidity ratios:

1.1 Current Ratio 3.85 : 1 3.00 : 1 0.87 : 1 2.94 : 1 1.80 :1 2.58 : 1

1.2 Quick Ratio 3.02 : 1 2.10 : 1 0.55 : 1 2.54 : 1 1.18 : 1 1.69 : 1

1.3 Liquid Ratio 3.02 : 1 2.10 : 1 0.55 : 1 2.54 : 1 1.18 : 1 1.69 : 1

2.Profitability Ratios:

2.1 Gross Profit Ratio 66.97% 52.04% 57.93% 37.84% 59.50% 61.69%

2.2 Net Profit Ratio 14.27% 17.54% 34.09% 42.87% 15.35% 14.38%

2.3 Return on Total Assets 7.75% 12.23% 27.10% 18.74% 8.49% 10.31%

2.4 Return On Capital Employed 11.27% 19.92% 46.71% 24.41% 14.37% 17.09%

2.5 Return on Equity 9.88% 18.68% 39.51% 24.10% 26.30% 22.41%

3. Market Based Ratio:

3.1 Earnings Per Share 28.26 9.03 63.47 48.96 16.56 18.80

3.2 Dividend Per Share 3.75 2.00 36.00 10.50 8.50 4.50

3.3 Dividend Payout Ratio 13.27% 22.16% 56.71% 21.45% 51.33% 23.94%

4.Leverage Ratio:

4.1 Debt Equity Ratio 0.10 0.15 0.004 0.02 1.38 0.70

4.2 Debt Assets Ratio 0.08 0.10 0.0029 0.02 0.45 0.32

4.3 Proprietary Ratio 0.78 0.66 0.69 0.78 0.32 0.46

5.Turnover Ratios:

5.1 Total Assets Turnover Ratio 0.54 0.70 0.79 0.44 0.55 0.72

5.2 Stock Turnover Ratio(In times) 6.00 3.90 7.67 4.39 4.55 5.21

5.3 Fixed Assets Turnover Ratio (In times)

2.70 2.11 16.98 3.57 2.42 1.87

5.4 Working Capital Turnover Ratio (In times)

1.52 1.60 -19.79 1.23 3.45 2.77

5.5 Sales To Capital Employed 0.63 0.94 1.20 0.55 0.72 0.96

5.6 Debtors Turnover Ratio(In times) 3.71 2.87 41.76 2.24 4.92 5.81

5.7 Creditors Turnover Ratio(In times) 2.05 3.86 2.78 2.36 3.28 2.60

6.Other Ratios:

6.1 Average collection Period (in days) 98.38 127.26 8.74 162.85 74.15 62.80

6.2 Average Payment Period (in days) 177.66 94.53 131.43 154.55 111.15 140.50

6.3 Interest Coverage Ratio 39.57 43.60 728.23 - 4.66 12.87


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1) Liquidity Ratios:

1.1 Current Ratio= Current Assets

Current Liabilities

1.1.1 Standard ratio: 2:1

1.1.2 Components:

a.) Current Asset = Inventories b.) Current Liabilities= Liabilities

+ Cash and Bank + Provisions

+ Debtors

+ Loans and Advances

+ Other Assets

1.1.3 Definitions: a.) Current Assets (C.A.) are resources which are in cash or will be converted into cash in “the

ordinary course of business.” b.) Current Liabilities (C.L.) means such obligations which will soon require cash settlement i.e. as

are paid within one year and as are paid out of current assets or by creating current liabilities. c.) Current Ratio (C.R.) is an indicator of the firm’s ability to promptly meet its short-term liabilities.

It shows the no. of times the current assets are in excess over current liabilities. A very high ratio will result from idealness of the funds only and therefore, is not a good sign. 1.1.4 Working:

Particulars A) CHL- Standalone B) Consolidated

INR-MILLIONS INR-MILLIONS

Current Assets 2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

Inventories 3310 3287 2128 4729 3896 2475

Cash & Bank 2825 2386 1851 3555 2784 1990

Debtors 190 124 23 926 990 438

loans & advances 3355 2273 2086 2013 2201 1588

Total 9680 8070 6088 11223 9871 6491

Current Liabilities

Liabilities 2776 3764 1999 4138 4588 2404

Provisions 983 743 597 913 858 605

Total 3759 4507 2596 5051 5446 3009

Current Ratio 2.58 1.79 2.35 2.22 1.81 2.16


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Particulars

C) Industry 2007-08

Dr. Reddy Cipla Glaxo Sun

Pharma Ranbaxy CHL

Current Assets INR-MILLIONS

Inventories 6409 11205 20596 3896 9761 3310

Cash & Bank 5373 793 15499 10724 1805 2825

Debtors 8977 13939 3777 10554 8829 190

loans & advances 8922 11158 13099 3619 6886 3355

other assets 0 345 2792 258 1020 0

Total 29682 37440 55764 29051 28301 9680

Current Liabilities Liabilities 6809 8309 24477 7263 8331 2776

Provisions 901 4168 39255 2628 7381 983

Total 7709 12477 63732 9891 15713 3759

Current Ratio 3.85 3.00 0.87 2.94 1.80 2.58

1.1.5 Graphical presentation:

1.1.6 Interpretations:

A. Cadila Health Care Ltd. : As we can observe that the current ratio for all the three years are almost nearer to the

standard ratio i.e. 2:1, so it can be said that short term financial position and policy of the company is very sound. But in the year 2006-07, the current ratio was the lowest because the proportionate increase in the current liabilities was 74% that was more than the proportionate increase in the current assets that was of 33%.

B. Consolidated:

Even in the consolidated financial statements of the company, it was observed that company is able to maintain the current ratio though in the year 2006-07 it was decreased due to the proportionate increase in liabilities was more than the proportionate increase in the assets.


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C. Industry:

Dr. Reddy: Here the ratio is the highest in the industry due to very high debtors as the average collection period is more than the standard period. And even the amount of provisions is very less, so the current liabilities are very less compared to other competitors. Therefore huge amount of ideal cash is there which might be used for some other purpose. So comparatively CHL has better ratio than this company, but both the companies have more liquidity than required.

Cipla: Here the company have high amount of debtors as the average collection period is almost double then the ideal time, so the funds are blocked in it. Even the amount of provisions kept by the company is too high, so the funds are ideal and the ratio is higher than the standard ratio, which is not a good sign.

Glaxo: Here the company has very less amount of debtors due to very fast collection of the amount, so the funds are not blocked in it, but the amount kept as provision is very high and so the current ratio is very low, which means that company has very less liquidity and so its short term financing capacity is not sound. While CHL is having sound financial position than Glaxo.

Sun Pharma: Here the company’s average collection period is almost 1.25 times of the ideal collection period, so the funds are blocked in it, but simultaneously the amount of cash in hand is also higher than other competitors, so the company is able to maintain good liquidity but the ratio is little bit higher than the standard ratio. So comparatively CHL has better ratio than this company.

Ranbaxy: Here the current ratio of the company is almost nearest to the ideal ratio, which is a very good sign. Infact, this company has the best ratio in the overall industry.

1.1.7 Conclusion / Recommendation: Following are the recommendations that the company should look upon:

CHL: Our Company should reduce their creditors, because the average payment period is high in all the three years. This can improve their liquidity to a greater extend.

Consolidated: Our Company should increase their work-in-progress, so that the finished goods are produced fast and so the sales turnover rate increases and thus the company can have enough cash on hand to plough back in the some other operations of it.

Industry: We can conclude that our company has very sound short term financing capacity and is very consistent in maintaining its current ratio as compared to other competitive companies in the industry.

_______________________________________________________________________________________


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1.2 Liquid Ratio: Liquid Assets

Current Liabilities

1.2.1 Standard Ratio= 1:1

1.2.2 Components:

a.) Liquid Assets: Cash and Bank b.) Current liabilities: Liabilities

+ Debtors + Provisions

+ Loans and Advances

+ Other Assets

1.2.3 Definition:

a.) Liquid assets (L.A.) means the current assets excluding stock and prepaid i.e. the assets which

are converted into cash without loss within a short period of time say, 1 year is known as liquid assets.

b.) Current Liabilities (C.L.) means such obligations which will soon require cash settlement i.e. as

are paid within one year and as are paid out of current assets or by creating current liabilities.

c.) Liquid Ratio: This Ratio is an indicator of the short term solvency of the firm. While computing

the liquid assets, the illiquid portion of current assets is eliminated. So this is a better indicator of liquidity.

1.2.4 Working:



Liquid Assets 2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

Cash & Bank 2825 2386 1851 3555 2784 1990

Debtors 190 124 23 926 990 438

loans & advances 3355 2273 2086 2013 2201 1588

Total 6370 4783 3960 6494 5975 4016


Provisions 983 743 597 913 858 605

Total 3759 4507 2596 5051 5446 3009

Liquid Ratio: 1.69 1.06 1.53 1.29 1.10 1.33


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Particulars C) Industry

Dr. Reddy Cipla Glaxo Sun Pharma Ranbaxy CHL

Liquid Assets INR-MILLIONS

Cash & Bank 5373 793 15499 10724 1805 2825

Debtors 8977 13939 3777 10554 8829 190

loans & advances 8922 11158 13099 3619 6886 3355

other assets 0 345 2792 258 1020 0

Total 23272 26235 35168 25155 18540 6370


Provisions 901 4168 39255 2628 7381 983

Total 7709 12477 63732 9891 15713 3759

Liquid Ratio: 3.02 2.10 0.55 2.54 1.18 1.69

1.2.5 Graphical Presentation:

1.2.6 Interpretation:

A. Cadila Health Care Ltd.:

As we can observe that the liquid ratio of the company for the year 2006-07 is the best,

while that in the year 2005-06 and 2007-08 is higher than the standard ratio, so in both the years the

company has high liquidity. This is because the company has comparatively less amount of liabilities than

in the year 2006-07. So the amount of liquid assets is higher than that required by the firm to maintain

short term liquidity. While the amount blocked in the liquid assets can be used for some other purpose.

B. Consolidated:

Similarly in this case also, the ratio for the year 2006-07 is the best, because the

proportionate increase in current liabilities is 81% that is more than the proportionate increase in liquid


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assets i.e. of 48%. While in the year 2007-08, reverse is the case i.e. the amount of current liabilities have

reduced while the amount of liquid assets have increased, this means that company has more liquidity

than required.

C. Industry:

Dr. Reddy: Here the ratio is the highest in the whole industry, as the company has very

high amount of liquidity, which is not a good sign for the company’s growth. The

amount of debtors is very high due to high average collection period, while the amount

of provisions is less. So while comparing it with CHL, it can be said that the latter has

better ratio, due to well maintained average collection period and required amount of

provisions.

Cipla: Here the ratio is higher than the standard due to high average collection period

and also high amount of loans and advances. So even in this case, CHL has better ratio.

Glaxo: Here the ratio is very low than the standard ratio, due to very high amount of

provisions are to be maintained by the company, for which sufficient amount of liquid

assets is not available. Thus while comparing it with CHL, it can be said that the latter

has sound financial position with required amount of liquidity.

Sun Pharma: Here the ratio is very high, because the company has high amount of

liquidity because of cash and bank and also the average collection period, which is

almost 1.5 times more than the standard ratio. This leads to higher amount of debtors.

So while comparing it with CHL, it can be said that the funds of the former company is

remaining ideal while that of the latter has sufficient amount of funds to pay the

liabilities.

Ranbaxy: Here the ratio of the company is very good, while compared to whole

industry. Though the amount of debtors is high, but the average collection period is

maintained by the company. Even the high amount of provisions is the reason, which

makes the ratio near to the standard. So while comparing it with CHL, it can be said that

the latter has high amount of liquidity than required.

1.2.7 Conclusion/ Recommendation:

Following are the recommendations that the company should look upon:

CHL: Our Company should reduce their creditors, because the average payment period is high in all the three years and major portion of the current liabilities is of creditors. This can improve their liquidity to a greater extend.

Consolidated: Our Company should maintain proper amount of cash that is required to maintain liquidity position, rest of the funds should be invested in other operations.

Industry: We can conclude that our company has good short term financing capacity and is maintaining its liquid ratio near to the ideal ratio as compared to other competitive companies in the industry.

__________________________________________________________________________


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1.3 Liquid Ratio: Liquid Assets

Liquid Liabilities

1.3.1 Standard Ratio: 1:1

1.3.2 Components:

a.) Liquid Assets: Cash and Bank b.) Current liabilities: Liabilities

+ Debtors + Provisions

+ Loans & Advances - Bank Overdraft

+ Other Assets

1.3.3 Definition:

a.) Liquid assets (L.A.) means the current assets excluding stock and prepaid i.e. the assets which

are converted into cash without loss within a short period of time say, 1 year is known as liquid assets.

b.) Liquid liabilities (L.A) are obtained by deducting bank overdraft from current liabilities. Bank

overdraft is not treated as liquid liability because it is not likely to be called on demand and it is treated as

sort of permanent mode of finance.

c.) Liquid Ratio indicates the cash liquidity position of the firm, that is whether the company will be

able to pay of its liquid liabilities immediately or not.

1.3.4 Working:



Liquid Assets 2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06

Cash & Bank 2825 2386 1851 3555 2784 1990

Debtors 190 124 23 926 990 438

loans & advances 3355 2273 2086 2013 2201 1588

Total 6370 4783 3960 6494 5975 4016

Liquid Liabilities

Liabilities 2776 3764 1999 4138 4588 2404

Provisions 983 743 597 913 858 605

Bank overdraft 0 0 0 61 36 14

Total 3759 4507 2596 4990 5410 2995

Liquid Ratio 1.69 1.06 1.53 1.30 1.10 1.34


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Liquid Assets INR-MILLIONS

Cash & Bank 5373 793 15499 10724 1805 2825

Debtors 8977 13939 3777 10554 8829 190

loans & advances 8922 11158 13099 3619 6886 3355

other assets 0 345 2792 258 1020 0

Total 23272 26235 35168 25155 18540 6370

Liquid Liabilities

Liabilities 6809 8309 24477 7263 8331 2776

Provisions 901 4168 39255 2628 7381 983

Total 7709 12477 63732 9891 15713 3759

Liquid Ratio 3.02 2.10 0.55 2.54 1.18 1.69




As we can observe that the liquid ratio of the company for the year 2006-07 is the best,

while that in the year 2005-06 and 2007-08 is higher than the standard ratio, so in both the years the

company has high liquidity. This is because the company has comparatively less amount of liabilities than

in the year 2006-07. So the amount of liquid assets is higher than that required by the firm to maintain

short term liquidity. While the amount blocked in the liquid assets can be used for some other purpose.

B. Consolidated:

Similarly in this case also, the ratio for the year 2006-07 is the best, because the

proportionate increase in current liabilities is 81% that is more than the proportionate increase in liquid


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assets i.e. of 48%. While in the year 2007-08, reverse is the case i.e. the amount of current liabilities have

reduced while the amount of liquid assets have increased, this means that company has more liquidity

than required.

C. Industry:

Dr. Reddy: Here the ratio is the highest in the whole industry, as the company has very

high amount of liquidity, which is not a good sign for the company’s growth. The

amount of debtors is very high due to high average collection period, while the amount

of provisions is less. So while comparing it with CHL, it can be said that the latter has

better ratio, due to well maintained average collection period and required amount of

provisions.

Cipla: Here the ratio is higher than the standard due to high average collection period

and also high amount of loans and advances. So even in this case, CHL has better ratio.

Glaxo: Here the ratio is very low than the standard ratio, due to very high amount of

provisions are to be maintained by the company, for which sufficient amount of liquid

assets is not available. Thus while comparing it with CHL, it can be said that the latter

has sound financial position with required amount of liquidity.

Sun Pharma: Here the ratio is very high, because the company has high amount of

liquidity because of cash and bank and also the average collection period, which is

almost 1.5 times more than the standard ratio. This leads to higher amount of debtors.

So while comparing it with CHL, it can be said that the funds of the former company is

remaining ideal while that of the latter has sufficient amount of funds to pay the

liabilities.

Ranbaxy: Here the ratio of the company is very good, while compared to whole

industry. Though the amount of debtors is high, but the average collection period is

maintained by the company. Even the high amount of provisions is the reason, which

makes the ratio near to the standard. So while comparing it with CHL, it can be said that

the latter has high amount of liquidity than required.


Following are the recommendations that the company should look upon:

CHL: Our Company should reduce their creditors, because the average payment period is high in all the three years and major portion of the current liabilities is of creditors. This can improve their liquidity to a greater extend.

Consolidated: Our Company should maintain proper amount of cash that is required to maintain liquidity position, rest of the funds should be invested in other operations.

Industry: We can conclude that our company has good short term financing capacity and is maintaining its liquid ratio near to the ideal ratio as compared to other competitive companies in the industry.

__________________________________________________________________________


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2.) Profitability Ratios:

2.1 Gross Profit Ratio= GP *100

Net sales

2.1.1 Components:

a.) GP= Gross Sales where, COGS: Opening Inventory

- Sales return + Consumption of raw materials and

- Excise Duty finished

- COGS - Closing Inventory

b.) Net sales: Gross sales

- Excise duty

2.1.2 Definition:

a.) Gross Profit (G.P) means the difference between net sales and cost of goods sold and it is

the first and the broadest measure of the profits.

b.) Net Sales means the amount of sales generated by a company after the deduction of returns,

allowances for damaged or missing goods and any discounts allowed. The sales number reported on a

company's financial statements is a net sales number, reflecting these deductions.

c.) Gross Profit Ratio means gross profit divided by net sales. High ratios are favorable in that

they indicate the business is earning a good return on the sale of its merchandise, although that may also

invite competition. This ratio should be adequate to cover the administrative and marketing expenses and

to provide for fixed charges, dividends and building up of reserves. Higher the ratio, better it is.


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2.1.3 Working:



Gross profit 2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06

gross sales 17191 15014 13082 23638 18747 15078

less: excise duty 771 877 623 978 892 625

Net Sales 16420 14137 12459 22660 17855 14453

Less: Cogs

opening inventory 3287 2128 1939 3896 2475 2221

Add: consumption 6313 5249 5090 7903 6372 5688

Less: closing inventory 3310 3287 2128 4279 3896 2475

Cogs 6290 4090 4901 7520 4951 5434

Total 10130 10047 7558 15140 12904 9019

Net sales gross sales 17191 15014 13082 23638 18747 15078

less: excise duty 771 877 623 978 892 625

Total 16420 14137 12459 22660 17855 14453

Gross Profit Ratio: 61.69% 71.07% 60.66% 66.81% 72.27% 62.40%

Particulars

C) Industry Dr. Reddy Cipla Glaxo Sun Pharma Ranbaxy CHL

Gross profit INR-MILLIONS

gross sales 33865 40886 171284 24274 43908 17191

less: excise duty 558 907 13570 617 447 771

net sales 33307 39979 157714 23656 43461 16420

less: Cogs

opening inventory 4876 9786 24095 3334 9549 3287

Add: consumption 12535 20594 62846 15267 17813 6313

Less: closing inventory 6409 11205 20596 3896 9761 3310

Cogs 11001 19175 66345 14705 17602 6290

Total 22305 20804 91369 8952 25860 10130

Net sales

gross sales 33865 40886 171284 24274 43908 17191

less: excise duty 558 907 13570 617 447 771

Total 33307 39979 157714 23656 43461 16420

Gross Profit Ratio: 66.97% 52.04% 57.93% 37.84% 59.50% 61.69%


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As we can observe that company is able to maintain very healthy gross profit ratio that

means the company is able to recover the cost of goods sales very easily.

B. Consolidated:

Here we can say that the company is maintaining very pretty ratio, as the direct cost to

produce goods is quite less. So it can be said that company has good control over direct expenses.

C. Industry:

Dr. Reddy: Here the ratio for this company is the highest in the industry, even the direct

expenses are less than the CHL. While COGS is only 33% of the gross sales, because of

which amount of gross profit is high.

Cipla: Here the ratio of the company is less than that of CHL, as it has high amount of

direct expenses and COGS which leads to decrease in gross profit of the company.

Glaxo: Here the ratio of the company is less than that of CHL, as its COGS is 42% of gross

sales which is high and this leads to decrease in gross profit of the company. While only

in this company, it can be seen that the COGS is more than the consumption of raw

material, which means that company has forecasted the demand properly.

Sun Pharma: Here the ratio of Gross profit is the lowest in the industry, due to lack of

inventory management because of which high amount of COGS (62% of gross sales) is

remaining idle and thus reducing the gross profit of the company.


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Ranbaxy: Here the ratio of company is very near to that of CHL, as the COGS are almost

of same percentage as that of our company.


We can conclude that our company maintains very pretty percentage of Gross Profit Ratio,

but still there are certain suggestions that it should consider. They are:

CHL: Our Company should reduce the amount of inventory (consumption) that is purchased every year and first utilize the closing stock of the last year. This will help the company to have better inventory control system and thus proper utilization of inventory will lead to reduce the amount of closing stock for that current year and thereby increase in gross profit.

Consolidated: Our Company should first use the existing stock and then only order new inventory, so that its proper utilization will reduce the closing stock and thereby help to increase the gross profit.

Industry: We can conclude that our company has good percentage of Gross profit ratio when compared to other competitors but still it should try to reduce its direct expenses as that of Dr. Reddy and thereby increase its GP Ratio.

__________________________________________________________________________

2.2 Net Profit Ratio: PAT*100

Net sales

2.2.1 Components:

a.) PAT

b.) Net sales= gross sales-excise duty

2.2.2 Definition:

a.) Net Profit (Profit after Tax - PAT) means amount of money earned after all expenses,

including overhead, employee salaries, manufacturing costs, and advertising costs, have been deducted

from the total revenue.

b.) Net Sales means the amount of sales generated by a company after the deduction of returns,

allowances for damaged or missing goods and any discounts allowed. The sales number reported on a

company's financial statements is a net sales number, reflecting these deductions.

c.) Net Profit Ratio is to determine the overall efficiency of the business. Higher the net profit

ratio, better the business. This ratio helps in determining the operational efficiency of the business.

Sometimes PBT/sales ratio is taken as a better indicator of profitability since tax liability on profit Is beyond

the control of the enterprise.


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2.2.3 Working:

Particulars

A) CHL- Standalone B) Consolidated


2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06

Net profit 2362 2047 1649 2576 2338 1524

Net sales:

gross sales 17191 15014 13082 23638 18747 15078

less: excise duty 771 877 623 978 892 625

Total 16420 14137 12459 22660 17855 14453

NET PROFIT RATIO: 14.38% 14.48% 13.24% 11.37% 13.09% 10.54%

Particulars


INR-MILLIONS

Net profit 4752 7014 53766 10140 6673 2362

Net sales:

gross sales 33865 40886 171284 24274 43908 17191

less: excise duty 558 907 13570 617 447 771

Total 33307 39979 157714 23656 43461 16420

NET PROFIT RATIO: 14.27% 17.54% 34.09% 42.87% 15.35% 14.38%



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As we can observe that our company is able to maintain good percent of Net Profit Ratio,

but the best ratio achieved was in the year 2006-07 as the increase in net profit was of 24% while the

increase in net sales was only 13%. While in the year 2007-08, the company was able to maintain almost

same percentage of NP Ratio, as the % increase in net profit was same as that of net sales.

B. Consolidated:

Similarly our company was able to achieve good % of NP ratio in the year 2006-07 as in this

year increase in net profit was more than that of net sales, but it was not able to maintain the ratio in the

year 2007-08 as the net sales increased more than that of net profit. So it can be said that the operating

efficiency of the company is quite sound.

C. Industry:

Dr. Reddy: Here it can be said that the ratio of this company is almost same as that of

CHL, though the net profit and net sales is almost double than that of CHL.

Cipla: Here it can be said that the ratio is better than CHL, as the net profit is

proportionately more than net sales of this company. So the operating efficiency of this

company is better than that of CHL.

Glaxo: Here the ratio is very good, as it can be seen that this company has very high

amount of net profit and even the sales is very high when compared to other companies

in the industry. So while compared with CHL, we can say that the company has good

control over the operating expenses.

Sun Pharma: The Net Profit Ratio of this company is the best in whole industry, as the

net profit of this company is almost 3.25times more than that of CHL while net sales is

23% more than that of CHL. So this means that this company has very sound operating

efficiency.

Ranbaxy: Even in this company we can observe that the ratio is higher than CHL due to

healthy net profit.


We can conclude that though the company is able to maintain and even increase the Net Profit

Ratio. But there are certain loop holes due to which it is not able to achieve so high ratio in the industry.

Following are the recommendations:

CHL: Our Company should reduce the amount of operating expenses, so that the net profit can be increased and should try to increase to sales with proper planning.

Consolidated: Our Company should try to reduce certain advertisement and sales promotion expenses, which are really not required by the company.


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Industry: We can conclude that our company has good percentage of Net profit ratio when compared to other competitors but still it should try to reduce its operating expenses as that of Sun Pharma and thereby improve its NP Ratio.

__________________________________________________________________________

2.3. Return on total assets: PAT*100

Total assets

2.3.1 Components: a.) Total assets: Fixed assets

b.) PAT

+Investments

+ Current assets

2.3.2 Definition:

a.) Total Assets are the resources which are expected to provide a firm with future economic

benefits, by way of higher cash inflows or lower cash outflows.

b.) Profit (Profit after Tax - PAT) means amount of money earned after all expenses, including

overhead, employee salaries, manufacturing costs, and advertising costs, have been deducted from the

total revenue.

c.) Return on Total Assets is considered an indicator of how effectively a company is using its

assets to generate earnings before contractual obligations must be paid.

2.3.3 Working:



Total assets: 2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06

Fixed assets 8803 7936 7449 14001 9783 8329

Investments 4427 2928 1851 254 261 714

Current assets 9680 8070 6088 11223 9871 6491

Total 22910 18934 15388 25478 19915 15534

PAT 2362 2047 1649 2576 2338 1524

RETURN ON TOTAL ASSETS: 10.31% 10.81% 10.72% 10.11% 11.74% 9.81%


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Total assets: INR-MILLIONS

Fixed assets 12331 18945 9290 6635 17969 8803

Investments 19306 948 133332 18436 32376 4427

Current assets 29682 37440 55764 29051 28301 9680

Total 61319 57332 198387 54122 78646 22910

PAT 4752 7014 53766 10140 6673 2362

RETURN ON TOTAL ASSETS: 7.75% 12.23% 27.10% 18.74% 8.49% 10.31%




As we can observe that our company is able to get good and consistent return on total

assets, especially in the year 2006-07, the ratio is good as the portion of current assets and other assets is

almost equal, so that liquidity is good and even the PAT in this year has increased proportionately more

than that in the year 2007-08.

B. Consolidated:

Even here it can be observed that company is able to maintain the ratio, as it said that

higher the return more efficient the management is in utilizing the asset base, but the amount of profit

after tax is not so good, even the investments are very less, due to this the returns on this investment will

be less and ultimately it will affect the amount of Profit after tax.


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C. Industry:

Dr. Reddy: While comparing this company with CHL, we can say that the latter has

better ratio than this company, as the amount of PAT is comparatively very less than our

company. So we can say that our company has better asset utilization base.

Cipla: While comparing this company with CHL, we can say that this company has better

return than CHL, as the amount of PAT is 3times more and the assets are only 2.5times

more than our company. So the company is having good asset utilization and thus gets

pretty returns.

Glaxo: Here it can be said that the return on assets of this company is the highest in the

industry, which means that it gets very good return on assets due to high amount of

investment.

Sun Pharma: Even this company has better ratio than CHL, due to very high amount of

Profit after tax and also less amount of fixed assets.

Ranbaxy: Here the ratio of this company is less than our company, because though the

amount of investment is pretty healthy, this company is not able to get good amount of

return on it.


We can conclude that the return on assets of our company is consistent but there are certain

suggestions that it should look upon:

CHL: Our Company should try to increase the amount of profit after tax with proper

planning for utilizing the assets in the most efficient manner.

Consolidated: Our Company should try to increase the amount of investment to get

proper returns on it and thereby improve the profits in order the increase total return

on assets.

Industry: We can conclude that our company has good return on the total assets but

still it should try to reduce its operating expenses so that profit can be increased and

thereby improve total return on assets.

__________________________________________________________________________

2.4. Return on capital employed: PBIT

Capital employed


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2.4.1 Components:

a.) Capital employed: Capital b.) PBIT: PBT

+ Reserves & Surplus + Interest

+ Loan fund

+ Minority Interest

- Misc Expenses

2.4.2 Definition:

a.) Capital employed is the total amount of capital used for the acquisition of profits or value of

all the assets employed in a business and it is arrived after deducting current liabilities from the total

assets of the concern.

b.) Profit before Interest and Tax (PBIT) is a measure of profit before considering interest

expense and tax burden and its abstracts away the effect of debt policy (which determines the interest

expense) as well as the tax code (which determines the tax burden).

c.) Return on Capital Employed is used in finance as a measure of the returns that a company

is realizing from its capital employed. It is commonly used as a measure for comparing the performance

between businesses and for assessing whether a business generates enough returns to pay for its cost of

capital.

2.4.3 Working:



Capital employed 2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06

Capital 628 628 314 628 628 314

Reserves & Surplus 9910 8195 7049 9994 8027 6675

loan fund 7389 4477 4332 8377 4535 4432

minority interest 0 0 0 194 142 7

misc exp 734 667 616 969 823 779

Total 17193 12633 11079 18224 12509 10649

PBIT

PBT 2737 2319 1999 3234 2739 1768

Interest 201 176 205 335 223 251

Total 2938 2495 2204 3569 2962 2019

Return on capital employed: 17.09% 19.75% 19.89% 19.58% 23.68% 18.96%

http://www.answers.com/topic/finance

http://www.answers.com/topic/returns-economics

http://www.answers.com/topic/capital-employed


102 | P a g e



Capital employed INR-MILLIONS

Capital 841 1555 8470 1036 1865 628


loan fund 4623 5805 577 1025 35030 7389

misc exp 0 693 5683 0 0 734

Total 52741 42670 130986 43101 60402 17193

PBIT

PBT 5841 8384 61117 10522 7744 2737

Interest 102 117 64 934 201

Total 5943 8501 61181 10522 8678 2938

Return on capital employed: 11.27% 19.92% 46.71% 24.41% 14.37% 17.09%




As we can observe that the return on capital employed for the company is good but not

consistent and infact is decreasing year by year, this means that the capital employed has increased more

rapidly than profit before interest and tax. Even the amount of loan fund is increasing consistently, due to

which the capital employed increases and so the return on capital employed decreases.


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B. Consolidated:

Even here the company is not able to maintain the return on capital employed, as it

increases the amount of loan fund and reserves and surplus every year so this decreases the return on

capital employed. But in the year 2006-07, the return on capital employed was very good as the amount of

loan fund was almost 50% than that in the year 2007-08.

C. Industry:

Dr. Reddy: Here the ratio is very less compared to that of our company, as the capital

employed of this company is very high than that of CHL.

Cipla: Here the ratio of this company when compared to CHL is high, as the increase in

the proportion of profit is more than that of increase in the capital employed.

Glaxo: Here it can be said that the ratio of this company is the best among all the

competitors in the industry, as this company’s profit is 19 times more than that of CHL,

while capital employed is only 6.6 times more than that of our company. So the

company uses its capital very efficiently to get proper returns on it, this leads to high

return on capital employed.

Sun Pharma: Here when the ratio is compared with CHL, this company has better ratio.

As it can be observed that the profit of this company is very high than CHL.

Ranbaxy: Here when CHL is compared with this company, we can say that the ratio of

our company is better as this company has very high amount of loan fund, which

decreases the return on capital employed.


We can conclude that our company has good return on capital employed, but not consistent. So

following are the recommendations that it should keep into mind:

CHL: Our Company should try to decrease the amount of loan fund, so that the capital

employed decreases and thereby get better return on capital employed.

Consolidated: Our Company should try to increase the operating profit, so that the

profit before interest and tax increase, but along with that our company should to

reduce the amount of loan fund due to which the capital employed increases and

thereby reduces the return on capital employed.

Industry: We can conclude that our company has good return on capital employed but

not consistent as the operating of the company is less and the amount of loan fund is

high which should be reduced and thereby improve total return on capital employed.

__________________________________________________________________________


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2.5 Return on equity: (PAT - Preference dividend)*100

Shareholders fund

2.5.1 Components:

a.) Share holders fund: Capital B.) PAT

+ Reserves & surplus - Preference Dividend

+ Minority Interest

2.5.2 Definition:

a.) Profit (Profit after Tax - PAT) means amount of money earned after all expenses,



b.) Shareholders’ Funds is the funds invested t the risk of the owners of the business concern and it

is arrived after deducting all the outside liabilities both current and concurrent from total assets of the

concern.

c.) Return on Equity is used to compare the performance of a company’s equity capital with that of

the company. The company with higher return on equity will be favored by the investors. In addition to this,

a greater market valuation will be placed on its shares.

2.5.3 Working:

Particulars



2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

PAT 2362 2047 1649 2621 2415 1525

Shareholder fund

Capital 628 628 314 628 628 314

reserves & surplus 9910 8195 7049 9994 8027 6675

Minority interest 0 0 0 194 142 7

Total 10538 8823 7363 10816 8797 6996

Return on equity: 22.41% 23.20% 22.40% 24.23% 27.45% 21.80%

Particulars

C) Industry


Pharma Ranbaxy CHL

INR-MILLIONS

PAT 4752 7014 53766 10140 6673 2362

Shareholder fund

Capital 841 1555 8470 1036 1865 628

reserves & surplus 47277 36004 127621 41041 23507 9910

Total 48118 37558 136092 42076 25372 10538

Return on equity: 9.88% 18.68% 39.51% 24.10% 26.30% 22.41%


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As it can be observed that the return on equity achieved by our company is pretty good in all the

three years. But it is the best in the year 2006-07, as the profit has increased more than 24% compared to

previous year, while in the year 2007-08 it has increase only 15% than its previous year. Even the company

has kept higher amount of profit as reserves and surplus, and therefore the shareholders fund increases,

due to which the return has decreased for shareholders in the year 2007-08.

B. Consolidated:

Here we can say that our company has good return on equity, especially in the year 2006-07

but it has decreased in the year 2007-08. The reason behind it is that a hefty amount of profit is kept aside

as reserves and surplus by the company and thereby the return on equity has reduced.

C. Industry:

Dr. Reddy: Here when the return of this company is compared with CHL, it can be said

that our company is having good return on equity and therefore it is able to utilize its

equity in a profitable manner. The reason of not getting higher returns for this company

is very less amount of borrowed funds, due to which the benefit of trading on equity

decreases that leads to decrease in return on equity.

Cipla: Here the return on equity of this company is bit lower than CHL, mainly due to

high amount of profit is kept as reserves and surplus i.e. more than 3.5 times of CHL

while profit increases only 3 times.

Glaxo: Here the return on equity of this company is the best in the industry. While

comparing it with CHL, it is high as the profit of this company is 22times more than our

company and shareholders fund is only 11 times more. So it can be said that this


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company has good return on equity and thus its valuation of shares and goodwill is very

high in the market.

Sun Pharma: Even this company has better return on equity than CHL, as it has good

amount of profits and better operating efficiency.

Ranbaxy: When the return on equity of this company is compared with our company,

the former has better return as it has kept less amount of profit as reserves and surplus

and thus it provides good returns to its shareholders by getting the benefit of trading of

equity with good debt to equity ratio.


We can conclude that our company provides very pretty returns to shareholders on their

investments, as it also gain the benefit of trading on equity by maintaining good debt to equity ratio. But

following are the recommendations that it should keep in mind:

CHL: Our Company should try to decrease the amount operating expenses and also the

amount of reserves and surplus as this leads to decrease in the total profit on company.

Consolidated: Our Company should try to decrease the operating expenses, so that the

profit increases, but along with that our company should to reduce the amount of

reserves and surplus due to which the shareholders fund increases and thereby reduces

the return on equity.

Industry: We can conclude that our company has good return on equity but it has stiff

competition with other companies in the industry especially with Glaxo, which has

achieved highest return on equity.

__________________________________________________________________________

3) MARKET BASED RATIO:

3.1 EPS= Net profit

no of equity shares

3.1.1 Component:

a.) Net profit

b.) No of equity shareholders

3.1.2 Definition:

a.) Net Profit (Profit after Tax - PAT) means amount of money earned after all expenses,




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b.) No of equity shares means the subscribed and paid up capital that is being hold by the

equity shareholder of the concern.

c.) Earnings per Share (EPS) indicates the profit available to the ordinary shareholders. This

ratio helps in evaluating the prevailing market price of the share in the light of profit earning capacity.

Higher the earning per share, better are the performance and prospects of the company. Generally 10-20

times of EPS are considered as a justified market price of share.

3.1.3 Working:

Particulars



2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

Net profit 2362 2047 1649 2576 2338 1524

No of shareholders 125.613708 125.613708 62.806854 125.613708 125.613708 62.806854

EPS= 18.80 16.30 26.26 20.51 18.61 24.26

Particulars


INR-MILLIONS

Net profit 4752.219 7014.3 53765.85 10140.4 6177.2 2362


EPS= 28.26 9.03 63.47 48.96 16.56 18.80



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As we can observe that our company gives good return to their shareholders by earning

good profits and thereby increasing the shareholders base. The best return was given in the year 2005-06,

as the EPS was highest in this year. But in the year 2006-07, company issued bonus shares in 1:1 ratio,

because of which the no. of shares increased while the amount of profit decreased comparatively.

B. Consolidated:

Even here the return in the year 2005-06 is the best, but further it decreased due to issue of

bonus shares in 1:1 ratio. This leads to expansions of shareholders base and therefore earning per share

decreases.

C. Industry:

Dr. Reddy: Here the earning per share of this company is pretty good than CHL, as the

divisible profit of this company is high because the proportion of debt in its capital

structure is very less.

Cipla: Here the earning per share of this company is very less than CHL, as it has high

equity base in its capital structure but it is not able to earn high amount of divisible

profits because major portion is kept as reserves and surplus.

Glaxo: Here the earning per share of the company is the highest in the whole industry,

as though the company has good equity base, it has high amount of profits also. So this

company is able to give high returns to its equity shareholders and thus have high

potential to grow.

Sun Pharma: Here the earning per share of the company is almost 2.5 times more than

that of CHL, as though the no. of shares is greater than CHL; the amount of profit is 5

times more than our company.

Ranbaxy: When the EPS of this company is compared with our company, we can say

that CHL gives better returns to its shareholders. Because this company has high

amount of debt, and so more portion of the profits are used up in paying the interest on

the borrowed funds and therefore less amount of profit is left for the shareholders.


We can conclude that our company earns good amount of profit and there it is able to give better

returns to its shareholders on each share. But there are certain suggestions that it should consider, they

are;


amount of reserves and surplus as this leads to decrease in the total profit on company

and so the divisible profit decreases.


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profit increases, but along with that our company should to reduce the amount of other

research expenses and thereby increase the earning per share.

Industry: We can conclude that our company earns pretty profit and therefore the

shareholders are able to earn good returns on their invested amount. But should try to

increase its profit and even the no. of shares, as it has very acute competition in the

industry. Most of the competitors are earning high amount of profit and are able to give

better returns to their shareholders.

__________________________________________________________________________

3.2 DPS= Dividend paid to ordinary

shareholders

no of equity shares

3.2.1 Component: a.) Dividend paid to ordinary shareholders

b.) No of equity shareholders

3.2.2 Definition:

a.) Dividend paid to ordinary shareholders is the part of profit paid to the equity

shareholders of the concern.

b.) No of equity shares means the subscribed and paid up capital that is being hold by the

equity shareholder of the concern.

c.) Dividend per Share (DPS) reveals the amount of dividend paid to the ordinary shareholders

on a per share basis.

3.2.3 Working:

Particulars



2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

Dividend paid to ordinary shareholders 565 502 377 565 506 377


DPS: 4.50 4.00 6.00 4.50 4.03 6.00


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Particulars


INR-MILLIONS

Dividend paid to ordinary shareholders 630.648 155.46 30493.08 2174.7 3171 565


DPS: 3.75 2.00 36.00 10.50 8.50 4.50




As we can observe that our company is able to give good dividend per share to their

shareholders, but DPS was the best in the year 2005-06 due to high rate of dividend, but slowly and

gradually it reduced in the further years due to low rate of dividend, as bonus issue of equity shares were

issued and thus more opportunities for the investors was to invest in equity shares.

B. Consolidated:

Even here the DPS was highest in the year 2005-06, but further it reduced as many investors

shifted to invest in equity shares as in the year bonus shares were issued in the ratio of 1:1.

C. Industry:

Dr. Reddy: Here the amount of DPS is slightly less than that of CHL.

Cipla: Here the amount of DPS is 50% to that of CHL, as the dividend policy of our

company is better than this company.


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Glaxo: This Company has the highest dividend per share in the whole industry, due to

high profit earning capacity which means that for the investors, it is the safest option for

the investors to invest their money.

Sun Pharma: Here the DPS of the company is double than CHL due to high earning

capacity of this company which is almost 4 times that of our company.

Ranbaxy: Here the DPS of this company is also more than our company due to high

amount of profits that it earns helps them to distribute more amount of dividend to its

shareholders.


We can conclude that our company gives good amount of DPS to its shareholders but there are

certain suggestions that it should consider. They are:


amount of reserves and surplus as this leads to decrease in the total profit on company

and so more amount of dividend can be distributed.


profit increases, but along with that our company should to reduce the amount of other

research expenses and thereby increase the dividend per share.

Industry: We can conclude that our company earns pretty profit and therefore the

shareholders are able to earn good returns on their invested amount. But should try to

increase its profit and even the no. of shares, as it has very acute competition in the

industry. Most of the competitors are earning high amount of profit and are able to give

better returns to their shareholders.

__________________________________________________________________________

3.3 Dividend payout ratio= DPS

EPS

3.3.1 Component: a.) DPS

b.) EPS

3.3.2 Definition:

a.) Dividend per Share (DPS) reveals the amount of dividend paid to the ordinary shareholders

on a per share basis.

b.) Earnings per Share (EPS) indicates the profit available to the ordinary shareholders. This

ratio helps in evaluating the prevailing market price of the share in the light of profit earning capacity.

Higher the earning per share, better are the performance and prospects of the company. Generally 10-20

times of EPS are considered as a justified market price of share.


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c.) Dividend Payout Ratio (DPR) defines the relationship between the returns

belonging to the ordinary shareholders and the dividend paid to them, or, the percentage share of net

profit is paid to ordinary shareholders.

3.3.3 Working:

Particulars



2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06

DPS 4.5 4 6 4.5 4.03 6

EPS 18.8 16.3 26.26 20.51 18.62 24.26

Dividend payout ratio 23.94% 24.54% 22.85% 21.94% 21.64% 24.73%

Particulars


INR-MILLIONS

DPS 3.75 2.00 36.00 10.50 8.50 4.5

EPS 28.26 9.03 63.47 48.96 16.56 18.8

Dividend payout ratio 13.27% 22.16% 56.71% 21.45% 51.33% 23.94%




As we can observe that our company has pretty hefty and consistent dividend payout ratio,

it means that good amount of the earnings is paid as dividend by the company.


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B. Consolidated:

But in this case the ratio has decreased, as the dividend per share is having decreasing trend

while earning per share is having increasing trend. So dividend policy is becoming conservative year to

year.

C. Industry:

Dr. Reddy: Here it can be said that his company has conservative dividend payout policy

than CHL.

Cipla: Here it can be said that this company’s earning is very low and therefore EPS and

DPS is comparatively lower than CHL.

Glaxo: This company has the highest DPS and EPS in the whole industry, so we can that

this company is the safest for the investors to get very good returns on their

investments, as major portion of the profit is distributed as dividend.

Sun Pharma: Here the ratio is lower than CHL, as les amount of profit is distributed as

dividend.

Ranbaxy: Here the ratio of this company is almost 50% of its total earning per share,

which means that though the company has less amount of EPS compared to other

companies, but it give high amount to dividend to its long term shareholders.


We can conclude that our company has good consistent dividend payout ratio and also it has

sufficient cash on hand to pay the dividends. But there are certain suggestions that the company should

consider:

CHL: Our Company should try to be more liberal in giving dividends to the shareholders.

Consolidated: Our Company should try to increase the dividend rate, so that more

returns can be given to the investors.

Industry: We can conclude that our company earns pretty amount of profit and

therefore the shareholders are able to earn good returns on their invested amount. But

it should try to give more amount of dividend like Glaxo and Ranbaxy, or else few

investors of our company will be attracted to the high returns given by the competitors

and we might lose our premium investors.

__________________________________________________________________________


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4) Leverage Ratios:

4.1 Debt equity ratio: Total Debt

Net Worth

4.1.1 Components:

a.) Total debt: Minority Interest b.) Net worth: Capital

+ Loan Fund + Reserves & surplus

4.1.2 Definition:

a.) Debt is one which is owed, usually referencing assets owed. In the case of assets, debt is a

means of using future purchasing power in the present before a summation has been earned.

b.) Net worth means subtracting total liabilities from total assets of the company.

c.) Debt Equity Ratio is used to derive an idea of the amount of capital supplied to the concern

by the proprietors and of asset ‘cushion’ or cover available to its creditors on liquidation. This ratio is

sufficient to assess the soundness of long term financial position. It also indicates the extent to which the

firm depends upon for its existence. In other words, it portrays the proportion of total funds acquired by

firm by the way of loans. Higher the ratio means the outside liabilities have a large claim than the owners

of the business. Lower the ratio will indicate that the company has not obtained the benefit of trading on

equity.

4.1.3 Working:



Total debt 2007-08 2006-07 2005-06 2007-08 2006-07 2005-06


Loan fund 7389 4477 4332 8377 4535 4432

Total 7389 4477 4332 8571 4677 4439

Net worth

Capital 628 628 314 628 628 314

Reserves & surplus 9910 8195 7049 9994 8027 6675

Total 10538 8823 7363 10622 8655 6989

Debt equity ratio: 0.70 0.51 0.59 0.81 0.54 0.64


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Total debt INR-MILLIONS

Loan fund 4623 5805 577 1025 35030 7389

Net worth

Capital 841 1555 8470 1036 1865 628


Total 48118 37558 136092 42076 25372 10538

Debt equity ratio: 0.10 0.15 0.004 0.02 1.38 0.70


4.1.5 Interpretation: A. Cadila Health Care Ltd.:

As we can observe that our company is able to get good amount of borrowed capital in all

the three years, so the company is obtaining the benefit of leverage and also trading of equity to certain

extend especially in the year 2007-08.

B. Consolidated:

Even in this case we can observe that the company is able to high amount of borrowed

capital in the year 2007-08, but the ratio is lowest in the year 2006-07 as bonus shares were issued in the

ratio of 1:1, due to which the owners’ capital has increased.


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C. Industry:

Dr. Reddy: Here the ratio is very less than that of CHL, as the company has kept high

amount of reserves and surplus due to which the amount of net worth is very high.

Cipla: Even this company has high amount of reserves and surplus and also the equity

base is broad, and so this company is not able to receive the benefit of trading on equity

and it is an unlevered firm.

Glaxo: Here the ratio is extremely low compared to other companies in the industry, as

its capital structure mainly consists of equity and also keep high amount of reserves and

surplus, thus don’t rely much on borrowed capital.

Sun Pharma: Even here the company had very low and negligent ratio when compared

to that of CHL, due to high reserves and surplus.

Ranbaxy: Here the company is highly levered as it depends highly on borrowed funds

while the proportion of equity is very less. Thus the ratio is higher than CHL, it cannot

avail the benefit of trading on equity.


We can conclude that our company has very good debt to equity ratio, as it is able to get the benefit of trading on equity and also of leverage and thus it will be able to give better returns to its shareholders.

__________________________________________________________________________

4.2.1 Components:

a.) Total debt: Minority Interest b.) Total assets: Fixed Assets

+ Loan Fund + Currents assets + Investments

4.2.2 Definition: a.) Debt is one which is owed, usually referencing assets owed. In the case of assets, debt is a

means of using future purchasing power in the present before a summation has been earned

b.)Total Assets are the resources which are expected to provide a firm with future economic


c.) Debt assets ratio indicates what proportion of equity and debt that the company is using to

finance its assets. Sometimes investors only use long term debt instead of total liabilities for a more

stringent test. A ratio greater than one means assets are mainly financed with debt, less than one means

equity provides a majority of the financing.

4.2 Debt assets ratio: Total Debt

Total Assets


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4.2.3 Working:



Total debt 2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06


Loan fund 7389 4477 4332 8377 4535 4432

Total 7389 4477 4332 8571 4677 4439

Total assets Fixed assets 8803 7936 7449 14001 9783 8329

Investments 4427 2928 1851 254 261 714

Current assets 9680 8070 6088 11223 9871 6491

Total 22910 18934 15388 25478 19915 15534

Debt assets ratio: 0.32 0.24 0.28 0.34 0.23 0.29



Total debt INR-MILLIONS

Loan fund 4623 5805 577 1025 35030 7389


Investments 19306 948 133332 18436 32376 4427

Current assets 29682 37440 55764 29051 28301 9680

Total 61319 57332 198387 54122 78646 22910

Debt assets ratio: 0.08 0.10 0.0029 0.02 0.45 0.32



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As we can observe that the company is able to maintain the ratio, but the amount of debt in

all the three year is less as compared to the total assets, which means that the company take less risk and

not much levered.

B. Consolidated:

Even in this case the ratio of the company is consistent, and the amount of debt is also less

than the total assets, so company has good amount of liquidity to pay off the debt.

C. Industry:

Dr. Reddy: Here the ratio of the company is lower than CHL, so it better. As it has less

amount of borrowed funds and proportionately assets are in good amount.

Cipla: Here also the ratio of the company is lower than CHL, so it better. As it has less

amount of borrowed funds and current assets are in good amount, so it has quick

liquidity to pay off the liabilities.

Glaxo: Here the ratio of this company is lowest in the industry, this means that it has the

least risk and is also an unlevered firm.

Sun Pharma: Here the ratio of the company is lower than CHL, so it better. As it has less

amount of borrowed funds and proportionately assets are in good amount.

Ranbaxy: Here the ratio of this company is higher than that of our company, which

means that CHL has less risk than this company.


We can conclude that our company has consistent debt to assets ratio. But there are certain

suggestions that the company should consider:

CHL: Our Company should try to reduce the amount of loan fund, so as reduce the risk

of paying the liabilities from the total assets.

Consolidated: Even here also our company should try to reduce the amount of loan

fund, so as reduce the risk of paying the liabilities from the total assets.

Industry: We can conclude that our company has lower ratio, and so it needs less

amount of liquidity and also it does not depends on outside funds for smooth

functioning of its business. Thus lower the ratio, better it is of the company.

__________________________________________________________________________


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4.3 Proprietary ratio/ Net worth ratio: Proprietors fund

total assets

4.3.1 Components:

a.) Proprietors fund: Capital b.) Total assets: Fixed assets

+ Reserves & Surplus + Investments + Current Assets

4.3.2 Definitions: a.) Proprietors Fund is the fund invested at the risk of the owners of the business concern.

b.) Total Assets are the resources which are expected to provide a firm with future economic


c.) Proprietary Ratio represents the proportion of Proprietors’ Equity to Total Assets. It is a test

of capitalization and a high or low ratio may indicate low or high earnings respectively per share. The higher this Proprietary ratio denotes that the shareholders have provided the funds to purchase the assets of the concern instead of relying on other sources of funds like bank borrowings, trade creditors and others. This ratio is a test of credit strength as too low a proprietary ratio would mean that the enterprise is relying a lot more on its creditors to supply its working capital.

4.3.3 Working:



Proprietors fund 2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06

Capital 628 628 314 628 628 314


Total 10538 8823 7363 10622 8655 6989


Investments 4427 2928 1851 254 261 714

Current assets 9680 8070 6088 11223 9871 6491

Total 22910 18934 15388 25478 19915 15534

Proprietary ratio: 0.46 0.47 0.48 0.42 0.43 0.45


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Proprietors fund INR-MILLIONS

Capital 841 1555 8470 1036 1865 628


Total 48118 37558 136092 42076 25372 10538


Investments 19306 948 133332 18436 32376 4427

Current assets 29682 37440 55764 29051 28301 9680

Total 61319 57332 198387 54122 78646 22910

Proprietary ratio: 0.78 0.66 0.69 0.78 0.32 0.46



As we can observe that the company has consistent proprietary ratio, but is decreasing very

slightly year to year. This means that creditors don’t need to supply the working capital and are safe as the

total assets are high.

B. Consolidated:

Even here the company’s ratio is decreasing continuously, as the amount of fixed assets

goes on increasing and thereby the shareholders fund increases slowly.


121 | P a g e

C. Industry:

Dr. Reddy: The ratio of this company is higher than CHL, so it has better coverage to

meet the creditors than our company.

Cipla: Even here the ratio of this company is better than our company; as the amount of

current assets is higher than our company.

Glaxo: Here also the ratio of the company is higher than our company due to high

amount of investments and its creditors are safer than our company.

Sun Pharma: Even here the ratio of this company is higher than CHL, so it has better

coverage to meet the creditors than our company.

Ranbaxy: Only this company has lower ratio than our company, which means that our

company has better liquidity and our creditors are on safer side.


We can conclude that our company is able to maintain good ratio, but following are the suggestion that it should consider:

CHL: Our Company should try to increase the amount of reserves and surplus so the

proprietors fund increases and thereby the creditors will be on safer side.

Consolidated: Even here also our company should try to increase the amount of

reserves and surplus so the proprietors fund increases and thereby the creditors will be

on safer side.

Industry: We can conclude that our company has lower ratio, and so it should increase

its reserves and surplus to make the creditors safe.

__________________________________________________________________________

5) TURNOVER RATIOS:

5.1 Total Assets turnover ratio: net sales

total assets

5.1.1 Components:

a.) Net sales: Gross sales b.) Total assets: Fixed assets

- Excise Duty + Investments + Current Assets


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5.1.2 Definitions: a.) Net Sales means the amount of sales generated by a company after the deduction of returns,

allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company's financial statements is a net sales number, reflecting these deductions.

b.)Total Assets are the resources which are expected to provide a firm with future economic


c.) Total Assets Turnover Ratio helps to know the efficiency with which assets are utilized in

the business or assets are employed. If the ratio is lower than we can conclude that assets are

underutilized and if it higher the assets are optimally utilized.

5.1.3 Working:



Total assets 2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06

Fixed assets 8803 7936 7449 14001 9783 8329

Investments 4427 2928 1851 254 261 714

Current assets 9680 8070 6088 11223 9871 6491

Total 22910 18934 15388 25478 19915 15534


less: excise duty 771 877 622 978 892 625

Total 16420 14137 12460 22660 17855 14453

Total Assets turnover ratio: 0.72 0.75 0.81 0.89 0.90 0.93



Total assets INR-MILLIONS

Fixed assets 12331 18945 9290 6635 17969 8803

Investments 19306 948 133332 18436 32376 4427

Current assets 29682 37440 55764 29051 28301 9680

Total 61319 57332 198387 54122 78646 22910


less: excise duty 558 907 13570 617 447 771

Total 33307 39979 157714 23656 43461 16420



123 | P a g e


5.1.5 Interpretations: A. Cadila Health Care Ltd.:

As we can observe that our company has good total assets turnover ratio but decreasing

consistently due to constant increase in the amount of investment, therefore though the net sales

increases every year but the ratio is decreasing. So our company utilizes the assets with good planning, but

it should try to increase the sale and thereby make the optimum use of all the assets.

B. Consolidated:

We can say that or company has very hefty turnover ratio, as the assets are utilized in the

best possible manner. As net sales are increasing every year at a very good rate but the fixed assets and

currents assets have increase rapidly due to which ratio is decreasing every year.

C. Industry:

Dr. Reddy: The ratio of our company is very good than this company as the net sales of

CHL is proportionately very high compared to this company which means that asset

utilization of the former is good than the latter.

Cipla: Here the ratio of this company is almost similar to our company, but the amount

of current assets is very high due to which the asset utilization for achieving better net

sales is less than CHL

Glaxo: Here this company has better assets utilization than our company as the current

assets and investment of this company are very high to achieve high amount of net

sales.

Sun Pharma: The ratio of our company is very high than this company, as tough the

total assets of this company are very high but it is underutilized and so the proportion of

net sales is very less than our company.


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Ranbaxy: Even the ratio of this company is less than our company because the total

assets are underutilized.


We can conclude that our company has very consistent assets turnover ratio, but there are few suggestions that it should consider to make the optimum use of assets. They are:

CHL: Our Company should try to increase the use of fixed assets because it can help in

obtaining higher amount of net sales and thus the turnover will increase to a greater

extent.

Consolidated: Even here also our company should try to plan how well it can make the

use of each and every asset to get better quantity of products and thus high sales for

the company.

Industry: We can conclude that our company has very good ratio compared to all the

companies in the industry except Glaxo as the latter is able to utilize its assets in more

optimum way than our company.

__________________________________________________________________________

5.2 Stock turnover ratio: Gross sales

Average stock

5.2.1 Components:

a.) Gross sales b.)Average Stock: (Opening Stock + Closing Stock)/2 5.2.2 Definitions:

a.) Gross sales is defined to be the total invoice value of sales, before deducting customers'

discounts, returns, or allowances.

b.) Average Stock means the average of opening and closing stock.

5.2.3 Working:



Average stock 2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

Opening stock 3287 2128 1939 3896 2475 2221

closing stock 3310 3287 2128 4729 3896 2475

Total 3298.5 2707.5 2033.5 4312.5 3185.5 2348

Gross sales 17191 15014 13082 23638 18747 15078

Stock turnover ratio: 5.21 5.55 6.43 5.48 5.89 6.42

http://en.wikipedia.org/wiki/Invoice


125 | P a g e

Particulars

C) Industry


Pharma Ranbaxy CHL

Average stock INR-MILLIONS

Opening stock 4876 9786 24095 3334 9549 3287

closing stock 6409 11205 20596 7728 9761 3310

Total 5643 10495 22346 5531 9655 3299

Gross sales 33865 40886 171284 24274 43908 17191

Stock turnover ratio: 6.00 3.90 7.67 4.39 4.55 5.21




As we can observe that the stock turnover ratio of our company is very healthy as it can

utilize the inventory to its optimum level and therefore it can trade with higher margins of profit.

Especially in the year 2005-06, the amount of closing stock is not so high than the opening stock and so

with less amount of average inventory, company is able to achieve high quantity of gross sales.

B. Consolidated:

Even in this case company is able to get high stock turnover ratio due to efficient inventory

management to produce and sale huge quantity of goods with better profit margins. The best turnover

was in the year 2005-06 due to high gross sales.


126 | P a g e

C. Industry:

Dr. Reddy: The ratio of this company is higher than our company as the amount of gross

sales generated by the average inventory is almost double than that generated by CHL.

So the inventory utilization of this company is very sound.

Cipla: In this company though the gross sales is higher than CHL, it has high utilization of

inventory and so its stock turnover ratio is the lowest in the industry.

Glaxo: As observed in all the above ratios, even in this ratio Glaxo has very high ratio

than any other company in the industry, as it is able to generate the gross sales 10 times

more than that of our company, while it utilizing comparative less amount of average

inventory. Thus this company has sound inventory management system.

Sun Pharma: Here the ratio of this company is lower than CHL due to more utilization of

inventory, but unable to generate high amount of gross sales.

Ranbaxy: Even here the ratio of this company is lower than CHL due to more utilization

of inventory, but unable to generate high amount of gross sales.


We can conclude our company is able to utilize the inventory in very efficient way. But there are

certain suggestions that the company should consider:

CHL: Our Company should try to utilize the opening stock of inventory before using the

purchased inventory, so that the closing stock will be less and thus it will be able to

generate high gross sales by proper utilization of inventory.

Consolidated: Even here also our company should try to have a better inventory

management, so that stock does not remain idle and thereby it will help to have huge

amount of production and sales of goods with higher profit margins and thus high

turnover ratio.


companies in the industry except Glaxo as the latter is able to utilize its stock in more


__________________________________________________________________________

5.3 Fixed assets turnover ratio: Net sales

fixed assets

5.3.1 Components:

a.) Net Sales: Gross Sales b.) Fixed assets

- Excise Duty


127 | P a g e



b.) Fixed Assets are usually non-liquid business assets used in the operation of a business. These

assets are expected to produce benefits more than one year and these assets may be tangible or intangible. Tangible fixed assets include real estate, buildings, furniture, fixtures, and equipment, whereas, intangible fixed assets include trademarks, patents, and brand recognition.

c.) Fixed Assets Turnover Ratio indicates how efficiently or otherwise the fixed assets are

used. If there is increase in the ratio it will indicate that there is improvement in the utilization of fixed assets. If there is fall in the ratio, it is a case for the management to investigate the fall, if fixed asset remain ideal for any reason, the turnover ratio for assets will decrease.

5.3.3 Working:



Net sales 2007-08 2006-07 2005-06 2007-08 2006-

07 2005-06

gross sales 17191 15014 13082 23638 18747 15078

less: excise duty 771 877 623 978 892 625

Total 16420 14137 12459 22660 17855 14453

Fixed assets 8803 7936 7449 14001 9783 8329

Fixed assets turnover ratio:

1.87 1.78 1.67 1.62 1.83 1.74

Particulars

C) Industry


Pharma Ranbaxy CHL

Net sales INR-MILLIONS

gross sales 33865 40886 171284 24274 43908 17191

less: excise duty 558 907 13570 617 447 771

Total 33307 39979 157714 23656 43461 16420

Fixed assets 12331 18945 9290 6635 17969 8803

Fixed assets turnover ratio: 2.70 2.11 16.98 3.57 2.42 1.87


128 | P a g e



As we can observe that our company is able to get high fixed assets turnover ratio with

increasing trend in all the three financial years, due to optimum utilization of fixed assets to produce huge

quantity of goods and thereby generate high amount of net sales with hefty profit margins.

B. Consolidated:

Even here the ratio is very good in the year 2006-07, but decreased in the year 2007-08 as

the net sales has increased in less proportion than fixed assets. Thus the utilization of fixed assets should

be increased.

C. Industry:

Dr. Reddy: Here the ratio of this company is almost 50 % more than that of CHL, as the

amount of net sales is almost double than our company. Thus fixed assets are highly

utilized.

Cipla: Here the ratio is better than our company due to better utilization of fixed assets.

Glaxo: This Company has the highest turnover ratio in the whole industry, as the

amount of fixed assets of the company is very less but high amount of net sales is

generated with those assets.

Sun Pharma: The ratio of this company is almost double than our company, thus it has

high asset utilization rate.

Ranbaxy: Here the ratio of this company is 50 % more than that of CHL, as the amount

of net sales is more than double of our company. Thus fixed assets are highly utilized.


129 | P a g e


We can conclude that our company has very consistent fixed assets turnover ratio, but

there are few suggestions that it should consider to make the optimum use of assets. They are: CHL: Our Company should try to increase the use of fixed assets because it can help in

obtaining higher amount of net sales and thus the turnover will increase to a greater

extent.

Consolidated: Even here also our company should try to plan how well it can make the

use of each and every asset to get better quantity of products and thus high sales for

the company.


companies in the industry except Glaxo as the latter is able to utilize its assets in more


__________________________________________________________________________

5.4 Working capital turnover ratio: Net sales

Working Capital

5.4.1 Components:

a.) Net Sales: Gross Sales b.) Working Capital: Current Assets

- Excise Duty - Current Liabilities 5.4.2 Definitions: a.) Net Sales means the amount of sales generated by a company after the deduction of returns,

allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company's financial statements is a net sales number, reflecting these deductions. b.) Working Capital is a financial metric which represents the amount of day-by-day operating liquidity available to a business. c.) Working capital turnover ratio indicates whether or not working capital has been effectively utilized in making sales. In other words, it measures the rate of working capital utilization. It also shows the number of times a unit invested in working capital produces sales.


130 | P a g e

5.4.3 Working:



Net sales 2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

gross sales 17191 15014 13082 23638 18747 15078

less: excise duty 771 877 623 978 892 625

Total 16420 14137 12459 22660 17855 14453

Working capital

Current assets 9680 8070 6088 11223 9871 6491

Less: Current liabilities 3759 4507 2596 5051 5446 3009

Total 5921 3563 3492 6172 4425 3482

Working capital turnover: 2.77 3.97 3.57 3.67 4.04 4.15

Particulars

C) Industry


Pharma Ranbaxy CHL

Net sales INR-MILLIONS

gross sales 33865 40886 171284 24274 43908 17191

less: excise duty 558 907 13570 617 447 771

Total 33307 39979 157714 23656 43461 16420

Working capital Current assets 29682 37480 55764 29051 28301 9680

Less: Current liabilities 7709 12477 63732 9891 15713 3759

Total 21972 25003 -7968 19160 12588 5921

Working capital turnover: 1.52 1.60 -19.79 1.23 3.45 2.77


131 | P a g e




As we can observe that the working capital turnover of our company is good but not

consistent over the years, as the amount of working capital has decreased due to proportionate increase in

assets were more than the liabilities and thus more no. of times a unit has to be invested in working capital

for producing better sales during the three years.

B. Consolidated:

Here it can be said that the company has to invest a unit for less no. of times as the ratio of

the company is very high in the year 2005-06 but decreases gradually in the following years due to less

amount of net sales was generated with high amount of working capital.

C. Industry:

Dr. Reddy: Here the ratio of our company is better than this company, as the working is

more but the net sales generated is lower than our company.

Cipla: Even here the ratio of our company is better than this company, as the working is

more due to high amount of current assets and liabilities but the net sales generated is

lower than our company.

Glaxo: Here the working capital of the company is in negative as it does not have

enough amount of current assets to meet with the current liabilities, it means it has no

liquidity and there the turnover ratio is negative and lowest in the industry.

Sun Pharma: Here the ratio of our company is better than this company, as the working

capital is very high but the net sales generated are lower than our company.


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Ranbaxy: The turnover ratio of this company is the highest in the industry as the net

sales is almost 2.5 times that of CHL, while the working capital is only two times of our

company.


We can conclude that though the ratio of our company is good but decreasing in the following years and so certain suggestions that it should follow are:

CHL: Our Company should try to increase the net sales by giving proper sales targets to

the personnel in order to compete with the other companies in the industry.

Consolidated: Even here also our company should try to decrease the current assets so

as to reduce liquidity and thereby increase profitability so as to invest the funds in some

other plans and thereby to have good working capital turnover ratio.


companies in the industry except Ranbaxy as the latter is has high amount of net sales

and so our company should try to increase the sales with optimum utilization of the

resources.

__________________________________________________________________________

5.5 Sales to capital employed ratio: Net sales

Capital Employed

5.5.1 Components:

a.) Net Sales: Gross Sales b.) Capital Employed: Capital

- Excise Duty + Reserves & Surplus + Loan fund - Misc Expenses



b.) Capital employed is the total amount of capital used for the acquisition of profits or value of

all the assets employed in a business and it is arrived after deducting current liabilities from the total

assets of the concern.

c.) Sales to capital employed ratio means how the company is able to generate the sales with

the capital employed by the company. So higher the ratio better ratio it is as it shows the efficiency of the company for using it existing capital in the most optimum way to have high sales.


133 | P a g e

5.5.3 Working:



Capital employed 2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

Capital 628 628 314 628 628 314


loan fund 7389 4477 4332 8377 4535 4432

misc exp 734 667 616 969 823 779

Total 17193 12633 11079 18030 12367 10642

Net sales

gross sales 17191 15014 13082 23638 18747 15078

less: excise duty 771 877 623 978 892 625

Net sales 16420 14137 12459 22660 17855 14453

Sales to capital employed: 0.96 1.12 1.12 1.26 1.44 1.36

Particulars

C) Industry


Pharma Ranbaxy CHL

Capital employed INR-MILLIONS

Capital 841 1555 8470 1036 1865 628


loan fund 4623 5805 577 1025 35030 7389

misc exp 693 5683 734

Total 52741 42670 130986 43101 60402 17193

Net sales

gross sales 33865 40886 171284 24274 43908 17191

less: excise duty 558 907 13570 617 447 771

Net sales 33307 39979 157714 23656 43461 16420

Sales to capital employed: 0.63 0.94 1.20 0.55 0.72 0.96


134 | P a g e




We can observe that our company has good ratio but it is decreasing gradually as the

amount of loan fund increased highly while the net sales does not increase to that extend. So we can say

that the existing capital is underutilized.

B. Consolidated:

Even here the ratio is decreasing but still we can say that company has best ratio in the year

2006-07 due to less amount of loan fund which increased gradually in the year 2007-08 and therefore the

ratio decreases highly.

C. Industry:

Dr. Reddy: Here the ratio of this company is less than our which means that our

company utilizes the capital employed better than this company.

Cipla: Here the ratio of this company is almost the same as our company as the

proportionate increase in net sales and capital employed is almost the same.

Glaxo: The ratio of this company is the best in the industry as the amount of net sales

generated is higher than the capital employed. So we can say that the company

manages the assets and liabilities very efficiently.

Sun Pharma: The ratio of this company is less than our company as the amount of

reserves and surplus was very high due to which the capital employed has increased but

net sales has not increased in that proportion.

Ranbaxy: Here the ratio of this company is less than our company due to high amount

of loan fund and therefore the ratio has decreases.


135 | P a g e


We can conclude that our company has good ratio of sales to capital employed, but not consistent.

So following are the recommendations that it should keep into mind:

CHL: Our Company should try to decrease the amount of loan fund, so that the capital

employed decreases and thereby get better ratio.

Consolidated: Our Company should try to reduce the amount of loan fund due to which

the capital employed increases and thereby reduces the ratio.

Industry: We can conclude that our company has very good ratio compared to other

companies in the industry except Glaxo as its net sales are very higher than our

company. So our company should try to increase the sales by allotting proper sales

target to the personnel and even amount of loan fund should be reduced which is

highest in the whole industry.

__________________________________________________________________________

5.6 Debtors turnover ratio: 365

Avg Collection period

5.6.1 Components:

Average Collection Period: (Debtors + Bills Receivables) *365 Net Credit Sales

5.6.2 Definitions:

a) The average collection period means the approximate amount of time that it takes for

a business to receive payments owed, in terms of receivables, from its customers and clients. Higher the ratio, better it is for the company as it means that the company is able to collect the dues from its debtors in a short time period. While if the ratio is lower, it means that the collection policy of the company is very liberal and high credit facilities are granted to its customers.

5.6.3 Working :

Particulars



2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06

Avg collection period 62.80 61.60 53.17 57.26 56.91 50.26

Debtors turnover ratio 5.81 5.92 6.86 6.37 6.41 7.26


136 | P a g e

Particulars


INR-MILLIONS


Debtors turnover ratio 3.71 2.87 41.76 2.24 4.92 5.81




As we can see that the debtor’s turnover of our company is decreasing year by year, which

means that the collection from the debtors are delayed as the debtors are increasing at a rapid rate than

the net sales.

B. Consolidated:

Here it can be said that the collection of debtors is very high in the year 2005-06, but

further it reduced as the debtors increased more than the net sales.

C. Industry:

Dr. Reddy: Here the ratio of our company is better than this company as the dues from

the debtors are collected only more than 3 times a year while our company collects

5times a year.

Cipla: The ratio of this company is almost half of our company as the collection policy of

this company is very liberal.


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Glaxo: Here the ratio of this company is highest in the industry as the net sales are very

high while the collection policy is very strict and therefore the no. of debtors are very

less.

Sun Pharma: The ratio of this company is the lowest in the whole industry due to high

amount of debtors with fewer amounts of net sales. This means that the credit period

given to the debtors is almost half a year.

Ranbaxy: Here the ratio of our company is better than this company as the dues from

the debtors are collected only more than 4.5 times a year while our company collects

more than 5.5 times a year.


We can conclude that our company has better debtor turnover ratio than almost all the companies in the industry except Glaxo, as the collection policy of this company is conservative and therefore the no. of debtors are very less and thus this company has high creditability in the industry. So the only suggestion for our company is to make a better and stricter collection policy so that the cash conversion cycle moves faster and thus increase the goodwill in the market.

___________________________________________________________________________

5.7 Creditors turnover ratio: 365

Average payment period

5.7.1 Components:

Average Payment period= (Creditors + Bills Payable) *365 Net Credit Purchases

5.7.2 Definitions: a.) The average payment period means the number of days a company takes to pay off credit

purchases. Higher the ratio, better it is for the company as it means that the company pays the dues of its creditors after a long time period. While if the ratio is lower, it means that the collection payment policy of the company is very strict and high credit facilities are granted by its suppliers which are optimally used by the company.

5.7.3 Working:

Particulars



2007-08 2006-07 2005-06 2007-08 2006-07 2005-

06


Creditors turnover ratios 2.60 1.61 2.80 2.17 1.66 2.88

http://www.businessdictionary.com/definition/day.html

http://www.investorwords.com/992/company.html

http://www.investorwords.com/7230/take.html

http://www.investorwords.com/3626/pay.html

http://www.investorwords.com/1193/credit.html

http://www.investorwords.com/3952/purchase.html


138 | P a g e

Particulars


INR-MILLIONS


Creditors turnover ratios 2.05 3.86 2.78 2.36 3.28 2.60



As we can see that the creditor’s turnover of our company is very low, this means that the

payment to the creditors is delayed as the creditors are increasing at a rapid rate than the net purchases.

B. Consolidated:

Even here it can be said that the payment to the creditors is highly delayed, this means that

our company takes the full benefit of the credit facilities provided by the suppliers, which might affect the

creditability of the company in future.

C. Industry:

Dr. Reddy: Here the ratio of our company is better than this company as the dues to the

creditors are paid more than 2.5 times a year while this company pays only 2 times a

year.

Cipla: The ratio of this company is more than our company as the payment policy of this

company is very bit stricter than our company. As this company has high net sales, we

can say that it has better goodwill in the whole industry.


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Glaxo: Here the ratio of this company is slightly more than our company as the net

purchase and creditors are almost 10 times than of our company.

Sun Pharma: The ratio of this company is slightly less than our company as the net

purchase of this company is higher than of our company.

Ranbaxy: Here the ratio of this company is better than our company as the dues to the

creditors are paid by us only more than 2.5 times a year while this company pays more

than 3 times a year.


We can conclude that our company is very strict when it comes to collection of dues from the debtors but when it comes to the payment to its suppliers, it delays a lot. So this means that it enjoys the credit facilities provided by the suppliers to its best. But this might affect it creditability and goodwill in the market and thus company should pay their suppliers almost for the same no. of times as the dues are collected from the debtors.

___________________________________________________________________________

6) OTHER RATIOS:

6.1 Average collection period= (Debtors + BR)*365

Net credit sales

6.1.1 Components: a.) Debtors b.) Bills Receivables c.) Net Credit Sales

6.1.2 Definitions: a.)Debtors mean a company or individual who owes money. If the debt is in the form of a loan

from a financial institution, the debtor is referred to as a borrower. If the debt is in the form of securities, such as bonds, the debtor is referred to as an issuer.

b.)Net Credit Sales means selling the products of the company by giving the customer a credit

period to pay back the amount back.

c.) The average collection period means the approximate amount of time that it takes for a

business to receive payments owed, in terms of receivables, from its customers and clients. Higher the ratio, better it is for the company as it means that the company is able to collect the dues from its debtors in a short time period. While if the ratio is lower, it means that the collection policy of the company is very liberal and high credit facilities are granted to its customers.


140 | P a g e

6.1.3 Working:

Particulars



2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

Debtors 2825 2386 1815 3555 2784 1990


less: excise duty 771 877 623 978 892 625

Total 16420 14137 12459 22660 17855 14453

Average collection period= 62.80 61.60 53.17 57.26 56.91 50.26

Particulars

C) Industry


Pharma Ranbaxy CHL

INR-MILLIONS

Debtors 8977 13939 3777 10554 8829 2825


less: excise duty 558 907 13570 617 447 771

Total 33307 39979 157714 23656 43461 16420

Average collection period= 98.38 127.26 8.74 162.85 74.15 62.80



141 | P a g e


As we can see that the average collection period of our company is increasing year by year,

which means that the collection from the debtors are delayed as the debtors are increasing at a rapid rate

than the net sales.

B. Consolidated:

Here it can be said that the collection of debtors is very fast in the year 2005-06, but further

it reduced as the debtors increased more than the net sales and due to liberal collection policy.

C. Industry:

Dr. Reddy: Here the collection period of our company is better than this company as the

dues from the debtors are collected after 3 months while our company collects it after 2

months.

Cipla: The period of this company is almost double than of our company as the

collection policy of this company is very liberal.

Glaxo: Here the collection period of this company is highest in the industry as the net

sales are very high while the collection policy is very strict and therefore the no. of days

for collection are very less i.e. almost a little more than a week.

Sun Pharma: The collection period of this company is the highest in the whole industry

due to high amount of debtors with fewer amounts of net sales. This means that the

credit period given to the debtors is almost half a year.

Ranbaxy: Here the duration of our company is slightly better than this company as the

dues from the debtors are collected only within 2 months while this company collects

after 2.5 months.


We can conclude that our company has better average collection period than almost all the companies in the industry except Glaxo, as the collection policy of this company is conservative and therefore the no. of debtors are very less and thus this company has high creditability in the industry. So the only suggestion for our company is to make a better and stricter collection policy so that the cash conversion cycle moves faster and thus increase the goodwill in the market.

___________________________________________________________________________


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6.2 Average payment period= (Creditors+ BP)*365

Net credit Purchase

6.2.1 Components: a.) Creditors b.) Bills Payable c.) Net Credit Purchase 6.2.2 Definitions: a.) Creditor is an entity (person or institution) that extends credit by giving another entity

permission to borrow money if it is paid back at a later date.

b.) Net Credit Purchases are merchandise or services purchased on the promise to pay

later.

c.) Average Payment Period means prompt employment of capital being one

part of good management working capital one should ascertain whether the firm is enjoying actually the credit promised by suppliers. If suppliers allow credit period of one month but if, as per calculations a firm is taking 2 months credit period of one month but if, as per calculations, a firm is taking 2 months credit period, it may seem either that the facilities given by creditors are not being fully utilized or that the firm is unnecessarily damaging its credit in the markets.

6.2.3 Working:

Particulars



2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

Creditors 2430 3265 1815 3641 3844 1973

Net credit purchases Consumption 6313 5249 5089 7903 6372 5688

Average payment period= 140.50 227.04 130.18 168.16 220.19 126.61

Particulars

C) Industry


Pharma Ranbaxy CHL

INR-MILLIONS

Creditors 6101 53351 22630 6465 5425 2430

Net credit purchases Consumption 12535 205996 62846 15267 17813 6313

Average payment period= 177.66 94.53 131.43 154.55 111.15 140.50


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As we can see that the average payment period of our company is very high, this means

that the payment to the creditors is delayed as the creditors are increasing at a rapid rate than the net

purchases. Thus our company is enjoying the full benefits of the credit facilities provided by the suppliers.

B. Consolidated:

Even here it can be said that the payment to the creditors is highly delayed, this means that

our company takes the full benefit of the credit facilities provided by the suppliers, which might affect the

creditability of the company in future. We can see that the company makes payment almost after 6

months or more than that.

C. Industry:

Dr. Reddy: Here the duration of our company is better than this company as the dues to

the creditors are paid after 4.5 months while this company pays after half a year.

Cipla: The duration of this company is less than our company as the payment policy of

this company is very bit stricter than our company. As this company has high net sales,

we can say that it has better goodwill in the whole industry.

Glaxo: Here the period of this company is slightly less than our company as the net

purchase and creditors are almost 10 times than of our company.

Sun Pharma: The ratio of this company is slightly more than our company as the net

purchase of this company is higher than of our company.

Ranbaxy: Here the ratio of this company is better than our company as the dues to the

creditors are paid by us after 4.5 months while this company pays within 4 months.


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We can conclude that our company is very strict when it comes to collection of dues from the debtors but when it comes to the payment to its suppliers, it delays a lot. So this means that it enjoys the credit facilities provided by the suppliers to its best. But this might affect it creditability and goodwill in the market and thus company should pay their suppliers almost for the same no. of times as the dues are collected from the debtors. ___________________________________________________________________________

6.3 Interest coverage ratio= EBIT

Interest

6.3.1 Components: a.) EBIT = PBIT b.) Interest

+ Interest - Other Income

6.3.2 Definitions: a.) Earnings before Interest and Tax (EBIT) is a measure of a firm's profitability that

excludes interest and income tax expenses.

b.) Interest Expense is a fee, paid on borrowed capital. c.) Interest coverage ratio indicates as to how many times the profit covers the

payment of interest on debentures and other long term loans. Hence it is also known as “Times – interest earned ratio”. It measures the debt service capacity of the firm in respect of fixed interest on long term debts. The higher this ratio, the more sound is the financial strength of the company, as it indicates the greater ability of the firm to handle fixed – charge liabilities. But at the same time if ratio is too high, it shows the firm is not making proper use of outside debt and very low ratio indicates that the firm is using excessive debt.

6.3.3 Working:

Particulars



2007-08 2006-07 2005-06 2007-08 2006-07 2005-06

EBIT 2587 1973 1825 3629 2698 2098

Interest 201 176 205 335 223 251

Interest coverage= 12.87 11.21 8.90 10.83 12.10 8.36

http://www.answers.com/topic/fee


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Particulars

C) Industry


Pharma Ranbaxy CHL

INR-MILLIONS

EBIT 4032 5097 52222 9246 4357 2587

Interest 102 117 72

934 201

Interest coverage= 39.57 43.60 728.23

4.66 12.87



As we can observe that the interest coverage ratio of our company is increasing year by

year, which means that the company is able to earn almost around more than 9 times of the interest paid

by them to the borrowed funds. Thus it has sound profit making capacity and so the borrowed funds are

utilized nicely to get better returns.

B. Consolidated:

Even here the ratio of the company is very good but the ratio in the year 2006-07 was the

highest as the amount of interest was very less and therefore the earnings was 12 times more than the

interest paid. So it is efficiently using its long term debts.

C. Industry:

Dr. Reddy: The ratio of this company is almost 3times more than our company as the

amount of earnings is double while the interest payment is half than that of our

company. So we can say that this company has earnings 40 times to that of interest

payment but this company are not able to take the benefits of outside debts.


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Cipla: Even this company has higher interest coverage ratio than our company because

though the profit of the company in increasing, the interest payment is very less and so

the company is not making proper use of outside debt.

Glaxo: Here the interest coverage ratio is the highest in the whole industry as the

company utilizes very less debt and so interest payment is very less while the profit is

extremely high.

Sun Pharma: Here the amount of interest is not available so I am unable to calculate

and interpret its ratio.

Ranbaxy: Here the ratio of this company is the lowest in the industry and even the

interest payment is very high than any other company, because it uses high excessive

debts.


We can conclude that our company is using good amount of outside debt and even it is able earn

high profits to cover up the interest payment easily.

________________________________________________________________________________________


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RATIOS OF CURRENT FINANCIAL YEAR 2008-09:

1.) CURRENT RATIO:

Particulars

CHL CONSOLIDTED

INR-MILLIONS

Current Assets 2008-09

Inventories 3490 6012

Cash & Bank 256 2517

Debtors 3819 4845

loans & advances 2409 2237

Total 9974 15611

Current Liabilities Liabilities 2935 5729

Provisions 1053 1186

Total 3988 6915

Current Ratio 2.50 2.26

INTERPRETATION:

a.) CHL: In this case we can say that the company has good liquidity as the ratio is higher than the standard ratio (2:1); this is due to rapid increase in debtors than in the year 2007-08. Thus the funds are remaining idle which can be used in some other projects.

b.) CONSOLIDATED:

In this case, the ratio is slightly higher than the standard ratio and even increasing compared to last year. The reason behind this is increase in inventories of 27% due to which the financial soundness of the company has increased also leading to increase in idle funds.


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2.) LIQUID/QUICK RATIO:

Particulars CHL CONSOLIDATED

INR-MILLIONS

Liquid Assets 2008-09

Cash & Bank 256 2517

Debtors 3819 4845

loans & advances 2409 2237

Total 6484 9599

Liquid Liabilities Liabilities 2935 5729

Provisions 1053 1186

Bank overdraft 0 190

Total 3988 7105

Liquid/Quick Ratio 1.63 1.35 INTERPRETATION:

a.) CHL:

Here the ratio is higher than the standard ratio and also ratio of last year, because of high debtors which leads to high liquidity in assets and thus it should plan to have high cash sales and less credit sales so that the cash conversion cycle can speed up and thus less working capital will be required.

b.) CONSOLIDATED:

In this case the ratio is higher than the standard ratio due to high amount of cash & bank is maintained by the company and even there is high amount of debtors, so that the liquidity is very high. So the company is not able to utilize the high funds to the optimum level.


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3.) GROSS PROFIT RATIO:


INR-MILLIONS

Gross profit 2008-09

gross sales 17374 29171

less: excise duty 389 547

net sales 16985 28624

less: Cogs opening inventory 3310 4279

Add: consumption 6498 9566

Less: closing inventory 3490 6012

Cogs 6318 7833

Total 10667 20791

Net sales gross sales 17374 29171


Total 16985 28624

Gross Profit Ratio: 62.80% 72.63%

INTERPRETATION: a.) CHL: As we can observe that company is able to maintain very healthy gross profit

ratio that means the company is able to recover the cost of goods sales very easily.

b.) CONSOLIDATED: Here we can say that the company is maintaining very pretty ratio, as the direct cost to produce goods is quite less. So it can be said that company has good control over direct expenses.

4.) NET PROFIT RATIO:

Particulars

CHL CONSOLIDATED

INR-MILLIONS

2008-09

Net Profit 2659 3031

Net sales: gross sales 17374 29171


Total 16985 28624

NET PROFIT RATIO: 15.65% 10.59%


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INTERPRETATION: a.) CHL:

As we can observe that our company is able to maintain good percent of Net Profit

Ratio, as the profit has increased but the net sales has remained almost the same. Thus

it can be said that the company is selling their products at a higher rate than last year,

thus it is successful in increasing the profit and thereby reduce the operating expenses

b.) CONSOLIDATED:

Similarly our company is able to achieve good % of NP ratio in this year but less than

the last year as in this year increase in net profit was less than that of net sales. So it can

be said that the operating efficiency of the company is good but it should try to sell the

goods at higher price as in case of domestic market.

5.) RETURN ON TOTAL ASSETS:


INR-MILLIONS

Total assets: 2008-09

Fixed assets 9542 17187

Investments 5954 249

Current assets 9974 15611

Total 25470 33047

PAT 2659 3031

RETURN ON TOTAL ASSETS: 10.44% 9.17%

INTERPRETATION: a.)CHL:

As we can observe that our company is able to get good and consistent return on

total assets in all the years, the ratio is good as the portion of current assets and fixed assets

is almost equal, so that liquidity is good and even the PAT in this year has increased

proportionately same as in the year 2007-08. Thus it said that higher the return more

efficient the management is in utilizing the asset base.


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b.) CONSOLIDATED:

Even here it can be observed that company was able to maintain the ratio in the

past three years, but this year it has decreased due to high purchase of fixed assets. Here

the amount of profit after tax is not so good, even the investments are very less, due to this

the returns on this investment will be less and ultimately it will affect the amount of Profit

after tax.

6.) RETURN ON CAPITAL EMPLOYED:


INR-MILLIONS

Capital employed : 2008-09

Capital 682 682

Reserves & Surplus 11646 11670

loan fund 8199 12674

minority interest 0 228

misc exp 553 1118

Total 19974 24136

PBIT: PBT 2964 3698

Interest 880 1205

Total 3844 4903

Return on capital employed: 19.25% 20.31%

INTERPRETATION: a.) CHL:

As we can observe that the return on capital employed for the company is pretty

good this year, this means that the profit before interest and tax has increased more

rapidly than capital employed. Even the amount of reserves and surplus has increased

highly while the profit has increased due to high return as interest, thus it leads to

increase in the profit and so the return on capital employed increases.

b.) CONSOLIDATED:

Even here the company is able to increase the return on capital employed, as it

increases the amount of loan fund and reserves and surplus every year so this decreases

the return on capital employed. But in this year, the profit ha increased a lot due to

which the return on capital employed has increased compared to last year.


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7.) RETURN ON EQUITY:

Particulars

CHL CONSOLIDATED

INR-MILLIONS

2008-09

PAT 2659 3032

Shareholder fund: Capital 682 682

reserves & surplus 11646 11670

Minority interest 0 228

Total 12328 12580

Return on equity: 21.57% 24.10%

INTERPRETATION:

a.) CHL:

As it can be observed that the return on equity achieved by our company is pretty

good in all the three years. Even the company has kept higher amount of profit as

reserves and surplus, and therefore the shareholders fund increases, due to which the

return has decreased for shareholders in this year.

b.) CONSOLIDATED:

Here we can say that our company has good return on equity almost same as last

year. The reason behind it is that a hefty amount of profit is kept aside as reserves and

surplus by the company and thereby the return on equity has reduced a bit.

8.) EARNING PER SHARE:

Particulars

CHL CONSOLIDATED

INR-MILLIONS

2008-09

Net profit 2659 3031

No of shareholders 133.919637 133.919637

EPS= 19.86 22.63

INTERPRETATION:

a.) CHL: As we can observe that our company gives good return to their shareholders by earning good profits and thereby increasing the shareholders base. In this year the company is able to give good EPS as the net profit has increased.


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b.) CONSOLIDATED: Even here the return in this year the EPS has increased due to almost 20% increase in profit

than that of the last year.

9.) DIVIDEND PER SHARE:

Particulars

CHL CONSOLIDATED

INR-MILLIONS

2008-09

Dividend paid to ordinary shareholders 614 614

No of shareholders 133.919637 133.919637

DPS: 4.58 4.58

INTERPRETATION: CHL and CONSOLIDATED: As we can observe that our company is able to give good dividend per share to their shareholders, but DPS was the best in the year 2005-06 due to high rate of dividend, but slowly and gradually it reduced in the further years due to low rate of dividend, as bonus issue of equity shares were issued in the ratio of 1:1 and thus more opportunities for the investors was to invest in equity shares.

10.) DIVIDEND PAYOUT RATIO:

Particulars

CHL CONSOLIDATED

INR-MILLIONS

2008-09

DPS 4.58 4.58

EPS 19.86 22.63

Dividend payout ratio 23.09% 20.26%

INTERPRETATION:

CHL and CONSOLIDATED: In this case the increase in EPS is more than the proportionate increase in DPS and therefore the Dividend payout ratio has decreased compared to last year.


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11.) DEBT EQUITY RATIO:


INR-MILLIONS

Total debt 2008-09

Minority interest 0 228

Loan fund 8199 12674

Total 8199 12902

Net worth Capital 682 682

Reserves & surplus 11646 11670

Total 12328 12352

Debt equity ratio: 0.67 1.04

INTERPRETATION: a.) CHL: As we can observe that our company is able to get good amount of borrowed capital in all the three years, so the company is obtaining the benefit of leverage and also trading of equity to a good extend in this year also. b.) CONSOLIDATED: Even in this case we can observe that the company is able to high amount of borrowed capital than the equity capital, due to which the ratio is very high, infact more than 1. Thus the company will not be able to distribute dividend to its equity shareholders as almost whole amount of profit earned will be used up in paying the interest to the debenture holders as an obligation.

12.) TOTAL ASSETS TURNOVER RATIO:


INR-MILLIONS

Total assets: 2008-09

Fixed assets 9542 17187

Investments 5954 249

Current assets 9974 15611

Total 25470 33047

Net sales gross sales 17374 29171


Total 16985 28624

Total Assets turnover ratio: 0.67 0.87


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INTERPRETATION: a.) CHL: As we can observe that our company has good total assets turnover ratio but decreasing consistently due to constant increase in the amount of investment and also fixed assets, therefore though the net sales increases every year but the ratio is decreasing. So our company utilizes the assets with good planning, but it should try to increase the sale and thereby make the optimum use of all the assets. b.) CONSOLIDATED: We can say that or company has very hefty turnover ratio, as the assets are utilized in the best possible manner. As net sales are increasing every year at a very good rate but the fixed assets and currents assets have increase rapidly due to which ratio is decreasing every year.

13.) STOCK TURNOVER RATIO:


INR-MILLIONS

Average stock 2008-09

Opening stock 3310 4279

closing stock 3490 6012

Total 3400 5145.5

Gross sales 17374 29171

Stock turnover ratio: 5.11 5.67

INTERPRETATION: a.) CHL As we can observe that the stock turnover ratio of our company is very healthy as it can utilize the inventory to its optimum level and therefore it can trade with higher margins of profit. Especially in this year, the amount of closing stock is not so high than the opening stock and so with less amount of average inventory, company is able to achieve high quantity of gross sales. b.) CONSOLIDATED: Even in this case company is able to get high stock turnover ratio due to efficient inventory management to produce and sale huge quantity of goods with better profit margins. Here the closing stock is higher than the opening stock due to which average inventory has increased but the gross sales have increased with high proportion then the stock.


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14.) WORKING CAPITAL TURNOVER RATIO:


INR-MILLIONS

Net sales 2008-09

gross sales 17374 29171


Total 16985 28624

Working capital Current assets 9974 15611

Less: Current liabilities 3988 6915

Total 5986 8696

Working capital turnover: 2.84 3.29

INTERPRETATION:

a.) CHL: As we can observe that the working capital turnover of our company is good and also increases compared to the last year. As the amount of working capital has remained almost the same due to proportionate increase in assets and liabilities was equal. Thus less no. of times a unit has to be invested in working capital for producing better sales during the three years. b.) CONSOLIDATED: Here it can be said that the company has to invest a unit for less no. of times as the ratio of the company is high in this year as the increase in fixed assets was very high and so it led to high working capital.

15.) DEBTORS TURNOVER PERIOD:

Particulars

CHL CONSOLIDATED

INR-MILLIONS

2008-09

Avg collection period 82.07 61.78

Debtors turnover ratio: 4.45 5.91


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INTERPRETATION:

a.) CHL: In this case the turnover period has increased as the collection duration from the

debtors has been liberalized by the company, thus the payment is received after almost 3 months. This may lead to delay in cash conversion cycle and thereby high working capital will be required.

b.) CONSOLIDATED:

Here the standard debtor’s turnover has been followed by the company, thus its good sign for the company.

16.) CREDITORS TURNOVER PERIOD:

Particulars

CHL CONSOLIDATED

INR-MILLIONS

2008-09

Avg collection period 159.08 185.18

Creditors turnover ratios: 2.29 1.97

INTERPRETATION:

a.) CHL:

As we can see that the creditor’s turnover of our company is very low, this means

that the payment to the creditors is delayed as the creditors are increasing at a rapid rate

than the net purchases.

B. Consolidated:

Even here it can be said that the payment to the creditors is highly delayed, this

means that our company takes the full benefit of the credit facilities provided by the

suppliers, which might affect the creditability of the company in future.


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Additional Learnings


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I. PRACTICAL WORK:

During the internship at CHL, I was able to learn about how the entries were done right from the purchase of raw material to its payment in the software SAP R/3 – Financial Module used by them. While I was also able to work in the software - VISION 21 in Dial for Health Ltd. (Subsidiary). This software was used by CHL till last year, but still at many Joint Ventures and Subsidiaries this software is still being used.

Work Done In SAP R/3: Entries for Expenses Entries for Debit Notes Entries for Credit notes (Claims) Entries for Finished Goods purchase (Party to Party) Entries for payments

Work Done in Vision 21: Entries for Purchase Entries for Expenses Entries for Debit Notes Entries for Credit notes (Claims) Entries for payments

I have tried to explain all the above practical work with the help of SNAP SHOTS of the screen of both the software, SAP and VISION21.

SAP R/3 – Financial Module: Following are the steps:

Step : 1

For starting with the entries in SAP, each and every department has its different code as well as password for logging in it. The SAP LOG ON used at CHL in ZYDUS TOWER is “ZYDUS PRODUCTION”, while the password differs from system to system.


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Step : 2 After initial log on in SAP, the following screen will appear on order to make different types of entries such as payment, purchase, claims, expenses etc. In this screen the particular number has to be entered as shown by the red arrow in the figure.


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STEP 3:

a.) ENTRIES FOR EXPENSES AND CREDIT NOTES: In the following diagram, the red arrow shows a particular code i.e. “FB60”, which is used for

making the Entries of Expenses and also for Claims (credit notes) as that is also one type of expense for the company.


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After the above screen, the following screen appears, in which the certain details regarding the transaction has to be entered. They are as follows:

i. Vendor Code: Here the vendor code is “193133”, which displays the party detail on the left of the screen (Jyoti).

ii. Invoice date: This date is displayed on the bill or invoice of expense. iii. Reference: Here the reference no of bill is entered, so that it can help in future if there is

any query of the transaction. iv. Posting Date: The date on which the entry is made has to be entered for accounting

purpose. v. Amount: This displays the amount shown on the bill.

vi. Bus.place/sectn: Here the place at which the transaction is undertaken has to be entered. CHLA stands for Cadila Healthcare Ltd., Ahmedabad.

vii. Text: It is a narration i.e. the purpose for which that amount was utilized. viii. G/L acct: This means the general ledger account no., which is unique as each and every

transaction falls under different ledger account. ix. Short text: This is just a short form on narration. x. Amount and Tax: Both this figures comes automatically.

xi. Plant: As this entry is for the personal expenses, plant has no role to play here and so no value is to be entered in this case.

xii. Cost center: Here the no. entered is “1071000001” meant for travelling expenses. This unique value has to be entered, as the expenses made is deducted from a particular Expense head that is called “Concurrence”. This is very important from the view point of the budget given to a particular department for a financial year and thus the expense should be deducted from a particular head only. While doing costing for different plant and departments, each concurrence head should be considered.

xiii. Profit center: As we enter the cost center, automatically the profit center is taken by the software as feeded beforehand.


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After entering all the data, the entry has to be stimulated in order to get the printout of the

docment and to attach it with the invoice. As we can see the stimulated entry in the following screen, where the details of the party, amount along with the TDS being deducted as per the Tax code (V1) and the cost center is visualized.

After saving this by pressing “CTRL + S”, a unique number will appear on the left corner of the screen which is called th Document no. This no has to be noted on the invoice, as it stands for no. of entry made in the Software.

Thus now it is ready for print out.


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The following screen is used for credit memo as shown with the help of red arrows, only that is the

point of difference from the entry made of expenses. All the other steps are same as mentioned above.

b.) ENTRIES FOR DEBIT NOTE: In case of debit note, the unique code entered for starting with the entries is “ FB65” and so the screen will display Debit Memo as the heading. All the other things remains the same as credit note and expenses.


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c.) ENTRIES FOR PAYMENT: For making the payment entries, “FB_58” has to be entered in the space shown by the red arrow in

the 1st screen as shown above, so that the following screen appears. i. Company code: This code is already entered in the software. ii. Payment method: This has to be written, here it is cheque so “C” is mentioned.

iii. House Bank: This code shows the bank and its brank through which the transaction has to be made.

iv. Cheque lot number: This shows the cheuqe no. v. After entering all the details, the tab “ Enter payments” has to be clicked.


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vi. This screen appears and all the detail regarding the invoice of the transaction has to be entered here.

vii. Document date and posting date: Means the date mentioned on the invoice and date of entry being made respectively.

viii. Document Number: This is the no. which appears on the bottom of the screen and we write it on the invoice. Here it is important to be mentioned so that no mistake is made while payment.

ix. Reference: It is the bill no. x. Amount: It has to be mentioned as per the invoice.

xi. Text: It shows the narration of the invoice. xii. Vendor code: Each and every vendor is given unique code for identification has to be entered.

xiii. Payment on Account: Here the actual amount to be paid has to be entered. As it is note necessary that the whole amount mentioned in the invoice is paid by the party.

xiv. After all the entries of the details, printout is taken.


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d.) ENTRIES FOR FINISHED GOODS ( PARTY TO PARTY):

In this case the unique code has been entered on the screen as “MIR6” for starting with the entries.


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The following screen appears where the details has to be entered.

i. Document no: This no. “5105669653” is already written in the invoice by the person who has entered the goods receipt entry in the software.

ii. Then the tab near the red arrow has to be clicked in order to enter into other screen.


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iii. When the following screen appears, the basic data like the invoice date, posting date, amount, reference, text (narration) and tax applicable code has to be entered.

iv. Then the tab pointed by the arrow should be pressed, in order to write any note or remark of the mistake in the invoice and then the tab of withholding tax has to be pressed and one has verify that no tax should be charged on the transaction.

v. Then the amount and the quantity highlighted in yellow color should by verified from the invoice.

vi. After all the details ae filled up in this screen, the following screen appears, in order to check the material received, along with the goods receipt no. and parked details.

vii. Then the messages should be checked if any RED colour signal is shown on the MESSAGE tab.

viii. After that back tab should be pressed, so that again the previous screen will appear and there the stimulate tab should be pressed.

ix. After that a screen will appear having “Environment” written on the menu bar, that should be pressed in order to post the entry and there to obtain the unique accounting no. and that should be written on the invoice.


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Here the description of the work done in SAP ends.

____________________________________________________________________________________


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VISION 21 SOFTWARE:

I also got an opportunity to work in VISION21- a software made by the company which is still used by many Joint Ventures and subsidiaries of Zydus Cadila Healthcare Ltd. while SAP R/3 was introduced in the company in the last year only. I worked in this software for Dail for Health Ltd. which is the subsidiary of Zydus Group.

Step 1:

The first step in VISION21 is to enter the “User Id” and “Password”,which differs from

system to system. After that the subsidiary ot Joint Venture in which the entry has to be passed should be

selected from the drop down arrow key.

Step 2:

After that the following screen will appear only having the menu bar of GL Code, SUB GL

Code and PARTY Code. GL code stands for the General Ledger code which includes various heads like Purchase

Journal, Expense Journal, Exports,etc SUB GL Code is the code of the items for which entry has to be made, which is basically used

in case of purchase of various assets. PARTY Code includes the code like D – Debotrs, C – Creditors, etc.

Step 3: The following screen appears after the selection of GL code, Sub GL code and PARTY code. It shows the lsit of assets being purchased along with its unique code in the left half of the

screen. While on the right half of the screen, the amount of purchase of assets made month wise is

given. E.g: In the month of april, DFH purchased the Office Plant & Machinery of Rs.6,413,109.48.

The amount written on the bottom of right half is the total of the assets purchased during the whole year.

If we click on the particular asset name, then the detail s will appear of the right side of the screen.

And if we want to know about the purchase made in a particular month but at different dates along with all the other details of party, then we have to click on that month of the corresponding asset. It also helps to know about the total debit and credit done in that month.


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STEP 4: To enter the following screen, file button has to be clicked upon as shown by red arrow. Then the smaller screen will appear which has various options like transactions in order to make

entries, reports for getting the printouts of all the entries made and query is used for verifying the entries already made.

As we can see that a hand is shown a purchase bill (domestic), which states that the entry for purchase done domestically should be entered there.

And in the same way all the entries will be made in the respective heads.


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STEP 5: This screen is of the purchase journal or the entry of Purchases, and following details are to be

entered in it. i. Doc Sr: PJ means it an entry for purchase.

ii. Doc no.: This no. is genrated by the software and has to be written on the invoice of purchase.

iii. Doc Date: The date mentioned in the invoice is to be entered. iv. Party code: Here “L5B021” is the code for “Paras Distributors- Ahmedabad”. v. Ref no: The bill no has to be entered here.

vi. Doc narration: Short description regarding purchase along with the GRN(Goods receipt no.) should be written.


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vii. Doc amount: The amount mentioned in the invoice should entered here. viii. GL code and sub GL code: Both are the unique code according to various transactions.

ix. Name of the store: it has to be mentioned as unique department code has to be entered according to it.

x. Tax: This code is important for calculating VAT. Here it is GJ22F, which stands for 4% VAT and 1 % additional VAT applicable on domestic goods. Whiel GJ24F stands for 12.5% VAT and 2.5% Additional VAT and MH22F and MH24F stands for purchase done from Mumbai store.

xi. Dept code: As I said earlier that shop name has to be entered, so that the expenses or purchase made by that shop will be under a particular dept. which has a unique code.

xii. Vat and Add Vat: Both the amounts are to be verified and then accounting effect has to be checked.

xiii. Finally save the entry by pressing : “ALT+S” so there by note dne the doc no. on the invoice.


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STEP 6: This is screen for making the entries of expenses. Here all the details to be entered are same as

purchase, but following are the points of difference: i. Doc Sr.: Here EJ is written which stands for Expense Journal. ii. Narration: Breif but proper narration should be entered.

iii. Tax code: As it is an expense entry, no tax is applicable and so its code is : “GJ1ZE”. iv. Dept: Here the dept for entering expenses is fixed as : ”F17” v. After all this data entered, the process is the same.


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STEP 7: The following screen is used for the entries of Petty Cash has to be done. It is made to calculate

about the misc expenses made by the company. All the other steps are same as done for expenses and purchase.


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STEP 8: For making the payment entries, the only point of difference is that the Bank through which

the payment has to be made has to be mentioned along with the cheque no. and the forwarding name which is suggested by the party for drawing the cheque.

In case of Entries foe debit notes, the amount that is to be debited is entered while making entry and also the tax should be credited accordingly.

While for making the entries for Credit note, the procedure is same as purchase entries, because here also the company has to make payment o the party like purchases.

Other work in Vision21:

i. I have made the Assets purchase statement for Dial For Health Ltd. for the last three years, by using VISION21 and in that query portion. This was helpful for the company to know about the total assets purchased during the year and thereby it helps in calculating the utilization of assets with the help of ratios.

ii. I have done Budgeting of the whole year in the International Finance Department for all the subsidiaries and joint ventures of ZYDUS group all over the world. From this budgeting, MIS reports are generated. Both the work was done in VISION21 only.

iii. I have also verified the Depreciation and TDS for the year 2008-09 of all the Subsidiaries that exist in the Premises of the H.O.

iv. I have made the statement showing credit sales made through credit cards and also showing its % to the total sales done by a particular shop of DFH. This was done in order to know where the credit card facility is utilized more and where it has to be stopped. This facility has to be stopped as the bank charges high service commission for each transaction and if there are not much credit sales through credit cards, then this facility is of no use to the shop as it is increasing the commission burden on the company and that also without getting any return on that facility.


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II. DUPONT ANALYSIS:

DUPONT ANALYSIS is a method of performance measurement that was started by the DuPont Corporation in the 1920s. It is one of the easiest ways to determine whether a company is an asset creator or a cash consumer is to look at the return on equity (ROE). In its simplest form, ROE is calculated by dividing one year's earnings by shareholder's equity. Businesses that generate high returns on equity are businesses that create substantial assets for each dollar invested.

DuPont analysis tells us that ROE is affected by three things:

1. Operating efficiency: This can be measured by net profit margin which shows how much profit a company makes for every Rs. 1/- it generates in revenue. The higher the net profit margin, the better it is. 2. Asset use efficiency: This can be measured by total asset turnover which shows the amount of sales generated for every rupee's worth of assets. This measures the firm's efficiency at using assets. The higher the number, the better it is. 3. Financial leverage: This can be measured by the equity multiplier which shows that the higher the number, the more debt the company has.

By breaking the ROE into distinct parts, investors can examine how effectively a company is

using equity, since poorly performing components will drag down the overall figure. If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming. DUPONT MODEL:

The DUPONT MODEL is a technique that can be used to analyze the profitability of the company using traditional performance management tools. To calculate this, the values of Income statement and Balance Sheet are taken. For doing the analysis, the DuPont model has to be used which includes all the formulas as specified below.

Return on Equity= ROA * Equity Multiplier

Return on Assets= Net Profit Margin * Total Assets Turnover Ratio

A.) Return on Assets= Net Profit

Total Assets

B.) Net Profit Margin= Net Profit

Net Sales

C.) Total Assets Turnover Ratio= Net Sales

Total Assets

D.) Equity/Leverage Multiplier= Total Assets

Equity*

* Equity= Capital + Reserves & Surplus

http://www.investorwords.com/4315/ROE.html

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http://www.investorwords.com/1726/equity.html


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Merits of DuPont Model:

a. It is very simple and easy to calculate the model with the help of values obtained from financial statements.

b. As ROE includes three different parts, so it can be easily predicted that which part of value has a major problem i.e. either in Profit margin or in assets turnover or in equity multiplier.

Demerits of DuPont Model:

a. It is a short term measurement.

b. It does not include the cost of capital.

c. It is based on accounting numbers, which are basically not reliable.

A.) Return on Assets

Particulars



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

Net Profit 2659 2362 2047 1649 3031 2576 2338 1524

Total Assets:

Fixed assets 9542 8803 7936 7449 17187 14001 9783 8329

Investments 5954 4427 2928 1851 249 254 261 714

Current assets 9974 9680 8070 6088 15611 11223 9871 6491

Total 25470 22910 18934 15388 33047 25478 19915 15534

Return on Assets 10.44% 10.31% 10.81% 10.72% 9.17% 10.11% 11.74% 9.81%



INR-MILLIONS

Net Profit 4752 7014 53766 10140 6673 2362

Total Assets:

Fixed assets 12331 18945 9290 6635 17969 8803

Investments 19306 948 133332 18436 32376 4427

Current assets 29682 37440 55764 29051 28301 9680

Total 61319 57332 198387 54122 78646 22910

Return on Assets 7.75% 12.23% 27.10% 18.74% 8.49% 10.31%


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B.) Net Profit Margin

Particulars



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

Net Profit 2659 2362 2047 1649 3031 2576 2338 1524

Net sales:

gross sales 17374 17191 15014 13082 29171 23638 18747 15078

less: excise duty 389 771 877 623 547 978 892 625

Total 16985 16420 14137 12459 28624 22660 17855 14453

NET PROFIT MARGIN: 15.65% 14.38% 14.48% 13.24% 10.59% 11.37% 13.09% 10.54%

Particulars

C) Industry


INR-MILLIONS

net profit 4752 7014 53766 10140 6673 2362

Net sales:

gross sales 33865 40886 171284 24274 43908 17191

less: excise duty 558 907 13570 617 447 771

Total 33307 39979 157714 23656 43461 16420

NET PROFIT MARGIN: 14.27% 17.54% 34.09% 42.87% 15.35% 14.38%


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C.) Total Assets Turnover Ratio



Total assets: 2008-09 2007-08 2006-07 2005-06 2008-09 2007-08 2006-07 2005-06

Fixed assets 9542 8803 7936 7449 17187 14001 9783 8329

Investments 5954 4427 2928 1851 249 254 261 714

Current assets 9974 9680 8070 6088 15611 11223 9871 6491

Total 25470 22910 18934 15388 33047 25478 19915 15534

Net sales

gross sales 17374 17191 15014 13082 29171 23638 18747 15078

less: excise duty 389 771 877 622 547 978 892 625

Total 16985 16420 14137 12460 28624 22660 17855 14453

Total Assets turnover ratio: 0.67 0.72 0.75 0.81 0.87 0.89 0.90 0.93



Total assets: INR-MILLIONS

Fixed assets 12331 18945 9290 6635 17969 8803

Investments 19306 948 133332 18436 32376 4427

Current assets 29682 37440 55764 29051 28301 9680

Total 61319 57332 198387 54122 78646 22910

Net sales

gross sales 33865 40886 171284 24274 43908 17191

less: excise duty 558 907 13570 617 447 771

Total 33307 39979 157714 23656 43461 16420



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D.) Equity / Leverage Multiplier



Average Total assets:

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

2006-07

2005-06

Fixed assets 9542 8803 7936 7449 17187 14001 9783 8329

Investments 5954 4427 2928 1851 249 254 261 714

Current assets 9974 9680 8070 6088 15611 11223 9871 6491

Total 25470 22910 18934 15388 33047 25478 19915 15534

Equity 12328 10538 8823 7363 12352 10622 8655 7303

Equity Multiplier 2.07 2.17 2.15 2.09 2.68 2.40 2.30 2.13



Average Total assets: INR-MILLIONS

Fixed assets 12331 18945 9290 6635 17969 8803

Investments 19306 948 133332 18436 32376 4427

Current assets 29682 37440 55764 29051 28301 9680

Total 61319 57332 198387 54122 78646 22910

Equity 48118 37558 136092 42076 25372 10538

Equity Multiplier 1.27 1.53 1.46 1.29 3.10 2.17

Return on Equity= ROA * Equity Multiplier



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

Return on Assets 10.72% 10.81% 10.31% 10.44% 9.81% 11.74% 10.11% 9.17%

Equity Multiplier 2.09 2.15 2.17 2.07 2.13 2.30 2.40 2.68

Return on Equity 22.40% 23.20% 22.41% 21.60% 20.87% 27.01% 24.25% 24.58%



Return on Assets 7.75% 12.23% 27.10% 18.74% 8.49% 10.31%

Equity Multiplier 1.27 1.53 1.46 1.29 3.10 2.17

Return on Equity 9.88% 18.68% 39.51% 24.10% 26.30% 22.41%


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GRAPHICAL PRESENTATION:


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Interpretation: a. CHL and CONSOLIDATED:

In case of CHL, we can say that the company is able to earn good return on equity as the equity multiplier and the ROA is very consistent. This means that the investors gets good return on their investment as the company utilizes its assets to the optimum level over the years. Especially in the year 2008-09, the ROE is the highest as the equity multiplier is the best hen compared with all the other years.

b. INDUSTRY: When we compare the ROE of our company with the industry, it can be said that our

company gives very acute competition to all the other companies in the industry and thus it makes the investors to think upon twice before investing their funds. Best return is given by GLAXO. Though the equity multiplier is less than our company, the utilization of assets is very goods of this company and thus the ROE is also very high than that if our company.

Conclusion: CHL has a good ROE in past years than this year because its use of assets was more efficient

over the years than this year (it generates more sales per rupee of asset investment). While in case of consolidated, this year give better ROE compared to previous year because it uses more debt financing. Its use of debt constitutes a greater risk because it may not be able to handle the interest payments and principal repayment as the equity multiplier is very high then the past years.


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III. SUSTAINABLE GROWTH RATE:

The sustainable growth rate is the maximum growth rate that a firm can achieve without

resorting to the external equity finance. This is the growth rate that can be sustained with the

help of retained earning matched with debt financing, in line with the debt equity-policy of the

firm.

This is an important growth rate because firms are reluctant to raised external equity

finance (even though they may not mind raising debt finance, in line with their debt equity-

policy) for the following reasons:

1. The dilution of control, consequent to the external equity issue , may not be acceptable to the existing controling interest.

2. There may be a significant degree of under prising when external equity is raised. 3. The cost of isssue tends to be high.

The following formulae is used for calculating the sustainable growth rate.

Sustainable growth rate = Return on equity * Income reinvestment rate Where,

Income reinvestment rate = 1 − Dividend payout ratio



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

Dividend payout ratio 0.23 0.25 0.24 0.23 0.25 0.22 0.22 0.20

Income Reinvestment Rate 0.77 0.75 0.76 0.77 0.75 0.78 0.78 0.80

Return on Equity 17.63% 18.52% 18.21% 17.76% 18.62% 16.96% 17.13% 16.16%

Sustainable growth rate 13.60% 13.97% 13.85% 13.66% 14.01% 13.29% 13.37% 12.88%



INR-MILLIONS

Dividend payout ratio 0.13 0.22 0.57 0.21 0.51 0.24

Income Reinvestment Rate 0.87 0.78 0.43 0.79 0.49 0.76

Return on Equity 11.51% 17.25% 24.55% 16.85% 24.98% 18.21%

Sustainable growth rate 9.98% 13.43% 10.63% 13.23% 12.16% 13.85%


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GRAPHICAL PRESENTATION:

Conclusion/Interpretation: Here it can be said that our company has the highest sustainable growth rate, which makes

the company to survive without external financing and only with the help of retained earnings. This shows that the financial position of our company is very sound.


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IV. ECONOMIC VALUE ADDED:

Economic value added (EVA) is a financial measure of what economists sometimes refer to as economic profit or economic rent. The difference between economic profit and accounting profit is essentially the cost of equity capital. EVA takes into consideration the total capital employed by the company – total shareholders' fund (equity and accumulated profits) and total debt – and finds out the difference between the earning and the cost of the capital employed. In other words, EVA is the difference between return achieved on resources invested and the cost of resources. Higher the EVA, better the level of resource unitization. Thus the fundamental concept of EVA is not whether the business or venture is profitable, but whether that profit is sufficient to compensate the equity capital invested in the firm at its opportunity cost and have any revenue remaining after compensating the cost of all resources.

A positive EVA means the firm is generating a return to invested capital that exceeds the

direct (i.e. interest) and opportunity cost of that invested capital; a negative EVA means that the firm did not generate a sufficient return to cover the cost of its debt and equity capital.

Even if EVA is positive, a declining EVA suggests that financial performance is deteriorating over time, and if this trend continues EVA will become negative and financial performance unacceptable. A negative EVA indicates that the firm is not compensating its capital resources adequately, and corrective action should be considered if this negative EVA persists over time.

Formula for calculating EVA:

EVA= NOPLAT - WACC Where,

NOPLAT= Net Operating Profit Les Adjusted Taxes

WACC= Weighted Average Cost of Capital


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Calculations for EVA:

SR NO. PARTICULARS 2008-09 INR MILLIONS

1.) NOPLAT

PBITDA as per P&L

5262

Less:

Non-operating income

204

Fringe Benefit Tax

77

Financial Charges

120

Depreciation

1118

VRS current year payment (amortization excluded)

97

EBIT

3646

Less: Adjusted Tax

Cash Tax (Current tax only)

412

Less: Tax on non operating incomes 23

Add: Tax shelter on net interest expenses 124

Add: Tax shelter on VRS amortization 11

Total Adjusted Tax

524

NOPLAT 3122

2.) Average Capital Employed & WACC

Adjusted Equity (Share capital + Reserves & Surplus 13834

+ deferred tax + Minority Interest - Fictitious assets

- Loans given/ investments made to which interest

income relates)

Adjusted debt incl. Buyers' credit (Secured Loans +

Unsecured loans - back to back debt related to

loans given to others to which interest income related 12674

Total Capital Employed

26508

Average Capital Employed

23552

WACC % based on market value weights 10.12

WACC - based on market value weights 23834

3.) EVA (NOPAT - WACC)

Based on market value weights WACC 739


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Working Note: 1. Cost of Equity:

Cost of Equity

Risk free rate of return 8.1

Market premium 9.1

Beta 0.36

Cost of Equity 11.38

2. Cost of Debt:

Cost of debt

Interest 1085

Tax 0.3

Debt 12674

Cost of debt 5.99

3. WACC - based on Market Value:

WACC- base on Market value Amount Proportion Weighted Average

Market Value of Debt

12674 23.33 1.40

Per share market value of equity 311

No. of shares

133.92

Market Value of Equity

41649.12 76.67 8.72

Total market Value of Capital Employed 54323.12

WACC- base on Market value 10.12


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Learnings & Conclusion


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Learning’s:

From the Project: First and foremost, I learnt about the actual scenario of the pharmaceutical industry in India

along with the various key issues and regulations of the industry, and the profitability of the five major pharmaceutical players and many other vital things.

I was able to learn about how the working capital is managed at CHL and also able to work upon the working capital requirement of the company by calculating the net operating cycle.

In order to judge the financial position of the company, I calculated the ratios of CHL standalone and consolidated along with its five main competitors.

I learnt about the inventory management system of the company, regarding how the company is able to judge about the requirement of various products in the market

The inventory planner that is made by the GDSO department and also about the procurement cycle for the goods.

Also learnt about the credit control system functions and activities performed by the credit control department. The entire operation of the distribution and marketing channel from factory to customer, including the concepts of stockiest and C&F agents.

The method of claim settlement opted by the company for the various types of claims of local as well as outstation parties.

The Domestic Cash management system and International Collection system followed by CHL.

I also learnt about the various topics in brief like the calculation of sales tax, service tax, SEZ, about the TDS, some briefing regarding the FOREX market, and also an overview about the process of making the Cost Sheet.

I got a thorough understanding of the entire export procedure followed by the company as well as how these exports are financed.

I also learnt about the practical work of entries that is done in SAP R/3 and VISION 21, which should be done with utmost care as the entries are not reversible and cannot be cancelled. If any mistake is done than it affects till the end of transaction.

I had a practical exposure to the plant about how actual inventory (raw material, packing material and finished goods) is stored, processed and manufactured by the company.

I was able to learn about certain financial tools like DuPont Analysis, Economic Value Added and sustainable growth rate, which help me to know about the financial soundness of the company.


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APART FROM PROJECT:

I was a bit impulsive by nature in the initial period of SIP but this training proved to be very profitable for me as I learned two very important skills - patience and tolerance.

During my training, interpersonal skills is one of the most important learning that I have gained. As this skill can either make or break the career. We are a social being and the virtue of humility and mutual cooperation is a must in making.

I learned to adjust to different working places and conditions and also learned the importance of being assertive and not aggressive.

It also leveraged on my creative approach in the problem solving and decision making situations.

Apart from these, Discipline and Punctuality are the other two values that have to be imbibed in us for a successful career and a person.

Above all my vision and focus towards my career path has also improved.

Recommendation:

Study each Product’s Life Cycle, understand which stage it is and make some addition to that product depending on the requirement of the customer with additional combinations & formulations. This will help in improving the net operating cycle.

The payment should be made faster, which will help in improving the credit worthiness and goodwill of the company in the market.

It is the age of Diversification so if enough funds are available, Zydus should also take few steps to diversify itself.

CHL should take the advantage of Trading on Equity and can easily mobilize by way of issuing shares or debentures or public deposits or debt from financial institutions or FDIs or FIIs as it has a reputed value in the national and international market.

Increase the profitability and market share by expanding the foreign market shares. Study some market nationally and internationally and introduce some product depends on the

requirement of the market.

CONCLUSION/FINDINGS: CHL is expanding its business every year by continuously acquiring many of the companies

worldwide and by this to make a mark not only in domestic market but also in the International Market.

The long term objective of the company is to become a research driven Innovation Company and accordingly the company’s R&D expenditure is increasing continuously over the years.

In this year the domestic sales of the company contributes around 70% of the company’s revenues while the rest is from the export business. The export business shows a high growth every year, as the medicines and other liquids manufactured by the company are in high


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demand in other countries and so high growth potential is there for the company in this market.

It was found that the inventory management system of the company is quite effective and functions smoothly. As it is a Pharma company, the sales forecast should be done accurately, as this sector has high growth rate, so the production should be done according. And CHL is successful in inventory management with the help of their two main department PPMC and GDSO which co-ordinates all the procedure of rest of the departments.

Distribution Channel is the main arm which helps for company for achieving the efficient working capital. The company has very strong and wide spread distribution channel all over the world which helps them to meets the market demand and thereby get good revenue through high turnover.

Credit control policy of the company is quite strict due to which the company has minimal bad debts and Citibank helps the company to minimize the liquidity crunch.

Also cash management initiative with Citibank had helped CHL in faster transfer of cash and thereby achieving higher liquidity. Thus the cash conversion cycle is very fast as the payment system accepted is through advanced demand draft or cheque. Therefore the working capital requirement will be less and so that cash can be invested in other projects of the company.

The safety is of major concerns in the pharmaceutical industry, so selling the drug products through updated technology packing is the requirement of the day to safeguard from duplication which is followed by the company.

The calculation of net operating cycle helped me to know about the storage period stages for the particular product in the Pharma Company and also at which point changes should be made, so that the operating cycle period is minimum, which will convert the cash rapidly and thereby reduce the working capital requirement.

Ratio analysis help me to determine the significance and meaning of financial statement data and thereby making me understand how each and every ratio has its own significance regarding the future prospect for the company.

Industry analysis helped me know the position of our company by analyzing the strength and weakness of it through comparison of ratios of other competitors. Here I observed that, CHL is like benchmark in almost all the ratios, but only in GLAXO and RANBAXY are the two companies giving tuff competition to the former in few areas.

If the working capital is too low, then the business is running out of cash and thereby high risk is there for its survival. But CHL is able to maintain it WCR to its optimum level.

Thus in the end to conclude about this whole journey, I would say that this project helped

me a lot in learning many activities of finance department, which helped in portraying the financial image of the company. I learned to take decisions even though when enough data was not available sometime due to company’s policy. I have tried to relate my theoretical learning in the company by practical application of it. There were many theories which were in line of practical implications but some theories totally differ in real life situation. Therefore, undertaking this project at CHL gave me an overwhelming welcome and a great exposure to the corporate world and also helped me in improving my analyzing skills as well interpersonal skills. Hence the learnings at CHL were interesting and excellent and hope this will help me to excel in my journey ahead.


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References:

Annual Reports of the company – ZYDUS CADILA HEALTHCARE LTD: For the year 2005-06 For the year 2006-07 For the year 2007-08

Financial Statements for the year 2008-09 “Analysis of Financial Statements” and “Working Capital management” by Dr. Prasanna

Chandra- Tata McGraw Hill Publishing Co. Ltd. www.investopedia.com www.google.com http://en.wikipedia.org/wiki/ www.ibef.org www.zyduscadila.com www.imshealth.com www.sunpharma.com www.ranbaxy.com www.cipla.com www.gsk.com www.drreddys.com www.prlog.org

http://www.investopedia.com/

http://www.google.com/

http://www.zyduscadila.com/

http://www.imshealth.com/

http://www.sunpharma.com/

http://www.ranbaxy.com/

http://www.cipla.com/

http://www.gsk.com/

http://www.prlog.org/

Mba Aanal Report

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