CHAPTER 1-INTRODUCTION

1.1 INTRODUCTION:
Financial statements are prepared primarily for decision making. They play a dominant
role in setting the framework of managerial decisions. But the information provided in the
financial statements is not an end in itself as no meaningful conclusions can be drawn from these
statements alone. However, the information provided in the financial statements is of immense
use in making decisions through analysis and interpretation of financial statements. Financial
analysis the process of identifying the financial strengths and weaknesses of the firm by
properly establishing relationship between the items of the balance sheet and the profit and loss
account There are various methods or techniques used in analyzing financial statements
financial statements are an important source of information for evaluating the performance and
prospects of firm, if properly analyzed and interpreted these statements can provide valuable
insights into firms performance. Analysis of financial statements is if interest to lenders,
investors, security analyst, manager and others.
Financial statements analysis may be done for a variety of purposes, which may range
from simple analysis of short term liquidity position of the form to a comprehensive assessment
of the strengths and weakness of the firm in various areas, it is helpful in assessing corporate
excellence, judging credit worthiness forecasting bond rating, evaluating intrinsic value of equity
shares predicting bankruptcy and assessing market risk.

Financial statements:
Managers, shareholders, creditors and other interested groups seek answer to the
following question about firm:

What is the financial position of the firm at a given point of time?

How has the firm performed financially over a given period of time?

What have been the sources an d uses of cash over a given period?

To answer these questions, accountant prepares two principle statements, the Balance
sheet and the profit and loss account, ancillary statement, the Cash Flow statement.

Analysis of financial statement

Analysis refers to the process of critical examination of the financial information contained in the
financial statement in order to understand and make decisions regarding the operations of the
firm. The analysis is basically study of the relationship among various financial facts and figure
as given in a set of financial statements. Complex figure as given in this statements are
dissected\broken up into simple and variable element and significant relationship are established
between the elements of the same statements are different financial statements.
This process of dis section, establishing and identifying the financial weaknesses and strengths
of the firm. It is indicative of two aspects of a firm i.e. the profitability and the financial position
and it are what are known as the objectives of the analysis.

Procedure of Financial Statements Analysis

Broadly speaking there are three steps involved in the analysis of financial statements. There are:

Selection,

Classification,

Interpretation.

The first step involves selection of information (data). The second step involved is the
methodical classification of the data and the third step includes drawing of internees and
conclusions.
The following procedure is adopted for the analysis and Interpretation of financial statements:

The analyst should acquaint himself with the principles and postulates of accounting.

The extent of analysis should be determined so that the sphere of work may be decided.

The financial data given in the statements should be re-organized and re-arranged.

A relationship is established among financial statements with the help of tools and
techniques of analysis such as ratios, trends, common size, funds flow etc.

The information is interpreted in a simple and understandable way. The significance and
utility of financial data is explained for helping decision-taking.

The conclusions drawn from interpretation are presented to the management in the form
of reports.

1.2 RESEARCH PROBLEM:

The pharmaceutical industry is one of the sunrise sectors in India. Its continuing success rests on
it rising to the many and diverse challenges faced in today's health care sector. Identifying new
drug targets, attaining regulatory approval, and refining drug discovery processes are among the
challenges that the pharmaceutical industry faces in the continual advancement of control and
elimination of disease. Pharmaceutical statisticians are at the forefront in meeting many of these
challenges; they have a vital role to play in the health care of the entire population.
As one of Indias leading pharmaceutical companiesDr Reddys has more than 190 medications
ready for patients to take, 60 active pharmaceutical ingredients, for drug manufacture, diagnostic
kits, critical care and biotechnology products. Reddy's manufactures and markets a wide range of
pharmaceuticals in India and overseas. Hence, the study of the companys financials and working
capital requirements is necessary to help the company grow further.

1.3 SIGNIFICANCE OF STUDY:

The pharmaceutical industry is a successful and rapidly growing worldwide industry. It has
greatly aided medical progress. It contributes significantly to the economies of the countries all
round the world where it is located, both as a major employer and as an export earner.With a
billion plus population, the need for healthcare is universal for both Urban and Rural India. With
3

an increasing incidence of life style diseases (approx. 33 percent of the total pie) and a growing
geriatric and pediatric population, there is an emphasis on the need for specialty care. India has
one of the highest private spending in healthcare as compared to other countries. Nearly 80% of
the total spends. Government Initiatives like NRHM, NUHM and RSBY are working towards
better healthcare for the poor. In recent years, despite the slowdown in the global economy,
exports from the pharmaceutical industry in India have shown good buoyancy in growth. Dr.
Reddy's Laboratories Ltd. is one of India's leading pharmaceutical companies with global
ambitions and stands second in the top 10 pharmaceutical companies in India. It is located in
Andhra Pradesh and hence is relevant to the study. Export has become an important driving force
for growth in this industry with more than 50% revenue coming from overseas market.

1.4 OBJECTIVES OF THE STUDY:

To analyze companys financial statements using comparative and common size analysis.
To study the profitability of Dr. Reddy's Laboratories Ltd.
To study the liquidity position of the company.
To derive findings, conclusions and suggestions to improve various ratios.

1.5 RESEARCH METHODOLOGY:

Research design or research methodology is the procedure of collecting; analyzing and
interpreting the data to diagnose the problem and react to the opportunity in such a way that the
costs can be minimized and desired level of accuracy can be achieved to arrive at particular
conclusion.
The methodology used in the study for the completion of project and the fulfillment of the
project objectives. The tools and techniques used for the study will be:
1. Comparative and Common Size analysis
2. Ratio Analysis

Sources of Information: Financial statements (5 years) of the Dr. Reddys Laboratories Ltd.
have been taken into consideration. (Secondary data)

1.6 SCOPE OF THE STUDY:

The analysis is made by taking financial statements of Dr. Reddy's Laboratories Ltd into

consideration.
The study is based on the information of last 5 years.
The study is conducted purely to understand financial position of the company.
The study attempts at analyzing the liquidity and profitability position of the company, as
well as preparing common size balance sheet and common size income statement by
interpreting the results.

1.7LIMITATIONS OF THE STUDY:

Like every study this study also has some limitations, such as

The data collected is completely restricted to the company. Hence, this analysis cannot be

taken as universal.
The scope is limited to the financial statements of the company and is limited to the
financials, which have been published by the company and has been taken as a

representative of the study.

Detailed study of the topic is not possible due to the limited size of the project.

CHAPTER 2
REVIEW OF LITERATURE

2.1 THEORETICAL BACKGROUND:

Financial Statement Analysis:

Financial statement analysis the process of understanding the risk and profitability of a firm
(business, sub-business or project) through analysis of reported financial information,
particularly annual and quarterly reports.
Financial statement analysis consists of 1) reformulating reported financial statements, 2)
analysis and adjustments of measurement errors, and 3) financial ratio analysis on the basis of
reformulated and adjusted financial statements. The two first steps are often dropped in practice,
meaning that financial ratios are just calculated on the basis of the reported numbers, perhaps
with some adjustments. Financial statement analysis is the foundation for evaluating and pricing
credit risk and for doing fundamental company valuation.

Comparative Statement:
A statement which compares financial data from different periods of time. The comparative
statement lines up a section of the income statement, balance sheet or cash flow statement with
its corresponding section from a previous period. It can also be used to compare financial data
from different companies over time, thus revealing the trend in the financials.

Comparative statements show the effect business decisions have on a company's bottom line.
Analysts can identify trends and evaluate the performance of managers, new lines of business
and new products on one statement instead of having to flip through individual financial
statements from different periods of time. When comparing different companies, a comparative
statement can show how businesses react to market conditions affecting an entire industry.

Comparative Statement Analysis:

Comparative statement analysis is an analysis of financial statement at different period of time.
This statement helps to understand the comparative position of financial andoperational
performance at different period of time. Comparative financial statements again classified into
two major parts such as comparative balance sheet analysis and comparative profit and loss
account analysis.

Common Size Statement:

A company financial statement that displays all items as percentages of a common base figure.
This type of financial statement allows for easy analysis between companies or between time
periods of a company.
The values on the common size statement are expressed as percentages of a statement component
such as revenue. While most firms don't report their statements in common size, it is beneficial
to compute if you want to analyze two or more companies of differing size against each other.
Formatting financial statements in this way reduces the bias that can occur when
analyzing companies of differing sizes. It also allows for the analysis of a company over various
time periods, revealing, for example, what percentage of sales is cost of goods sold and how that
value has changed over time.
Common Size Statement Analysis:

In this figures reported are converted into percentage to some common base. In the balance sheet
the total assets figures is assumed to be 100 and all figures are expressed as a percentage of this
total. It is one of the simplest methods of financial statement analysis, which reflects the
relationship of each and every item with the base value of 100%
Ratio Analysis:
Financial Ratio Analysis is the calculation and comparison of main indicators - ratios which are
derived from the information given in a company's financial statements. It involves methods of
calculating and interpreting financial ratios in order to assess a firm's performance and status.
This Analysis is primarily designed to meet informational needs of investors, creditors and
management. The objective of ratio analysis is the comparative measurement of financial data
to facilitate wise investment, credit and managerial decisions.

2.2 CITING OF PAST WORKS:

Ms. Subhedar

(2006-2007) a study was done by her titled R & D ACCOUNTING AND

REPORTING AND RATIO ANALYSIS OF DR.REDDY S LABORATORIES LTD. Dr.

Reddy s laboratories Ltd. the second largest Pharmaceutical Company mainly focuses on R & D
division for reducing its costs. This project helped to understand the companys R & D
accounting and reporting and its financial position by using Ratio Analysis.
In respect of R & D accounting and reporting Dr. Reddy s laboratories Ltd. is found considerably
good in comparison with other companies. R & D expenditure constitutes major part of the
turnover and are treated as intangible assets. In respect of Ratio Analysis Return on assets (ROA)
return on total capital employed and return on shareholders equity how increased by about 35%
from 1995-96 to 2005-05 indicating an excellent overall performance by the management. The
current ratio (approx. 1.5) and quick ratio (approx. 1.3) indicates an effective liquidity
management by Company. The Net profit Margin has been around 15% in the last three financial
years reflecting a better earning for the shareholders. The high Debt equity, debt assets and debt
to total capital ratio indicates a moderate existence of equity and capital employed. The company

maintains a modest interest coverage ratio so that it can easily meet its interest burden even if
EBIT suffers a decline.

Shetty 2 (2010) a study was done by him titled AN ANALYSIS & COMPARATIVE STUDY
OF FINANCIAL STATEMENTS FOR KALYANI STEELS LTD. Kalyani Steels Ltd is a
leading manufacturer of Carbon and Alloy steels. The objective of the project was to analyze and
understand financial feasibility of the company in terms of liquidity, turnover, solvency,
profitability etc. by using Ratio Analysis technique and to make comparative study of financial
statements of different years.
The findings of the project were satisfactory. The company has strong short term liquidity
position. The company had excellent turnover of various assets in the year 2005-2006. The assets
were efficiently employed to generate maximum sales. However for the year 2006-2007 the
turnover ratios suffered because of fall in sales. The company has got excellent gross profit ratio
and the trend is rising which is appreciable indicating efficiency in production cost. The net
profit for the year 2006-2007 is excellent and it is 6.17 times past year indicating reduction in
operating expenses and large proportion of net sales available to the shareholders of company.
The company has strong solvency position as all the solvency ratios are favorable. The company
has excellent overall profitability ratios indicating effective use of funds provided be
shareholders and creditors. According to the capital gearing ratio the company is geared by
including fixed income bearing securities with an intention to increase the income of
shareholders.

Gupta, Deogirikar, Raj, Singh and Prakash3(2013) a study was done by them titled
FINANCIAL REPORTING ANALYSIS -COMPARING FINANCIAL PERFORMANCE
OF CIPLA AND LUPIN. The pharmaceutical industry in India is third largest in the world. It
has been growing at approximately 10% every year. Indian companies hold just around 7% share
in the global pharmaceutical market but they are expected to become major players soon with the

10

help of their innovatively-engineered generic drugs and active pharmaceutical ingredients. At

this juncture, a closer look at some of the promising companies in the Indian pharma sector was
done to identify possible investment opportunities within these companies. The report attempted
to study the financial reports of Cipla & Lupin and highlight the t aspects that are crucial for the
investment decision viz., Revenues, Profitability, Liquidity, Capital market performance and
Cash flow. This was done by conducting comparative financial and ratio analysis.
Both the companies have posted healthy growth numbers for past so many years; they have
reached a consolidation phase due to which the growth rate has slowed down a bit in the recent
years. Quality of earnings has been good with minimum dependence on other income. On a
long term both the companies can be good investment opportunities. If one wants to get into a
slightly a defensive pharma play with good returns, Cipla seems to be the better bet, since it did
well during recession too. For a high return of investment, Lupin could be the right option.

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Review of literature
Though there are innumerable literatures available on the subject, the most appropriate
studies have been reviewed. Dr. Promod Kumar published a book in 1991Analysis of
financial statement of Indian Industries The study covered the 17 private sector, 5 state
owned public sector and 1 central public sector companies. He studied analysis of
activities, assessment of profitability, return on capital investment, analysis of financial
structure, analysis of fixed assets and working capital. In his research he revealed
various problems of industries and suggested remedies for the problems. He also
suggested for the improvement of profitability and techniques of cost control.1Ahindra
Chakrabati published an articles Performance of public sector enterprises a Case study
on fertilizers in The Indian journal of public enterprise in the year 1988-89. He made
analysis of consumption and production of fertilizer by public sector; he also made
analysis of profit and loss statement. He gave suggestion to improve the overall
performance of public enterprise.2 In the year of 2002, Dr. Sugan C. Jain has written a
book on Performance appraisal automobile industry In his study he has analyses the
performance of the automobile industry and presented comparative study of some
national and international units. The operational efficiency and profitability had been
analyzed using the composite index approach. He made several suggestions from the
strengthening the financial soundness improving profitability, working capital the
performance of fixed assets.3 Recently in the year 1998 a study was made by S.J.parmar
on Financial Efficiency-Modern methods, tools & Techniques for the period from
1998-89 to 1994-95.He had made an attempt to analyze financial strength, liquidity,
profitability, cost and sales trend and social welfare trend by using various ratios
analysis, common size analysis and value added analysis. He made several suggestions
for the improvement of profitability of industry. In his analysis, he indicates various
12

reasons for higher cost, low profitability, and inefficient use of internal resources.4Dr
Sanjay Bhayani published a book in 2003, Practical financial statement analysis The
study covered 16 public limited cement companies in private sector. He made study of
analysis of profitability, working capital, capital structure and activity of Indian cement
industry. In his research he revealed various problems of cement industries and
suggested remedies for the problems. He also suggested for the improvement of
profitability and techniques of cost control.5Ram Kumar, Kakani Biswatosh saha and
V.N.Reddy has written research paper on Determinants of Financial Performance of
Indian Corporate Sector in the Post-Liberalization Era: An Exploratory Study. This
paper attempts to provide an empirical validation of the widely held existing theories on
the determinants of firm performance in the Indian context. The study uses financial
statement and capital market data of 566 large Indian firms over a time frame of eight
years divided into two sub-periods (viz., 1992-96, and 1996-2000) to study Indian firms'
financial performance across various dimensions viz., shareholder value, accounting
profitability and its components, growth and risk of the sample firms. It reveals that
even on the same data, the determinants of marketbased performancemeasures and accounting-based performance measures differ due to
influence of 'Capital Market Conditions'. We found that size, marketing
expenditure, and international diversification had a positive relation with a firm's
market valuation. Apart from these firm attributes that reflect either operating
parameters of firms or 'strategic choice' of firm managers, we also found that a firm's
ownership composition, particularly the level of equity ownership by Domestic Financial
Institutions and Dispersed Public Shareholders, and the leverage of the firm were
important factors affecting its financial performance. The different implications of the
findings for various stakeholders of a firm are also discussed.6Dutts S.K has written an
article on Indian tea industry an appraisal which was published in Management
accountant in the year of March 1992. He analyzed the profitability, liquidity and
financial efficiency by using various ratios.7

13

CHAPTER 3
ORGANIZATION PROFILE

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1. Introduction
Indias pharmaceutical sector has been the subject of much conjecture recently because
evolving intellectual property (IP) laws are sure to alter the status quo. As a knowledge driven
industry, pharmaceuticals are especially sensitive to regulatory changes that affect IP. In the past,
Indian pharmaceutical firms have derived considerable revenues by selling copies of Western
companies patented products. In 2006, this practice will likely come to an end, when India
implements stronger IP protection laws. What is less obvious is how the industry
will react in the post-2006 environment. Existing research has analyzed 2006 from a number of
angles, ranging from consumer-focused to investor-focused, and used both theoretical (topdown) and company-specific (bottom-up) methods.
By focusing on the strategic activities of twelve influential companies, this paper makes
projections about how the Indian pharmaceutical industry might develop in the coming decades.
It can be argued that this method puts too much emphasis on the role of the firm in the larger
industry context, and overlooks other factors such as patent enforcement, market segmentation,
and demand. However, given that firm strategies are derived from assessments of external
factors, it is reasonable to invest some confidence in them. Furthermore, the extent to which
pharmaceutical companies control their own destinies must be observed. Consider, for example,
the prospect of creating new drugs in India. Indias capacity to produce its own IP is very much
contingent on the success of firms such as Dr. Reddys Laboratories (DRL) and Ranbaxy.

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1.1 Structure of paper

The principal objective of this paper is to project the effects that 2006 IP laws are likely
to have on the Indian pharmaceutical industry. Section 2 provides background on
pharmaceuticals in India, while section 3 strikes at the heart of the issue in question by reporting
and analyzing how companies are preparing for 2006.

1.2 Summary of findings

This research supports a number of conclusions about the impact of reforms on the
pharmaceutical industry. Increased patent protection need not spell disaster for Indian
pharmaceutical companies, even though the current practice of profiting from other companies
IP will likely cease to be a strategic option. The future success of Indian pharmaceutical
companies hinges on their ability to find productive roles for themselves in the post-2006
environment.
The most publicized reaction of Indian firms to 2006 has been the development of drug
discovery programs by companies such as DRL, Ranbaxy, Wockhardt, and Dabur, who plan to
use product patent protection as an incentive to produce their own IP. To be sure, Indian drug
discovery programs are still in their infancy and there remain considerable obstacles on the
horizon. Indian companies have neither the capital bases nor the experience of their multinational
company (MNC) competitors. On the other hand, odds are high that some firms in India will
succeed in drug discovery within the next few years. If successful, India will be the one of the
first emerging economies to produce cutting-edge technology. Not all Indian pharmaceutical
firms possess the resources, the will, or the know-how to initiate drug discovery, but there is
hope for lesser-endowed companies after 2006. Consider the following points. First, 90 percent1
of the Indian pharmaceutical market consists of second and third generation drugs that are no
longer subject to patent protection in the developed world. After 2006, Indian companies will be
able to continue to produce such drugs. It has even been suggested that the market for these older
drugs will increase as the prices for newer, on-patent drugs increase. Some companies have
already established themselves as exporters of generic drugs to the developed world, and 2006

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patent legislation does not pose a threat to these revenue sources. Second, Indian drug companies
have advantages over MNCs in the Indian market in a number of no technological areas,
including marketing, distribution, and traditional medicines. Some Indian companies are
leveraging these no technological strengths (and even building entire businesses around them) as
they approach 2006. Third, mergers and acquisitions (M&A) have become increasingly common.
By matching companies with complementary strengths, the M&A process promises to better
equip Indian companies to compete with MNCs in years ahead. To the extent that M&A activity
has occurred between Indian and multinational firms, the distinctions between the two groups are
increasingly blurred. Four of the twelve firms in the sample for this paper were MNC
subsidiaries. Accordingly, the paper also offers insights into these companies 2006-related
strategies. Most MNCs that already have a presence in India are building up the capacity to
localize further their post-2006 Indian operations, pending the specific nature of the new patent
environment. The recently passed Exclusive Marketing Rights (EMR) amendment to Indias
patent act has demonstrated to MNCs that the government will try to accommodate their interests
in coming years, but the post-2006 scenario for patent protection is still far from clear. Section
3.3.7 details the currents that underlie localization decisions for MNCs. MNCs without Indian
presence will undoubtedly enter the market after 2006. It is likely that a considerable share of
new entrants will rely on co-marketing arrangements with local companies and other MNCs to
distribute their products.

2. Overview
This section provides the background to strategic issues discussed in section 3. It is
comprised of four subsections, each of which offers different perspectives on pharmaceuticals in
India. Section 2.1 highlights major developments in the industry over the past century; section
2.2 presents a functional model of the pharmaceutical product cycle; and section 2.3 examines
the regulatory environment in which pharmaceutical companies operate. Finally, section 2.4
considers the evolution of domestic demand for drugs.

2.1 A Brief History (19001999)

The Indian pharmaceutical industry traces its roots to the 1903 formation of Bengal
Chemical and Pharmaceutical Works in Calcutta by Professor P.C. Roy. During the first half of

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the twentieth century, however, and despite modest efforts on the part of the colonial government
to spur local production, India remained largely dependent on the UK, France, and Germany for
medicines.

The new and independent government in 1947which emphasized industrialization to

achieve self-relianceinvested heavily in pharmaceuticals (among other industries) and curbed
imports. 2 Yet, in contrast to its policies toward other sectors, the government did not
discourage foreign firms from competing in India. In other sectors, self-reliance was pursued at
high cost, but pharmaceutical policies emphasized national health. Because there was no local
substitute for MNCs technology, the government did not discourage their presence in
the country. In fact, until 1970, the Indian pharmaceutical industry consisted almost entirely of
MNCs, most of which maintained minimal physical operations in India.
The government took its first concrete steps toward self-reliance in pharmaceuticals with
the establishment of Hindustan Antibiotics Ltd. (HAL) in 1954 and Indian Drugs and
Pharmaceuticals Ltd. (IDPL) in 1961. IDPL (in spite of its grossly inefficient character) became
instrumental in the development of the industry by serving as the vehicle for a comprehensive
Soviet-sponsored program in which Russians supplied machinery, personnel, and technical
know-how to produce antibiotics. The IDPL development program helped self-reliance in several
ways. First, it showed that it was possible to produce drugs in India at competitive costs. Second,
it developed human and physical capital, some of which moved in due course to other
companies. Third, it spurred the existence of a network of support institutes, pharmacy colleges,
and up and down stream businesses.

The IDPL program alone was insufficient to jumpstart local industry. Local companies
needed a way to compete with more experienced and better endowed foreign firms; only then
would the industry have the critical mass to sustain itself. The 1970 Patent Act made headway
toward this end by recognizing patents on processes but not patents on products, which in turn
enabled local firms to legally produce compounds that were patented elsewhere. Consequently,
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scores of Indian pharmaceutical companies evolved to reverse-engineer and cheaply sell copies
of all major drugs. Although many Western observers criticize the 1970 Patent Act on ethical
grounds, it cannot be denied that the legislation helped to develop Indias pharmaceutical
industry. Over the next thirty years, the industry would grow from a handful of MNC players to
todays 16,000 licensed pharmaceutical companies. From 1970, local Indian firms reverseengineered bulk drugs, which they either sold wholesale or processed into simple formulations.
Meanwhile, MNCsreluctant to expose their IP in such a lawless marketlimited their
exposure to India. By 1997, MNCs had come to account for 30 percent of bulks and 20 percent
of locally produced formulations.4 Most
MNCs did the bare minimum needed to stay in the Indian market (such as producing simple
formulations from imported bulks), while awaiting the arrival of stronger patent protection. The
few MNCs that have been bullish toward India over the past thirty years have local managers to
thank for their aggressive posture.
Even without strong patent protection, the Indian pharmaceutical industry matured during
the 1980s. In particular, local companies grew less reliant upon reverse-engineering for revenues.
By increasingly focusing on attributes such as novel delivery systems, Indian firms were on their
way to creating revenues based on their own added value. Companies also started to produce
products better tailored for their markets than typical MNC products. For example, Lupin Labs
introduced its AKT-4 kits, which combined four anti tuberculosis (anti-TB) drugs that were
generally administered together into a single package. The AKT-4 kits were well received by TB
patients, who no longer had to worry about the lack of availability of any one drug. (Selective
discontinuation of anti-TB drugs can lead to resistance and even relapse in TB patients.)
2.2 The Pharmaceutical Production Cycle
Pharmaceutical production consists of a number of discrete activities. Because different
phases of the pharmaceutical production cycle require different types of resources and levels of
funding, it is useful to examine firms strategies within their operational contexts. In fact, many
of the conclusions drawn in section 3.3.1 are relevant only within certain phases of the product
cycle. This paper assumes that the product cycle has four main components: 1) discovery, 2)
clinical trials, 3) production and manufacturing, and 4) marketing and distribution.

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Large MNCs typically have activities that span all of these areas. However, smaller companies
in India and elsewhereoften specialize in one or more functions.

2.2.1 Discovery
In principle, discovering new drugs is a straightforward process. First, chemists supply
research scientists with compounds for testing, a process referred to as lead generation.
Generally, such compounds are closely related molecules within a given disease area. In the
West, because the success of a discovery operation is at least partially contingent upon the
number of leads, drug companies have recently turned to combinatorial chemistry in order to
accelerate the lead generation process. (Combinatorial chemistry, with its high costs and
unproven effectiveness, has not yet gained widespread acceptance in India.) Second, scientists
screen molecules in a lab environment by conducting in vitro (Petri dish) tests. Next, compounds
with attractive medical qualities are advanced to an animal house for in vivo tests. In vivo tests
are used to determine the minimum dosage necessary to produce the intended results (efficacy)
and the maximum nonlethal dose (toxicity) of the drug in question in animal subjects.
Companies usually file for patent protection of promising compounds midway through in vivo
testing. Additionally, research scientists note any side effects that may be associated with the
drugs administration. Following the completion of in vivo tests, companies may apply to
conduct clinical trials on their compounds in their desired markets. Permission to conduct
clinical trials depends on the results of both the in vitro and in vivo tests, and their conformity to
generally accepted standards, as they are determined in individual countries.
2.2.2 Clinical Trials
While testing on animals provides valuable and necessary insights into a drugs medical
characteristics, regulatory authorities in virtually all markets require comprehensive clinical trials
on human subjects before granting production and marketing approval. The standards for clinical
trials are considerably more stringent than those for animal testing. Doctors and other
professionals who administer trials are required to pass reviews that are administered by

20

independent Institutional Review Boards (IRBs).6 Trials must employ double-blind test
procedures. Production facilities should be in accord with Good Manufacturing Practices (GMP)
as determined by the relevant regulatory authority.7 This list is not exhaustive; clinical trials are
exacting and, consequently, expensive to administer. Furthermore, since different countries have
different standards, it is necessary to conduct clinical trials in multiple locations (or at least
simultaneously in the same location) to achieve global distribution. Several analysts have
suggested that India is well suited for clinical trials because it has a strong university system
capable of producing low-cost human capital, and a large population of poor and relatively
disease-ridden potential test subjects. Some local companies namely Cedilla and Ranbaxy
have begun to fill this role. However, the issues alluded to above still prevent global clinical
trials from being a viable option for most Indian pharmaceutical companies. Therefore, while
MNCs may begin to use India for clinical trials in the near future, local companies will likely
enlist other firms to assist them in this capacity as
they discover new drugs.
2.2.3 Production and Manufacturing
Pharmaceutical production consists of bulk drug manufacturing (in which active
compounds are synthesized on an industrial scale) and formulation manufacturing (in which
active and inactive ingredients are packaged into tablets, capsules, liquids, and injectibles. Bulk
drug manufacturing is more technology-intensive than formulation manufacturing because, while
the former draws from reverse-engineering skills and requires knowledge of chemical processes,
the latter merely approximates the job of the local pharmacist on a larger scale. Indian companies
have proven themselves capable in both areas, as barriers to entry are modest and domestic
manufacturing guidelines are liberal. However, to export products to developed markets,
companies must bring their factories into conformance with GMP standards (see section 2.3.1).
U.S. Food and Drug Administration (FDA) and UK Department of Health and Social Services
(DHSS) sanctioned factories are consequently premium assets in India. According to D.M.
Gavaskar, managing director of Knoll Pharmaceuticals, GMP-compliant facilities are 25-30
percent more valuable than noncompliant facilities. This cost premium renders it difficult for
smaller companies to compete in manufacturing.

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2.2.4 Marketing and Distribution

Since fixed costssuch as those for R&D and clinical trialsrepresent a considerable
portion of the total costs for developing drugs, pharmaceutical profit margins are largely
contingent upon the number of customers reached. Therefore, companies strive to build their
reputations with doctors who prescribe pharmaceuticals and the patients who use them. The
largest pharmaceutical companies in India use field sales forces, ranging in size from 500 to over
2,000, to bring their products to the domestic market. According to Uday Bhansali of Arthur
Andersen, Indian companies have a decisive edge over MNCs in terms of distribution because
they better understand the nuances of the Indian market for drugs.
Until recently, the Indian market alone provided sufficient profitability for Indian
pharmaceutical companies. But as this market becomes more congested and the costs for
producing new products grows, it is increasingly necessary for companies to look for customers
beyond India and the developing world. Unfortunately, most Indian companies do not produce
enough products to justify investments in global marketing and distribution. Established MNCs,
on the other hand, enjoy rapport throughout the worlds pharmaceutical markets. When Merck
develops a new product, for example, it can insert it into a large distribution system. In order for
Indias pharmaceutical companies to match the distribution capabilities of the major international
players, they will likely have to join their own local forces, or enlist the support of MNCs to
supplement their efforts.
2.3 Regulatory Environment
It is almost impossible to engage in a discussion about pharmaceuticals without
addressing regulation. This is true for two reasons. First, since drugs affect the health and well
being of so many citizens, government has an interest in assuring their adherence to medical
standards (see section 2.3.1) and availability (see section 2.3.2). Second, in light of the fact that
patentable research can represent up to ten percent of a given drug companys cost structure, IP
protection is essential to provide firms with incentives to develop new drugs.
2.3.1 Approval Process

22

Unlike other products, drugs must undergo extensive approval procedures before they
may be marketed. Indias domestic approval standards are quite low, but export products must
comply with standards in all destination markets. Approvals are required for both products and
processes. After a new drug is developed, regulatory authorities oversee clinical trials, which
determine efficacy, toxicity, and side effects (see section 2.2.2). Companies are free to
manufacture and formulate all approved products for which they have production rights (whether
newly patented molecules or off-patent substances) as long as the relevant authorities determine
that their production facilities comply with global GMP standards. GMP standards apply to
equipment, sanitation, and documentation.
2.3.2 Price Controls
Price controls are not nearly as important in todays pharmaceutical sector as are other
regulatory issues. This is partly because market-clearing prices for controlled drugs have
typically fallen at or below price-controlled levels since the late 1970s. In cases where price
controls did pose problems, companies simply adjusted their product portfolios accordingly,
toward non controlled drugs. But price controls are still worthy of mention insofar as past price
control orders have shaped current pharmaceutical operations. Furthermore, it is plausible that
price controls will assume a role of increasing importance in the near future. In 1970, the
government introduced the Drug Price Control Order (DPCO) to guarantee public access to
essential drugs, to provide a reasonable rate of return to companies, and to ensure quality.9 In
response to the DPCO, many firms concentrated on production of (nonessential) drugs outside its
scope. Some even divested themselves completely of controlled drugs.
Prior to 1970, India employed Western-style patent legislation, and recognized product
patents in addition to process patents on drugs. Under that environment, MNCs prospered while
local companies lacked the resources to enter the industry. The 1970 Patent Act, which
represented a change in favor of local producers, consisted of the following key clauses:
1) No pharmaceutical product patents are admissible, only process patents are
2)
3)
4)
5)

acknowledged;
The term for a process patent is fourteen years;
Three years from filing, patents are deemed to be endorsed as license of right;
Patents must be worked within three years of filing;
The Indian government may use or authorize others to use the patented invention.
23

In 1995, the government amended the 1970 Patent Act to conform to the TRIPS accord of
the Uruguay round of GATT. The main provisions of the 1995 ordinance were:
1)
2)
3)
1.
4)
5)
6)

The recognition of product patents;

Exclusive marketing rights (EMR) for new products from 20002006;
A mailbox provision for filing product patent applications during the transitional
period from 19952006;
Twenty-year patent life;
Shifting of the burden of proof to the alleged infringer;
The extension of protection to include imported materials and products.

2.3.4 Other Regulatory Issues

Aside from approvals, price controls, and patent policies, the Indian government has used
other tactics to regulate the pharmaceutical and other sectors. These are primarily those of classic
protectionism (e.g., tariffs on imports, mandatory licensing, restrictions banning imports, etc.).
Liberalization efforts of 19911992 sought to disassemble projectionist barriers and allow
foreign firms to compete on more even footing with their Indian counterparts. The main
components of this 19911992 liberalization included:
a)
b)
c)
d)
e)

MNCs treated as equal to Indian companies.

Automatic approval for 51 percent foreign equity proposals.
Automatic approval for foreign technology agreements.
Most bulk drugs (and their forms) delicensed.
Provision for a higher rate of return for companies undertaking production from
basic stages.

2.4 The Indian Market

The previous three subsections have dealt primarily with factors pertaining to
pharmaceutical supply. This section examines the characteristics of pharmaceutical demand.
There is much anticipation concerning the future of the Indian market for pharmaceuticals. With
a population of 950 million and a plethora of diseases, India is a desirable market for drug
companies. Furthermore, in spite of their low incomes, Indian consumers have exhibited
extraordinary pharmaceutical purchasing habits. According to Ranjit Shahani, managing director
of Novartis India Limited, even though the dollar value of the Indian drug market is still too
small to warrant serious attention, the market is one of the largest in the world in terms of
volume. For the Indian market to justify large pharmaceutical investments, incomes and drug
prices need to rise, and it is safe to assume that this will occur. Barring unlikely political
24

collapse, India is bound to maintain its course of rapid development. IMS Health estimates 8.6
percent annual growth for the Indian pharmaceutical market between 1998 and 2002, and
forecasts that the Indian market will be worth $7.8 billionits figure for the North American
drug market is $169.1 billionin 2002.16 Despite the apparent precision of such projections,
several unknowns complicate the marketing initiatives of pharmaceutical companies. In
particular, there is insufficient information about: 1) the time frame of Indias rise to economic
prosperity, 2) the market reaction to liberalization (i.e., customers willingness to tolerate price
increases), and 3) the structure of the post-2006 market
3. Impact of 2006 on Firm Strategies
This section explores how Indian companies are reacting to anticipated changes in patent
protection following 2006. It will be demonstrated that firm strategies are contingent upon
expectations about and capacities to adapt to the new patent environment.
3.1 Expectations
There are still many unknowns concerning the anticipated patent legislation in 2006.
Even if (as is expected) the new patent law nominally complies with WTO guidelines, much
uncertainty persists about its specific operation. For example, the law may be interpreted in a
manner that favors Indian companies over MNCs. Furthermore, courts might be unwilling or
unable to enforce decisions.
3.1.1 New Delhis will to affect change
In evaluating the degree to which the New Delhi government will support stronger patent
protection, it is useful to consider its standpoint with respect to the costs and benefits associated
with patent protection. If perceived costs, such as increased prices and local firms weakened
competitive position, outweigh the benefits associated with innovation, then New Delhi will be
inclined to choose weak legislation and enforcement. If the government believes that strong
patent protection will contribute positively to Indias overall social and industrial welfare, the
reverse will be true.
3.1.2 New Delhis ability to affect change

25

Even if the 2006 patent law fully complies with OPPI specifications, it will be ineffective
without proper enforcement. Patent examiners possess skills not easily attainable in India, and
they generally command premium compensation. Lanjouw estimates that the Indian patent and
trademark office (PTO) currently spends $330,000 per year, whereas its U.S. counterpart
operates on a $300 million budget.19 Obviously, New Delhi will have to allocate more resources
to its PTO if it is to function effectively. In addition, India lacks other complementary private
sector features that are required of a well-functioning patent system, such as patent attorneys and
a general appreciation of IP issues.20
3.1.3 Firms views
In the final analysis, patents will probably not be as strong or as well enforced as the
OPPI firms and Western governments want, but the post-2006 scenarioagainst the apparent
wishes of New Delhiis sure to represent a significant departure from the status quo. The
potential range of possible outcomes poses significant problems for firms attempting to draft
post-2006 strategies. Several of the MNCs covered in this study have decided to refrain from
making a judgement about 2006 until after the fact, but have devised expansion plans to
distribute higher revenue, easily prepared, first generation drugs in India. Other firms, such as
Sun Pharmaceuticals, have made detailed guesses about the degree of patent protection they will
receive, and have initiated costly, irreversible investments based on their assumptions. A third set
of firms, such as Wockhardt, is more forward-looking than the first group, but places a higher
value on workable contingency strategies than the second.
3.2 Capabilities
Because different companies have different strengths and weaknesses, two companies
may well put forth identical analyses of the post-2006 patent environment, yet react in
completely different ways. This subsection attempts to highlight some of the features that
differentiate companies from one another. Figure 1 presents a qualitative snapshot of the
functional capabilities of the companies that comprise this papers sample. According to the
sample, in all four areas of the product cycle, the most prominent Indian companies are
competitive with MNCs in the domestic market. Indian companies excel particularly in domestic
marketing and distribution. For the MNCs, the domestic figures may be somewhat misleading,

26

because MNC subsidiaries often rely upon their parent companies for assistance in specific areas,
rather than duplicating work themselves.
3.3.1 Size
Historically, large companies have dominated the global pharmaceutical industry. This
has been the case primarily because certain phases of the product cycle (see section 2.2), such as
clinical trials and (global) marketing, require substantial investment. In India, three factors have
reduced the importance of companies size, as compared with elsewhere in the world. Local
companies did not have to engage in discovery and clinical trials, limited their operations to
India and its neighbors, and finally, were offered substantial protection under
the drug price control order (DPCO). For these reasons, bigger did not necessarily mean better in
India.
3.2.2 Markets
Some of the companies covered in this study, such as Lupin Laboratories, Dabur
Research, and Knoll Pharmaceuticals, sell the vast majority of their products within India.
Others, such as Sun Pharmaceuticals, sell large percentages of output to India and other
emerging markets that have low approval and patent standards. A third group sells bulks and
branded generic formulations all over the world.
3.2.3 Present Technological Capabilities
Technological competence is developed gradually. Therefore, firms that already have
technologically intensive operations have a better chance at rising to the level of their MNC
competitors than those that do not.
3.3 Strategies
This section evaluates some of the measures companies are adopting to ensure solvency
after 2006.
3.3.1 Technological Strengthening

27

The most common strategic concern that 2006 has raised for Indian pharmaceutical
companies is the perceived need for technological strength. Companies are faced with the
realization that the only way they can continue to sell first generation drugs (in the absence of
licensing or distribution agreements) is by discovering and developing them indigenously. For
Indian firms, there are two routes to this end. They can either latch onto the skills of MNCs or
they can embark on programs to develop their own technical capacities.
Most Indian firms surveyed here have decided that new drug discovery is an unfeasible
short term goal and have consequently pursued more modest technological programs. Sun and
Lupin fall into this category. While acknowledging that new drug discovery belongs on
their long-term horizons, they have devised strategies that afford profitable operations without
new drugs. Both have worked to bring more of the production process under their own control
(through forward and backward integration) while simultaneously sharpening their existing R&D
practices. Lupine, for example, prides itself on its innovative line extensions. Even if these
companies had more capital at their disposal, they would be unlikely to pursue new drug
discovery programs because their managers firmly believe that technological competence needs
to be fostered gradually.
3.3.2 Redefining New Drug Discovery
Several Indian companies (e.g., Ranbaxy, DRL, Dabur, and Wockhardt) are turning the
prospect of increased patent protection to their advantage by spearheading new drug discovery
programs. Their efforts have attracted much attention. Skeptics assert that Indian companies are
not large enough to discover and develop their own drugs successfully. Indian companies also
lack the experience of the major players; leading MNCs have spent the better part of the
twentieth century honing R&D skills.
3.3.3 Public research
Most individuals surveyed for this paper were decidedly negative about Indias public
research facilities. In theory, public R&D labs should be an invaluable resource to Indias smaller
drug companies because they allow them access to lead molecules and other specialized R&D
functions that they could not otherwise afford. In practice, however, the current quality of such

28

labs is so poor that relying on them for survival, in the opinion of most experts, is one of the
biggest mistakes companies can make. A notable exception to this maxim is the Indian Institute
of Science (IIS), which has been quite successful at conducting clinical trials. Whether or not
other public research labs can follow IIS example remains to be seen.
3.3.4 Leveraging Non technological Strengths
On the surface, 2006 seems to call for Indian companies to become more technologically
focused, and indeed, a number of Indias more prominent firms (e.g. Ranbaxy, DRL, and
Wockhardt) are pursuing this goal by developing U.S. FDA-approved processes and drug
discovery programs. As 2006 draws nearer, however, Indias pharmaceutical companies must
also expand and develop their non technological strengths to keep pace with MNC competition.
In keeping with this broader development strategy, some companies (e.g. Sun, Lupin, etc.) are
undertaking less technologically oriented initiatives. Sun, for example, recently expanded its
R&D operations to place greater emphasis on developing state-of-the-art processes and novel
delivery systems. Such endeavors fall short of new drug discovery, but they represent important
steps toward technological self-sufficiency.
3.3.5 Growing Larger
Section 3.2.1 demonstrated that only large pharmaceutical companies can engage in all
four phases of the pharmaceutical production cycle. Indian companieswhich have traditionally
limited themselves to domestic production and distributionmust therefore grow larger to enter
discovery and clinical trials in addition to their current operations, and/or to expand to developed
export markets. This section reviews the means by which these companies are growing.
3.3.6 Help from Parent Companies
Some MNC subsidiaries (e.g., HMR, Knoll, and Glaxo) have adopted a more relaxed
posture toward 2006 than India-based companies. For them, adaptation consists of waiting to see
where opportunity lies and then capitalizing on it by transferring resources from their parent
organization.
3.3.7 Export Focus

29

Liberalization has substantially increased the global competitiveness of Indian

pharmaceutical products, as local companies have been forced to compete alongside MNCs in
their home market. Moreover, as the Indian market becomes more crowded, companies are
increasingly pressured to look elsewhere in order to expand their revenues. For these reasons, the
majority of the Indian companies profiled for this paper have taken specific measures to boost
exports.
3.3.8 Localization of Operations for MNCs
Pharmaceutical industry experts have long argued that India is especially well suited for
drug production and discovery because it possesses an abundant supply of highly skilled labor, a
wide range of raw materials, and a strong domestic market. However, a considerable portion of
pharmaceutical MNCs have either avoided India altogether or maintained the minimum presence
necessary to gain market access.
4. Appendix: Company Profiles
This appendix reviews the operations of the companies surveyed for this paper. Each
company is reviewed with respect to principal lines of business and strategic considerations for
2006.
4.1 Dabur Research Foundation
Dr. D.B. Ananatha Narayana, Head of R&D
Dr. Ravi Jain, Senior Manager
Dabur was founded in 1884 as a pharmaceutical company, but in the ensuing years, has
greatly diversified into product lines ranging from cheeses to veterinary products. Only 5 percent
of 1994 turnover was derived from pharmaceuticals, because since 1993, Dabur has consciously
undiversified and concentrated on doing fewer things better. Still, Daburs scope of operations
is vast when juxtaposed with that of other pharmaceutical companies. Liberalization has affected
Dabur in a number of ways. First, increased competition has eroded profit margins in many of
Daburs markets. In the past, Dabur produced as many products as possible to capitalize on its
distribution expertise. Now, Indias infrastructure is greatly improved and specialists can sell

30

products for less than Daburs total cost. In response to falling margins, Dabur has abandoned
failing products and pursued productivity-enhancing measures such as freight cost control,
process automation, and a proposed merger with Dabur Research Foundation (at present, R&D is
done a contract basis with the research foundation). Second, stronger IP protection has enticed
Dabur to build up its pharmaceutical business and pursue new drug discovery.
4.2 Dr. Reddys Laboratories (DRL)
Dr. K. Anji Reddy, Chairman
Mr. K. Suresh, General Manager
Mr. T. Balamurali Krishna, Manager
Dr. M, Satyanarayana Reddy, General Manager
Mr. P.V. Sankar Dass, Marketing Manager
Dr. G.O.M. Reddy (DRL Research Foundation), Vice President

DRL was founded as a bulk drug company in 1984. It has since added formulations and
new drug research to its docket of business activities. DRL prides itself on its ability to
reverseengineer any molecule in six months. Its product mix comprises an even balance of high
volume (e.g., antibacterial) and high margin (e.g., cardiovascular) drugs. DRLs primary
objective is to serve the Indian market, but it is much more involved in export markets than most
of its competitors. In addition to exporting to other emerging markets, DRL exports a sizeable
volume of bulk drugs to Western markets. Along with Ranbaxy and Cipla, DRL has
evolved into a key player in the global generics market. DRL attempts to have a physical
presence in all of its export markets, through joint venture tie-ups, wholly owned subsidiaries,
and contractual arrangements. Perhaps the most notable aspect of DRLs current strategy is its
vigorous support of new drug discovery in India; in this respect, it is arguably the most advanced
Indian company.

31

4.3 Glaxo India Ltd.

Mr. Madhav B. Kurdekar, Executive Vice President
Glaxos global strength has traditionally been the design and production of leading edge,
high margin drugs. For the past seventy-five years, in order to participate in the Indian market,
Glaxo has been forced to sell its best drugs at prices well below what it charges elsewhere in the
world. Glaxo India also produces bulk drugs and formulations, and sells drugs on behalf of other
foreign companies that do not have Indian presence. Glaxo India does not sell the entire product
line of its parent company, UK-based Glaxo
4.4 Hindustan Antibiotics Ltd. (HAL)
Mr. M.C. Abraham, Managing Director
Mr. S.R. Naik, General Manager
Founded in 1954, HAL is a state-owned company, and one of the key building blocks of
the Indian pharmaceutical industry. The companys original objectives were threefold: job
creation, life saving, and technological diffusion. Today, HAL manufactures seventy-eight
formulations and four bulk drugs.
HALs corporate practices will not be affected by the advent of stronger patent protection
in 2006 becauseas a state-owned companyit has never engaged in semi-ethical practices
such as reverse-engineering. However, other facets of liberalization and rising levels of
competition have challenged HAL. As other firms become more competitive and more
productive, HAL remains shackled by its intractable bureaucracy.

32

4.5 Hoechst Marion Roussel Ltd. (HMR)

Mr. Debabrata Bhadury, Managing Director
HMR is a multinational chemical company that has had operations in India since 1956.
Over the past several years HMR India has abandoned its petrochemical divisions in order to
focus efficiently on pharmaceuticals, a practice which mirrors the intent of its parent company.
HMRs efficiency drive has also consisted of taking full advantage of economies of scale by
centralizing certain functions in Frankfurt and establishing good communication throughout the
HMR family. As a result, HMR India is much more closely integrated with its parent company
than are most other MNC pharmaceutical subsidiaries in India. Although it invests large sums of
money to support pro-patent lobbies in New Delhi, HMR, like other MNCs, is unsure of what to
expect of the post-2006 patent regime. Rather than subjecting itself to such uncertainty, it has
pursued a strategy of relying on headquarters in Frankfurt for products, technology, and
marketing programs on an as-needed basis. Meanwhile, it has divested itself of its local
primary/bulk R&D facilities. Interestingly, HMR has filed more patents in India than any other
drug company, and pending attractive patent protection, it may well reinvest in its Indian
operations after 2006. Whether or not it does so will have almost no impact on the types of
products it is able to produce and sell in India.
4.6 Knoll Pharmaceuticals Ltd. (BASF Pharma)
Mr. D.M. Gavaskar, Managing Director & President
Dr. A.V. Prabhu, Vice President
In 1997, BASF acquired UK-based Boots Pharmaceuticals. Subsequently, Boots India
was restructured under Knoll, BASFs U.S.-based pharmaceutical subsidiary. In India, Knoll acts
with considerable autonomy from its corporate parent. D.M. Gavaskar, its managing director and
president, believes that autonomy is necessary for Knoll to serve its markets adequately. Two
33

reasons underlie this belief. First, complex matrix structures, in which employees perform both
regional and functional duties, tend to inhibit distribution relationships, which are critical to
success in India. Second, in many respects the Indian market differs fundamentally from the
global market. For example, cough and cold medicines are currently the second largest functional
segment in India, although they are of trivial importance on the world scene. Adopting a more
centralized approach would weaken Knolls individual capacity to promote cough and cold
remedies. In general, a certain degree of autonomy is necessary to capitalize on Knolls strengths
a strong distribution network and an intimate knowledge of the Indian market for drugs. Knoll
does not involve itself in exports (only 3 percent of its products are exported).
4.7 Lupin Laboratories Ltd.
Mr. Lalit Kumar, President
Mr. Shrikant Kulkarni, General Manager
Lupin is a twenty-seven year-old Indian pharmaceutical company. In the past, Lupin
derived a considerable portion of its revenues from producing bulk and intermediate drugs with
no infringing processes, many of which were bound by product patents in more developed
countries. It specializes in anti-TB medications and cephalosporins (antibiotics derived from the
Cephalosporium genus of fungi).
With the onset of government liberalization and the prospects of increased patent
protection after 2006, Lupin has decidedly changed its course in several ways. First, it has shifted
focus from low-margin bulks to higher value-added products, such as novel delivery systems and
niche products for selective markets. Second, it has adopted an export focus; in 1997, 55 percent
of turnover came from exports.

4.8 Nicholas Piramal India Ltd. (NPIL)

Dr. A.G. Seshdrinathan, Vice President

34

Established in 1947, NPIL is engaged in the sale of pharmaceuticals and glass products
for the pharmaceutical industry. Within pharmaceuticals, NPIL has a presence in the
cardiovascular, anti-infective, antacid, and dermatological segments of the market. With the
exception of cardiovascular, these are high-volume segments. NPILs principal strategy is to
build economies of scale in the production of high-volume drugs, which it then markets in India
and other countries with similar drug markets, such as Africa, Southeast Asia, and Russia. As it is
strong in marketing and distribution, NPIL has also been particularly active in marketing MNC
products in India.
4.9 Novartis India Ltd.
Mr. Ranjit Shahani, Chief Executive Officer
Novartis India Ltd. was formed in 1997, following the merger of Sandoz (India) and
Hindustan Ciba-Geigy. The old Hindustan Ciba-Geigy (India) had traditionally focused on
producing formulations of its parent companys products for the Indian market, as well as a small
number of export markets with conditions similar to those of India. More recently,
Novartis India, as it is now called, has begun to produce bulk drugs for use in local formulations
and for export to other Novartis plants.
4.10 Ranbaxy Laboratories
Dr. J.M. Khanna, Executive Vice President & Member of the Board
Dr. Sudarshan Arora, Executive Director (New Drug Discovery)
Dr. M.R. Marathe, Assistant Director
Ranbaxy is the largest Indian drug company, second only to Glaxo India in terms of
overall pharmaceutical market share. Because of its size and global ambitions, Ranbaxy has
received a large amount of press in the last several years. Indeed, many analysts believe that
Ranbaxy is especially well positioned to compete alongside multinationals in future decades.
Parvindar Singhthe 55 year-old chairman of Ranbaxyis convinced that Indias
pharmaceutical industry is evolving in a way that will make complacency a losing strategy in
years to come. He believes that Indian companies need drastically to reorient themselves to
35

remain competitive in the post-2006 marketplace.26 Ranbaxy is pursuing three initiatives in

response to its changing environment: new drug discovery, globalization, and domestic
strengthening. The company has also vowed not to introduce any more pirated drugs, as doing so
will threaten its credibility.
4.11 Sun Pharmaceuticals Laboratories Ltd.
Mr. Rakesh Mehta, Vice President
Sun Pharmaceuticals, founded in 1983, makes formulations and bulk drugs that are
suitable for Indias market needs and those of foreign markets with similar conditions. Within
this context, Sun offers bundles of branded generics in three therapeutic areasneurology,
psychiatry, and cardiologyas well as specialized, high margin products in segments such as
gastroenterology. None of these segments is subject to Indias price control regime. Industry
experts applaud Suns diverse product line and its innovative marketing initiatives.

4.12 Wockhardt Ltd.

Mr. Vinod Pabi, Senior Vice President

Mr. Javed Hussain, Deputy General Manager
Dr. M.V. Patel, Director
Dr. S.K. Agarwal, Senior Scientist
Dr. Sudarsan Jagannathan, Scientist
Wockhardt is an Indian pharmaceutical company engaged in the production and sale of
bulks and formulations, large volume parenterals, infant foods, and agricultural products. Its
specialty therapeutic segments are systemic antibiotics, cough and cold remedies,
antispasmodics/anticholinergics/gastroprokinetics,

36

analgesics,

antiseptics/disinfectants,

and

biotechnology. For the most part, Wockhardt focuses on drugs with relatively high barriers to
entry in terms of technology. Wockhardts approach to pharmaceuticals is also diseaseoriented.
The company targets areas of medical need and then builds baskets of drugs accordingly.
Prior to the governments liberalization programs in the early 1990s, Wockhardt restricted
itself to formulation production, using bulks purchased from other sources. Since then, it has
emerged as a prominent producer of bulks in its own right, and now produces almost its entire
requirement of bulk drugs. This has helped the company to achieve relatively high operating
profitability compared with its competitors.

37

COMPANY PROFILE

38

ABOUT US (OVER VIEW OF THE COMPANY)

Dr. Reddys began as an API manufacturer in 1984, producing high-quality APIs to first the
Indian, and later, the international markets. In 1987, we started our formulations operations and,
after becoming a force to reckon with in the Indian formulations market, went international in
1991.
Today, our value proposition to our customers derives from an optimal operating system in which
operations, product development and marketing & sales are fully integrated. Operations and the
supply chain are aligned to ensure high availability, pull based replenishment of products at the
retail level and superior inventory turns to our customers. This advantage is combined with a
highly effective prescription generation detailing effort.
A field force of over 2700 motivated and knowledgeable representatives supported by an
integrated network of back-end services and armed with handheld devices for quick information
access add value to every customer call and interaction.
Dr. Reddys - India today is more than a 200 million dollar venture with presence in almost all
major therapeutic areas. Our finished dosage business in India started in 1986 with launch of
Norilet (norfloxacin). Our market penetration through nearly 3000 sales force who connect to
more than 3,00,000 doctors on a regular basis has yielded us reaching all corners of the country
and providing affordable and innovative medicines in all major therapeutic areas like gastrointestinal, oncology, pain management, cardiovascular, dermatology, diabetes, etc. Eight of our
brands feature in the top-300 brands in India that include drugs like Stamlo, Reditux, Omez and
Ketorol.

39

Alongside the presence of end-to-end pharmaceutical capabilities within the organization helps
us cater customer and patient needs much more effectively. Medicines like for any other
geography, we manufacture at our USFDA approved finished dosage facility with utmost
importance on quality and efficacy of the drugs.
Recently we have deepened our focus into the rural markets in India to ensure the expansion of
our reach. In this initiative we have collaborated with our CSR wing, Dr. Reddys Foundation to
help us reach the millions who are still away from effective treatment and availability of the right
medicines. Apart from manufacturing and distribution of medicines we also provide patient care
through our various initiatives like Sparsh, Life at your Doorstep, etc. (where patients are given
free treatment and medicines), and educate and create awareness among healthcare professionals
through DRFHE to cater to the millions who are in need of proper treatment across the country.
OUR BUSINESSES
Pharmaceutical Services & Active Ingredients
Through our Pharmaceutical Services & Active Ingredients (PSAI) business, which comprises
the Active Pharmaceutical Ingredients (API) and Custom Pharmaceutical Services (CPS)
businesses, we offer IP advantaged, speedy product development, cost-effective and robust
manufacturing services to our customers, both generic companies and innovators.
Our API business seeks to make our generics customers successful, early and always. At the
outset, we enable them to be the first to launch a generic product by leveraging on IP strengths.
Our highly skilled API global team ensures that our customers gain the full benefits of timely
product development and supply, in line with all regulatory and quality requirements.
Our CPS business serves several 'innovators', both Big Pharma and emerging biotech. Our CPS
business offers both speed and flexibility. We have the capability to supply both small-scale
clinical trial quantities and commercial-scale requirements. Our end to end services and
competitive pricing makes a compelling value proposition to our global innovator' customers.
Global Generics

40

Our Global Generics business seeks to serve the millions around the world who find access to
medicines unaffordable. Our branded generics in doctor driven markets and unbranded generic
products in distribution driven markets offer lower-cost alternatives to highly-priced innovator
brands, both directly and through key partnerships. We serve a large number of emerging
markets through partnerships with GlaxoSmithKline (GSK).
Our effort spans the entire value chain - from process development of the API to submission of
the finished dosage dossier to the regulatory agencies - offering high quality products at the right
time and at competitive prices.

Proprietary Products
Our Proprietary Products business comprises of New Chemical Entities (NCEs), Biosimilars and
Differentiated Formulations.
In NCE, we are engaged in the discovery, development, and commercialization of novel small
molecule agents to address significant clinical unmet needs. Our therapeutic areas of focus are
bacterial infections, metabolic disorders, and pain/ inflammation.
Our emerging Differentiated Formulations portfolio consists of developing novel formulations of
currently marketed drugs or combinations thereof to enhance patient comfort. Our most
advanced Differentiated Formulations efforts are in dermatology.
Promius Pharma, our wholly owned subsidiary, headquartered in New Jersey, US, develops and
markets differentiated formulations for important dermatology indications. Our portfolio
includes in-licensed and co-developed dermatological products and an internal pipeline of
products under development that will provide better answers to the skin care needs of today and
tomorrow.
Our Biologics business has dedicated development and manufacturing suites for both E. coli &
mammalian cell culture, conforming to the highest development standards of cGMP, GLP and
other applicable bio-safety levels. seamlessly by a competent project management framework.
Mission & vision
41

Vision: To become a discovery ruled global pharmaceutical company with a core purpose of
helping people lead healthier lives.
Mission: To be first Indian Pharmaceutical company that successfully takes its products from
discovery to commercial launch globally.
Promoters (Hint :- CEO, Directors)

Management - Dr Reddys Laboratories

Name

Designation

G V Prasad

Chairman & CEO

Anupam Puri

Independent Director

Bruce L A Carter

Independent Director

Kalpana Morparia

Independent Director

Ravi Bhoothalingam

Independent Director

Name

Designation

Satish Reddy

Vice Chairman & Mng.Director

Ashok S Ganguly

Independent Director

J P Moreau

Independent Director

Omkar Goswami

Independent Director

Sridar Iyengar

Fact Sheet (Milestones)

FactSheet.pdf

42

Awards & Recognition

2014
Best Learning Organization Of Asia 2014 Award
Conferred the second runners up award for its unique learning practices and clearly defined
learning agenda at the L&OD Round table
India's Best Companies To Work For 2014
Ranked 2nd in Biotechnology and Pharmaceutical Industry in a study conducted by Great Place
to Work Institute and The Economic Times. Dr. Reddy's was also ranked among the top 50
Companies having more than 1000 employees.
Best Managed Boards of India award
Awarded the Best Managed Boards of India by the Stars of the Industry Group, Asian
Confederation of Businesses at their Corporate Excellence Awards.
2013
ICAI Gold Shield for Excellence in Financial Reporting in the Manufacturing sector (Sales
more than 500 Crores)
The award was presented by Dr. Veerappa Moily (Minister of Corporate Affairs) and Mr. K
Rahman Khan (Deputy Chairman, Rajya Sabha) in a ICAI International Conference.
Thomson Reuters Innovation Award 2013 - India for PharmaCorporate
at "Decade of Innovation: India @ Year 1" organized by the Confederation of Indian Industry
and the National Innovation Council.
Pharmexcil Award (Gold Prize) for Export Excellence
for Outstanding Export Performance for 2012-12 in the Large Scale Industry category.

43

2012
NDTV Profit Business Leadership Awards 2012
Business Leader in the Pharmaceutical Sector
5th RASBIC (Recruiting and Staffing Best in Class) Awards
Best recruiting evaluation Technique
5th RASBIC (Recruiting and Staffing Best in Class) Awards
Best overall Recruiting and staffing organization of the year
Contact us (Hint :- Address Of the company or plant location Head Office)
Dr. Reddy's Laboratories Limited
Door No 8-2-337,
Road No 3, Banjara Hills,
Hyderabad - 500034.
Andhra Pradesh
Tel: +91-40-49002900
Fax: +91-40-49002999
Visit: www.drreddys.com

44

CHAPTER 4
DATA ANALYSIS AND
INTERPRETATION

45

4.1 FINANCIAL STATEMENT ANALYSIS:

1. Comparative Balance Sheet:
Comparative balance sheet analysis concentrates only the balance sheet of the concern
at different periods. Under this analysis, the balance sheets are compared with previous years
figures or one-year balance sheet figures are compared with other years. Comparative balance
sheet analysis may be horizontal or vertical basis. This type of analysis helps to understand the
real financial position of the concern as well as how the assets, liabilities and capitals are placed
during a particular period.
Table-4.1.1.1

DR REDDYS COMPARITIVE BALANCE SHEET 2011-2012

Particulars
Inventories
Sundry Debtors
Cash and Bank Balances
Total Current Assets
Investment
Fixed Assets
Total Assets
Current Liabilities
Net Worth
Long Term Liabilities
Total Liabilities

2011
640.93
897.71
67.19
1605.83
2,080.71
987.41
4673.95
786.36
4,811.81
462.31
6060.48

2012 Change In Value

Change In %
735.1
94.17
14.69
1,419.70
521.99
58.15
84.3
17.11
25.47
2239.1
633.27
39.44
1,865.10
-215.61
-10.36
1,210.80
223.39
22.62
5315
641.05
13.72
1,163.30
376.94
47.93
5,259.10
447.29
9.30
640.3
177.99
38.50
7,062.70
1,002.22
16.54

Interpretation:
2010-11 and 2011-12:

The working capital of the company has been increased by Rs. 256.33 Cr. There has
been an increase in both the current assets and current liabilities of the company.

46

However, the increase in current assets has been more than the increase in the current
liabilities.

There is a decrease in the investments from Rs. 2080.71 Cr. in 2010-10to Rs. 1865.1 Cr.
in 2011-12.

The fixed assets have also been increased by 22.62% .the company is encouraging new
technology and adding assets for large production.

The shareholder funds have also been increased by 9.30%, which means the
shareholders are investing money to expand the business activities.

Hence, the overall position of the company is good as they have generated good profit

Table 4.1.1.2

DR REDDYS COMPARITIVE BALANCE SHEET 2012-2013

Particulars
Inventories
Sundry Debtors
Cash and Bank Balances
Total Current Assets
Investment
Fixed Assets
Total Assets
Current Liabilities
Net Worth
Long Term Liabilities
Total Liabilities

2012
735.1
1,419.70
84.3
2239.1
1,865.10
1,210.80
5315
1,163.30
5,259.10
640.3
7,062.70

2013 Change In Value

Change In %
897.4
162.30
22.08
1,060.50
-359.20
-25.30
47.9
-36.40
-43.18
2006.8
-233.30
-10.42
2,652.70
787.60
42.23
1,315.60
104.80
8.66
5974.1
659.10
12.40
1,543.80
380.50
32.71
5,914.60
655.50
12.46
563.2
-77.10
-12.04
8,021.60
958.90
13.58

47

2011-12 and 2012-13:

The working capital of the company has been decreased by Rs. 613.80 Cr. This is mainly
because of the decrease in the sundry debtors and the cash balance and on the other
hand, there has been an increase in the current liabilities of the company. The reason for
this is that the company has not been effective in collecting their dues from their debtors
and failed to maintain their cash balance.

There is increase in investment from Rs. 1865.1 Cr. in 2011-12 to Rs. 2652.7 Cr. in
2012-13, which means the company has been making productive investments.

The fixed assets have also been increased by 8.66%. The company is encouraging new
technology and adding assets for large production.

The shareholder funds have also been increased by 12.46%. As there has been an
increase in the share capital, resulting in an increase in the long term sources of fund and
simultaneously there has been an increase in the long-term assets of the company. This
means that the long term sources of funds has been utilized to finance the long-term
assets.

Hence, the overall position of the company is good, as they have generated good profits.

48

Table 4.1.1.3

DR REDDYS COMPARITIVE BALANCE SHEET 2013-2014

Particulars
Inventories
Sundry Debtors
Cash and Bank Balances
Total Current Assets
Investment
Fixed Assets
Total Assets
Current Liabilities
Net Worth
Long Term Liabilities
Total Liabilities

2013
897.4
1,060.50
47.9
2006.8
2,652.70
1,315.60
5974.1
1,543.80
5,914.60
563.2
8,021.60

2014 Change In Value

Change In %
1,063.20
165.80
18.48
1,770.50
710.00
66.95
66.2
18.30
38.20
2,899.90
894.10
44.58
2,462.00
-190.70
-7.19
3,025.00
1,709.40
129.93
8,386.90
2,412.80
40.39
1,565.20
21.40
1.39
6,020.20
105.60
1.79
1,444.80
881.60
156.53
9,030.20
1,008.60
12.57

2012-13 and 2013-2014:

The working capital of the company has been increased by Rs. 872.70 Cr., which is a
good sign for the company as it has been able to meet its currents liabilities as they
mature using their current assets.

There is a decrease in the investment from Rs. 2652.7 Cr. in 2012-1to Rs. 2462 Cr. in
2013-14.

49

The fixed assets have also been increased by 129.93%.The company is encouraging new
technology and adding assets for large production.

There has been a slight increase in the current liabilities as there has been an increase in
the short-term borrowings of the company.

The shareholder funds have also been increased by 1.79%, as there has been an increase
in the reserves and surplus of the company.

Hence, the overall position of the company is good, as they have generated good profits.

Table 4.1.1.4

DR REDDYS COMPARITIVE BALANCE SHEET 2014-2015

Particulars
Inventories
Sundry Debtors
Cash and Bank Balances
Total Current Assets
Investment
Fixed Assets
Total Assets
Current Liabilities
Net Worth
Long Term Liabilities
Total Liabilities

2014
1,063.20
1,770.50
66.2
2,899.90
2,462.00
3,025.00
8,386.90
1,565.20
6,020.20
1,444.80
9,030.20

2015 Change In Value

1,326.70
1,943.50
93.1
3,363.30
2,477.70
3,507.80
9,348.80
1,534.30
6,717.80
1,533.40
9,785.50

263.50
173.00
26.90
463.40
15.70
482.80
961.90
-30.90
697.60
88.60
755.30

Change In %
24.78
9.77
40.63
15.98
0.64
15.96
11.47
-1.97
11.59
6.13
8.36

Table-4.1.1.5
2013-14 and 2014-15:

The working capital of the company has increased by Rs. 494.30 Cr. which is a good
sign for the company as there are enough current assets to pay of the liabilities and
shows a good working capital management by the company.

50

There is increase in investment from Rs. 2462 Cr. in 2013-14 to Rs. 2477 Cr. in 2014-15.
This means that the company has been making long term investments to increase its
profits.

The fixed assets have also been increased by 15.96% .The company is encouraging new
technology and adding assets for large production.

The current liabilities of the company have decreased. The company is paying off the
short term credits and liabilities. This means that the company is in a good liquidity
position as it has been able to meet its short term obligations.

The share holder funds have also been increased by 11.58% which means the share
holders are investing more money to expand the business activities and also there has
been an increase in the reserves and surplus.

Hence the overall position of the company is satisfactory as they has been an increase in
sales, generated good profits and there is a decrease in the current liabilities.

DR REDDYS COMPARATIVE BALANCE SHEET

(GROWTH IN PERCENTAGE)
Particulars
Inventories
Sundry Debtors
Cash and Bank Balances
Total Current Assets
Investment
Fixed Assets
Total Assets
Current Liabilities
Net Worth
Long Term Liabilities
Total Liabilities

2011-12

2012-13
14.69
58.15
25.47
39.44
-10.36
22.62
13.72
47.93
9.30
38.50
16.54

22.08
-25.30
-43.18
-10.42
42.23
8.66
12.40
32.71
12.46
-12.04
13.58

51

2013-14
18.48
66.95
38.20
44.58
-7.19
129.93
40.39
1.39
1.78
156.53
12.57

2014-15
24.78
9.77
40.63
15.98
0.64
15.96
11.47
-1.97
11.59
6.13
8.36

2. Comparative Profit and Loss Account:

Another comparative financial statement analysis is comparative profit and loss account analysis.
Under this analysis, only profit and loss account is taken to compare with previous years figure
or compare within the statement. This analysis helps to understand the operational performance
of the business concern in a given period. It may be analyzed on horizontal basis or vertical
basis.
Table-4.1.2.1

DR REDDYS COMPARITIVE PROFIT AND LOSS ACCOUNT 2011-2012

Particulars
Net Sales
Stock Adjustments
Less: COGS
Gross Profit
Less: Selling and Administration Expenses
Less: Miscellaneous Expenses
Operating Profit
Add: Non Operating Incomes
Less: Non Operating Expenses

2011
2012 Change In Value Change In %
3343.89
3999.5
655.61
19.61
93.87
64.1
-29.77
-31.71
1921.08
2142.4
221.32
11.52
1,516.68 1,921.20
404.52
26.67
896.54
1117.9
221.36
24.69
37.44
45.3
7.86
20.99
582.70
758.00
175.30
30.08
197.29
212.2
14.91
7.56
0
0
0.00
0
52

Profit Before Depreciation, Tax and Interest

Less: Interest
Profit Before Depreciation and Tax
Depreciation
Other Written Off
Profit Before Tax
Less: Tax
Net Profit

779.99
14.69
765.30
161.99
20.71
582.60
108.88
473.72

970.20
27.4
942.80
193.6
19.7
729.50
168.6
560.90

190.21
12.71
177.50
31.61
-1.01
146.90
59.72
87.18

24.39
86.52
23.19
19.51
-4.88
25.21
54.85
18.40

Interpretation
2010-11 and 2011-12:

The net sales of the company have increased from last year to current year by Rs. 655.61
Cr.
The cost of goods sold has also increased due to increase in sale.
The expenses incurred on sale have increased but the company has to minimize the
selling expenses.
The gross profit of the company has increased from Rs. 1516.68 Cr. to Rs. 1921.20 Cr.
This is a good sign for the company.
There is just a slight increase in the net profiti.e., by Rs. 87.18 Cr. The company has to
minimize the indirect expenses and encourage more sales.
Hence, the overall position of the company is satisfactory.

Table-4.1.2.2

DR REDDYS COMPARITIVE PROFIT AND LOSS ACCOUNT 2012-2013

Particulars
Net Sales
Stock Adjustments
Less: COGS
Gross Profit
Less: Selling and Administration Expenses

2012
2013 Change In Value Change In %
3999.5
4395.6
396.10
9.90
64.1
117.3
53.20
83.00
2142.4
2337.2
194.80
9.09
1,921.20 2,175.70
254.50
13.25
1117.9
1036.6
-81.30
-7.27
53

Less: Miscellaneous Expenses

Operating Profit
Add: Non Operating Incomes
Less: Non Operating Expenses
Profit Before Depreciation, Tax and Interest
Less: Interest
Profit Before Depreciation and Tax
Depreciation
Other Written Off
Profit Before Tax
Less: Tax
Net Profit

45.3
758.00
212.2
0
970.20
27.4
942.80
193.6
19.7
729.50
168.6
560.90

50.6
1,088.50
254
0
1,342.50
16
1,326.50
222.4
19.3
1,084.80
238.7
846.10

5.30
330.50
41.80
0.00
372.30
-11.40
383.70
28.80
-0.40
355.30
70.10
285.20

2011-12 and 2012-13:

The net sales of the company have increased from last year to current year by Rs. 396.10
Cr.
The cost of goods sold has also been decreased which means the company is making
efforts to reduce selling expenses.
The gross profit of the company has increased from Rs. 1921.20 Cr. to Rs. 2175.20 Cr.
This is a good sign for the company.
There is an increase in the net profit. The net profit has increased by Rs. 285.20 Cr.
Hence, the overall position of the company is satisfactory.

2012-13 and 2013-14:

The net sales of the company have increased by Rs. 792.90 Cr. in 2013-13.
The cost of goods sold has also increased due to increase in sale.
The expenses incurred on sale have increased. Thus, the company has to minimize the
selling expenses.
The gross profit of the company has increased from Rs. 2175.70 Cr. to Rs. 2541.20 Cr.
This is a good sign for the company.
There is an increase in the net profit. The net profit has increased by Rs. 47.30 Cr. The
company has to minimize the indirect expenses and encourage more sales.
Hence, the overall position of the company is satisfactory.

54

11.70
43.60
19.70
0
38.37
-41.61
40.70
14.88
-2.03
48.70
41.58
50.85

Table-4.1.2.3

DR REDDYS COMPARITIVE PROFIT AND LOSS ACCOUNT 2013-2014

Particulars
Net Sales
Stock Adjustments
Less: COGS
Gross Profit
Less: Selling and Administration Expenses
Less: Miscellaneous Expenses
Operating Profit
Add: Non Operating Incomes
Less: Non Operating Expenses
Profit Before Depreciation, Tax and Interest
Less: Interest
Profit Before Depreciation and Tax
Depreciation
Other Written Off
Profit Before Tax
Less: Tax
Net Profit

2013
4395.6
117.3
2337.2
2,175.70
1036.6
50.6
1,088.50
254
0
1,342.50
16
1,326.50
222.4
19.3
1,084.80
238.7
846.10

55

2014 Change In Value Change In %

5,188.50
792.90
18.04
79.00
-38.30
-32.65
2726.3
389.10
16.65
2,541.20
365.50
16.80
1,256.70
220.10
21.23
65
14.40
28.46
1,219.50
131.00
12.03
117.00
-137.00
-53.94
0
0.00
0
1,336.50
-6.00
-0.45
9.9
-6.10
-38.13
1,326.60
0.10
0.0075
247.9
25.50
11.47
26.8
7.50
38.86
1,051.90
-32.90
-3.03
158.5
-80.20
-33.60
893.40
47.30
5.59

Table-4.1.2.4 2012-13 and 2013-2014:

The shareholders fund of the company has reduced from74.46% to 73.73%.

The long-term liabilities have increased from 9.07% to 7.02%.
The investments have reduced from 44.40% to 29.36.
The fixed assets have increased from 22.02% to 37.52%, which implies that the long-

term funds have been used to finance the fixed assets.

The total current assets have reduced from 77.98% to 62.48% as the inventories and cash

balance has reduced while the sundry debtors have increased.

The total current liabilities have reduced from19.25% to17.33%.

DR REDDYS COMPARITIVE PROFIT AND LOSS ACCOUNT 2014-2015

Particulars
Net Sales
Stock Adjustments
Less: COGS
Gross Profit
Less: Selling and Administration Expenses
Less: Miscellaneous Expenses
Operating Profit
Add: Non Operating Incomes
Less: Non Operating Expenses
Profit Before Depreciation, Tax and Interest
Less: Interest
Profit Before Depreciation and Tax
Depreciation
Other Written Off
Profit Before Tax
Less: Tax
Net Profit

2014
5,188.50
79.00
2726.3
2,541.20
1,256.70
65
1,219.50
117.00
0
1,336.50
9.9
1,326.60
247.9
26.8
1,051.90
158.5
893.40

2015 Change In Value Change In %

6,686.30
1,497.80
28.87
104.80
25.80
32.66
3294.7
568.40
20.85
3,496.40
955.20
37.59
1,554.40
297.70
23.69
80.3
15.30
23.54
1,861.70
642.20
52.66
0.00
-117.00
-100
191.9
191.90
100
1,669.80
333.30
24.94
69.2
59.30
598.99
1,600.60
274.00
20.65
301.1
53.20
21.46
40.3
13.50
50.37
1,259.20
207.30
19.71
346.8
188.30
118.80
912.40
19.00
2.13

2013-14 and 2014-15:

The net sales of the company have increased from last year to current year by Rs.
1497.80 Cr.
The cost of goods sold has also increased due to increase in sale.

56

The expenses incurred on sale have increased and thus the company has to take steps to
minimize the selling expenses.
The gross profit of the company has increased from Rs. 2541.20 Cr. to Rs. 3496.80 Cr.
This is a good sign for the company.
There is a slight increase in the net profit. The net profit has increased by Rs. 19 Cr. The
company has to minimize the indirect expenses and encourage more sales.
Hence, the overall position of the company is satisfactory.

Table-4.1.2.5

DR REDDYS COMPARITIVE PROFIT AND LOSS ACCOUNT

(GROWTH IN PERCENTAGE)
Particulars
Net Sales
Stock Adjustments
Less: COGS
Gross Profit
Less: Selling and Administration Expenses
Less: Miscellaneous Expenses
Operating Profit
Add: Non Operating Incomes
Less: Non Operating Expenses
Profit Before Depreciation, Tax and Interest
Less: Interest
Profit Before Depreciation and Tax
Depreciation
Other Written Off
Profit Before Tax
Less: Tax
Net Profit

2011-12
2012-13
2013-14
2014-15
19.61
9.90
18.04
28.87
-31.71
83.00
-32.65
32.66
11.52
9.09
16.65
20.85
26.67
13.24
16.80
37.59
24.69
-7.27
21.23
23.69
20.99
11.70
28.46
23.54
30.08
43.60
12.03
52.66
7.56
19.70
-53.94
-100
0
0
0
100
24.39
38.37
-0.45
24.94
86.52
-41.61
-38.12
598.99
23.19
40.70
0.0075
20.65
19.51
14.88
11.47
21.46
-4.88
-2.03
38.86
50.37
25.21
48.70
-3.03
19.70
54.85
41.58
-33.60
118.80
18.40
50.85
5.59
2.12

57

3. Common Size Balance Sheet:

Common size balance sheet presents not only the standard information contained in a balance
sheet, but also a column that notes the same information as a percentage of the total assets (for
asset line items) or as a percentage of total liabilities and shareholders' equity (for liability or
shareholders' equity line items).

It is extremely useful to construct a common size balance sheet that itemizes the results as of the
end of multiple time periods, so that you can construct trend lines to ascertain changes over
longer time periods. The common size balance sheet is also useful for comparing the proportions
of assets, liabilities, and equity between different companies, particularly as part of an industry
analysis or an acquisition analysis.
A company balance sheet that displays all items as percentages of a common base figure. This
type of financial statement can be used to allow for easy analysis between companies or
between time periods of a company.
Table-4.1.3.1

DR REDDYS COMMON SIZE BALANCE SHEET

Particulars
Investments
Inventories

2011 Change In%

2,080.71
44.52
640.93
13.72

58

2012 Change In%

1,865.10
35.09
735.1
13.83

Sundry Debtors
Cash and Bank Balance
Total Current Assets
Fixed Assets
Total Assets
Current Liabilities
Net Worth
Long Term Liabilities
Total Liabilities

897.71
67.19
3,686.54
987.41
4,673.95
786.36
4,811.81
462.31
6060.48

19.21
1.44
78.87
22.78
100.00
12.98
79.40
7.63
100

1,419.70
84.3
4,104.20
1,210.80
5,315.00
1,163.30
5,259.10
640.3
7,062.70

26.71
1.59
77.22
22.02
100.00
16.47
74.46
9.07
100

Interpretation:
2010-11and 2011-12:

The shareholders fund of the company has reduced from79.40% to 73.73%.

The long-term liabilities have reduced from7.63% to 7.02%.
The investments have reduced from 44.51% to 35.09%.
The fixed assets have reduced from 22.78% to 22.02%.
The total current assets have reduced from 77.22% to77.98%.
The total current liabilities have increased from12.97% to 16.47%.
The company has not been as effective as there has been an increase in the current
liabilities and decrease in the current assets.

Table-4.1.3.2

DR REDDYS COMMON SIZE BALANCE SHEET (CONTINUATION)

2013 Change In%
2,652.70
44.40
897.4
15.02
1,060.50
17.75
47.9
0.80
4,658.50
77.98

2014 Change In%

2,462.00
29.36
1,063.20
12.68
1,770.50
21.11
66.2
0.79
5,361.90
63.93

59

2015 Change In%

2,477.70
26.50
1,326.70
14.19
1,943.50
20.79
93.1
0.99
5,841.00
62.48

1,315.60
5,974.10
1,543.80
5,914.60
563.2
8,021.60

22.02
100.00
19.25
73.73
7.02
100

3,025.00
8,386.90
1,565.20
6,020.20
1,444.80
9,030.20

37.52
100
17.33
66.67
16.00
100

3,507.80
9,348.80
1,534.30
6,717.80
1,533.40
9,785.50

37.52
100.00
15.68
68.65
15.67
100

2011-12 and 2012-13:

The shareholders fund of the company has reduced from73.73% to66.67%.

The long-term liabilities have increased from 7.02% to 16.99%.
The investments have increased from 35.09% to 44.40%, which means the company has

been effective in utilizing its idle funds to make productive investments.

The fixed assets have remained same for the two years at 22.02%.
The total current assets have reduced from78.87% to77.22% as the inventories as

increased and the sundry debtors and the cash balance has reduced.
The total current liabilities have reduced from16.47% to 19.25%.

Table-4.1.3.3

DR REDDYS COMMON SIZE BALANCE SHEET

(GROWTH IN PERCENTAGE)
Particulars

2011

2012

2013

2014

2015

Investments
Inventories
Sundry Debtors
Cash and Bank Balance

44.52
13.71
19.21
1.44

35.09
13.83
26.71
1.59

44.40
15.02
17.75
0.80

29.36
12.68
21.11
0.79

26.50
14.19
20.79
0.99

Total Current Assets

78.87

77.22

77.98

63.93

62.48

Fixed Assets
Total Assets

22.78
100

22.02
100

22.02
100

37.52
100

37.52
100

60

Current Liabilities
Net Worth
Long Term Liabilities
Total Liabilities

12.98
79.40
7.63
100

16.47
74.46
9.06
100

19.25
73.73
7.02
100

17.33
66.67
16.00
100

2013-13 and 2014-14:

The shareholders fund of the company has increased from 66.67% to 68.65%.
The long-term liabilities have reduced from 16.99% to 15.67%.
The investments have reduced from29.36% to 29.36%.
The fixed assets have remained same for the two years at 37.52%.
The total current assets have reduced from 63.93% to 62.48% even though the
inventories and the cash balance have increased while the sundry debtors have reduced.
The higher value of inventories at 14.19% indicates that the money is blocked in

inventories.
The total current liabilities have reduced from 17.33% to 15.68%.

4. Common Size Income Statement:

Common size income statement analysis allows an analyst to determine how the various
components of the income statement affect a company's profit.
It is used for analysis purposes where each item on the face of income statement is expressed in
relation to revenue so that users can easily understand that how different expenses and other
incomes and gains add up to gross profit and net profit. This is widely used in ratio analysis and
serves as a vital tool start up a financial analysis of the key areas of performance and then
detailed ratios are applied on each item afterwards.
Although common size income statements do not provide a detailed financial analysis of income
statement and its items but it does help in comparing the financial performance of the company

61

15.68
68.65
15.67
100

with the preceding accounting periods known as trend-analysis or time-series analysis. We can
also compare financial information of one company with other companies in the industry, which
is known as cross-sectional analysis. The good thing about common-size analysis is that it is easy
to do and also interpreting the results is not so difficult. Even the users who are not proficient in
analysis techniques can gain insight of companys financial performance to some extent from
common size financial statements i.e. income statement and statement of financial position.
Table-4.1.4.1

DR REDDYS COMMON SIZE PROFIT AND LOSS ACCOUNT

Particulars
Net Sales
Stock Adjustments
Less: COGS
Gross Profit
Less: Selling and Administration Expenses
Less: Miscellaneous Expenses
Operating Profit
Add: Non Operating Incomes
Less: Non Operating Expenses
Profit Before Depreciation, Tax and Interest
Less: Interest
Profit Before Depreciation and Tax
Depreciation
Other Written Off
Profit Before Tax
Less: Tax
Net Profit

2011 Change In %
2012 Change In %
3343.89
100.00
3999.5
100.00
93.87
2.81
64.1
1.60
1921.08
57.45
2142.4
53.57
1,516.68
45.36 1,921.20
48.04
896.54
26.81
1117.9
27.95
37.44
1.12
45.3
1.13
582.70
17.43
758.00
18.95
197.29
5.90
212.2
5.31
0
0.00
0
0.00
779.99
23.33
970.20
24.26
14.69
0.44
27.4
0.69
765.30
22.89
942.80
23.57
161.99
4.84
193.6
4.84
20.71
0.62
19.7
0.49
582.60
17.42
729.50
18.24
108.88
3.26
168.6
4.22
473.72
14.17
560.90
14.02

Interpretation:
2010-11 and 2011-12:

62

The net sales of the company have increased by Rs. 655.61 Cr., which is a good sign for
the company.

The COGS has increased due to the increase in sales. However, the company has to
control its direct expenses.

The gross profit has gradually increased from 45.36% to 48.04%. The company has
generated good profits in comparison to the last year.

Table-4.1.4.2

DR REDDYS COMMON SIZE PROFIT AND LOSS ACCOUNT

(CONTINUATION)
2013 Change In %
4395.6
100.00
117.3
2.67
2337.2
53.17
2,175.70
49.50
1036.6
23.58
50.6
1.15
1,088.50
24.76
254
5.78
0
0.00
1,342.50
30.54
16
0.36
1,326.50
30.18
222.4
5.06
19.3
0.44
1,084.80
24.68
238.7
5.43
846.10
19.25

2014 Change In %
5,188.50
100.00
79.00
1.52
2726.3
52.55
2,541.20
48.98
1,256.70
24.22
65
1.25
1,219.50
23.50
117.00
2.25
0
0.00
1,336.50
25.76
9.9
0.19
1,326.60
25.57
247.9
4.78
26.8
0.52
1,051.90
20.27
158.5
3.05
893.40
17.22

2013-14 and 2014-15:

63

2015 Change In %
6,686.30
100.00
104.80
1.57
3294.7
49.28
3,496.40
52.29
1,554.40
23.25
80.3
1.20
1,861.70
27.84
0.00
0.00
191.9
2.87
1,669.80
24.97
69.2
1.03
1,600.60
23.94
301.1
4.50
40.3
0.60
1,259.20
18.83
346.8
5.19
912.40
13.65

The net sales of the company have increased by Rs. 1497.8 Cr., which is a good sign for
the company.

The COGS as a percentage of sales has reduced from 52.55% to 49.28%, this may be due
to the control in the direct costs of production.

The gross profit has gradually increased from 48.98% to 52.29%. The company has
generated good profits in comparison to the last year.

The operating profit has also increased by Rs. 642.20 Cr. This means that the company is
running on good lines by generating profits and incurring expense for the sales.

There has been an increase in the finance cost from 0.19% to 1.03% as there has been an
increase in the loans taken by the company.

There has been an increase in the taxes from 3.05% to 5.19% while the net profit of the
company has increased from Rs. 893.40 Cr. to Rs. 912.40 Cr., which indicates an
improvement in the profitability of the company.

Hence, the overall position of the company is satisfactory.

Table-4.1.4.3

DR REDDYS COMMON SIZE PROFIT AND LOSS ACCOUNT

(GROWTH IN PERCENTAGE)
Particulars
Net Sales
Stock Adjustments
Less: COGS
Gross Profit
Less: Selling and Administration Expenses
Less: Miscellaneous Expenses
Operating Profit
Add: Non Operating Incomes
Less: Non Operating Expenses

2011
100
2.81
57.45
45.36
26.81
1.12
17.43
5.9
0
64

2012
100
1.6
53.57
48.04
27.95
1.13
18.95
5.31
0

2013
100
2.67
53.17
49.5
23.58
1.15
24.76
5.78
0

2014
100
1.52
52.55
48.98
24.22
1.25
23.5
2.25
0

2015
100
1.57
49.28
52.29
23.25
1.2
27.84
0
2.87

Profit Before Depreciation, Tax and Interest

Less: Interest
Profit Before Depreciation and Tax
Depreciation
Other Written Off
Profit Before Tax
Less: Tax
Net Profit

23.33
0.44
22.89
4.84
0.62
17.42
3.26
14.17

24.26
0.69
23.57
4.84
0.49
18.24
4.22
14.02

30.54
0.36
30.18
5.06
0.44
24.68
5.43
19.25

25.76
0.19
25.57
4.78
0.52
20.27
3.05
17.22

The operating profit has also increased by Rs. 175.3 Cr. This means that the company is
running on good lines by generating profits and incurring expense for the sales.

The net profit of the company after deducting tax, interest and depreciation has increased
from 14.17% to Rs. 14.2%, which is decrease in net profit. This may be because of the
expenses.

Hence, the overall position of the company is satisfactory. There is a scope of

improvement in indirect expenses incurred as office expenses.

4.2 RATIO ANALYSIS:

1. Liquidity Ratio: Liquidity refers to the ability of the firm to meet its short term obligations
usually up to one year.
a. Current Ratio: It may be defined as the relationship between current assets and current
liabilities. This ratio is also known as working capital ratio. It is a measure of general liquidity
and is most widely used to make analysis of a short-term financial position or liquidity of a firm.
The standard current ratio is 2:1.
The ratio is mainly used to give an idea of the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher
the current ratio, the more capable the company is of paying its obligations. A ratio under 1
suggests that the company would be unable to pay off its obligations if they came due at that

65

24.97
1.03
23.94
4.5
0.6
18.83
5.19
13.65

point. The current ratio can give a sense of the efficiency of a company's operating cycle or its
ability to turn its product into cash. This ratio is similar to the acid-test ratio except that the acidtest ratio does not include inventory and prepaid as assets that can be liquidated.
Current Ratio= Current Assets / Current Liabilities

Table-4.2.1.1

YEAR
2011
2012
2013
2014
2015

CURRENT
CURRENT
CURRENT
ASSETS
LIABILITIES
RATIO
1605.83
786.36
2.04
2239.1
1163.3
1.92
2006.8
1543.8
1.30
2899.9
1565.2
1.85
3363.3
1534.3
2.19

Figure-4.2.1.1

CURRENT RATIO
YEAR
2011

2.041
1

2012

1.922
2

CURRENT RATIO
2013

2014

1.3 3
3

Interpretation

66

1.854
4

2015

2.19 5
5

In the year 2014-15, the companys liquidity position is found to be good as the
company has enough assets to pay the liabilities. The company has 2.19% of assets to

pay off the liabilities.

In 2014-2015, the companys liquidity position is satisfactory as it has equal assets to

pay off the liabilities.

In the year 2012-2013, the companys liquidity position is satisfactory as it has assets
to pay off the liabilities but there are no huge profits to the company. The company

has 1.30 % of assets to pay off the liability, which is far less than the ideal ratio.
In the year 2011-12 the liquidity position of the company is quiet satisfactory though

less than the ideal ratio.

In the year 2010-11, the companys liquidity position is good as the company has
enough assets to pay off the liabilities as along the ideal ratio.

b. Liquid Ratio: Although receivable debtors and bills receivable are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash immediately or in time.
Hence, absolute liquid ratio should also be calculated together with current ratio and quick ratio
to exclude even receivables from the current assets and find out the absolute liquid assets. The
standard liquid ratio is 1.5:1.
Liquid Ratio= Liquid assets/ Liquid Liability
Table-4.2.1.2

YEAR
2011
2012
2013
2014
2015

LIQUID
CURRENT
ASSETS
LIABILITIES
LIQUID RATIO
964.9
786.36
1.23
1504
1163.3
1.29
1108.4
1543.8
0.72
1836.7
1565.2
1.17
2036.6
1534.3
1.33

Figure-4.2.1.2

67

LIQUID RATIO
YEAR
2011

2.041

2012

1.922

CURRENT RATIO
2013

2014

1.3 3
3

1.854

2015

2.19 5

Interpretation

In the year 2014-2015, the companys liquid assets are satisfactory though not the
same as ideal ratio. The ratio of liquid asset is1.33:1 which means we have equal

liquid assets to pay off the liabilities. We dont have enough liquid profit.
The case is more or less similar for the years 2013-2014, 2011-2012&2010-2011
except for the year 2012-2013 when the companys liquidity position is bad as we
have less liquid assets. The ratio is far below the ideal ratio.

2.Profitability Ratio: These ratios help measure the profitability of a firm. A firm, which
generates a substantial amount of profits per rupee of sales, can comfortably meet its operating
expenses and provide more returns to its shareholders. The relationship between profit and sales
is measured by profitability ratios.

68

a. Gross Profit Ratio:Gross profit ratio expresses relationship between gross profit and net
sales. Gross profit is obtained by deducting cost of goods sold from net sales. Net sales are
basically determined by deducting sales returns from sales. The standard gross profit ratio is
25%.
Gross profit ratio evaluates the effectiveness of business. It indicates the efficiency of firm in
terms of its production and how much it has gained profit. Gross profit reflects the profit firm has
made on cost of goods sold. If firm has higher gross profit margin then it is a sign of success
because all operating expenses, interest charges and dividends would have to be taken off from
GP. If company increase selling price of goods sold and decrease cost of goods sold then this
ratio increases. However If company decrease selling price of goods sold and increase cost of
goods sold then this ratio decreases.
Gross Profit Ratio= (Gross Profit/Net Sales)*100

Table-4.2.2.1

YEAR
2011
2012
2013
2014
2015

GROSS
GROSS PROFIT
PROFIT
NET SALES
RATIO
1422.09
3343.89
42.53
1857.1
3999.5
46.43
2058.4
4395.6
46.83
2462.2
5188.5
47.45
3391.6
6686.3
50.72

Figure-4.2.2.1

69

GROSS PROFIT RATIO

YEAR
2011

2.041
1

2012

1.922
2

CURRENT RATIO
2013

2014

1.3 3
3

1.854
4

2015

2.19 5
5

Interpretation

The gross profit ratio of the company has gradually increased from 42.53 in 2011-12 to
50.72 in 2014-15 as the company has controlled its expenses and encouraged sales year
after year.

b. Net Profit Ratio: Net Profit Ratio indicates that portion of the sales which is left out with the
owners after considering all types of expenses and costs either operating or non-operating or
normal or abnormal. The ratio is valuable to measure the overall profitability. It also indicates the
firms capacity to face adverse economic conditions such as low demand, price competition etc.
A higher net profit ratio is desirable as it indicates higher profitability of the business. The
standard net profit ratio is 10 to 12.
Net Profit Ratio= (Net Profit after Taxes/ Net Sales)*100

Table-4.2.2.2
NET PROFIT
YEAR NET PAT
NET SALES
RATIO
2011
475.22
3343.89
14.21
2012
560.9
3999.5
14.02

70

2013
2014
2015

846.4
893.4
912.4

4395.6
5188.5
6686.3

19.26
17.22
13.65

Figure-4.2.2.2

NET PROFIT RATIO

YEAR
2011

2.041
1

2012

1.922
2

CURRENT RATIO
2013

2014

1.3 3
3

1.854
4

2015

2.195
5

Interpretation

In the year 2014-15 the net profit ratio is 13.6 which is greater than the ideal ratio.
However it is observed that this ratio has decreased from 17.22 in 2013-14 to 13.6 in

2014-15.
The year 2012-13 records the highest net profit ratio among the five years considered
in the study. This gives a good sign to investors and shareholders to invest into the

company as the company is making good profits.

The ratio has experienced certain rise and falls in this span of 5 years which may be
subjected to some temporary situations prevailing at that time.

c. Return on Assets Ratio:It measures how profitable a company is relative to its total
assets.Sometimes this is referred to as "return on investment".The assets of the company are
comprised of both debt and equity. Both of these types of financing are used to fund the
operations of the company.The ROA figure gives investors an idea of how effectively the
company is converting the money it has to invest into net income.

71

Return on Assets Ratio= (Net Income/Total Assets)*100

Table-4.2.2.3

YEAR
2011
2012
2013
2014
2015

NET
RETURN ON ASSETS
INCOME
TOTAL ASSETS RATIO
3541.18
5274.09
67.14
4211.7
5899.4
71.39
4649.6
6477.8
71.78
5303.5
7465
71.04
6494.4
8251.2
78.71

Figure-4.2.2.3

RETURN ON ASSETS RATIO

YEAR
2011

2.041
1

2012

1.922
2

CURRENT RATIO
2013

2014

1.3 3
3

1.854
4

2015

2.195
5

Interpretation

The return on purchase of assets has gradually increased year after year with the least in
2011 and highest on 2015 which gives a good sign to the investors indicating that the
company is making good profits and the time is right to invest into the company.

72

d. Return on Capital Employed: This ratio shows the relationship between net profits before
interest to capital employed of the company. the term capital employed includes all assets except
fictitious assets. A ratio that indicates the efficiency and profitability of a company's capital
investments.
Return on Capital Employed= (Net Profit before Interest and Tax/ Capital Employed)*100
Table-4.2.2.4
CAPITAL
RETURN ON CAPITAL
YEAR NET PBT
EMPLOYED
EMPLOYED
2011
582.6
4487.7
12.98
2012
729.5
4736.1
15.40
2013
1084.8
4934
21.99
2014
1051.9
5899.8
17.83
2015
1259.2
6717.1
18.75

Figure-4.2.2.4

RETURN ON CAPITAL EMPLOYED

YEAR
2011

2.041
1

2012

1.922
2

CURRENT RATIO
2013

2014

1.3 3
3

Interpretation
73

1.854
4

2015

2.195
5

The return on capital employed ratio has gradually increased from 12.98 in 2010-11 to
21.99 in 2012-13. The company can minimize the credit taken by the creditors and pay

off the liabilities as it is making enough profits.

However we can notice that there is a slight decrease in this ratio in 2013-14 which

indicated that the company has to make efforts to increase this ratio.
In 2014-15 this ratio has increased as compared to the previous year which indicates a
comeback of the company and highlights the companys efforts to increase this ratio.

e. Return on Share Holders Fund: This ratio is very important from the owners point of view
as it helps the firm to know whether the firm has earned enough returns to repay its shareholders
or not. It measures the return that the shareholder gets as compared to their investment. This ratio
explains the relationship between total profits earned by the business and total assets employed.
This ratio thus measures the overall efficiency of the business operation.
Return on Shareholders Fund= (Net Profit after Tax/Shareholders Fund)*100

Table-4.2.2.5
SHAREHOLDERS RETURN ON
YEAR NET PAT
FUND
SHAREHOLDERS FUND
2011
475.22
5274.12
9.01
2012
560.9
5899.4
9.51
2013
846.4
6477.8
13.07
2014
893.4
7465
11.97
2015
912.4
8251.2
11.06

Figure-4.2.2.5
74

RETURN ON SHAREHOLDER FUND

YEAR
2011

2.041
1

2012

CURRENT RATIO
2013

1.922
2

2014

1.3 3
3

1.854
4

2015

2.195
5

Interpretation

We can notice a gradual increase in shareholders fund till 2012-13. In the succeeding
years there is a slight fall in this ratio. The company has to make efforts to increase
this ratio else the shareholders and investors may lose interest and may change their
investment in some other more profitable company.

3.Turnover Ratios:Turnover ratios are also referred to as Activity Ratios or Asset Management
Ratios . They show the relationship between levels of different assets. They tell us how
efficiently assets are deployed by the firm.
a.Inventory Turnover Ratio: It is a ratio showing how many times a company's inventory is
sold and replaced over a period.This ratio reflects the efficiency of inventory management. The
inventory should be in line with sales; not too high not too low.

Inventory Turnover ratio= Cost of Goods Sold / Average Inventory

75

Table-4.2.3.1

YEAR COGS
AVG. INVENTORY
2011
1921.08
320.46
2012
2142.4
367.55
2013
2337.2
448.7
2014
2726.3
531.6
2015
3294.7
663.35

INVENTORY TURNOVER
RATIO
5.99
5.83
5.20
5.13
4.97

Figure-4.2.3.1

INVENTORY TURNOVER RATIO

YEAR
2011

2.041
1

2012

1.922
2

CURRENT RATIO
2013

2014

1.3 3
3

1.854
4

2015

2.195
5

Interpretation

The inventory turnover ratio has continuously decreased from 5.99 in 2010-11 to 4.97
in 2014-15 which indicates a decrease in sales. Efforts should be made to increase
sales.

b. Debtor Turnover Ratio: Debtors Turnover Ratio indicates the speed at which the sundry
debtors are converted in the form of cash. It indicates the number of times the debtors are turned
76

over a year. It is the reliable measure of receivables from credit sales. The higher the value the
more efficient is the management of debtors. Similarly, lower the ratio means inefficient
management of debtors. This ratio is also known as accounts receivable turnover ratio.
Debtor Turnover Ratio= (Credit Sales/Debtors)
Table-4.2.3.2
CREDIT
DEBTOR
YEAR SALES
DEBTORS
TURNOVER RATIO
2011
3343.89
897.71
3.72
2012
3999.5
1419.7
2.82
2013
4395.6
1060.5
4.14
2014
5188.5
1770.5
2.93
2015
6686.3
1943.5
3.44

Figure-4.2.3.2

DEBTORS TURNOVER RATIO

YEAR
2011

2.041
1

2012

1.922
2

CURRENT RATIO
2013

2014

1.3 3
3

1.854

2015

2.195

Interpretation

This ratio shows the average days in which we will be able to get payment from our
debtors. The lesser the days the better. The number of days has increased gradually
year after year. It is not good as compared to previous years.

77

c. Fixed Assets Turnover Ratio: The fixed-asset turnover ratio measures a company's ability to
generate net sales from fixed-asset investments - specifically property, plant and equipment
(PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has
been more effective in using the investment in fixed assets to generate revenues.
Fixed Assets Turnover Ratio= Sales/ Fixed Assets
Table-4.2.3.3
FIXED ASSETS
YEAR SALES
FIXED ASSETS TURNOVER RATIO
2011
3343.89
987.41
2012
3999.5
1,210.80
2013
4395.6
1,315.60
2014
5188.5
3,025.00
2015
6686.3
3,507.80

Figure-4.2.3.3

FIXED ASSETS TURNOVER RATIO

YEAR
2011

2.041
1

2012

1.922
2

CURRENT RATIO
2013

2014

1.3 3
3

78

1.854
4

2015

2.195
5

3.39
3.30
3.34
1.72
1.91

Interpretation

The fixed assets turnover ratio has consequently decreased during the 5 years. This
shows that the company has not been effective in using the investment in fixed assets
to generate revenues

CHAPTER 5

FINDINGS

79

SUMMARY:

Dr. Reddys is one of the most promising companies in India. The company has a bright

future because of its scientific and flexible management approach.

2011-2015 is considered as the period of study.
The methodology used is financial statement analysis and ratio analysis.
The company is growing year after year.
Quality of earnings has been good with minimum dependence on other income.
The recession is passing off starting early 2012.
The company has shown strong increase in sales.
The company maintains modest ratios.
The overall position of the company remains satisfactory.

80

FINDINGS:

From the above comparative and common size analysis we can say that:

The company has been able to maintain an appropriate level of working capital as the
current assets are higher than current liabilities. However, only in the year 2012-12 there
has been a decrease mainly because of the decrease in sundry debtors and cash balance in

current assets and an increase in current liability.

They have been able to use their idle funds effectively to make productive investments as

there has been an increase in investment in 2014-14.

The fixed assets of the company is increasing as the company is encouraging new

technology by adding assets for large production.

The company has been effective in increasing its sales in all the 5 years.
It has been able to maintain profitability as it has been generating appropriate levels of

net profit.
The overall position of the company is satisfactory over the 5 years.

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The analysis of the ratios suggests:

The current liabilities have been increasing with the size of the business.
Fixed assets have increased, as well as the long term borrowings have increased which

implies that the long-term loan is taken to finance the fixed assets.
The company has been able to maintain a satisfactory current ratio for all the 5 yrs as it
has been able to maintain an adequate level of current assets to meet its current liability

as and when they mature.

All the liquidity ratios have increased from 2011-2015 except for the year 2013 in which

either the ratios are same as last year or decreased in comparison to preceding years.
The gross profit ratio has gradually increased from 2011-2015 whereas the net profit ratio
shows an irregular pattern of ups and downs year after year. The price of raw material is
increasing which in turn resulted in increase of cost of production and effected the

profitability of company.
Return on assets is stable in from 2012-2014 and has increased by around 7% in 2015
which gives a good sign to the investors to invest into the company. The company has

been more affective in utilizing its assets to generate sales.

The return on capital employed has increased from 2011-2013 but this ratio experiences a
fall in 2014. However, the company has made attempts to increase this ratio which is

evident by an increase of 1% in 2015 in comparison to the previous year.

There has been a slight decline in inventory turnover ratio in the year 2015. This could be

the result of slow moving stock.

The debtor turnover ratio or the receivable ratio is shows an irregular trend which

indicates inefficient management of debtors and ineffective collection practice.

The fixed assets turnover ratio has gradually decreased. This shows that company has not
been effective in using the investment in fixed assets to generate revenues.

CONCLUSIONS:
.

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The gross profit of the company is increasing year after year but it is not the same with
net profit. To improve profits, the company needs to cut down on expenses by applying

more effective costing and budgeting techniques.

From ratio analysis, one can infer that the overall position of the company is good and all

the ratios have improved.

2012-2013 seems to be the most profitable year as almost all the ratios in this year stand

strong in comparison to other years considered in the study.

The high liquidity ratios reflect a very strong short-term financial structure. The company
should maintain current assets in the form of receivables and cash rather than in inventory

to meet its current obligation efficiency.

On a long term, the company can be looked as good investment opportunity.

BIBLIOGRAPHY

Webliography
83

BOOKS, JOURNALS AND MAGAZINES:

1. HARVARD BUSINESS REVIEW, JANUARY/FEBRUARY, 1999
2. JOURNAL OF ECONOMICS AND BUSINESS, MAY/JUNE, 1997
3. BUSINESS TODAY, FEBRUARY, 2000
4. FINANCIAL ANALYSTS JOURNAL, MAY/JUNE, 1997
5. FUNDAMENTALS OF FINANCIAL MANAGEMENT BY C.VAN HPRNE

6.

FINANCIAL

MANAGEMENT-

M.Y.KHAN

EDITION, TATA Mc

AND

P.K.JAIN

FIFTH

GRAW-HILL EDUCATION

2008.
7.FINANCIAL

MANAGEMENT-I.M.PANDEY,NINTH

PUBLISLISHING HOUSE PVT.LTD.2011

WEBSITES REFERED

http://www.valuenotes.com
http://www.drreddys.com
http://www.moneycontrol.com

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EDITION,VIKAS