1. Project Report
On
STUDY OF WORKING CAPITAL
MANAGEMENT OF RANBAXY LAB LTD
A Comparative Analysis
Submitted to:

2. PREFACE
Businesses face ever increasing pressure on costs and growing Financing
requirements as a result of intensive competition in globalize markets. Many
of them are therefore considering ways of making themselves more efficient.
In identifying possible options it is important not to focus exclusively on
income and expense items, but also to take the balance sheet into account.
Improvements to the existing capital structure can free up valuable resources
and bring increased efficiency. Active working capital management is an
extremely effective way to increase enterprise value. Optimizing working
capital results in a rapid release of liquid resources and contributes to an
improvement in free cash flow and to a permanent reduction in inventory and
capital costs.
My project on “Analysis of Working Capital Management in Ranbaxy
Laboratories Ltd.”
The attempt is aimed to analyze the various aspects of working capital
management of Ranbaxy and compare it with that of Dr Reddy’s and with
industry standards.
By adopting various calculation and analysis and then making interpretation
with the solution of specific problem, best efforts on giving appropriate
suggestion to the company have been made.
To this context various methods and techniques like ratio analysis DuPont
analysis, statistical tool, Correlation analysis, and working towards the
optimal level of working capital, estimation of working capital and various
ratios have been used to draw an exact picture of company.
Page 2 of 96

3. TABLE OF CONTENTS
Abstract 06
Introduction 07
Industry Profile 08
Research and Development 11
Organizational profile 14
Working capital 32
Defining the problem 39
Literature review 41
Methodology 43
Financial performance of Ranbaxy
Liquidity Ratios 48
Profitability Ratios 51
Liquidity Analysis 53
Ratio Analysis 63
Liquidity Ranking 76
Credit Analysis & Policies 81
Conclusion
Limitations 89
Summary of findings 90
Recommendations and Suggestions 92
References 95
Page 3 of 96

4. ABSTRACT
A project work is a mandatory requirement for the Business Management
Programme. This type of study aims at exposing the young prospective
executive to the actual business world.
This project gives me knowledge about the working capital of the company.
Working capital refers to the funds required for day to day operations of the
organization. It is very effective way to judge a company’s cash flow
prospects, as cash is like blood life for any company.
The report initially begins with the company profile, followed by the detailed
analysis of company, like businesses of the company, products offered by the
company, financials of the company, etc
The report involves a lot of research to understand what exactly working
capital is, why companies require working capital, what are the ideal ratios for
Working Capital a Company should maintain, etc. The purpose is to develop
an action plan that creates such a working capital that will upgrades and
standardize the quality of business analysis.
Various tools, including financial tools, are used in this project to calculate and
compare the financial position of the company, e.g. ratio analysis, DuPont
analysis, SWOT analysis, etc.
Page 4 of 96

5. INTRODUCTION
A firm is required to maintain a balance between liquidity and profitability
while conducting its day to day operations. Liquidity is a precondition to
ensure that firms are able to meet its short-term obligations and its continued
flow can be guaranteed from a profitable venture.
The importance of cash as an indicator of continuing financial health should
not be surprising in view of its crucial role within the business. This requires
that business must be run both efficiently and profitably. In the process, an
asset-liability mismatch may occur which may increase firm’s profitability in
the short run but at a risk of its insolvency.
The purpose of this project is to examine the trends in working capital and its
impact on firm’s performance. The trend in working capital needs and
profitability of firm is examined to identify the causes for any significant
differences.
The rest of the report is organized as follows: It starts with the Industry profile
& then a detailed introduction of the company. The following section of the
report looks briefly at the theoretical underpinnings and the relevant literature
which attempts to explain the link between poor performance and working
capital management.
After that, the analysis part covers in depth analysis of working capital of
Ranbaxy. Finally the conclusion is made & it has been observed that the
overall structure of working capital of the co. is good and it is a growing
concern. The company uses various techniques to maintain its working capital.
Some suggestions have been given on the basis of the conclusion.
Page 5 of 96

6. INDUSTRY PROFILE
Industry Definition
“The Indian pharmaceutical industry is a success story providing employment for millions
and ensuring that essential drugs at affordable prices are available to the vast population
of this sub-continent.”
Richard Gerster
The Indian Pharmaceutical Industry today is in the front rank of India’s science-based
industries with wide ranging capabilities in the complex field of drug manufacture and
technology.
Facts about the Role of Pharmaceutical Industry in Indian Gross Domestic Product (GDP):
• Indian Pharmaceutical Industry ranks fourth in the world, pertaining to the volume
of sales.
• The estimated worth of the Indian Pharmaceutical Industry is US$ 6 billion.
• The growth rate of the industry is about 13% per year.
• Almost most 70% of the domestic demand for bulk drugs is catered by the Indian
Pharma Industry.
• The Pharma Industry in India produces around 20% to 24% of the global Generic
drugs.
• The Indian Pharmaceutical Industry is one of the biggest producers of the Active
Pharmaceutical Ingredients (API) in the international arena.
• The Indian Pharma sector leads the science-based industries in the country.
• Around 40% of the total pharmaceutical produce is exported.
• 55% of the total exports constitute of formulations and the other 45% comprises of
bulk drugs.
• The Indian Pharma Industry includes small scaled, medium scaled, large scaled
players, which totals nearly 300 different companies.
• As per the present growth rate, the Indian Pharma Industry is expected to be a US$
20 billion industry by the year 2015.
• The Indian Pharmaceutical sector is also expected to be among the Top Ten
Pharma based markets in the world in the next ten years
Page 6 of 96

7. • The sales of the Indian Pharma Industry would worth US$ 43 billion within the next
decade.
• The multinational companies, investing in research and development in India may
save up to 30% to 50% of the expenses incurred
• The cost of hiring a research chemist in the US is five times higher than its Indian
counterpart.
• The manufacturing cost of pharmaceutical products in India is nearly half of the cost
incurred in US.
• The cost of performing clinical trials in India is one tenth of the cost incurred in US.
• The cost of performing research in India is one eighth of the cost incurred in US.
Following the de-licensing of the pharmaceutical industry, industrial licensing for most of
the drugs and pharmaceutical products has been done away with. Manufacturers are free to
produce any drug duly approved by the Drug Control Authority. Technologically strong and
totally self-reliant, the pharmaceutical industry in India has low costs of production, low
R&D costs, innovative scientific manpower, strength of national laboratories and an
increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and
research capabilities, supported by Intellectual Property Protection regime is well set to take
on the international market.
ADVANTAGE IN INDIA
Competent workforce: India has a pool of personnel with high managerial and technical
competence as also skilled workforce. It has an educated work force and English is
commonly used. Professional services are easily available.
Cost-effective chemical synthesis: Its track record of development, particularly in the area
of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It
provides a wide variety of bulk drugs and exports sophisticated bulk drugs.
Legal & Financial Framework: India has a 53 year old democracy and hence has a solid
legal framework and strong financial markets. There is already an established international
industry and business community.
Information & Technology: It has a good network of world-class educational institutions
and established strengths in Information Technology.
Page 7 of 96

8. Globalization: The country is committed to a free market economy and globalization.
Above all, it has a 70 million middle class market, which is continuously growing.
Consolidation: For the first time in many years, the international pharmaceutical industry is
finding great opportunities in India. The process of consolidation, which has become a
generalized phenomenon in the world pharmaceutical industry, has started taking place in
India.
THE GROWTH SCENARIO
India's US$ 3.1 billion pharmaceutical industry is growing at the rate of 14 percent per year.
It is one of the largest and most advanced among the developing countries.
Over 20,000 registered pharmaceutical manufacturers exist in the country. The domestic
pharmaceuticals industry output is expected to exceed Rs260 billion in the financial year
2002, which accounts for merely 1.3% of the global pharmaceutical sector. Of this, bulk
drugs will account for Rs 54 bn (21%) and formulations, the remaining Rs 210 bn (79%). In
financial year 2001, imports were Rs 20 bn while exports were Rs87 bn.
The above graph shows the percentage of pharmaceutical products export by various
countries.
Page 8 of 96

9. (SOURCE Competitiveness of the Indian pharmaceutical industry in the new product patent
regime a report by FICCI)
RESEARCH AND DEVELOPMENT
Drug discovery is the process by which
potential drugs are discovered or
designed. In the past most drugs have
been discovered either by isolating the
active ingredient from traditional
remedies or by serendipitous discovery. Modern
biotechnology often focuses on understanding the metabolic
pathways related to a disease state or pathogen, and
manipulating these pathways using molecular biology or
Biochemistry. A great deal of early-stage drug discovery has
traditionally been carried out by universities and research
institutions.
Drug development refers to activities undertaken after a compound is identified as a
potential drug in order to establish its suitability as a medication. Objectives of drug
development are to determine appropriate Formulation and Dosing, as well as to establish
safety. Research in these areas generally includes a combination of in vitro studies, in vivo
studies, and clinical trials. The amount of capital required for late stage development has
made it a historical strength of the larger pharmaceutical companies
Often, large multinational corporations exhibit vertical integration, participating in a broad
range of drug discovery and development, manufacturing and quality control, marketing,
sales, and distribution. Smaller organizations, on the other hand, often focus on a specific
aspect such as discovering drug candidates or developing formulations. Often, collaborative
agreements between research organizations and large pharmaceutical companies are to
explore the potential of new drug substances formed
The cost of innovation
Drug discovery and development is very expensive; of all compounds investigated for use
in humans only a small fraction are eventually approved in most nations by government
appointed medical institutions or boards, who have to approve new drugs before they can be
marketed in those countries. Each year, only about 25 truly novel drugs (New chemical
entities) are approved for marketing. This approval comes only after heavy investment in
pre-clinical development and clinical trials, as well as a commitment to ongoing safety
monitoring. Drugs which fail part-way through this process often incur large costs, while
generating no revenue in return. If the cost of these failed drugs is taken into account, the
Page 9 of 96

10. cost of developing a successful new drug (New chemical entity or NCE), has been
estimated at about 1 billion USD.
A study by the consulting firm Bain & Company reported that the cost for discovering,
developing and launching (which factored in marketing and other business expenses) a new
drug (along with the prospective drugs that fail) rose over a five year period to nearly $1.7
billion in 2003.
These estimates also take into account the opportunity cost of investing capital many years
before revenues are realized (see Time-value of money). Because of the very long time
needed for discovery, development, and approval of pharmaceuticals, these costs can
accumulate to nearly half the total expense. Some approved drugs, such as those based on
re-formulation of an existing active ingredient (also referred to as Line-extensions) are
much less expensive to develop. The consumer advocacy group Public Citizen suggests on
its web site that the actual cost is under $200 million, about 29% of which is spent on FDA-
required clinical trials. For me-too-drugs and for generics, the cost are even less.
Calculations and claims in this area are controversial because of the implications for
regulation and subsidization of the industry through federally funded research grants.
Controversy about drug development and testing
There have been increasing accusations and findings that clinical trials conducted or funded
by pharmaceutical companies are much more likely to report positive results for the
preferred medication.
In response to public outcry about specific cases in which unfavorable data from
pharmaceutical company-sponsored research was suppressed, the Pharmaceutical Research
and Manufacturers of America have published new guidelines urging companies to report
all findings and limit the financial involvement in drug companies of researchers. As a
result of this public outcry and Pharma response the US congress signed into law a bill
which requires phase II and phase III clinical trials to be registered by the sponsor on the
NIH website
Drug researchers not directly employed by pharmaceutical companies often look to
companies for grants, and companies often look to researchers for studies that will make
their products look favorable. Sponsored researchers are rewarded by drug companies, for
example with support for their conference/symposium costs. Lecture scripts and even
journal articles presented by academic researchers may actually be 'ghost-written' by
pharmaceutical companies. Some researchers who have tried to reveal ethical issues with
clinical trials or who tried to publish papers that show harmful effects of new drugs or
cheaper alternatives have been threatened by drug companies with lawsuits.
Product approval in the US
In the United States, new pharmaceutical products must be approved by the FDA as being
both safe and effective. This process generally involves submission of an Investigational
new drug filing with sufficient pre-clinical data to support proceeding with human trials.
Following IND approval, three phases of progressively larger human clinical trials may be
Page 10 of 96

11. conducted. Phase I generally studies toxicity using healthy volunteers. Phase II can include
Pharmacokinetics and Dosing in patients, and Phase III is a very large study of efficacy in
the intended patient population.
A fourth phase of post-approval surveillance is also often required due to the fact that even
the largest clinical trials cannot effectively predict the prevalence of rare side-effects. Post-
marketing surveillance ensures that after marketing the safety of a drug is monitored
closely. In certain instances, its indication may need to be limited to particular patient
groups, and in others the substance is withdrawn from the market completely. Questions
continue to be raised regarding the standard of both the initial approval process, and
subsequent changes to product labeling (it may take many months for a change identified in
post-approval surveillance to be reflected in product labeling) and this is an area where
congress is active.
The FDA provides information about approved drugs at the Orange Book site.] In the UK,
the British National Formulary is the core guide for pharmacists and clinicians.
Orphan drugs
There are special rules for certain rare diseases ("orphan
diseases") involving fewer than 200,000 patients in the United
States, or larger populations in certain circumstances. Because
medical research and development of drugs to treat such diseases is financially
disadvantageous, companies that do so are rewarded with tax reductions, fee waivers, and
market exclusivity on that drug for a limited time (seven years), regardless of whether the
drug is protected by patents.
Industry revenues
For the first time ever, in 2006, global spending on prescription drugs topped $643 billion,
even as growth slowed somewhat in Europe and North America. The United States accounts
for almost half of the global pharmaceutical market, with $289 billion in annual sales
followed by the EU and Japan. Emerging markets such as China, Russia, South Korea and
Mexico outpaced that market, growing a huge 81 percent. US profit growth was maintained
even whilst other top industries saw slowed or no growth. Despite this, "..the
pharmaceutical industry is — and has been for years — the most profitable of all businesses
in the U.S. In the annual Fortune 500 survey, the pharmaceutical industry topped the list of
the most profitable industries, with a return of 17% on revenue."
Pfizer's cholesterol pill Lipitor remains the best-selling drug in the world for the fifth year in
a row. Its annual sales were $12.9 billion, more than twice as much as its closest
competitors: Plavix, the blood thinner from Bristol-Myers Squibb and Sanofi-Aventis;
Nexium, the heartburn pill from AstraZeneca; and Advair, the asthma inhaler from
GlaxoSmithKline.
IMS Health publishes an analysis of trends expected in the pharmaceutical industry in
2007, including increasing profits in most sectors despite loss of some patents, and new
'blockbuster' drugs on the horizon.
Page 11 of 96

12. Teradata Magazine predicted that by 2007, $40 billion in U.S. sales could be lost at the top
10 pharma companies as a result of slowdown in R&D innovation and the expiry of patents
on major products, with 19 blockbuster drugs losing patent.
STEPS TO STRENGTHEN THE INDUSTRY
Indian companies need to attain the right product-mix for sustained future growth. Core
competencies will play an important role in determining the future of many Indian
pharmaceutical companies in the post product-patent regime after 2005. Indian companies,
in an effort to consolidate their position, will have to increasingly look at merger and
acquisition options of either companies or products. This would help them to offset loss of
new product options, improve their R&D efforts and improve distribution to penetrate
markets.
Research and development has always taken the back seat amongst Indian pharmaceutical
companies. In order to stay competitive in the future, Indian companies will have to refocus
and invest heavily in R&D.
The Indian pharmaceutical industry also needs to take advantage of the recent advances in
biotechnology and information technology. The future of the industry will be determined by
how well it markets its products to several regions and distributes risks, its forward and
backward integration capabilities, its R&D, its consolidation through mergers and
acquisitions, co-marketing and licensing agreements.
Page 12 of 96

13. INTRODUCTION TO RANBAXY
COMPANY PROFILE
“A company empowered by one mission –to place itself on the world map. An
enterprise propelled by one force-that synergizes its energies to charter unexplored
markets. Organizations fuelled by one dream-to transform competition into opportunity.”
Ranbaxy Laboratories Ltd. was incorporated in June 1961, in the name of M/S LEPITIT
RANBAXY LABORATORIES LTD and it commenced its business in MARCH 1962, in
technical and financial collaboration with an international company named LEPTIT SPA,
MILAN, ITALY.
Page 13 of 96

14. Ranbaxy Laboratories Pvt. Ltd. merged with “Leptit Ranbaxy Laboratories Pvt. Ltd.” in
1962 Ranbaxy and company also merged with this company in 1966. The collaboration
arrangement with M/S LEPTIT was terminated in 1966; after which Indian nationals
acquired the entire share capital of the company.
Therefore the word Leptit was removed from the name of the company. The name is known
as RANBAXY LABORATORIES LIMITED. In 1973 the company issued shares to the
general public and became a full fledged PUBLIC LIMITED COMPANY.
Today, Ranbaxy has emerged as a Leading
Pharmaceutical Company on the Indian firmament,
with the second largest market share and enjoys an
enviable reputation for its high standard of ethics and
quality around its core strength of anti-infective, it has
produced new brands in emerging therapeutic areas
like cardiovascular, central nervous system and
nutritional. Supporting this expansion, the company
has invested in world class manufacturing infrastructure that leverages India’s comparative
cost
Advantage and skilled manpower, while delivering international quality.
The company’s drive for Internationalism is guided by the well planned brand strategy that
covers some of the world emerging markets like China, Central Europe and Latin America .
Its position today is in league of the Top Ten Pharmaceutical companies of three world an
decent ranking as the eleventh largest company in the international generics space is the
resounding endorsement of its strategic mind.
It is clear that for a long time, the dominant share of revenues of the company would
continue to come from the ever expanding global generics market. Hence the intent of
Ranbaxy mission is to achieve a sustained growth rate through the continuous pursuit of
innovation phase one trials for pervasion, a compound for treating prosthetic males have
been completed. Phase 1 trials with clafrinast, an asthma compound is an important step
towards research based value creation.
This company also had success with Ciplofloxacine, an ingenious form, created through the
novel drug delivery systems research. As the demand of the bulk drugs inside the country
and abroad was increasingly rapidly a new, plant was set up at Toansa near Ropar in 1987.
This was a higher capacity plant designed to cater to the present and future needs, initially
antibiotics like Ampicillin, Trihydrate and Doxycycline were manufactured.
Later, on the other drugs like Cephalexin monohydrate and Ranitidine were also prepared.
The plant at Toansa was designed to meet the stringent standards set by the Food and Drug
Administration (FDA) of U.S.A. This plant has been approved by FDA and this will open
up American and other newer markets for Ranbaxy’s products
.
Page 14 of 96

15. At present Ranbaxy have four plants for the manufacture of bulk drugs two at Mohali, one
at Dewas (M.P) AND Another at Toansa near ROPAR. At present, Ranbaxy is the second
most Indian company engaged in the manufacturing of Pharmaceuticals, Bulk Drugs and
Fine Chemicals.
RANBAXY’s vast range of highly pure laboratory reagent and chemicals enjoy a place of
pride in the market. IT trends, has rebuilt As a step towards leveraging information for
value creation using its information backbone around an ERP application, along the focus
on reengineering several business processes around the internet and has putting place
business solutions that challenge existing ways of doing Business. The undying spirit of the
company’s human assets and their intensive competitive and entrepreneurial energy has
played a great part in transforming the company into a multicultural and multiracial team.
Today, Ranbaxy is the largest exporter accounting for 12% of the industry exports
pharmaceutical substance and dosages forms to over 50 countries with the internationals
sales comprising of 45% of the total turnover.
Page 15 of 96

16. VISION GARUDA
During the year 2002, the company has evolved a 10-year vision till 2012, for
sustaining significant growth consistent with its mission to be an international
research based Pharmaceutical Company, under the rubric ‘Vision Garuda’,
with increasing emphasis on Novel Drug Delivery Systems Research (DDR).
In licensing and out licensing, relationship with other important
pharmaceutical entities, expansion of manufacturing facilities both in India
and strategic overseas locations, revamping of organizational structures to
cater to the wider and more dispersed span of operations, and streamlining and
standardizing the business processes through out the global organization, are
other areas that receive focus and attention of management on priority.
Page 16 of 96

17. Mission
“To become a Research based
International pharmaceutical company”
Vision-2012
Achieve significant business in
Proprietary prescription products
By 2012
With a strong presence in developed markets
Aspirations-2012
Aspire to be a$5 billion company
Become a Top 5 global generics player
Significant income from Proprietary products
Page 17 of 96

18. OPERATING JOINT VENTURES AND
SUBSIDIARIES
BRAZIL : Ranbaxy S.P. Medicamentos Ltd.
CHINA : Ranbaxy (Guangzhou China) Ltd.
EGYPT : Ranbaxy Egypt Ltd.
GERMANY : Basics Gmb H.
HONG KONG : Ranbaxy (Hong Kong) Ltd.
INDIA : Rexcel pharmaceuticals Ltd.,
Solus pharmaceuticals Ltd.,
Vidyut Travel Services ltd.
IRELAND : Ranbaxy Ireland Ltd.
MALAYSIA : Ranbaxy (Malaysia) Sdn. Bhd.
NETHERLANDS : Ranbaxy Pharmaceuticals B.V.
NIGERIA : Ranbaxy Nigeria Ltd.
PANAMA : Ranbaxy Panama SA.
POLAND : Ranbaxy Poland Sp. Zo.
SOUTH AFRICA : Ranbaxy (SA) (Pty.) Ltd.
THAILAND : Unichem pharmaceuticals LTD.,
Unichem Distributors Ltd. Part,
Ranbaxy Unichem CO.Ltd.
U.K : Ranbaxy (UK) Ltd
USA : Ranbaxy pharmaceuticals Inc.
Ohm Laboratories Inc.,
Ranbaxy Schein Pharma, LLC
VIETNAM : Ranbaxy Vietnam Company Ltd.
Page 18 of 96

19. ALLIED BUSINESSES
Ranbaxy Animal Health
The Animal Health division saw an encouraging growth despite the prevailing
poor market conditions. The division grew at twice the growth rate recorded in
the industry. On the basis of having a vast dome satiated animal population,
the livestock, poultry business and pets business are among the fastest growing
sectors in India. A vast infrastructure of veterinary colleges, agricultural
institutes, technologists and researchers are helping farmers to source healthy,
cost effective products. In conjunction with the present scenario, the AHC
division of Ranbaxy Laboratories Limited has introduced several latest
generation products.
Ranbaxy Fine Chemicals Limited (RFCL)
The division ranked 4th in the
industry and captured 11% market
share. RANKEM is established as
a powerful brand, RFCL's brand
for its range of Reagents is now
synonymous with excellence in
reagents and fine chemicals in the
country. The focus of business
remains on developing extensive
customer relations; enhancing service levels and enriching the product mix
with the help of a qualified and competent marketing and sales team
Diagnostics
The diagnostics division has aggressively focused on market expansion
activities based on strategy of reliability, quality products and efficient service.
Page 19 of 96

20. Introduction of products in ‘Point of Care’ markets has expanded market
presence and over the next 1 – 2 years this segment will see considerable
expansion in line with world trends.
The Dade Behring segment has increased its installation base by 60% in
leading hospitals and laboratories. Plans are afoot for the introduction of more
parameters for the ‘Point of Care’ market and the launch of Special
Chemistries, a range of drug assays, plus an entry into automated microbiology
in both the Base and Dade Behring business areas.
The company has also witnessed significant milestones in the area of Novel
Drug Delivery Systems (NDDS). The company has entered into strategic
business arrangements with companies such as Bayer AG, Glaxo-Wellcome,
Eli-Lilly etc. for production and co-marketing operations. Many innovative
developments have been taking place in recent times. The company’s research
team is capable of developing one NDDS product every 12 to 18 months.
Also, two new products: Roletra-D and Altiva-D, will soon be launched in
India.
In order to expand and promote global growth, the company opened several
new markets during the year, notably in Brazil, where 25 filings were
undertaken in a span of 2-3 months.
The company has planned to build and protect intellectual property with the
help of IPC, which addresses all matters pertaining to patents. CQA supervises
the implementation of standard operating procedures (SOP) and ensures
compliance to corporate quality assurance policy in all technological
operations of the organization. The company is committed to invest 6% of the
sales in R and D by 2003, of which 7% of the expenditure will be earmarked
for research on New Drug Discovery and Novel Drug Delivery Systems. There
Page 20 of 96

21. will be continuous emphasis on augmenting R and D performance and
productivity with advanced scientific and technological tools.
VALUES OF RANBAXY LABORATORIES
LIMITED
1. Achieving customer satisfaction is fundamental to their business.
2. Practice dignity and equity in relationships and provide opportunities for
people to realize their full potential.
3. Ensure profitable growth and enhance wealth of shareholders.
4. Foster mutually beneficial relationships with all their business partners.
5. Manage their operations with concern for safety and environment.
6. Be a responsible corporate citizen.
Page 21 of 96

22. OBJECTIVES OF RANBAXY LABORATORIES
LTD.
1. To be a leader in the Pharmaceutical industry.
2. To be a profitable company with a steady growth in earnings.
3. To set an example as a socially responsible company.
4. To diversify in health care related areas.
5. To strive for excellence and continuous improvement in all spheres.
6. To improve the quality of life of people by providing better services and
quality products.
VARIOUS DIVISIONS OF RANBAXY
LABORATORIES LTD.
1. Chemical Division
2. Diagnostic Division
3. Stan care Division
4. Curradia Division
5. International Division
6. Pharmaceutical Division
7. Technical Division
8. Corporate Division
9. Animal Health Care Division
DIVISIONS IN VARIOUS GEOGRAPHICAL
AREAS
1. India and Middle East
2. Europe, CIS and Africa
3. Asia Pacific and Latin America
4. North America
Page 22 of 96

23. JOINT VENTURE OF THE COMPANY.
2000 Ranbaxy files IND Application for Asthma
Molecule- RBx4638, after successful completion of
pre-clinical studies. Ranbaxy acquires Bayer’s
Generics business (trading under the Name of
Basics) in Germany.
Ranbaxy forays into Brazil, the largest
pharmaceutical market in South America and
achieves global sales of U.S. $ 2.5 million in this
market.
2001 Ranbaxy took a significant step forward in Vietnam
by initiating the Setting up of a new manufacturing
facility with an investment of U.S. $ 10 million.
Ranbaxy achieved a turnover of U.S. $ 502 million
for the year 2002 and moved closer to achieving a
target of 1 billion dollar by 2004.
2002 Receives approval from FDA to market Midazolam
Hydrochloride Syrup 2 Mg base/ ml. Ranbaxy
receives and approval from FDA to manufacture and
market Cefpodoxime Proxetil for Oral Suspension,
Lisinopril + Hydrochlorothiazide Tablets Us,
Terazosin Hydrochloride Capsules and Amoxcillin
Oral suspension USP.Heralding the company’s entry
into the Indian OTC market.
2003 Ranbaxy received the economic times award for
corporate excellence-for the company for
Page 23 of 96

24. year.ranbaxy signed an agreement toacquire
RPG(aventis) SA along with its fully owned
subsidiary,OPIH SARL,in france
2004 Ranbaxy launched its first range of herbal projects.
2005 Acquisition of additional stake in Ranbaxy
Farmaceutica Ltda., Brazil Ranbaxy announced the
acquisition of Be-Tabs Pharmaceuticals (Pty)
Limited
2008 Acquired by the Japanese giant, the $9.62 billion
Daiichi Sankyo, ranked No. 3 in Japan
BRIEF INTRO OF RANBAXY PLANTS IN
INDIA
In the chemical division, various bulk drugs are manufactured. The chemical
division had three units in Punjab. One is located at Toansa, two are located at
Mohali and one unit is located at Dewas near Indore in Madhya Pradesh,
where Ciprofloxacine is manufactured. In the plant of the chemical division,
various drugs like Antibiotics, Anti-malarial, Antibacterial and Anti-ulcer are
manufactured. One of the older plants of Ranbaxy was closed after the
accident in June 2003.the second one is still working
Page 24 of 96

25. The 1991, the Toansa plant started functioning in 1992 and the Dewas plant
started functioning in 1999. Various plant heads independently manage all
these plants.
In each unit, separate facilities with respect to the manufacture of drugs, along
with their manufacturing areas have been provided. This is required to reduce
the chances of any cross contamination under the drug laws and to comply
with good manufacturing practices.
At Mohali plant, separate blocks have been provided for the preparation of
each drug .The Toansa, Mohali and Dewas plants are planned in such a way
that their system, facilities, manufacturing practices and standards meet the
requirements of FDA. Mohali Plant also mainly in the manufacturing of
Active Pharmaceutical Ingredients (API). The Plant is divided into two plant
areas A8 and A9
THE VARIOUS DEPARTMENTS
Human Resource Department
The basic function of the human resource department in the modern corporate
world is knowledge management. The HR department strives to maintain
cohesiveness among employees. It also ensures interdepartmental cooperation
in achieving targets. The appraisal system is also taken care by this
department. The HR department delves deep into the employee’s psyche to
analyze the positives and negatives of each employee, so that a proper system
of delegation and / or empowerment can be evolved.
Finance Department
The finance department takes care of the regular financial needs of the
company it ensures proper allocation of funds and takes care of the working
capital requirements. It verifies capital raised by different departments and
sends them for approval to the higher authorities.
Stores Department
The function of this department is to provide adequate and proper storage and
preservation of various items to meet the demand of various other departments
Page 25 of 96

26. by proper issues and maintaining accounts of consumption. It also keeps a
track of stock accumulation and abnormal consumption.
Erection and Fabrication Department
As the name suggests, this department identifies new projects and helps in
erecting them. This department also undertakes major modifications of
equipment.
ERP Department
ERP department helps to integrate the entire enterprise starting from the
supplier to the customer, covering financial and human resources. This will
enable the enterprise to increase productivity by reducing costs. It also ensures
a single solution to the information needs of the whole organization.
Production Department
As a part of their on going commitment to produce hi-tech quality drugs and
pharmaceuticals that take care of the specific needs of markets around the
world, Ranbaxy Laboratories Limited has increased the investment in the
production department. It is the most important department of the company
and has the following objectives:
1. Improving volume of production.
2. Reducing rejection rate.
3. Maintaining rework rate.
Engineering Department
This department undertakes building, construction and maintenance.
Maintaining service facilities such as water, gas, heating, ventilation, air
conditioning, painting and plumbing are some of the other areas dealt by this
department. This department also helps in maintaining electrical equipments
such as generators, transformers, telephone system and electrical installation.
Purchase Department
The purchase department provides material to the factory without which the
wheels of machines cannot move. The various functions performed by this
Page 26 of 96

27. department include: Securing good vendor performance, including prompt
deliveries of supplies of acceptable qualities.
1. To develop satisfactory sources of supply and maintaining good
relationships with the suppliers.
2. To pay reasonably low prices.
Quality Control/Quality Assurance Department
The purpose of QC & QA departments is to ensure that the desired quality
standard is achieved. It also ensures that the processing or fabrication of
material conforms to the specific characteristics selected, to assure that the
resulting product will in fact perform its intended function.
PRODUCT REVIEW
Ranbaxy’s therapeutic width covers five of the top six categories including
Anti-infective, Gastrointestinal, Nutritionals, Cardiovascular, Central Nervous
System, Respiratory, Dermatological and others. While anti-infective
contribute 56% of the total sales, Ranbaxy’s other brands like Simvotin and
Storvas in the cardiovascular segment, Serlift in CNS and Revital and Riconia
in Nutritionals, are on their way to success in multiple markets.
During Jan - Dec 2000, amongst the top products of Ranbaxy, Sporidex
(Cephalexin) was the Number 1 brand, closely followed by Cifran
(Ciprofloxacin).
Anti - Infectives
Anti- infective has been the main driver of Ranbaxy’s sales. The important
brands in this category are Cifran (Ciprofloxacin), Sporidex (Ciphalexin),
Enhancin (Amoxyclav), Crixan (Clarithromycin), Vercef (Cefaclor), Oframax
(Ceftriaxone), Cepodem (Cefpodoxime Proxetil), Zanocin (Ofloxacin),
Ceroxim (Cefuroxime Axetil), and Loxof (Levofloxacin).
Cifran (Ciprofloxacin) is the key brand in the anti- infective portfolio, with
estimated sales of US $ 32 Mn, currently being marketed in 15 countries.
Page 27 of 96

28. Development of Ciprofloxacin once a day has been an important landmark
achieved by Ranbaxy. The product has been licensed to Bayer. Cifran
continues to be a dominant player in the quinolones market in India, China and
Russia.
Sporidex is another leading brand in Ranbaxy’s product portfolio with
worldwide annual sales of US $ 35 Mn. It is available in eight different dosage
forms including capsules, dry powder for suspension, redimix, dispersible
tablets, paediatric drops, soft gelatin capsules, sachet and advanced
formulation for twice-daily administration. It is currently marketed in 15
countries. In India, Sporidex is the leading brand with a market share of 36%
of the Cephalexin segment.
Keflor is available in seven different dosage forms and is the third-largest
selling brand for Ranbaxy worldwide. The dosage forms list includes capsules,
dry syrup, modified release tablets, dispersible tablets, drops and redimix.
Enhancin is expected to be the leading product in Ranbaxy’s product portfolio
with estimated sales of US $ 45 Mn by the year 2005. The product will be
rolled out to about 20 important markets during this period.
Zanocin, with approximate sales of US $ 10 Mn, is the seventh-largest
contributor to Ranbaxy’s total sales.
Cepodem is currently available in three different countries outside India, and
will be rolled out to 13 different countries in the near future.
Cardiovasculars
Cardiovascular is projected to be the second-best category for Ranbaxy.
Statins have been the key drivers for this segment. The sale of Simvastatin has
grown substantially in the past few years, a trend that is likely to continue in
the future. In India, Simvotin (Simvastatin) is the market leader in the
cholesterol reducer segment. Another leading brand in this category is Storvas
(Atorvastatin). Storvas has been one of the fastest-ever to enter the top-300
brands list of the Indian pharma industry. Other global cardiovascular brands
are Covance (Losartan) and Caslot (Carvedilol).
Central Nervous System
The Central Nervous Segment is one of the important focus areas identified by
Ranbaxy, with Serlift being the key brand. In India, Serlift is number 1
Page 28 of 96

29. amongst Sertraline brands. New product introductions will be drivers of
growth in this category.
Gastrointestinal
Currently, gastrointestinal drugs are the second-largest category for Ranbaxy.
The key brands in this category include Histac and Romesac. The current
annual sales of Ranitidine are estimated to be around US $ 16 Mn and the
product is marketed in more than 20 countries.
Rheumatologicals
The first generation Cox-2 inhibitors principally drive worldwide growth in
rheumatology. This category is estimated to grow exponentially for Ranbaxy,
with brands like Celecoxib. This year, Rofibax (Rofecoxib) introduced in
India, has established itself as a leader in the Cox-2 inhibitor category and has
overtaken all Celecoxib brands. It has been identified as a key Global brand
for the future.
Nutritonals
Nutritionals have been a major contributor to Ranbaxy’s sales. Two of the
important products in this category are Revital and Riconia. With annual sales
estimated at about US $ 10 Mn, Revital contributes a significant share of total
sales. It is a leading brand in India and has done exceedingly well in some
parts of the world as an OTC product.
Dermatologicals
The dermatology category is mainly driven by India region and is likely to
show a good growth pattern in the future. Some of the key brands doing well
in this segment are Mobizox, Silverex, Moisturex, etc.
Page 29 of 96

30. WORKING CAPITAL MANAGEMENT
INTRODUCTION
As levers of financial management go, none bears more weight than working capital. The
viability of every business activity rests on daily changes in receivables, inventory and
payables. It’s the lifeblood of the business, and every manager’s primary task to keep it
moving and put shareholders capital to work efficiently and effectively.
Working Capital is the capital used for the day-to-day operations in the organization. It
denotes the money that circulates in the organization for smooth functioning of the
organization.
Strict working capital management leads to immense improvement in internal efficiencies.
Working Capital is the difference between resources in cash (current assets) and
organizational commitments for which cash would be soon required (Current Liabilities).
Current Assets are the resources which are in cash or will soon be converted into cash in
“ordinary course of business”. The faster a business expands the more cash it will need for
working capital and investment.
Good management of working capital will generate cash, help to improve the profits,
solidify the relationships with suppliers and customers, and reduce risks.
Page 30 of 96

31. This project was undertaken to analyze the working capital policies, working capital
management of the company and to reduce down their problems and finding the solutions
with respect to the working capital management of the company.
Working in an organization, especially with a brand like RANBAXY the main objective is
to learn maximum from the intellectually stimulating mentors and multi-dimensional
colleagues in the organization.
• To study and compare the working capital of RANBAXY with its
competitors in the industry
• To see whether the company is prepared with enough working
capital to face any kind of contingencies.
• To assess Liquidity position, Long term solvency, operational
efficiency, and overall profitability of RANBAXY
Value Addition for the company
A well designed and implemented working capital management is expected to contribute
positively to the creation of a firm’s value The purpose of this project is to examine the
trends in working capital management and its impact on firms’ performance.
This project would help Ranbaxy in comparing its financial status with its competitors. The
in depth analysis might bring out some key issues that may be ignored but may prove
Page 31 of 96

32. significant for the company. Various analyses conducted for analyzing the working capital
will prove beneficial to the company.
Working Capital:
“Working Capital includes the current assets and current liabilities areas of the
balance sheet. Working Capital can be called by its alternative name - "Net Current
Assets”.
Working Capital Management is the process of planning and controlling the level and mix
of current assets of the firm as well as financing these assets. It may be regarded as a life
blood of a business; its effective provision can do much to ensure the success of a business,
while its efficient management may lead not only to loss of profits but loss to ultimate
downfall in a going concern. Analysis of working capital is of major importance to internal
and external analysis because it is closely related to the current day-to-day operations.
WORKING CAPITAL INCLUDES FOUR
BALANCE SHEET ITEMS
• Stock - stocks of raw materials, partly completed production and finished goods
awaiting sale.
• Debtors - amounts owed to the company, mainly from customers in respect of
sales made on credit.
• Creditors - amounts owed BY the company, mainly to suppliers of raw materials,
services (electricity, water, telephone, rent, etc.) but also, possibly, unpaid tax
demands, unpaid dividends and other items.
• Cash - bank balances, cash holdings and short-term investments.
Page 32 of 96

33. The three major characteristics of current assets are:
• They have a short life span.
• Cash balances are held only for a week or so.
• They are rapidly transformed into other assets form.
Some of the decisions taken in working capital management are:
• An adequate supply of raw materials.
• Cash to meet the operational payments.
• The ability to grant credit to customers.
• Investment in various current assets.
• Appropriate sources of fund to finance current assets.
• Proportion of long term and short term funds to finance current assets.
Objective of Working Capital Management:
• Two fold objective of working capital management
• Maintenance of working capital, and
• Availability of ample funds at the times of need.
Uses of Working Capital:
• The typical uses of working capital are as follows:
• Adjusted net loss from operations
• Purchase of non-current assets:
• Repayment of long-term debt (debentures or bonds) and short-term debt (bank
borrowing)
• Redemption of redeemable preference shares
• Payment of cash dividend.
Page 33 of 96

34. ADVANTAGES OF ADEQUATE WORKING
CAPITAL
• Increase in debt capacity and goodwill: Adequate working capital represents the
financial soundness of the company. If one company is financially sound it would
be able to pay its creditors timely and properly. It will increase company’s
goodwill. Thus a firm with adequate working capital can raise requisite funds from
market, borrow short-term credit from banks, and purchase inventories of raw
materials, etc., for the smooth operation of its business.
• Increase in production efficiency: With adequate working capital the firm can
smoothly carryout research and development activities and thus adds to its
production efficiency.
• Exploitation of favorable opportunities: In the presence of adequate working capital,
a company can avail the benefits of favorable opportunities. Adequate working
capital will help the company to have bulk purchases, seasonal storage of raw
material etc., which would reduce the cost of production.
Page 34 of 96

35. • Meeting contingencies and adverse changes: A company can easily face certain
business and economic crises. A company having adequate working capital can
successfully meet contingencies such as business oscillations, financial crisis arising
from heavy losses etc.
• Available cash discount: Maintenance of adequate working capital enables a
company to avail the advantage of cash discount by making cash payments for to the
suppliers of raw materials and merchandise.
• Solvency and efficiency of fixed assets: It helps to maintain the solvency of the
company, so that payments could be made in time as and when they fall due.
• Attractive Dividend to Shareholders: It enables the company to offer attractive
dividend to the shareholders so that sense of security and confidence will increase
among them. It also increases the market value of its shares.
DISADVANTAGE OF INADEQUATE WORKING
CAPITAL
• Loss of goodwill and creditworthiness: As the firm fails to honor its current
liabilities it loses it goodwill and creditworthiness among its creditors.
• Firm can’t make use of favorable opportunities: The firm fails to undertake the
profitable projects, which not only prevent the firm from availing the benefits of
favorable opportunities but also stagnate its growth.
• Adverse effects of credit opportunities: The firm also fails to avail the attractive
credit opportunities but also stagnate its growth.
• Operational inefficiencies: It leads the company to operating inefficiencies, as day-
to-day commitments cannot be met.
• Effects on financial capacity: Inadequacy of working capital also weakens the
shock-absorbing capacity of the firm because it cannot meet the contingencies
Page 35 of 96

36. arising from business oscillations, financial losses, due to shortage of working
capital.
• Non-achievement of Profit Target: The firm cannot implement operational plans
due to unavailability of fund, which will lead to non-achievement of profit targets.
Dangers of Redundant working capital
• Low rate of return on capital
• Decline in Capital and Efficiency
• Loss of Goodwill and Confidence
• Evils of Over-Capitalization
• Destruction of Turnover Ratio
Company must have adequate working capital pursuant to its requirements. It should
neither be excessive nor inadequate. Both situations are dangerous. While inadequate
working capital adversely affects the business operations and profitability, excessive
working capital remains idle and earns no profits for the company. So company must
assure its working capital is adequate for its operations.
STUDY OF WORKING CAPITAL MANAGEMENT
OF RANBAXY LABORATORIES LTD
Businesses face ever increasing pressure on costs and growing Financing
requirements as a result of intensive competition in globalize markets. Many
of them are therefore considering ways of making themselves more efficient.
In identifying possible options it is important not to focus exclusively on
income and expense items, but also to take the balance sheet into account.
Improvements to the existing capital structure can free up valuable resources
and bring increased efficiency. Active working capital management is an
extremely effective way to increase enterprise value. Optimizing working
capital results in a rapid release of liquid resources and contributes to an
improvement in free cash flow and to a permanent reduction in inventory and
capital costs.
Page 36 of 96

37. My project on “Analysis of Working Capital Management in Ranbaxy
Laboratories Ltd.”
The attempt is aimed to analyze the various aspects of working capital
management of Ranbaxy and compare it with that of Dr Reddy’s,others
competitors and with industry standards.
By adopting various calculation and analysis and then making interpretation
with the solution of specific problem, best efforts on giving appropriate
suggestion to the company have been made.
DEFINING THE PROBLEM
Areas of working capital has different problems and these are discussed separately in the
following sections:
1. Stock control
Problem
If too much stock is held, the organisation wastes money through a variety of
factors:
• Money is tied up in stock when it could be put to better use.
• There are superfluous warehousing and storage costs.
Page 37 of 96

38. • Stock may deteriorate.
• There is a potentially greater risk of theft.
On the other hand, too little stock can lead to stock-outs which can:
• Halt activity
• Lose income
• Cause discomfort or distress to clients
However, finding the correct level of stock for any one particular item is
complex. This is because there are many influencing factors including the
anticipated demand for the items and the cost-efficient use of the organisation's
resources. The aim is to find the right balance.
2. Debtor Control
Problem
“It is better to have cash in your bank account
than in your customers ”
Commercial organisations normally give credit to their customers in
order to encourage sales. In the case of charities it is less likely that you
are encouraging additional sales by giving credit and more likely that
your clients will want credit and will wish to dictate the terms on which
they will pay. Therefore, for voluntary organisations, management is
more about dealing with credit than deciding on a control policy.
• If you get the money in quickly you can use it for other purposes which
will advance the organisation's objectives.
• Giving credit costs money, even if it is only a small amount of interest
foregone. If you have an overdraft, the costs rise sharply.
• If a large client demands an unreasonable amount of credit you may
have to simply walk away from the contract. You cannot afford to risk
running out of cash.
• If stage payments are delayed, you may perhaps have to say, for
example, that you will be unable to complete the contract; this may help
with neogitations
3. Cashflow Management
Page 38 of 96

39. Cash flow management is about achieving maximum effectiveness of cash receipts
and payments.
The aim is to strike a balance between:
• Putting money to work for the charity so it returns a satisfactory yield from deposit
accounts or short-term investments
• Ensuring cash is available when needed to pay the day-to-day running expenses of
the organisation, and also the fairly predictable "lump-sum" amounts - replacement
of computing equipment, for example.
Managing your cash balances is the most important part of working capital
management. If an organisation runs out of cash resources it will have to stop
operating immediately. There may not even be the money to pay the salaries at the
end of the month, and the banks might have started dishonouring cheques.
Furthermore, the trustees or directors could stand charged with wrongful or
fraudulent trading, which could entail personal liability or even imprisonment.
4. Creditor control
Creditor control is managing your relationship with organisations or people you
owe money to, such as suppliers. It forms part of working capital management.
It is, unfortunately the area over which not-for profit organisations have least
control. If you are dealing with an industrial giant or a big local authority, they
generally dictate the terms of trade.
LITERATURE REVIEW
Working capital policy refers to the firm's policies regarding
1) target levels for each category of current operating assets and liabilities, and
2) how current assets will be financed.
Generally good working capital policy (i.e. under conditions of certainty) is considered to
be one in which holdings of cash, securities, inventories, fixed assets, and accounts payables
are minimized. The level of accounts receivables should be used as a means of stimulating
sales and other income. Previous literature on working capital management has found a
negative association, overall, between level of working capital and operating performance
as measured by operating returns and operating margins (Peterson and Rajan, 1997). Under
conditions of certainty (i.e. sales, costs, lead times, payment periods, and so on, are known),
firms have little reason to hold more working capital than a minimum level. Larger amounts
would increase the level of operating assets, increase the need for external funding,
Page 39 of 96

40. resulting in lower return on assets and a lower return on equity, without any increase in
profit.
However the picture changes when uncertainty (i.e. uncertain growth) is introduced
(Brigham and Houston, 2000). Larger amounts of cash, securities, accounts receivables,
marketable securities, inventories, and fixed assets will be needed to support increased sales
Required levels will be based on expected sales levels and expected order lead times.
Additional holdings may be needed to enable the firm to deal with departures from the
expected values. Further, firms will also attempt to increase their accounts payable balances
as a means of financing increased levels of current operating assets. Firms which are in high
growth stages will face the challenge of maintaining the necessary level of operating assets
to support subsequent growth, while at the same time attempting to maintain adequate
performance indicators.
This study focuses on understanding how IPO companies manage their working capital and
other balance sheet items to support subsequent growth. This study supports the existing
literature on working capital and contributes to the existing literature by examining a
sample of firms (i.e. recent IPO firms) which have a wider range of growth levels than non-
IPO firms. Our study examines the impact of working capital management on the operating
performance and growth of new public companies. The study also examines these
relationships under three categories of growth (i.e. negative growth, moderate growth, and
high growth). The study also examines other selected firm characteristics in light of
working capital management: firm operating and financial risk, amount of debt, firm size,
and industry.
An underlying theme of this study is that high growth certainly does not ensure high
operating performance. Consistent with prior research (Peterson and Rajan, 1997) this study
provides further evidence that good working capital management is positively associated
with better operating performance. Higher levels of accounts receivable are associated with
higher operating performance, in all three of the growth rate categories. The study also finds
that maintaining control over levels of cash, securities, inventory, fixed assets, and accounts
payables is associated with higher operating performance. We find that firms which are
experiencing very high growth will hold higher levels of cash, securities, inventory, fixed
assets, and accounts payable to support the high growth. The study suggests that these firms
are sacrificing operating performance (accepting lower operating returns) to support the
high growth. This, in turn, increases financial and operating risk for these firms. Perhaps
IPO firms should stay more focused on their operating performance, while maintaining
more moderate growth levels
Another aspect of this study is that it fills a void in the initial public offerings literature.
Recent literature finds that new public companies underperform the market after going
public. Ritter in his 1991 paper reports substantially lower stock returns for IPO firms
between 1975 and 1984 than for a size-and-industry-matched sample of seasoned firms.
Since then there is a growing literature explaining IPO underperformance as related to
agency cost (Smith, 1990), institutional holdings (Field, 1995), venture capital (Jain and
Gompers, 1997; Jain and Kini, 2000), market timing of IPO (Benninga, 2004), and earnings
management (Teho et al., 1998; Ahmad-zaluki et al., 2008). However, there is no study
linking the working capital management and post-IPO performance. Our paper tries to fill
the void. The findings of this study would be interesting to investors and creditors of new
public companies.
Page 40 of 96

41. METHODOLOGY
A study by analyzing the trends of working capital of the firm and to examine the possible
causes for any significant differences. The data has been collected from the financial
statements. For the purpose of this study, profitability is measured by Return on Total
Assets (ROTA), which is defined as profit before interest and tax divided by total assets.
A comprehensive measure of profitability is best captured by computing the return on
total assets which is equal to the total liabilities of the firms, made up mainly of equity
capital and current liabilities.
All important ratios have been calculated to know the financial health of the company with
the help of past trends, mainly profitability & return ratios considered in section I of
analysis part. It also covers the DuPont analysis and correlation analysis of working capital
& its impact on profitability of the company. Section II consists of in depth analysis of
every component of working capital.
Page 41 of 96

42. All important components of working capital have been analyzed in detail i.e, Inventory,
Cash, and Payables etc
The methodology to be adopted is as follows:
• Collection of financial data of RANBAXY and Dr Reddy from annual reports and
company’s internal resources.
• Computation of various financial ratios and comparing them with standards and with
each others.
• Analyzing the trends of working capital of the firm and to examine the possible
causes for any significant differences.
• Various tools of analysis like correlation analysis, DuPont analysis, Ratio analysis
etc to be applied.
• All important components of working capital to be analyzed in detail i.e.
Receivables, Inventory, Cash, Payables and Operating cycle.
• Making comparison of the above computations with that of Dr Reddys.and industry
standards.
• Analysis of results, drawing conclusions and giving recommendations.
FINANCIAL PERFORMANCE OF RANBAXY
Profit after Tax (PAT) - Rs in Million
Page 42 of 96

43. Sales (Rs in Millions)
Page 43 of 96

44. Though the Sales of the company had been on a constant increase over the last 10 years,
there was a sudden fall in the Profit After Tax (PAT-Profit available to the Equity holders
and the organization itself) in 2005, 2006 and 2008. The key reason for the sudden fall in
PAT can be attributed to the sudden hike in the R&D expenditure in 2005.
In 2008, there was an unprecedented economic downturn across all markets globally and the
fluctuating financial and Forex environment created a substantial negative impact on
profitability. Further prohibition on drugs by the US Food and Drug Administration and
pricing stress has acted as a wet blanket in the periodical figures of the company. The trend
line shows the reason behind the fall in profitability.
SELLING AND ADMINISTRATION COSTS
Page 44 of 96

45. Comparison with the Industry Standards
The following financial comparison has been made keeping in view the scale of operations
of the company and the Industry Standards. The Industry standards have been taken from
Centre for Monitoring Indian Economy (CMIE), March 2009.
The following is the list of Company taken for Comparison:
1. Cipla
2. Sun Pharmaceuticals
3. Dr Reddy’s Laboratories
4. Lupin
5. Ranbaxy Laboratories Ltd.
For any company functioning in the free market, its important how best it operates but this
is equally important (if not more) that how it performs viz-a-viz its rivals i.e. other similar
companies in the market. Here, to find out about Ranbaxy, a comparison has been made
with 5 other companies operating on comparable size to see whether Ranbaxy is following
industry norms or not or whether Ranbaxy is doing better (or worse) compared to its rivals.
Its liquidity position has been compared by considering Working Capital Turnover Ratio,
Current Ratio and Quick Ratio and further Profitability of Ranbaxy viz-a-viz other
Page 45 of 96

46. companies have been compared by considering Return on Capital Employed and Earnings
per share.
Liquidity Ratios
The liquidity refers to the availability of cash and cash convertible assets with an
organization to meet its short-term obligations i.e. creditors and other Current Liabilities.
Any company's liquidity may vary due to seasonality, the timing of sales, and the state of
the economy. But liquidity ratios can provide small business owners with useful limits to
help them regulate borrowing and spending. Some of the best-known measures of a
company's liquidity include:
1. Working Capital Turnover Ratio
It is a measurement comparing the depletion of working capital to the generation of sales
over a given period. This provides some useful information as to how effectively a company
is using its working capital to generate sales.
A company uses working capital to fund operations and purchase inventory . These
operations and inventory are then converted into sales revenue for the company . The
working capital turnover ratio is used to analyze the relationship between the money used to
fund operations and the sales generated from these operations. In a general sense, the higher
Page 46 of 96

47. the working capital turnover, the better it is because it means that the company is generating
a great degree of sales as compared to the money it utilizes.
From the Industry comparison, it is apparent that Ranbaxy is way above the Industry
standards in 2008 which implies that the sales generated by Ranbaxy Laboratories has
always been much higher than the cost incurred to generate those sa les as compared to
other Pharmaceutical giants in the Industry.
2. Current Ratio
The current ratio of Ranbaxy has been compared with the Top five Pharmaceutical
organizations for the year 2008. A Current ratio measures the ability of an entity to pay its near-
term obligations. Though the ideal current ratio depends to some extent on the type of business,
a general rule of thumb is that it should be at least 2:1. The higher the current ratio, the greater
the "cushion" between current obligations and a firm's ability to pay them. A lower current ratio
means that the company may not be able to pay its bills on time, while
a higher ratio means that the company has money in cash or safe investments that could be put
to better use in the business.
The ideal Current ratio to be maintained by the pharmaceutical cannot be accurately assessed
because the scale of operations and the inventory size has been different for all the concerns in
the Industry. According to CMIE Industry Standards the current ratio for 2008 is 1.535.
Page 47 of 96

48. As per the above graph, the Current ratio maintained by Ranbaxy in 2008 is way below the
normal industry standards. The reason for a lower Current Ratio is the heavy amount of
Current liabilities incurred mainly due to huge loss on derivative valuations. Ban in U.S
market for more than 30 generic drugs and depreciation in several currencies were other
factors for Ranbaxy’s dismal performance in 2008.
3. Quick Ratio
Quick Ratio also known as „Acid Test Ratio‟ is an even conservative measure of liquidity.
The ratio expresses the degree to which a company's current liabilities are covered by the
most liquid current assets. Here Quick assets include all current assets except inventories.
Page 48 of 96

49. A high ratio indicates under stocking and low ratio indicates over stocking. Stock is
excluded because it may take time to be converted into cash. Quick ratio measures those
assets, which are immediately converted into cash without much loss. Though there is no
way to measure an ideal Quick ratio but as a rule of thumb, it should be at least 1:1.
From the above comparison, it can be inferred that a Ranbaxy’s Current liabilities were
much more as compared to other companies. This is because although the Quick Ratio
maintained by Ranbaxy is very near a said ideal ratio of 1:1 but that way below the Industry
standards of 1.19 of the year 2008. Moreover, it can be clearly viewed from the Balance
Sheet that a decent component of the Current liabilities includes fair valuation loss on
derivatives.
Page 49 of 96

50. Profitability Ratios
Profit is the difference between revenue and expenses over a period of time. The
profitability ratios are calculated to measure the operating efficiency of the company.
1. Return on Capital Employed
A return on capital employed, also called earning power is a measure of business
performance which is not affected by interest charges and tax-burden. It abstracts away the
effect of capital structure and tax factor and focuses on operating performance. Hence it is
eminently suited for inter- firm, so internally consistent.
Return on Capital employed = Profit Before Tax / Total Assets
As compared to other Pharmaceutical rivals in the Industry, Ranbaxy has a negative return
on Capital employed and way below the Industry standards of 8.06% for the year 2008.
This means that the Profit before Tax (PBT) of the company is heavier on the Total Assets
which is dragging down the Return on Capital Employed. This is mainly because of the
forex decline due to global economic downturn and ban on generic products in the U.S
market.
2. Earnings per Share(EPS)
Page 50 of 96

51. EPS states a corporation's profits on a per share basis. It can be helpful in further
comparison to the market price of the stock. It is an index of profitability from
shareholder’s point of view. The higher the earning per share, the more attractive will be the
investment plan.
Earnings per share = Profit after tax / Number of equity shares
From the Industry comparison, it is clear that the earnings per share for the Equity
Shareholders of Ranbaxy are negative. The main reason for the figure of EPS being
negative is the drastically low Profits it has incurred in the year 2008.
Page 51 of 96

52. LIQUIDITY ANALYSIS OF
RANBAXY LABORATORIES LIMITED
Liquidity of any company is the indicator as to how the company is placed with reference to
its capacity to meet its current financial obligation. This means that here we have to
consider the current assets which can be easily converted into cash to meet its immediate
financial obligations or dues. Liquidity position of Ranbaxy Laboratories Limited has been
analyzed in the following paragraphs based on different measures.
Current Assets
Ranbaxy has a growth of around 318.23% in current assets over the period of ten years.
From Rs 12310.24 Million in 1998-99, The Company has increased its current assets to Rs
51485.24 Million. Coefficient of variation for this period has been 49.11 which indicate that
the growth of current assets during the period under consideration has been sustainable
except for the year 2007-08 which shows a sharp increase in current assets which is largely
due to increase in cash and bank balances which has increased more than ten times as
compared to 2007.
Liquid Assets
Page 52 of 96

53. Company has also witnessed significant increase in liquid assets. From Rs 8382.22 M in
1998-99 to Rs 39500.05 M in 2007-08, there has been a growth of 371.24% in ten years. As
it is clear from the above mentioned data, liquid assets growth has been slightly more than
the growth of current assets. Standard deviation and coefficient of variation for this period
has been Rs 9079.38 M and 57.81% respectively.
Current Liabilities
From 1998-99 to 2007-08, current liabilities for Ranbaxy Laboratories have increased from
Rs 4152.78 M to Rs 42725.97 M with average current liabilities over this period being Rs
13067.47 M. As we see here, growth rate for current liabilities in this period has been
928.85% which is much higher than the growth for current and liquid assets which shows
that current liabilities have increased at a higher pace than its corresponding assets. Further,
coefficient of variation for this period is 84.91 which also reflect more flexibility in current
liabilities during this time. Current liabilities increased more than four times from 2007 to
2008 primarily because of huge loss on derivative valuations. Ban in U.S market for more
than 30 generic drugs and deprecation in several currencies were another factors for
Ranbaxy’s dismal performance in 2008.
Page 53 of 96

54. Working Capital
Net working capital is an important measure which itself indicate margin of safety or
cushion of protection provided to the creditors. As the following diagram shows, the
company has all over positive net working capital. The greater the amount of net work ing
capital, the greater the liquidity of the firm. NWC of the company increased from Rs
8157.46 M to Rs 8759.27 M i.e. overall growth of 7.38% only. Coefficient of variation for
the NWC is also 20.99% which is also less as compared to current assets or current
liabilities. There is a decrease in Net working capital in the year 2008.Even though there is
an increase in current asset and current liabilities however increase in current liabilities is
much more which has let to decline in Net working capital. There is a decrease in Net
working capital in the year 2008.Even though there is an increase in current asset and
current liabilities however increase in current liabilities is much more which has let to
decline in Net working capital.
Page 54 of 96

55. Growth Index of Net Working Capital
Page 55 of 96

56. Working Capital (Quick)
However, the measure of Net Working Capital does not indicate the true ability to pay
current debts when they become due. The reason being the NWC being access of current
assets over current liabilities and since these current assets comprises of illiquid inventory,
the measure of Quick Net Working Capital has been adopted. This is nothing but liquid or
quick assets less the current liabilities. Quick assets refer to current assets less inventory.
Following diagram shows that even though QNWC of the company has all along been
positive, during 2003-04, it has been substantially low. Further, in 2007-08 it was negative
because of exceptional increase in current liabilities.
Page 56 of 96

57. Page 57 of 96

58. Components of Gross Working Capital
Gross Working Capital has many constituents like inventory, sundry debtors, cash and bank
accounts etc. Composition has been calculated in Annexure-B at the end of this part of
report. Gross Working Capital has been calculated considering four components namely
Inventory, Sundry Debtors, Cash & Bank Balances and Loan & advances.
Sundry Debtors to Gross Working Capital
Out of all four components of working capital, the component, namely sundry debtors
contributed highest to the working capital. It varied from a lowest of 19.69% in 2002-03 to
the highest of 40.40% in 2005-06. Over the period of time, on an average, sundry debtors
contributed 33.2% to the working capital. The increase in percentage of sundry debtor
reflects a liberal credit policy with chances of bad debts and collection charges.
Page 58 of 96

59. Inventory to Gross Working Capital
Next major component after sundry debtors is the inventory which decreased from 31.91%
in 1998-99 to 23.28% in 2007-08 with the highest contribution in 2004-2005 that of
39.33%. Over the period of time, on an average inventory has contributed 33.43% to the
working capital. However, in these ten years, there have not been substantial changes as far
as inventory percentage is concerned as also evident from the diagram below.
Cash & Bank to Gross Working Capital
Cash and Bank balances have contributed the least to the gross working capital. It varied
from 4.09% in 1998-99 to 37.58% in 2007-08 with lowest of 1.11% in 1999-00 and highest
of 37.58% in 2007-08. On an average, in this period, cash and bank balance has contributed
7.30% only to the working capital. Even the average of 7.30% is because of high percentage
in 2007-08, in all other financial years this component has contributed very little to
Working Capital. In a business which is comfortable financed, cash and bank balance
should not run less than 5 to 10% of the current assets. Further, as the current liabilities are
not expected to exceed half of the current assets, the cash percentage should not run under
10 to 20%. This data indicates that the company had not maintained sufficient cash and
Page 59 of 96

60. bank balance and this definitely affects the profitability of the company except for the year
2008 which was high due to increase in deposit accounts of scheduled banks.
Loan & Advances to Gross Working Capital
Loan and advances even though constituted one of the most important component of net
working capital in 1998-99 (i.e. 25.02%), declined over the period of time as percentage of
working capital. Over these ten years, approximately 26% working capital has been
contributed from loans and advances with a highest of 43.09% in 2002-2003.
Page 60 of 96

61. Page 61 of 96

62. Ratio Analysis
Even though above analysis based on composition provide some indicator to the liquidity
position of the company, these do not show the extent of margin of safety provided for
current creditors. For this, ratio analysis has been done as follows:
Current Ratio
Relationship between current assets and current liabilities is shown by current ratio. It
basically measures company‟s ability to meet its short term obligation out of its short term
resources. Higher the current ratio, the greater is the assurance of the ability to pay the
current liabilities and vice versa. However, even though a higher value of current ratio is
good for the creditors against their credit, it may not be good for the management as it will
indicate poor financial planning and over capitalization. In normal circumstances,
hypothetical norm of 2:1 is supposed to be a good current ratio and if the current ratio for
the company is less than that, the solvency or liquidity of the company becomes
questionable.
As it is evident from the following table and the graph, the company had an average current
ratio of 1.87 over the period of seven years from 2002 to 2008. However, as it is clear from
the data that it varied from 2.19 to 1.21 which shows a variation over the years. Further, a
current ratio of less than 2 is normally not supposed to be good as such it can be considered
Page 62 of 96

63. the company passed through a difficult phase of liquidity in 2004 and 2008.
However, over all for this period, the company was sound as far as its liquidity was
concerned and it had liquidity facilities available for the creditors. The performance
standards of the Indian Pharmaceutical Industry for 2002-2008, as published by Centre for
Monitoring Indian Economy (CMIE) are 1.51 to 1.54.The current ratios are always above
the standards during the study period indicating a comfortable liquidity position for the
company except for 2008. The average was also higher than the standard set by the CMIE.
However, current ratio considers the quantity of current assets only and not its quality. So a
Page 63 of 96

64. more in-depth analysis is required for definite inference to be drawn for the company’s
liquidity.
Quick Ratio or Acid Test Ratio
Current assets sometime also include a high amount of slow moving inventory or which
may not move at all which means that even though current ratio of a company is very high,
even though it may not be in a position to meet its immediate liabilities. For that, an
analysis of quick ratio is also needed which shows the extent of cushion provided from the
quick assets to the current creditors. This ratio excludes the inventory and bank overdraft,
which are normally difficult to realize at short notice. Quick ratio is defined as the ratio of
quick assets to quick liabilities. Under normal circumstance, an ideal quick ratio of 1:1 is
supposed to be good enough which will reflect a satisfactory current financial condition.
Page 64 of 96

65. Page 65 of 96

66. Above data for Ranbaxy Laboratories indicates that Acid Test Ratio for the period under
study has consistently been above 1 except for 2008 where it was lowest of 0.92 and an
average of 1.23. It shows that the company has a healthy liquidity position in this period. As
per the set standards according to Indian Pharmaceutical Industry, norm for Acid Test Ratio
is 1.07 to 1.19 and as such, considering the above data, it can be said that company’s
immediate payment position was satisfactory and its liquid assets were adequate to meet its
short term obligations.
Absolute Liquidity Ratio or Cash Position Ratio
Even more rigorous than the quick ratio is the absolute liquidity ratio which is calculated even
excluding receivables from the current assets. It does away with the doubts about the realization
of receivables and debtors. Absolute liquidity ratio or cash position ratio is calculated by
dividing cash including bank balances and marketable securities by the amount of current
liabilities. Basically, it shows that how much cash is available for immediate payment for the
current obligations. A high cash position ratio is good from the creditors‟ point of view but
from the management point of view, it indicates poor investment policy. Normally a ratio of
0.5:1 or say 1:2 is considered to be acceptable.
Page 66 of 96

67. Above data indicates that absolute liquidity ratio of cash position ratio of the company has
been consistently very low compared to the industry norm except for the year 2007- 2008
where it rose to 0.45. It varied from a lowest of 0.03 to highest of 0.45. Over the period of
time, its average has been only 0.14. This shows that company has followed a policy of not
maintaining a high cash position ratio and rather focused more on utilization of cash
resources. However, from a creditors point of view, cash position ratio for the company was
not acceptable for the said duration. As compared to Industry standards of CMIE, the
average was much lower than the acceptable norm.
Inventory to Sales Ratio or Inventory Turnover Ratio
Relationship between the sales and average stock kept by the company is normally reflected
by the Inventory to Sales Ratio which is also called as Inventory Turnover Ratio. This is
Page 67 of 96

68. also an indicator for the liquidity of the concern as it will reflect the rate at which
inventories are being converted into sales and subsequently cash. A higher inventory to
sales ratio will show higher efficiency on the part of the management and vice versa.
Following table shows that Inventory Sales Ratio varied from 3.78 in 2001-02 to 4.38 in
2007-08. On an average, the value of Inventory Sales Ratio remained 3.82 for this period.
Further, it is also evident from the table and the graph, that from 2001-02, efficiency of
management has improved as far as conversion of inventory into sales was concerned. As
per the industry norm, normally an inventory sales ratio of more than 2 to 2.5 is considered
acceptable. As during this time, average of inventory turnover ratio in Ranbaxy was higher
than the Industry standard of CMIE, the inventory management of the company can be said
to be satisfactory from 2001-02 to 2007-08.
Page 68 of 96

69. Debtors to Sales Ratio or Debtors Turnover Ratio
A company adopts a policy for credit and collection and this is important to find out how
the debtors are performing over the year. Debtors to Sales Ratio or Debtors Turnover Ratio
is the indicator of number of times the debtors are turned over during the year. Since
debtors constitute a major element of current assets, the credit and collection policy of a
concern must be under continuous watch. The liquidity of a firm depends upon the quality
of debtors to a great extent. Debtors Turnover Ratio measures the rapidity or slowness of
debtors‟ collectability. Generally, the higher the value of the debtors‟ turnover ratio, the
more efficient is the management of assets.
As has been calculated in the following table, initially debtors to sales ratio for Ranbaxy in
2001-02 was 4.0 initially which slightly improved over the period of time to 4.4 in 2007-08
though it remained maximum in 2002-03 at 7.3. Over the period under consideration,
average Debtors to Sales Ratio has been 4.78 with standard deviation 1.15 and coefficient
of variation as 24.14. As per the standard norms, normally for an Indian Manufacturing
Company, the average debtors‟ turnover ratio is 4.92. This shows that the debtor‟s turnover
ratio in the Ranbaxy was lower than the standard set by the industry norms which is not a
good sign from the liquidity point of view.
Page 69 of 96

70. Page 70 of 96

71. Working Capital Turnover Ratio
There is a close relationship between sales and the working capital and the working capital
turnover ratio is an indicator of that. This ratio is computed by dividing the net sales by the
net working capital. It basically helps to understand the efficiency with which net working
capital is being utilized. The higher the turnover, the greater is the efficiency and the larger
is the rate of profit earned. However, a very high working capital turnover ratio is also
indicative of over trading and lack of working capital. In other words, if the working capital
turnover ratio is very less, it means that working capital has not been efficiently utilized.
In the table below, Ranbaxy has successfully improved its performance with reference to
relationship between working capital and sales as is evident from the fact that Working
Capital Turnover Ratio has improved from 2.95 in 2001-02 to 5.12 in 2007-08. For the
duration of seven years, average ratio has been 3.46. It also means that for generating a sale
of Rs 1, the company invested Rs 0.29. This shows that the management was active to take
assume risk and tended to reduce the size of working capital in relation to sales volume over
the period of time. The average of working capital turnover ratio for the company was
higher than the standard set by CMIE.
Page 71 of 96

72. Current Assets to Sales Ratio
Current Assets Turnover Ratio or Current assets to sales ratio is applied to measure the
turnover and profitability of the total current assets employed to conduct the operations of a
firm. This is calculated by dividing the amount of sales by the amount o f current assets.
This will give an overall impression of how rapidly the total investment in current assets is
bring turned. Lower the turnover of the current assets, the worse is the utilization of current
assets and vice-versa.
This is to say that analysis of current assets to sales ratio over a period of time will show the
overall efficiency of the working capital management of the company.
Following table again shows that the company over the period of time has improved its
efficiency as it is reflected by the fact that Current Assets to Sales Ratio has improved from
1.6 in 2001-02 to 1.48 in 2006-07 except for 2007-08 where it has again decreased to 0.87.
For the period of seven year, average current assets turnover ratio has been 1.45 with
standard deviation of 0.26 and coefficient of deviation as 18.13%. It shows that the
decreased volume of current assets in relation to sales was put in a commercially prudent
manner. The average of working capital turnover ratio for the company was lower than the
standard set by CMIE.
Page 72 of 96

73. Page 73 of 96

74. Current Assets to Total Assets Ratio
This ratio indicates the relationship between the total amount of current assets and the
amount of investments in total assets. It indicates the extent of funds invested for working
capital purpose out of total investment.
Page 74 of 96

75. Table above shows that current assets to total assets ratio was 0.63 in 2001-02 which came
down to 0.44 in 2007-2008. Over the period of seven years under consideration, average
current assets to total assets ratio has been 0.5 with standard deviation of 0.13 and
coefficient of variation as 25.47%. Higher investment in current assets shows that the firm
had a better liquidity in the beginning however it also shows that profitability was less as
higher liquidity normally results in lesser profitability. The average of working capital
turnover ratio for the company was lower than the standard set by CMIE
Consistency among all ratios
Table given in Annexure C shows the calculation of all the ratios in addition to its mean,
standard deviation and coefficient of variation. By comparing CV for different variables,
consistency of different ratio can be compared with. Greater the CV, less consistent is the
ratio or it can be considered more fluctuating.
As evident from the table, absolute liquidity ratio is least consistent and fluctuates a lot
between different values whereas inventory to sales ratio is the most consistent with very
little fluctuations.
Page 75 of 96

76. Liquidity Ranking
Liquidity position of the company is affected by the composition of working capital. In
order to evaluate the overall liquidity position, Motaal‟s comprehensive test has been
applied. In this test, a method of ranking has been applied to arrive at a more comprehensive
assessment of liquidity in which four different factors viz inventory to current assets ratio,
sundry debtors to current assets ratio, cash & bank to current assets ratio and loans &
advances to current assets ratios have been computed and combines in a points score. To
calculate that, a high value of sundry debtors to current assets ratio, cash & bank to current
assets ratio and loans & advances to current assets ratios shows a relatively favorable
liquidity position and ranking has been done in that order. Contrary to this, a low inventory
to current assets ratio indicates more favorable liquidity position and hence, ranking has
been done accordingly. Final ranking has been done on the basis that the lower the total of
the individual ranks, the more favorable is the liquidity position of the company and vice
versa.
A comprehensive calculation sheet is attached at Annexure D which resulted in following
results.
Above table shows that the Ranbaxy had the most sound liquidity position during the year
1998-1999 and 2006-2007. On the contrary, 2003-2004 was the weakest year as far as the
liquidity position was concerned.
Page 76 of 96