Project Report On STUDY OF WORKING CAPITAL MANAGEMENT OF RANBAXY LAB LTD A Compa rative Analysis Submitted to:

PREFACE Businesses face ever increasing pressure on costs and growing Financing requirem ents 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 exis ting capital structure can free up valuable resources and bring increased effici ency. Active working capital management is an extremely effective way to increas e enterprise value. Optimizing working capital results in a rapid release of liq uid resources and contributes to an improvement in free cash flow and to a perma nent reduction in inventory and capital costs. My project on Analysis of Working Capital Management in Ranbaxy Laboratories Ltd. The attempt is aimed to analyze t he various aspects of working capital management of Ranbaxy and compare it with that of Dr Reddys and with industry standards. By adopting various calculation an d 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 u sed to draw an exact picture of company. Page 2 of 94

TABLE OF CONTENTS Abstract Introduction Industry Profile Research and Development Organizational p rofile Working capital Defining the problem Literature review Methodology Financ ial performance of Ranbaxy Liquidity Ratios Profitability Ratios Liquidity Analy sis Ratio Analysis Liquidity Ranking Credit Analysis & Policies Conclusion Limit ations Summary of findings Recommendations and Suggestions References 06 07 08 11 14 32 39 41 43 48 51 53 63 76 81 89 90 92 95 Page 3 of 94

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 actu al 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 operati ons of the organization. It is very effective way to judge a companys cash flow p rospects, as cash is like blood life for any company. The report initially begin s with the company profile, followed by the detailed analysis of company, like b usinesses of the company, products offered by the company, financials of the com pany, etc The report involves a lot of research to understand what exactly worki ng 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 standard ize 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 94

INTRODUCTION A firm is required to maintain a balance between liquidity and profitability whi le conducting its day to day operations. Liquidity is a precondition to ensure t hat 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 efficient ly and profitably. In the process, an assetliability mismatch may occur which ma y increase firms 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 firms 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 rep ort looks briefly at the theoretical underpinnings and the relevant literature w hich attempts to explain the link between poor performance and working capital m anagement. After that, the analysis part covers in depth analysis of working cap ital 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 conc ern. The company uses various techniques to maintain its working capital. Some s uggestions have been given on the basis of the conclusion. Page 5 of 94

INDUSTRY PROFILE Industry Definition The Indian pharmaceutical industry is a success story providi ng employment for millions and ensuring that essential drugs at affordable price s are available to the vast population of this sub-continent. Richard Gerster The Indian Pharmaceutical Industry today is in the front rank of Indias science-base d industries with wide ranging capabilities in the complex field of drug manufac ture and technology. Facts about the Role of Pharmaceutical Industry in Indian G ross Domestic Product (GDP): Indian Pharmaceutical Industry ranks fourth in the world, pertaining to the volu me 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 dr ugs. The Indian Pharmaceutical Industry is one of the biggest producers of the A ctive Pharmaceutical Ingredients (API) in the international arena. The Indian Ph arma sector leads the science-based industries in the country. Around 40% of the total pharmaceutical produce is exported. 55% of the total exports constitute o f formulations and the other 45% comprises of bulk drugs. The Indian Pharma Indu stry includes small scaled, medium scaled, large scaled players, which totals ne arly 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 India n Pharmaceutical sector is also expected to be among the Top Ten Pharma based ma rkets in the world in the next ten years The sales of the Indian Pharma Industry would worth US$ 43 billion within the next decade. The multinational companies, investing in research and development in India may save up to 30% to 50% of the expenses incurred Page 6 of 94

 The cost of hiring a research chemist in the US is five times higher than its In dian counterpart. The manufacturing cost of pharmaceutical products in India is nearly half of the cost incurred in US. The cost of performing clinical trials i n 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. Manuf acturers are free to produce any drug duly approved by the Drug Control Authorit y. Technologically strong and totally self-reliant, the pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpo wer, strength of national laboratories and an increasing balance of trade. The P harmaceutical Industry, with its rich scientific talents and research capabiliti es, 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 educate d work force and English is commonly used. Professional services are easily avai lable. Cost-effective chemical synthesis: Its track record of development, parti cularly in the area of improved cost-beneficial chemical synthesis for various d rug 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. Th ere is already an established international industry and business community. Inf ormation & Technology: It has a good network of world-class educational institut ions and established strengths in Information Technology. Globalization: The cou ntry 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 f inding great opportunities in India. The process of consolidation, which has bec ome a Page 7 of 94

generalized phenomenon in the world pharmaceutical industry, has started taking place in India. THE GROWTH SCENARIO India s US$ 3.1 billion pharmaceutical indus try 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 pharmaceuti cal manufacturers exist in the country. The domestic pharmaceuticals industry ou tput is expected to exceed Rs260 billion in the financial year 2002, which accou nts for merely 1.3% of the global pharmaceutical sector. Of this, bulk drugs wil l 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 variou s countries. (SOURCE Competitiveness of the Indian pharmaceutical industry in th e new product patent regime a report by FICCI) Page 8 of 94

RESEARCH AND DEVELOPMENT Drug discovery is the process by which potential drugs are discovered or designe d. In the past most drugs have been discovered either by isolating the active in gredient from traditional remedies or by serendipitous discovery. Modern biotech nology often focuses on understanding the metabolic pathways related to a diseas e 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. Objec tives of drug development are to determine appropriate Formulation and Dosing, a s well as to establish safety. Research in these areas generally includes a comb ination 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 o f the larger pharmaceutical companies Often, large multinational corporations ex hibit vertical integration, participating in a broad range of drug discovery and development, manufacturing and quality control, marketing, sales, and distribut ion. Smaller organizations, on the other hand, often focus on a specific aspect such as discovering drug candidates or developing formulations. Often, collabora tive agreements between research organizations and large pharmaceutical companie s 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 t ruly novel drugs (New chemical entities) are approved for marketing. This approv al comes only after heavy investment in preclinical development and clinical tri als, 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 i n return. If the cost of these failed drugs is taken into account, the cost of d eveloping 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 discove ring, developing and launching (which factored in marketing and other business e xpenses) a new Page 9 of 94

drug (along with the prospective drugs that fail) rose over a five year period t o nearly $1.7 billion in 2003. These estimates also take into account the opport unity cost of investing capital many years before revenues are realized (see Tim e-value of money). Because of the very long time needed for discovery, developme nt, and approval of pharmaceuticals, these costs can accumulate to nearly half t he total expense. Some approved drugs, such as those based on reformulation of a n existing active ingredient (also referred to as Line-extensions) are much less expensive to develop. The consumer advocacy group Public Citizen suggests on it s web site that the actual cost is under $200 million, about 29% of which is spe nt 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 feder ally funded research grants. Controversy about drug development and testing There have been increasing accusations and findings that clinical trials conduct ed or funded by pharmaceutical companies are much more likely to report positive results for the preferred medication. In response to public outcry about specif ic cases in which unfavorable data from pharmaceutical company-sponsored researc h was suppressed, the Pharmaceutical Research and Manufacturers of America have published new guidelines urging companies to report all findings and limit the f inancial involvement in drug companies of researchers. As a result of this publi c outcry and Pharma response the US congress signed into law a bill which requir es 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/sympos ium costs. Lecture scripts and even journal articles presented by academic resea rchers may actually be ghost-written by pharmaceutical companies. Some researc hers who have tried to reveal ethical issues with clinical trials or who tried t o 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 pr oceeding with human trials. Following IND approval, three phases of progressivel y larger human clinical trials may be conducted. Phase I generally studies toxic ity using healthy volunteers. Phase II can include Pharmacokinetics and Dosing i n patients, and Phase III is a very large study of efficacy in the intended pati ent population. A fourth phase of post-approval surveillance is also often requi red due to the fact that even the largest clinical trials cannot effectively pre dict the prevalence of rare side-effects. Postmarketing surveillance ensures tha t after marketing the safety of a drug is monitored closely. In certain instance s, its indication may need to be limited to particular patient groups, and in Pa ge 10 of 94

others the substance is withdrawn from the market completely. Questions continue to be raised regarding the standard of both the initial approval process, and s ubsequent changes to product labeling (it may take many months for a change iden tified in post-approval surveillance to be reflected in product labeling) and th is is an area where congress is active. The FDA provides information about appro ved 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 certa in circumstances. Because medical research and development of drugs to treat suc h diseases is financially disadvantageous, companies that do so are rewarded wit h 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 Uni ted States accounts for almost half of the global pharmaceutical market, with $2 89 billion in annual sales followed by the EU and Japan. Emerging markets such a s 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 sl owed 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 Fortun e 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 ann ual 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 Glaxo SmithKline. IMS Health publishes an analysis of trends expected in the pharmaceu tical industry in 2007, including increasing profits in most sectors despite los s of some patents, and new blockbuster drugs on the horizon. Teradata Magazine predicted that by 2007, $40 billion in U.S. sales could be lost at the top 10 p harma companies as a result of slowdown in R&D innovation and the expiry of pate nts on major products, with 19 blockbuster drugs losing patent. Page 11 of 94

STEPS TO STRENGTHEN THE INDUSTRY Indian companies need to attain the right produ ct-mix for sustained future growth. Core competencies will play an important rol e 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 pro duct options, improve their R&D efforts and improve distribution to penetrate ma rkets. Research and development has always taken the back seat amongst Indian ph armaceutical companies. In order to stay competitive in the future, Indian compa nies will have to refocus and invest heavily in R&D. The Indian pharmaceutical i ndustry also needs to take advantage of the recent advances in biotechnology and information technology. The future of the industry will be determined by how we ll it markets its products to several regions and distributes risks, its forward and backward integration capabilities, its R&D, its consolidation through merge rs and acquisitions, co-marketing and licensing agreements. INTRODUCTION TO RANBAXY Page 12 of 94

COMPANY PROFILE A company empowered by one mission to place itself on the world ma p. 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 M ARCH 1962, in technical and financial collaboration with an international compan y named LEPTIT SPA, MILAN, ITALY. Ranbaxy Laboratories Pvt. Ltd. merged with Lept it Ranbaxy Laboratories Pvt. Ltd. in 1962 Ranbaxy and company also merged with th is 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. Page 13 of 94

Today, Ranbaxy has emerged as a Leading Pharmaceutical Company on the Indian fir mament, with the second largest market share and enjoys an enviable reputation f or its high standard of ethics and quality around its core strength of anti-infe ctive, it has produced new brands in emerging therapeutic areas like cardiovascu lar, central nervous system and nutritional. Supporting this expansion, the comp any has invested in world class manufacturing infrastructure that leverages Indi as comparative cost Advantage and skilled manpower, while delivering internationa l quality. The companys drive for Internationalism is guided by the well planned brand strategy that covers some of the world emerging markets like China, Centra l Europe and Latin America . Its position today is in league of the Top Ten Phar maceutical companies of three world an decent ranking as the eleventh largest co mpany in the international generics space is the resounding endorsement of its s trategic 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 ma rket. 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 c ompound for treating prosthetic males have been completed. Phase 1 trials with c lafrinast, 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 b ulk drugs inside the country and abroad was increasingly rapidly a new, plant wa s 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 C ephalexin monohydrate and Ranitidine were also prepared. The plant at Toansa was designed to meet the stringent standards set by the Food and Drug Administratio n (FDA) of U.S.A. This plant has been approved by FDA and this will open up Amer ican and other newer markets for Ranbaxys products . 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 comp any engaged in the manufacturing of Pharmaceuticals, Bulk Drugs and Fine Chemica ls. RANBAXYs 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 inf ormation for value creation using its information backbone around an ERP applica tion, along the focus on Page 14 of 94

reengineering several business processes around the internet and has putting pla ce business solutions that challenge existing ways of doing Business. The undyin g spirit of the companys human assets and their intensive competitive and entrepr eneurial energy has played a great part in transforming the company into a multi cultural and multiracial team. Today, Ranbaxy is the largest exporter accounting for 12% of the industry exports pharmaceutical substance and dosages forms to o ver 50 countries with the internationals sales comprising of 45% of the total tu rnover. VISION GARUDA Page 15 of 94

During the year 2002, the company has evolved a 10-year vision till 2012, for su staining significant growth consistent with its mission to be an international r esearch based Pharmaceutical Company, under the rubric Vision Garuda, with increas ing 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, rev amping of organizational structures to cater to the wider and more dispersed spa n of operations, and streamlining and standardizing the business processes throu gh out the global organization, are other areas that receive focus and attention of management on priority. Mission To become a Research based Page 16 of 94

International pharmaceutical company Vision-2012 Achieve significant business in Proprietary prescription products By 2012 With a strong presence in developed ma rkets Aspirations-2012 Aspire to be a$5 billion company Become a Top 5 global generics player Significant income from Proprietary products OPERATING JOINT VENTURES AND SUBSIDIARIES Page 17 of 94

BRAZIL CHINA EGYPT GERMANY HONG KONG INDIA IRELAND MALAYSIA NETHERLANDS NIGERIA PANAMA POLAND SOUTH AFRICA THAILAND U.K USA VIETNAM : : : : : : : : : : : : : : : : : Ranbaxy S.P. Medicamentos Ltd. Ranbaxy (Guangzhou China) Ltd. Ranbaxy Egypt Ltd. Basics Gmb H. Ranbaxy (Hong Kong) Ltd. Rexcel pharmaceuticals Ltd., Solus pharm aceuticals Ltd., Vidyut Travel Services ltd. Ranbaxy Ireland Ltd. Ranbaxy (Malay sia) Sdn. Bhd. Ranbaxy Pharmaceuticals B.V. Ranbaxy Nigeria Ltd. Ranbaxy Panama SA. Ranbaxy Poland Sp. Zo. Ranbaxy (SA) (Pty.) Ltd. Unichem pharmaceuticals LTD. , Unichem Distributors Ltd. Part, Ranbaxy Unichem CO.Ltd. Ranbaxy (UK) Ltd Ranba xy pharmaceuticals Inc. Ohm Laboratories Inc., Ranbaxy Schein Pharma, LLC Ranbax y Vietnam Company Ltd. ALLIED BUSINESSES Ranbaxy Animal Health Page 18 of 94

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 i ndustry. On the basis of having a vast dome satiated animal population, the live stock, 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 effec tive products. In conjunction with the present scenario, the AHC division of Ran baxy Laboratories Limited has introduced several latest generation products. Ran baxy Fine Chemicals Limited (RFCL) The division ranked 4th in the industry and c aptured 11% market share. RANKEM is established as a powerful brand, RFCL s bran d for its range of Reagents is now synonymous with excellence in reagents and fi ne chemicals in the country. The focus of business remains on developing extensi ve customer relations; enhancing service levels and enriching the product mix wi th the help of a qualified and competent marketing and sales team Diagnostics Th e diagnostics division has aggressively focused on market expansion activities b ased on strategy of reliability, quality products and efficient service. Introdu ction of products in Point of Care markets has expanded market presence and over t he next 1 2 years this segment will see considerable expansion in line with worl d trends. The Dade Behring segment has increased its installation base by 60% in leading hospitals and laboratories. Plans are afoot for the introduction of mor e 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 Bas e and Dade Behring business areas. Page 19 of 94

The company has also witnessed significant milestones in the area of Novel Drug Delivery Systems (NDDS). The company has entered into strategic business arrange ments with companies such as Bayer AG, Glaxo-Wellcome, Eli-Lilly etc. for produc tion and co-marketing operations. Many innovative developments have been taking place in recent times. The companys research team is capable of developing one ND DS 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 al l matters pertaining to patents. CQA supervises the implementation of standard o perating procedures (SOP) and ensures compliance to corporate quality assurance policy in all technological operations of the organization. The company is commi tted to invest 6% of the sales in R and D by 2003, of which 7% of the expenditur e will be earmarked for research on New Drug Discovery and Novel Drug Delivery S ystems. There will be continuous emphasis on augmenting R and D performance and productivity with advanced scientific and technological tools. Page 20 of 94

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 rea lize their full potential. 3. Ensure profitable growth and enhance wealth of sha reholders. 4. Foster mutually beneficial relationships with all their business p artners. 5. Manage their operations with concern for safety and environment. 6. Be a responsible corporate citizen. OBJECTIVES OF RANBAXY LABORATORIES LTD. 1. 2. 3. 4. 5. 6. To be a leader in the Pharmaceutical industry. To be a profita ble company with a steady growth in earnings. To set an example as a socially re sponsible company. To diversify in health care related areas. To strive for exce llence and continuous improvement in all spheres. To improve the quality of life of people by providing better services and quality products. Page 21 of 94

VARIOUS DIVISIONS OF RANBAXY LABORATORIES LTD. 1. 2. 3. 4. 5. 6. 7. 8. 9. Chemical Division Diagnostic Division Stan care Divis ion Curradia Division International Division Pharmaceutical Division Technical D ivision Corporate Division Animal Health Care Division DIVISIONS IN VARIOUS GEOGRAPHICAL AREAS 1. 2. 3. 4. India and Middle East Europe, CIS and Africa Asia Pacific and Latin America North America JOINT VENTURE OF THE COMPANY. Page 22 of 94

2000 Ranbaxy files IND Application for Asthma Molecule- RBx4638, after successfu l completion of pre-clinical studies. Ranbaxy acquires Bayers Generics business ( trading under the Name of Basics) in Germany. Ranbaxy forays into Brazil, the la rgest 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 Vie tnam by initiating the Setting up of a new manufacturing facility with an invest ment 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 200 4. 2002 Receives approval from FDA to market Midazolam Hydrochloride Syrup 2 Mg base/ ml. Ranbaxy receives and approval from FDA to manufacture and market Cefpo doxime Proxetil for Oral Suspension, Lisinopril + Hydrochlorothiazide Tablets Us , Terazosin Hydrochloride Capsules and Amoxcillin Oral suspension USP.Heralding the companys entry into the Indian OTC market. 2003 Ranbaxy received the economic times award for corporate excellencefor the company for year.ranbaxy signed an agreement toacquire RPG(aventis) SA along with its fully owned subsidiary,OPIH S ARL,in france Ranbaxy launched its first range of herbal projects. 2005 Acquisit ion of additional stake in Ranbaxy Farmaceutica Ltda., Brazil Ranbaxy announced the acquisition of Be-Tabs Pharmaceuticals (Pty) Limited 2008 Acquired by the Ja panese giant, the $9.62 billion Daiichi Sankyo, ranked No. 3 in Japan BRIEF INTRO OF RANBAXY PLANTS IN INDIA Page 23 of 94

In the chemical division, various bulk drugs are manufactured. The chemical divi sion had three units in Punjab. One is located at Toansa, two are located at Moh ali and one unit is located at Dewas near Indore in Madhya Pradesh, where Ciprof loxacine is manufactured. In the plant of the chemical division, various drugs l ike Antibiotics, Anti-malarial, Antibacterial and Anti-ulcer are manufactured. O ne of the older plants of Ranbaxy was closed after the accident in June 2003.the second one is still working The 1991, the Toansa plant started functioning in 1 992 and the Dewas plant started functioning in 1999. Various plant heads indepen dently manage all these plants. In each unit, separate facilities with respect t o the manufacture of drugs, along with their manufacturing areas have been provi ded. 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, sep arate blocks have been provided for the preparation of each drug .The Toansa, Mo hali and Dewas plants are planned in such a way that their system, facilities, m anufacturing 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 Page 24 of 94

Human Resource Department The basic function of the human resource department in the modern corporate world is knowledge management. The HR department strives t o maintain cohesiveness among employees. It also ensures interdepartmental coope ration in achieving targets. The appraisal system is also taken care by this dep artment. The HR department delves deep into the employees psyche to analyze the p ositives and negatives of each employee, so that a proper system of delegation a nd / or empowerment can be evolved. Finance Department The finance department ta kes care of the regular financial needs of the company it ensures proper allocat ion of funds and takes care of the working capital requirements. It verifies cap ital raised by different departments and sends them for approval to the higher a uthorities. Stores Department The function of this department is to provide adeq uate and proper storage and preservation of various items to meet the demand of various other departments by proper issues and maintaining accounts of consumpti on. It also keeps a track of stock accumulation and abnormal consumption. Erecti on and Fabrication Department As the name suggests, this department identifies n ew projects and helps in erecting them. This department also undertakes major mo difications of equipment. ERP Department ERP department helps to integrate the e ntire 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 t he whole organization. Production Department Page 25 of 94

As a part of their on going commitment to produce hi-tech quality drugs and phar maceuticals that take care of the specific needs of markets around the world, Ra nbaxy Laboratories Limited has increased the investment in the production depart ment. It is the most important department of the company and has the following o bjectives: 1. Improving volume of production. 2. Reducing rejection rate. 3. Mai ntaining rework rate. Engineering Department This department undertakes building , construction and maintenance. Maintaining service facilities such as water, ga s, 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 el ectrical installation. Purchase Department The purchase department provides mate rial to the factory without which the wheels of machines cannot move. The variou s functions performed by this department include: Securing good vendor performan ce, including prompt deliveries of supplies of acceptable qualities. 1. To devel op satisfactory sources of supply and maintaining good relationships with the su ppliers. 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 characterist ics selected, to assure that the resulting product will in fact perform its inte nded function. PRODUCT REVIEW Page 26 of 94

Ranbaxys therapeutic width covers five of the top six categories including Anti-i nfective, Gastrointestinal, Nutritionals, Cardiovascular, Central Nervous System , Respiratory, Dermatological and others. While anti-infective contribute 56% of the total sales, Ranbaxys other brands like Simvotin and Storvas in the cardiova scular segment, Serlift in CNS and Revital and Riconia in Nutritionals, are on t heir way to success in multiple markets. During Jan - Dec 2000, amongst the top products of Ranbaxy, Sporidex (Cephalexin) was the Number 1 brand, closely follo wed by Cifran (Ciprofloxacin). Anti - Infectives Anti- infective has been the ma in driver of Ranbaxys sales. The important brands in this category are Cifran (Ci profloxacin), Sporidex (Ciphalexin), Enhancin (Amoxyclav), Crixan (Clarithromyci n), Vercef (Cefaclor), Oframax (Ceftriaxone), Cepodem (Cefpodoxime Proxetil), Za nocin (Ofloxacin), Ceroxim (Cefuroxime Axetil), and Loxof (Levofloxacin). Cifran (Ciprofloxacin) is the key brand in the anti- infective portfolio, with estimat ed sales of US $ 32 Mn, currently being marketed in 15 countries. Development of Ciprofloxacin once a day has been an important landmark achieved by Ranbaxy. Th e product has been licensed to Bayer. Cifran continues to be a dominant player i n the quinolones market in India, China and Russia. Sporidex is another leading brand in Ranbaxys 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 capsul es, sachet and advanced formulation for twice-daily administration. It is curren tly marketed in 15 countries. In India, Sporidex is the leading brand with a mar ket share of 36% of the Cephalexin segment. Keflor is available in seven differe nt dosage forms and is the third-largest selling brand for Ranbaxy worldwide. Th e dosage forms list includes capsules, dry syrup, modified release tablets, disp ersible tablets, drops and redimix. Enhancin is expected to be the leading produ ct in Ranbaxys product portfolio with estimated sales of US $ 45 Mn by the year 2 005. The product will be rolled out to about 20 important markets during this pe riod. Zanocin, with approximate sales of US $ 10 Mn, is the seventh-largest cont ributor to Ranbaxys total sales. Page 27 of 94

Cepodem is currently available in three different countries outside India, and w ill 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 su bstantially in the past few years, a trend that is likely to continue in the fut ure. In India, Simvotin (Simvastatin) is the market leader in the cholesterol re ducer 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 th e Indian pharma industry. Other global cardiovascular brands are Covance (Losart an) and Caslot (Carvedilol). Central Nervous System The Central Nervous Segment is one of the important focus areas identified by Ranbaxy, with Serlift being th e key brand. In India, Serlift is number 1 amongst Sertraline brands. New produc t introductions will be drivers of growth in this category. Gastrointestinal Cur rently, 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 inhibito rs principally drive worldwide growth in rheumatology. This category is estimate d to grow exponentially for Ranbaxy, with brands like Celecoxib. This year, Rofi bax (Rofecoxib) introduced in India, has established itself as a leader in the C ox-2 inhibitor category and has overtaken all Celecoxib brands. It has been iden tified as a key Global brand for the future. Nutritonals Page 28 of 94

Nutritionals have been a major contributor to Ranbaxys sales. Two of the importan t 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 driv en by India region and is likely to show a good growth pattern in the future. So me of the key brands doing well in this segment are Mobizox, Silverex, Moisturex , etc. WORKING CAPITAL MANAGEMENT INTRODUCTION As levers of financial management go, none bears more weight than working capita l. The viability of every business activity rests on daily changes in receivable s, inventory and Page 29 of 94

payables. Its the lifeblood of the business, and every managers primary task to ke ep it moving and put shareholders capital to work efficiently and effectively. W orking Capital is the capital used for the day-to-day operations in the organiza tion. It denotes the money that circulates in the organization for smooth functi oning of the organization. Strict working capital management leads to immense im provement in internal efficiencies. Working Capital is the difference between re sources in cash (current assets) and organizational commitments for which cash w ould be soon required (Current Liabilities). Current Assets are the resources wh ich are in cash or will soon be converted into cash in ordinary course of busines s. The faster a business expands the more cash it will need for working capital a nd investment. Good management of working capital will generate cash, help to im prove the profits, solidify the relationships with suppliers and customers, and reduce risks. This project was undertaken to analyze the working capital policie s, working capital management of the company and to reduce down their problems a nd finding the solutions with respect to the working capital management of the c ompany. Working in an organization, especially with a brand like RANBAXY the mai n 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 f ace any kind of contingencies. To assess Liquidity position, Long term solvency, operational efficiency, and overall profitability of RANBAXY Value Addition for the company Page 30 of 94

A well designed and implemented working capital management is expected to contri bute positively to the creation of a firms value The purpose of this project is t o examine the trends in working capital management and its impact on firms perfor mance. This project would help Ranbaxy in comparing its financial status with it s competitors. The in depth analysis might bring out some key issues that may be ignored but may prove significant for the company. Various analyses conducted f or analyzing the working capital will prove beneficial to the company. Working C apital: 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 con trolling the level and mix of current assets of the firm as well as financing th ese assets. It may be regarded as a life blood of a business; its effective prov ision can do much to ensure the success of a business, while its efficient manag ement may lead not only to loss of profits but loss to ultimate downfall in a go ing 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 operat ions. WORKING CAPITAL INCLUDES FOUR BALANCE SHEET ITEMS Page 31 of 94

 Stock - stocks of raw materials, partly completed production and finished goods awaiting sale. Debtors - amounts owed to the company, mainly from customers in m ade on credit. respect of sales Creditors - amounts owed BY the company, mainly to suppliers of raw materials, s ervices (electricity, water, telephone, rent, etc.) but also, possibly, unpaid t ax demands, unpaid dividends and other items. Cash - bank balances, cash holding s and short-term investments. The three major characteristics of current assets are: They have a short life sp an. Cash balances are held only for a week or so. They are rapidly transformed i nto 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. Appr opriate sources of fund to finance current assets. Proportion of long term and s hort 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. Page 32 of 94

Uses of Working Capital: The typical uses of working capital are as follows: Adjusted net loss from oper tions 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. 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 companys good will. Page 33 of 94

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 efficien cy: With adequate working capital the firm can smoothly carryout research and de velopment 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 wil l help the company to have bulk purchases, seasonal storage of raw material etc. , which would reduce the cost of production. Meeting contingencies and adverse c hanges: A company can easily face certain business and economic crises. A compan y having adequate working capital can successfully meet contingencies such as bu siness oscillations, financial crisis arising from heavy losses etc. Available c ash 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 securi ty and confidence will increase among them. It also increases the market value o f its shares. DISADVANTAGE OF INADEQUATE WORKING CAPITAL Loss of goodwill and creditworthiness: As the firm fails to honor its current li abilities it loses it goodwill and creditworthiness among its creditors. Page 34 of 94

 Firm cant make use of favorable opportunities: The firm fails to undertake the pr ofitable 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 dayto-day commitments cannot be met. Effects on financial capacity: Inadequacy of working capital also weakens the shock-absorbi ng capacity of the firm because it cannot meet the contingencies arising from bu siness oscillations, financial losses, due to shortage of working capital. Non-a chievement 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 shou ld neither be excessive nor inadequate. Both situations are dangerous. While ina dequate working capital adversely affects the business operations and profitabil ity, 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 requirem ents as a result of intensive competition in globalize markets. Many of them are therefore considering ways of making themselves more efficient. In Page 35 of 94

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 incr eased efficiency. Active working capital management is an extremely effective wa y to increase enterprise value. Optimizing working capital results in a rapid re lease of liquid resources and contributes to an improvement in free cash flow an d 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 comp are it with that of Dr Reddys,others competitors and with industry standards. By adopting various calculation and analysis and then making interpretation with th e 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 separate ly in the following sections: Page 36 of 94

1. Stock control Problem If too much stock is held, the organisation wastes money through a varie ty of factors: Money is tied up in stock when it could be put to better use. The re are superfluous warehousing and storage costs. Stock may deteriorate. There i s a potentially greater risk of theft. On the other hand, too little stock can l ead to stock-outs which can: Halt activity Lose income Cause discomfort or distr ess to clients However, finding the correct level of stock for any one particula r 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 organisat ion 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 enc ourage sales. In the case of charities it is less likely that you are encouragin g 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 deci ding on a control policy. If you get the money in quickly you can use it for other purposes which will adv ance the organisation s objectives. Giving credit costs money, even if it is onl y a small amount of interest foregone. If you have an overdraft, the costs rise sharply. Page 37 of 94

 If a large client demands an unreasonable amount of credit you may have to simpl y 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 Cash flow management is about achieving maximum effectiveness of cash receipts a nd payments. The aim is to strike a balance between: Putting money to work for t he charity so it returns a satisfactory yield from deposit accounts or short-ter m investments Ensuring cash is available when needed to pay the day-to-day runni ng expenses of the organisation, and also the fairly predictable "lump-sum" amou nts - replacement of computing equipment, for example. Managing your cash balanc es 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 bank s might have started dishonouring cheques. Furthermore, the trustees or director s could stand charged with wrongful or fraudulent trading, which could entail pe rsonal 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 c ontrol. If you are dealing with an industrial giant or a big local authority, th ey 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 Page 38 of 94

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 sal es 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 an d Rajan, 1997). Under conditions of certainty (i.e. sales, costs, lead times, pa yment periods, and so on, are known), firms have little reason to hold more work ing capital than a minimum level. Larger amounts would increase the level of ope rating assets, increase the need for external funding, 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 (Bri gham and Houston, 2000). Larger amounts of cash, securities, accounts receivable s, marketable securities, inventories, and fixed assets will be needed to suppor t increased sales Required levels will be based on expected sales levels and exp ected 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 le vels of current operating assets. Firms which are in high growth stages will fac e the challenge of maintaining the necessary level of operating assets to suppor t subsequent growth, while at the same time attempting to maintain adequate perf ormance indicators. This study focuses on understanding how IPO companies manage their working capital and other balance sheet items to support subsequent growt h. This study supports the existing literature on working capital and contribute s to the existing literature by examining a sample of firms (i.e. recent IPO fir ms) which have a wider range of growth levels than non-IPO firms. Our study exam ines the impact of working capital management on the operating performance and g rowth of new public companies. The study also examines these relationships under three categories of growth (i.e. negative growth, moderate growth, and high gro wth). The study also examines other selected firm characteristics in light of wo rking capital management: firm operating and financial risk, amount of debt, fir m size, and industry. An underlying theme of this study is that high growth cert ainly does not ensure high operating performance. Consistent with prior research (Peterson and Rajan, 1997) this study provides further evidence that good worki ng capital management is positively associated with better operating performance . Higher levels of accounts receivable are associated with higher operating perf ormance, in all three of the growth rate categories. The study also finds that m aintaining 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 gr owth. The study suggests that these firms are sacrificing operating performance (accepting lower operating returns) to support the high growth. This, in turn, i ncreases financial and operating risk for these firms. Perhaps IPO firms should stay more focused on their operating performance, while maintaining more moderat e growth levels Another aspect of this study is that it fills a void in the init ial public offerings literature. Recent literature finds that new public compani es underperform the market after going public. Ritter in his 1991 paper reports substantially lower stock returns for IPO firms Page 39 of 94

between 1975 and 1984 than for a size-and-industry-matched sample of seasoned fi rms. Since then there is a growing literature explaining IPO underperformance as related to agency cost (Smith, 1990), institutional holdings (Field, 1995), ven ture 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 a l., 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 st udy would be interesting to investors and creditors of new public companies. METHODOLOGY A study by analyzing the trends of working capital of the firm and to examine th e possible causes for any significant differences. The data has been collected f rom the financial statements. For the purpose of this study, profitability is me asured by Return on Total Assets (ROTA), which is defined as profit before inter est 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 tot al liabilities of the firms, made up mainly of equity capital and current liabil ities. Page 40 of 94

All important ratios have been calculated to know the financial health of the co mpany with the help of past trends, mainly profitability & return ratios conside red in section I of analysis part. It also covers the DuPont analysis and correl ation analysis of working capital & its impact on profitability of the company. Section II consists of in depth analysis of every component of working capital. All important components of working capital have been analyzed in detail i.e, In ventory, Cash, and Payables etc The methodology to be adopted is as follows: Collection of financial data of BAXY and Dr Reddy from annual reports and companys internal resources. Computatio n of various financial ratios and comparing them with standards and with each ot hers. Analyzing the trends of working capital of the firm and to examine the pos sible causes for any significant differences. Various tools of analysis like cor relation analysis, DuPont analysis, Ratio analysis etc to be applied. All import ant components of working capital to be analyzed in detail i.e. Receivables, Inv entory, Cash, Payables and Operating cycle. Making comparison of the above compu tations with that of Dr Reddys.and industry standards. Analysis of results, draw ing conclusions and giving recommendations. FINANCIAL PERFORMANCE OF RANBAXY Profit after Tax (PAT) - Rs in Million Page 41 of 94

Sales (Rs in Millions) Page 42 of 94

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 ac ross all markets globally and the fluctuating financial and Forex environment cr eated a substantial negative impact on profitability. Further prohibition on dru gs 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 reaso n behind the fall in profitability. SELLING AND ADMINISTRATION COSTS Page 43 of 94

Comparison with the Industry Standards The following financial comparison has been made keeping in view the scale of op erations of the company and the Industry Standards. The Industry standards have been taken from Centre for Monitoring Indian Economy (CMIE), March 2009. The fol lowing is the list of Company taken for Comparison: 1. Cipla 2. Sun Pharmaceutic als 3. Dr Reddys Laboratories 4. Lupin 5. Ranbaxy Laboratories Ltd. For any compa ny functioning in the free market, its important how best it operates but this i s 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 compa rison has been made with 5 other companies operating on comparable size to see w hether Ranbaxy is following industry norms or not or whether Ranbaxy is doing be tter (or worse) compared to its rivals. Its liquidity position has been compared by considering Working Capital Turnover Ratio, Current Ratio and Quick Ratio an d further Profitability of Ranbaxy viz-a-viz other companies have been compared by considering Return on Capital Employed and Earnings per share. Page 44 of 94

Liquidity Ratios The liquidity refers to the availability of cash and cash convertible assets wit h an organization to meet its short-term obligations i.e. creditors and other Cu rrent Liabilities. Any company s liquidity may vary due to seasonality, the timi ng of sales, and the state of the economy. But liquidity ratios can provide smal l business owners with useful limits to help them regulate borrowing and spendin g. 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 co mpany is using its working capital to generate sales. A company uses working cap ital to fund operations and purchase inventory . These operations and inventory are then converted into sales revenue for the company . The working capital turn over ratio is used to analyze the relationship between the money used to fund op erations and the sales generated from these operations. In a general sense, the higher 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 utiliz es. Page 45 of 94

From the Industry comparison, it is apparent that Ranbaxy is way above the Indus try standards in 2008 which implies that the sales generated by Ranbaxy Laborato ries 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 enti ty to pay its near-term obligations. Though the ideal current ratio depends to s ome 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 c urrent 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 p harmaceutical cannot be accurately assessed because the scale of operations and the inventory size has been different for all the concerns in the Industry. Acco rding to CMIE Industry Standards the current ratio for 2008 is 1.535. Page 46 of 94

As per the above graph, the Current ratio maintained by Ranbaxy in 2008 is way b elow 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 derivati ve valuations. Ban in U.S market for more than 30 generic drugs and depreciation in several currencies were other factors for Ranbaxys dismal performance in 2008 . 3. Quick Ratio Quick Ratio also known as Acid Test Ratio is an even conservative measure of liqui dity. The ratio expresses the degree to which a company s current liabilities ar e covered by the most liquid current assets. Here Quick assets include all curre nt assets except inventories. Page 47 of 94

A high ratio indicates under stocking and low ratio indicates over stocking. Sto ck is excluded because it may take time to be converted into cash. Quick ratio m easures those assets, which are immediately converted into cash without much los s. 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 Ranbaxys Current liabilities were much more as compared to other companies. This is because although the Qui ck Ratio maintained by Ranbaxy is very near a said ideal ratio of 1:1 but that w ay below the Industry standards of 1.19 of the year 2008. Moreover, it can be cl early viewed from the Balance Sheet that a decent component of the Current liabi lities includes fair valuation loss on derivatives. Page 48 of 94

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 abstra cts away the effect of capital structure and tax factor and focuses on operating performance. Hence it is eminently suited for inter- firm, so internally consis tent. Return on Capital employed = Profit Before Tax / Total Assets As compared to other Pharmaceutical rivals in the Industry, Ranbaxy has a negati ve 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 hea vier 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 49 of 94

EPS states a corporation s profits on a per share basis. It can be helpful in fu rther comparison to the market price of the stock. It is an index of profitabili ty from shareholders point of view. The higher the earning per share, the more at tractive 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 Eq uity 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 50 of 94

LIQUIDITY ANALYSIS OF RANBAXY LABORATORIES LIMITED Liquidity of any company is the indicator as to how the company is placed with r eference to its capacity to meet its current financial obligation. This means th at here we have to consider the current assets which can be easily converted int o cash to meet its immediate financial obligations or dues. Liquidity position o f Ranbaxy Laboratories Limited has been analyzed in the following paragraphs bas ed 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 curren t assets to Rs 51485.24 Million. Coefficient of variation for this period has be en 49.11 which indicate that the growth of current assets during the period unde r consideration has been sustainable except for the year 2007-08 which shows a s harp increase in current assets which is largely due to increase in cash and ban k balances which has increased more than ten times as compared to 2007. Liquid Assets Page 51 of 94

Company has also witnessed significant increase in liquid assets. From Rs 8382.2 2 M in 1998-99 to Rs 39500.05 M in 2007-08, there has been a growth of 371.24% i n 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% respe ctively. Current Liabilities From 1998-99 to 2007-08, current liabilities for Ranbaxy Laboratories have incre ased from Rs 4152.78 M to Rs 42725.97 M with average current liabilities over th is period being Rs 13067.47 M. As we see here, growth rate for current liabiliti es in this period has been 928.85% which is much higher than the growth for curr ent and liquid assets which shows that current liabilities have increased at a h igher 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 t o 2008 primarily because of huge loss on derivative valuations. Ban in U.S marke t for more than 30 generic drugs and deprecation in several currencies were anot her factors for Ranbaxys dismal performance in 2008. Page 52 of 94

Working Capital Net working capital is an important measure which itself indicate margin of safe ty 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 am ount 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 w orking capital in the year 2008.Even though there is an increase in current asse t and current liabilities however increase in current liabilities is much more w hich has let to decline in Net working capital. There is a decrease in Net worki ng capital in the year 2008.Even though there is an increase in current asset an d current liabilities however increase in current liabilities is much more which has let to decline in Net working capital. Page 53 of 94

Growth Index of Net Working Capital Page 54 of 94

Working Capital (Quick) However, the measure of Net Working Capital does not indicate the true ability t o 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 compri ses of illiquid inventory, the measure of Quick Net Working Capital has been ado pted. This is nothing but liquid or quick assets less the current liabilities. Q uick 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 exce ptional increase in current liabilities. Page 55 of 94

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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 f our 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 debt ors 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 57 of 94

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 2004-200 5 that of 39.33%. Over the period of time, on an average inventory has contribut ed 33.43% to the working capital. However, in these ten years, there have not be en substantial changes as far as inventory percentage is concerned as also evide nt 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 199 9-00 and highest of 37.58% in 2007-08. On an average, in this period, cash and b ank 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 whi ch 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 1 0 to 20%. This data indicates that the company had not maintained sufficient cas h and bank balance and this Page 58 of 94

definitely affects the profitability of the company except for the year 2008 whi ch 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% workin g capital has been contributed from loans and advances with a highest of 43.09% in 2002-2003. Page 59 of 94

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Ratio Analysis Even though above analysis based on composition provide some indicator to the li quidity position of the company, these do not show the extent of margin of safet y provided for current creditors. For this, ratio analysis has been done as foll ows: Current Ratio Relationship between current assets and current liabilities is shown by current ratio. It basically measures companys ability to meet its short term obligation o ut of its short term resources. Higher the current ratio, the greater is the ass urance of the ability to pay the current liabilities and vice versa. However, ev en though a higher value of current ratio is good for the creditors against thei r credit, it may not be good for the management as it will indicate poor financi al 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 c ompany is less than that, the solvency or liquidity of the company becomes quest ionable. As it is evident from the following table and the graph, the company ha d an average current ratio of 1.87 over the period of seven years from 2002 to 2 008. However, as it is clear from the data that it varied from 2.19 to 1.21 whic h shows a variation over the years. Further, a current ratio of less than 2 is n ormally not supposed to be good as such it can be considered the company passed through a difficult phase of liquidity in 2004 and 2008. Page 61 of 94

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 pu blished by Centre for Monitoring Indian Economy (CMIE) are 1.51 to 1.54.The curr ent ratios are always above the standards during the study period indicating a c omfortable liquidity position for the company except for 2008. The average was a lso higher than the standard set by the CMIE. However, current ratio considers t he quantity of current assets only and not its quality. So a more in-depth analy sis is required for definite inference to be drawn for the companys liquidity. Quick Ratio or Acid Test Ratio Current assets sometime also include a high amount of slow moving inventory or w hich 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 lia bilities. For that, an analysis of quick ratio is also needed which shows the ex tent of cushion provided from the quick assets to the current creditors. This ra tio excludes the inventory and bank overdraft, which are normally difficult to r ealize at short notice. Quick ratio is defined as the ratio of quick assets to q uick liabilities. Under normal circumstance, an ideal quick ratio of 1:1 is supp osed to be good enough which will reflect a satisfactory current financial condi tion. Page 62 of 94

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Above data for Ranbaxy Laboratories indicates that Acid Test Ratio for the perio d 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 liquidit y position in this period. As per the set standards according to Indian Pharmace utical Industry, norm for Acid Test Ratio is 1.07 to 1.19 and as such, consideri ng the above data, it can be said that companys immediate payment position was sa tisfactory and its liquid assets were adequate to meet its short term obligation s. 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 wit h the doubts about the realization of receivables and debtors. Absolute liquidit y ratio or cash position ratio is calculated by dividing cash including bank bal ances 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. Norm ally a ratio of 0.5:1 or say 1:2 is considered to be acceptable. Page 64 of 94

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 h ighest of 0.45. Over the period of time, its average has been only 0.14. This sh ows that company has followed a policy of not maintaining a high cash position r atio and rather focused more on utilization of cash resources. However, from a c reditors point of view, cash position ratio for the company was not acceptable f or 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 Tur nover Ratio. This is also Page 65 of 94

an indicator for the liquidity of the concern as it will reflect the rate at whi ch inventories are being converted into sales and subsequently cash. A higher in ventory 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 Ra tio remained 3.82 for this period. Further, it is also evident from the table an d 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, norm ally 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 tha n the Industry standard of CMIE, the inventory management of the company can be said to be satisfactory from 2001-02 to 2007-08. Page 66 of 94

Debtors to Sales Ratio or Debtors Turnover Ratio A company adopts a policy for credit and collection and this is important to fin d out how the debtors are performing over the year. Debtors to Sales Ratio or De btors 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. D ebtors Turnover Ratio measures the rapidity or slowness of debtors collectability . Generally, the higher the value of the debtors turnover ratio, the more efficie nt is the management of assets. As has been calculated in the following table, i nitially debtors to sales ratio for Ranbaxy in 2001-02 was 4.0 initially which s lightly improved over the period of time to 4.4 in 2007-08 though it remained ma ximum 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 varia tion as 24.14. As per the standard norms, normally for an Indian Manufacturing C ompany, the average debtors turnover ratio is 4.92. This shows that the debtors tu rnover ratio in the Ranbaxy was lower than the standard set by the industry norm s which is not a good sign from the liquidity point of view. Page 67 of 94

Working Capital Turnover Ratio Page 68 of 94

There is a close relationship between sales and the working capital and the work ing capital turnover ratio is an indicator of that. This ratio is computed by di viding the net sales by the net working capital. It basically helps to understan d the efficiency with which net working capital is being utilized. The higher th e turnover, the greater is the efficiency and the larger is the rate of profit e arned. 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 capita l turnover ratio is very less, it means that working capital has not been effici ently utilized. In the table below, Ranbaxy has successfully improved its perfor mance with reference to relationship between working capital and sales as is evi dent 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 investe d Rs 0.29. This shows that the management was active to take assume risk and ten ded to reduce the size of working capital in relation to sales volume over the p eriod of time. The average of working capital turnover ratio for the company was higher than the standard set by CMIE. Page 69 of 94

Current Assets to Sales Ratio Current Assets Turnover Ratio or Current assets to sales ratio is applied to mea sure the turnover and profitability of the total current assets employed to cond uct 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 r apidly the total investment in current assets is bring turned. Lower the turnove r 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 per iod of time will show the overall efficiency of the working capital management o f the company. Following table again shows that the company over the period of t ime has improved its efficiency as it is reflected by the fact that Current Asse ts 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, ave rage 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 c urrent 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 st andard set by CMIE. Page 70 of 94

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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. 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 consi deration, average current assets to total assets ratio has been 0.5 with standar d deviation of 0.13 and coefficient Page 72 of 94

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 aver age of working capital turnover ratio for the company was lower than the standar d 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. Greate r 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 flu ctuates a lot between different values whereas inventory to sales ratio is the m ost consistent with very little fluctuations. Liquidity Ranking Liquidity position of the company is affected by the composition of working capi tal. In order to evaluate the overall liquidity position, Motaals comprehensive t est has been applied. In Page 73 of 94

this test, a method of ranking has been applied to arrive at a more comprehensiv e assessment of liquidity in which four different factors viz inventory to curre nt assets ratio, sundry debtors to current assets ratio, cash & bank to current assets ratio and loans & advances to current assets ratios have been computed an d 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 & advance s to current assets ratios shows a relatively favorable liquidity position and r anking 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 yea r as far as the liquidity position was concerned. Coefficient of a Rank Correlation and testing the significance As the liquidity and profitability, both are important for any company, I have a nalyzed the relationship between the two by using Spearmans rank correlation coef ficient. Further, to judge the significance of the relationship, the t-test has been applied. Page 74 of 94

To do this analysis, liquidity indicator has been taken to be the ratio of curre nt assets to total assets. Ratio of return on capital employed has been taken as the indicator for profitability. A detailed calculation has been done in the ex cel table which has resulted in the following: Rank correlation coefficient between the liquidity and profitability of the comp any has been calculated as 0.452562. To study the significance of the computed v alue of correlation coefficient, the t-test has been applied as: H0: Null Hypoth esis There exists no significant correlation between the liquidity and profitabi lity of Ranbaxy Laboratories Limited. H1: Alte rnative Hypothesis There exists a significant correlation between the liquidity and profitability of Ranbaxy Labo ratories Limited. Say 5 % level of significance, = 0.05 Critic l V lue of t for 5 % level of signific nce = 2.306 P ge 75 of 94

In bove c se, t h s been c lcul ted in bove t ble itself which comes out to be 2.571 which is gre ter th n the critic l v lue of t i.e.2.262 which shows th t the null hypothesis m y be rejected which me ns th t there is signific nt rel ti onship between liquidity nd profit bility. Fin ncing of Working C pit l Need of working c pit l could be met in m ny w ys. However, its normally consists of Short term financing and long term financing. Cost of financing is different for short term and long term financing and its this reason that an attempt has b een made to analyze the funding pattern of working capital at Ranbaxy Laboratori es Limited. Calculation for financing of working capital has been made in the fo llowing table by dividing it into short term and long term financing. As is evident from the above table, during 1998-99, % of long term finance used for working capital requirement was 38.02% which has seen an overall decline in the period under consideration to 7.48% in 2007-08. It has reached the maximum i n 1998-99 to 38.02%. There is a clear indication that company has with passage o f time shifted its preference towards short term financing (aggressive policy) w hich might be primarily because of the uncertain and short term nature of the ph armaceutical market. Page 76 of 94

Working Capital Trend Analysis Working capital trend is very important to study about the practice and policy o f the management of the company with regard to whether the company is following a proper policy towards working capital or some improvement is needed for better management of working capital funds. The trend value of working capital has bee n calculated as follows: Page 77 of 94

It is evident from the above table that working capital has increased over the p eriod of time from Rs 8157.46 M in 1998-99 to Rs 8759.27 M in 2007-08. It had an increasing trend except in the year 200-01, 2003-04 and 2007-08 where the worki ng capital had actually declined. CREDIT ANALYSIS Besides establishing credit standard, a firm should develop procedures for evalu ating credit applicants. The second aspect of credit policy of a firm is credit analysis and investigation. There are two steps involved in the credit investiga tion. Obtaining Credit Information Analysis of Credit Information Page 78 of 94

Obtaining of credit information The first step in credit analysis is obtaining c redit information on which to the base evaluation of a customer. The sources of information are: Internal Sources: Usually company requires their customers to f ill various forms and documents giving details about financial operations. Some times company also asks for references. Another source of internal information i s the records of the firm contemplating an extension of credit. External Sources : Some of the external sources of information are Financial Statements Bank Refe rences Trade References Credit Bureau Reports Analysis of credit information Onc e the credit information has been collected from different sources, it should be analyzed to determine the credit worthiness of customer. The analysis should co ver two aspects. Quantitative Analysis The assessment of the quantitative aspect s is based on the factual information available from the financial statements, p ast records of the firm and so on. First step in this assessment is to prepare a n aging schedule to calculate average age of accounts payable. Another method is ratio analysis, i.e. calculation of liquidity, profitability and debt capacity ratios, of the applicant. These ratios will help to find out financial strength of applicant. Qualitative Analysis This type of assessment is based on subjective judgment. It covers quality of management, references from suppliers, banks and other reports prepar ed by special credit bureaus. On the basis of all these things analysis will be drawn under qualitative analysis. CREDIT TERMS Other important decision in receivables management is related to terms of credit . The stipulations under which goods are sold on credit are referred as credit t erms. These are relates to the repayment of the amount under the credit sale. Cr edit terms have three components: Credit Period Cash Discount Cash Discount Peri od Page 79 of 94

Credit Period It is the duration of time for which trade credit is extended duri ng this period the overdue amount must be paid by the customer. Cash Discount Th is is the amount for which the customer can take advantage of by making early pa yment. Sometimes company offer its customer a condition that if they will pay am ount early than the scheduled the time than they will get some discount. This is called cash discount. Cash discount provided by the company can affect the sale s volume, average collection period and profits of the company. Cash Discount Pe riod It refers as duration during which the cash discount can be availed of. It is directly related to sales generally. For instance, if company increases its c ash discount period than its average collection period will also increase. With the increase in average collection period sales level is also increases. CREDIT POLICIES Collection policies refer to the procedures followed to collect the account rece ivables when, after the expiry of the credit period they become due. It includes two aspects: (i) Degree of collection efforts and (ii) Type of collection effor ts. Degree of Collection efforts Page 80 of 94

It refers what degree of efforts; company is using to collect its receivables. I f company use strict efforts than bad debts costs will decline, and average coll ection period will also reduce. But cost involved in this kind of strategy is co mparatively high. Also sales volume can be decline with this policy. On the othe r hand, lenient efforts are just opposite to strict efforts. So company has to d ecide that method in which overall cost is low and revenue is high. Type of coll ection efforts The methods available are Telephone calls for personal contacts L etters including reminders Personal Visits Help of Collection agencies Legal Act ion CREDIT POLICY OF RANBAXY As we know that a manufacturing company is frequently deals with debtors and mos t of its sales are credit sales. A huge amount of capital is blocked in to recei vables. Therefore to make an effective credit policy is very important for the c ompany. Ranbaxy is, like many other companies, involves in both kinds of sales i .e. domestic as well as exports. It have different credit policies for both dome stic and export customers. For domestic customers: Most of the domestic sales of Ranbaxy are based on advance payment. Some part of contract money is received i n advance and then sale is made. Remaining amount is received later on. Generall y, the credit period allowed by Ranbaxy is up to 45 days but sometimes it went u p to 60 days also (only via prior approval of management). Page 81 of 94

Company also doesnt plan for any bad debts losses, but if any bad debt happen tha n it has to be written off fully. For obtaining information related to the new a pplicants only internal sources are used. As company generally deals with blue c hip companies or old customers, it is not a difficult job to obtain information about them. No external source is used by Ranbaxy. And for the analysis part, co mpany use both qualitative and quantitative tools. As per qualitative tool, comp any generally go for market reputation and past record of customer and for quant itative tool, company use the size of order, financial position of customer etc. As far as collection efforts are concerned, company generally uses lenient effo rts. But in some cases company also go for strict methods. Ranbaxy normally uses all types of collection efforts like letters including reminders, telephone cal ls, personal visits & legal actions. But company doesnt take help of collection a gencies. The collection cost is very nominal in domestic sales and difficult to determine. Whereas capital cost is equal to the cost of working capital which is not determined because of confidentiality. For Export Sales: From the sale data of Ranbaxy it was found that around 66% of sales are based on exports. Therefor e it is very important area for planning. Exports are based on letter of credit. A foreign company who want to purchase the material from Ranbaxy sent an LC fir st. Than on the basis of that LC, export order is made. Copy of that order is se nt to corporate office and head office at Gurgaon and New Delhi respectively.. F rom the manufacturing plants, the material is dispatched as per the export order and LC is sent to bank for collection. Banks collects the amount and transfers it to Ranbaxys account. No other credit policy is present for export sale of Ranb axy. Collection cost is around 0.5 1 % of export order. Capital cost is here als o equal to the working capital cost. CASH MANAGEMENT Cash flows in a cycle into, around and out of a business. It is the business s l ifeblood and every manager s primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then i t should, in theory, generate cash surpluses. If it doesn t generate surpluses, the business will eventually run out of cash and expire. The faster a business e xpands the more cash it will need for working capital and investment. The cheape st and best sources of cash exist as working capital right within business. The goal is to receive cash as soon as possible while at the same time waiting to pa y out cash as long as possible. Even profitable companies fail if they have inad equate cash flow. Liabilities are settled with cash not profits. Here a firm alr eady is holding the cash so the goal Page 82 of 94

is to maximize the benefits from holding it and wait to pay out the cash being h eld until the last possible moment. The primary objective of working capital man agement is to ensure that sufficient cash is available to: Meet day-to-day cash flow needs; Pay wages and salaries when they fall due; Pay creditors to ensure c ontinued supplies of goods and services; Pay government taxation and providers o f capital dividends; Ensure the long-term survival of the business entity. Cash is both the balancing figures between debtors, stock and creditors, and als o the control element. It is not possible to extend credit, order stock or pay c reditors if there is not the cash available to meet working capital demands. Her e the liquidity, risk and return of investments must all come into play with the length of time before funds are needed playing an important role. More fundamen tal than this is cash flow control making sure funds are available when needed. In the short term this is best achieved by preparation of weekly or monthly fore casts for comparison with actual results. Reason for firms holding Cash: The fin ance profession recognizes the three primary reasons offered by economist John M aynard Keynes to explain why firms hold cash. The three reasons are for the purp ose of speculation, for the purpose of precaution, and for the purpose of making transactions. All three of these reasons stem from the need for companies to po ssess liquidity. Speculation: Here company holding cash as creating the ability for a firm to take advantage of special opportunities that if acted upon quickly will favor the firm. An example of this would be purchasing extra inventory at a discount that is greater than the carrying costs of holding the inventory. Precaution: Holding cash as a precaution serves as an emergency fund for a firm. If expected cash inflows are not received as expected cash held on a precaution ary basis could be used to satisfy shortterm obligations that the cash inflow ma y have been bench marked for. Transaction: Firms hold cash in order to satisfy t he cash inflow and cash outflow needs that they have. The firm needs cash primar ily to make payments for purchases, wages and salaries, other operating expenses , taxes, dividends, etc. The need to hold cash would not arise if there were per fect synchronization between cash receipts and cash payments. Page 83 of 94

Cash Planning Cash planning is a technique to plan and control the use of cash. It helps to anticipate the future cash flows and needs of the firm and reduces t he possibility of idle cash balances and cash deficits. Cash planning protects t he financial condition of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given period. Cash plann ing may be done on daily, weekly or monthly basis. The period and frequency of t he planning generally depends upon the size and nature of business of company. T ypes of cash planning: Short term cash planning Long term cash planning SHORT TERM CASH PLANNING Definition and functions It is comparative easy to make short term cash forecast s. It helps in determining the cash requirements for a predetermined period to r un a business. If the cash requirements are not determined, it would not be poss ible for management to know how much cash balance is to be kept in hand, to what extent bank financing be dependent upon and whether surplus funds would be avai lable to invest in marketable securities. The important functions of short term cash planning are: To determine operating cash requirements To anticipate short t erm financing To manage investment of surplus cash Page 84 of 94

Methods The receipts and disbursement method The adjusted net income method The receipts and disbursement method:This method is generally employed to foreca st for limited periods, such as a week or month. Cash flows in and out in most c ompanies on a continuous basis. The prime aim of this method is to summarize the se flows during a predetermined period. Three broad sources of cash inflows can be identified as (i) operating, (ii) non-operating (iii) Financial. Cash sales a nd cash received from debtors come under operating cash flows. Non operating inc ome includes sale of fixed assets, dividends & interest income. Issue of shares & loans etc. considered as financial inflows. The next step is to determine cash outflows. Cash outflows include: (i) Operating outflows: cash purchase, payment s of payables, advances to suppliers, wages & salaries etc. (ii) Capital expendi ture, (iii) Contractual payments: repayment of loan, interest & tax payments etc . (iv) Discretionary payments: ordinary and preference dividend. Cash Management in Ranbaxy: Cash management system adopted by Finance Department in Ranbaxy is very reliable and transparent. As cash is a very important activi ty for a good operation of company here in RLL cash is monitored every day and i ntimated to Finance Department. The daily cash report includes the all details o f cash inflows and outflows. Monthly cash budgets are maintained for the estimat ed of monthly cash inflows and outflows. Finally the annual cash budget is made by the Finance Department in the corporate head office. The corporate office all ocates different amount of each to different manufacturing units as per their re quirement. Corporate office acts as a linkage between the manufacturing unit and creditors. Corporate office has determined the credit facility for every units of the company and this keeps on changing from year to year depending up on comp anys position transactions, profitability and inventory position. The corporate o ffice provides cash to manufacturing units but there most function is controlled in unit itself. All the need related to inventory is met through corporate offi ce as well as individual efforts of unit. Page 85 of 94

Fund Allocation: Here the initial allocation for manufacturing units is done by corporate office and all supplementary requirements are to look upon by Commerci al department. Fund Utilization: Company operates an annual Cash Budget and a roll ing Cash Plan drawn up every month. Although specific forecasting technique is use d, funds are deployed to different departments as per their requirements. Daily reports on cash transaction are prepared by Procurement department to keep a tra ck of all payments made in the days work. Every month cash transaction report is sent to Finance department in the corporate office showing all the transaction of cash, (inflow and outflows) actual utilization of cash and allocation of fund is compared. If the utilization of cash is more than the allocation of fund, th en the plant has to justify its more utilization. To meet the requirement of cas h company approach to bank and present the required detailed by the bank. RLL ke pt less cash in hand to meet the entire cash requirement it depends on financing process. LIMITATIONS Availability of the financial data was very limited which is not disclosed due t o sensitive nature for the company. The year ended for Ranbaxy is December, and that of Dr Reddys is March. So figures taken are past 4 years but 3 months diffe rence is there in the corresponding figures of RLL & DRL. The main component of working capital is cost of capital, which is not described in the project becaus e of confidential nature. Page 86 of 94

 External environment influence was not considered while doing the theoretical st andard rather than the industrial standard because of unavailability of any such specific standard. Lack of availability of plant related data to finance depart ment which acted as a limitation for the project. Efficiency falls to a great extent due the technical errors in the system. These errors refer to the following: The SAP server goes low due to the exhaustive load on a single server. There is lack of machines at disposal because of which the speed of work goes down. The hardwar e provided to the staff is not up to the mark which adversely affects the effici ency to a great extent. SUMMARY OF FINDINGS There is a huge investment in working capital at Ranbaxy Laboratories Limited, a s it has a large production cycles. The company follows a steady production poli cy and hence there are no seasonal variations. Aggressive policy of more profita bility, more risk is followed, which is an ideal situation as far as the strateg y for working capital financing is concerned. Ranbaxy has a good earning record; thus it enjoys great confidence of the suppliers, as it is looked upon favorabl y. As far as components of working capital are concerned, on the domestic front, sales have increased as well as the finished goods inventory has also increased . Page 87 of 94

 The increase in the current ratio of 2001 as compared to that of the previous ye ar indicates that the liquidity position of the company is improving. The invent ory turnover ratio of the company is not very high. It should try to achieve a q uicker movement of stock into sales. There is an inverse relationship between sa les and working capital at Ranbaxy Laboratories Limited. WORKING CAPITAL TURNOVER RATIO In general higher the ratio, more efficient is th e management. Since Ranbaxy Laboratories Limited has a low working capital ratio , it should look carefully into this area to ensure its effective utilization. DEBTORS TURNOVER RATIO After analysis of the debtors turnover ratio, it was foun d out that Ranbaxy Laboratories Limited has a low debtors turnover ratio, which may be a result of a liberal and inefficient credit and collection policy. This involves the risk of bad debts and the burden of high interests. This is another area that should be looked into. INVENTORY TURNOVER RATIO After analysis of this ratio, we can conclude that Ranb axy Laboratories Limited is holding an unfavorable quantity of inventory. Since, the inventory turnover ratio is not very high, we can conclude that the managem ent of inventory is not very efficient because the stocks are not sold very freq uently, as a result of which a large amount of money is required to finance the working capital requirement. QUICK RATIO Ranbaxy has a satisfactory liquidity position. CURRENT RATIO A curre nt ratio of 2:1 is considered to be a satisfactory. If the current ratio is 2 or more, it means that the company is adequately liquid and has the ability to mee t its current obligations. A lower current ratio indicates that the company may be trading beyond its capacity. Ranbaxy Laboratories Limited has a satisfactoril y high current ratio but at same time it may mean that the company has idle cash which when invested can yield returns to the company. RELATIONSHIP BETWEEN SALES AND GROSS WORKING CAPITAL There exists a negative cor relation between the two, which indicates that the sales are low and this has le d to an accumulation of stock. RELATIONSHIP BETWEEN SALES AND NET WORKING CAPITAL Sales and net working capital have a negative correlation, which implies that there is an inverse relationshi p between sales and net working capital. It shows that the sales are low and thi s has led to an accumulation of stock. Page 88 of 94

 Profitability ratios of Ranbaxy are low as compared to industry ratios it means that company is investing a lot in its operations to compete with its competitor s and is expecting to reap profits in its coming years. The return ratios are no t showing an increasing trend which is not a good sign for the companys growth. B ut return of working capital is increasing which means that company is doing mor e sales with less working capital. Gearing ratio is low which shows that it is l ess levered firm, which is a good sign for company and moreover its liquidity po sition is very strong. The overall liquidity position is very strong. The compan ys current ratio is approx. 3.5 from last many years which mean that company can manage any sort of financial contingencies. The correlation shows the impact of various components of Working Capital on Profitability of the company. So, that company can take care of main components. Ranbaxys Raw Material holding period is decreasing due to which its Raw Material turnover is increasing, which is a pos itive sign. As far as Receivables are concerned co.s credit policy varies from pa rty to party and according to the nature of the business & one can say that this policy is good for a pharma company. Most of the domestic sales of Ranbaxy are based on advance payment. Some part of contract money is received in advance and then sale is made Ranbaxys total exports accounts for 66% & the balance 33% repr esent sales in India. The Inventory Holding Period (IHP) is almost constant due to this their Net Working Capital cycle is also not showing a significant change . Average collection period is also increasing which needs to be shortened RECOMMENDATIONS AND SUGGESTIONS Pertaining to Working Capital Management: Management of the company would be interested in every aspect of the financial a nalysis. It is their overall responsibility to see that the firms resources are m ost effectively and efficiently utilized to ensure a sound financial position of the company. The financial policy of working capital management policy of the c ompany has to be revised. The firm follows an aggressive policy as far as workin g capital management Page 89 of 94

is concerned. According to this policy, Risk and Profitability should be increas ed and the liquidity should be reduced. Though the company has increased risk an d reduced liquidity, the profitability has not increased. This is an area into w hich the management needs to look. Future forecasts of cash should also be made effectively in order to meet unexpected requirements. As far as the inventory po sition is concerned, the company doesnt have a sound position. Better the quality , lesser would be the work-in-process. The rejected stock has to go through furt her modifications until the quality department approves it. This therefore remai ns as work-in-process and increases the value of the work-in-process. Speeding u p the quality checks can reduce the holding time of finished goods. Efforts shou ld be made to keep the norms up to date. Thus a quarterly review is suggested. N orms should be as realistic as possible as to give a correct estimate of the inv entory levels. The firm should make consistent efforts to increase its earnings in order to move towards the path of growth. It is suggested that the firm shoul d neither have too high nor too low debtor turnover ratio. There is an increase in the current ratio suggesting that there may be idle funds with the company. I t is therefore recommended that the company should invest the excess cash in mar ketable securities. This would be more profitable than holding idle cash. It may also be mentioned that there is no rule of thumb or standard ratio. The norms m ay be different depending upon the nature of the industry and business condition . Ranbaxy should focus on maintaining its consistency or increasing it as there is a decline in their Operating Profit from last 3 years. It can be done by incr easing its sales and decreasing its operating costs. If companys operating profit will increase, then it will help in increasing its overall profitability. Compa nys return ratios also need a check. Turnover ratios are decreasing but not up to that extent. Dr.Reddys, its nearest competitor have better turnover ratios whic h mean that Ranbaxy has scope to lower down its assets to maintain the same leve l of sales or increase its sales on the same level of assets. As it was clear th at company have high liquidity in its capital structure, it means a close observ ation is required for the benefits of share holders. It should chanalize its inv estments towards those areas where returns would be higher. The company should t ry to reduce its inventory holding to lower down the holding cost & increase its Raw Material Turnover. It can also help in lower down the operating cycle. The company should also try to reduce its Average collection period to It can also h elp in lower down the operating cycle. Company can make some improvements in the ir credit policy. Currently they take advance before delivering the consignment. They can increase the credit period as Page 90 of 94

well, currently it is 45 to 120 days depending upon different parties and their creditworthiness. As far as the cash management is concerned, its difficult to su ggest anything because I believe that companys cash planning is very good. All th e time company looks for new investment opportunities in the market on a reasona ble rate of return. The reduction in inventory holding period can be done by mor e outsource manufacturing. As companys international sales are high (66%) and com pany should focus the domestic markets as well, as demand for healthcare product s is increasing in Indian market. Also it is their social responsibility to prov ide maximum benefits to its domestic customers. Pertaining to Work Culture and Working Conditions: Besides improving the working efficiency of the employees, it is important that the morale of the employees at work should be kept up through the following meth ods: They could be provided with rigorous training periodically so that they can be well versed with the technology rather than confining their knowledge to the ir domain only. They could be provided with regular incentives both monetary and nonmonetary so that they have a positive attitude towards their work. On the co ntrary, this negative attitude becomes a bottleneck for the employees and the sw iftness of the system as a whole. Employees are required to give output rather than putting in time at their workp lace. Measures should be adopted to measure their performance rather than measur ing their work hours. They can be given deadlines both for a work and the time. For this, timings could be made flexible. It is the inter-dependency of the employees which makes their working rigid and lowers their efficiency. This could be removed or at least minimized by regular training and improving the working conditions for the staff. Page 91 of 94

Pertaining to Technology: The following changes need to be inculcated in the provision of technology to th e employees: The machines provided to the employees are not up to the mark. Ther e is no uniformity in the speed and compatibility of systems. The systems should be regularly upgraded. This would have an impact on the working efficiency of t he employees. The number of machines on the floor at accounts department needs t o be increased because the existing systems are not able to do the needful. The SAP system is over-loaded due to exhaustive usage. This needs to be corrected by taking the required measures. It can be rectified by changing or adding a serve r for supporting SAP in Ranbaxy.

REFERENCES Companys Internal Documents Annual Reports Journals of Ranbaxy Text Books & Lite ature ( I.M Pandey). Financial Management Kalyani publishers WebPages www.pharmaceutical-business-review.com http://www.ranbaxy.com Page 92 o f 94

 http://www.cipla.com http://www.google.com http://www.wikipedia.com http://www.d rreddy.com http://www.lupingroup.com http://www.sunpharma.com http://www.moneypo re.com www.bizstats.com www.reuters.com www.economictimes.com www.dereddys.com w ww.bloomsberg.com www.livemint.com www.studyfinance.com www.bized.com www.bpubs. com Page 93 of 94

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