GMITE-7
Industry : Pharma
Group- 6
Venkatakrishna
Adhikamsetty
Anuj
Magazine
Krishnamurthy
Manjunath Havaldar
Niranjan Tallapalli
Ravinder Goud Katta
Deepa
Pavankumar
Gunjan
Subramani
Raghavendra
Vidapankal
1. To determine the financial position and performance of the identified business
enterprises and to interpret the financial statements ( BS and P&L) of two
pharma companies.
2. Perform financial statement analysis from the management standpoint.
3. To observe and provide recommendations based on the analysis.
Economic Data
• India’s industry worth
$6b
• 13 % annual growth
rate
• Indian Pharma
industries contribute
world's forth-largest in
terms of volume.
• According to
PriceWaterhouseCoop
ers (PWC) in 2010,
India joined among
the league of top 10
global
pharmaceuticals
markets in terms of
sales by 2020 with
value reaching US$50
billion.
Pharma Industry Trend
Characteristics
• Heavily regulated
Industry (FDA –
USA )
• Generic Drugs in
India
• High rate of
innovation
(outside India)
• Frequent mergers
and acquisitions
Dr.Reddy’s
CIPLA
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1985 – Incorporated.
1985-90: Gained credibility and started exports
to Europe and Far East.
1991-99: Expansion and Innovation.
2000-12: Grown globally.
2012 revenue $2.1 billion
2012 Net income $300 million.
15000+ employees globally over 3 business
segments, Pharmaceutical Services & Active
Ingredients, Global Generics and Proprietary
Products.
1935 – Incorporated.
1939 supplied life saving drugs during WW-II.
1987-96: Innovation, introduced new drugs.
1997-2012: Expansion and Recognition.
2012 Revenue $1.27 billion
2012 Net income $204.39 million.
20000+ employees, spread over 170 countries.
CIPLA
Depreciation on fixed assets-Straight-line method
Dr Reddy’s
Depreciation on fixed assets Straight-line method
FINANCIAL POSITION
FINANCIAL POSITION
Reserves and surplus, substantial increase of 14.6% due to
Reserves and surplus has substantial growth of 24%
unrealized forex losses - foreign currency translation Reserve
(from 1.28CR to 16.47CR). Due to INR appreciation
Long term borrowings has significant growth of 206%.
Long term borrowing, significant reduction of 88% due to
repayment of term loan in 2011.
Short term barrowing has drastically reduced to 98% in
Long term loan taken by subsidiary from Citibank carrying interest
rate of LIBOR plus 145 bps and is repayable in eight equal quarterly
installments starting from Dec2014 and ending in Sep 2016.
Short term barrowings has reduced to 13% in 2012
2012
Current investment has increased to 321% in 2012 ( 223 CR
to 940.5CR). Additional Plant and machinery purchased in 2012
could help increase the production in 2013 onwards
FINANCIAL PERFORMANCE
REVENUES increased by 32% while expenses at 26%
57% of its revenue comes from international market.
FINANCIAL PERFORMANCE
REVENUES increased by 12% while expenses at 9%
EBITDA growth is recorded at 51%
EBITDA growth is recorded at 23%
Changed its policy on valuation of inventory from the first-in firstout(FIFO) method to the weighted average cost method. This
probably has helped the company to match revenue and expenses
EBIT growth is recorded at 25%
EBIT growth is recorded at 58%
Ratio
Indicates
Industry
standard
Dr Reddy
(2011-2012)
Cipla
(2011-2012)
Current Ratio
Ability of the firm to meet its short term debt
1.5
1.14 to 1.52
2.62 to 3.51
Average
Collection Period
number of days to convert the receivables into
cash.
135 days
88.39 to 82.8
85 to 77.94
Inventories Held
indicates improved operational efficiencies and
inventory management
160 days
395.87 to 363.88
291 to 290.87
Inventory T.O
If company is efficiently managing and selling its
inventory
6
4.53 to 4.85
3.32 to 3.79
Fixed Assets T.O
Firms investment in the fixed assets have grown.
1.83 to 2.29
1.87 to.1.96
Total Assets T.O
improved inventory and account receivable has
resulted in better total asset
0.81 to 0.83
0.74 to 0.75
Debt Ratio
Reduced business risk due to lower debt ratio
0.55 to 0.56
0.22 to 0.18
Debt Equity
Company’s financial risk against borrower money
2.2 to 2.27
1.29 to 1.22
Interest cover
Assured returns and increased confidence to the
lenders.
49 to 18
47 to 39
Return on Equity
Amount earned relative to level of investment in
total asset. Share holders will benefit .
Return on
Investment
Net income you earn based on how efficiently
you generate sales with your asset base.
Net Profit Margin
Management is doing a good job to control the
expenses
PE Ratio
investors are expecting higher earnings growth in
the future
1
40
16-18%
25 to 26%
13 to 17%
14.51 to 15%
14-16%
18-20%
16 to 19%
15 to 16%
18%
28 to 25
26 to 29
Would an investment generate
attractive returns for Dr.Reddy’s ?
• No, from the market ratios, the PE ratio has fallen down, in 2011 the
market was willing to pay 28 times the eps and in 2012 it came
down to 25. It means the growth of the company from investors
point of view is not very good.
• No, from long term solvency ratios, it is running high risk with debt
ratios above 0.5 and debt-equity ratios above 2, this company's
financial growth is more from the borrowers money, so its not
completely safe to invest over the long run. As a shareholder, if
these ratios are deteriorating, then their assets and equity are not
sufficient to fund the total liabilities.
• No, from short term solvency ratios, the current ratio is recorded <
1.5 (1.14 in 2011) and when this is correlated with the average
collection period (88 in 2011 to 83 in 2011), it shows that if the
trade receivables are delayed over the average collection period,
then the company has to liquidate its current assets against trade
payables. Dr. Reddy must reduce it short term borrowings and at the
same time it should be able to reduce its average collection period.
• NOTE: However from the annual report numbers, the company
claims, it looks like it has good trust in the market which is earning
good profits from the borrowed money and stock is upword.
What is the degree of risk inherent in the investment?
In 2011&2012, more than 50% (Debt Ratios) of company's assets are financed through debt. D-E ratios are also high which tells
us that the company is running high financial risk.
Should existing investment holdings be liquidated?
In 2011, the current ratio was very close to 1 (1.14), considering avg account receivables close to 3 months, it ran the CA to CL
neck to neck. Any more delay in TRs would make the company to sell off its assets against TPs. In 2012 it is good.
Would an investment generate
attractive returns for CIPLA ?
• Yes, from the market ratios, PE ratio is increased from 26 to 28
which shows the market is willing to pay even more over 2011.
• Yes, from the long term solvency ratios, debt ratios are around 0.2
and debt-equity is around 1.2, which shows that company's assets
and equities would be enough to fund shareholders money in case
of company bankrupt on the long run in the worst case, otherwise
would return good returns.
• Yes, from short term solvency ratios, current ratios are around 3,
which is very good for short term investors.
What is the degree of risk inherent in the investment?
Financial risk is low as they are financed for assets from debts only for 20%. Their D-E ratios are quite low which reflects less risk.
Should existing investment holdings be liquidated?
Not at all, it is running very good CRs. In fact it is wasting some investments, instead it can do some more investments and generate
more returns.
• Generally accepted accounting principles(GAAP) were adopted and practiced in both the firms
Dr.Reddy’s and Cipla.
• Rupees depreciated by more than 14% as compared to US dollar and this has helped
CIPLA and
Dr.Reddy to achieve significant profit from exports.
• Dr. Reddy's has EPS of 76.72 in 2012 whereas Cipla has EPS of only 14.25 and this is
•
indicated in the net income as well where Reddy has increased its net revenues by 32% YoY
whereas Cipla has managed to increase it by 12% YoY. However, market sentiment does not
seem to appreciate this as P/E ratio for Dr. Reddy's has come down from 26 to 22 and Cipla has
come down by 25 to 22. Clearly the total liabilities is weighing them down.
From the analysis we would not vote for both CIPLA and Dr Reddy's. CIPLA would need further
more analyzation based on their sudden shifts in reduction of liabilities and increase of
assets. Dr Reddy's is imposing financial risk on already existing business risk and
hence we cannot predict the long term financial stability of the company, it depends on several
external factors like economy of the country, industry competition, etc.