SUMMER INTERNSHIP PROJECT

REPORT

Under the guidance of

(Mr. Manoj Vyas)

Submitted for the partial completion of the degree of Master of Business

Administration

at

SubmittedBy:

Sunny

Chauhan

BGIET, SANGRUR 1

TABLE OF CONTENTS

Declaration

Certificate from the Organization

Certificate of Supervisor (Guide)

Acknowledgement

Executive Summary

Chapter- 1 Introduction Page No

1.1 To the topic

1.2 Overview of the Industry

1.3 Profile of the Organization

1.4 Need of the study

1.5 Objectives of the study

Chapter-2 Research Methodology

2.1 Statement of the Problem

2.2 Research Design

2.3 Sampling Techniques used

2.4 Selection of Sample Size

2.5 Data Collection

2.6 Statistical Tools Used

2.7 Limitations of the Study

Chapter-3 Data Analysis and interpretation

Chapter-4 Conclusion and Suggestions

Bibliography

BGIET, SANGRUR 2

DECLARATION

I, Sunny chauhan, a Student of MBA 2009-11 Batch, Bhai

Gurdas Institute of Engg. & Technology, hereby declare that the

project on “Working capital management in Dr.Reddy’s

laboratories ltd.” is my original work and that it has not

previously formed the basis for the award of any other Degree,

Diploma, Fellowship or other similar titles.

It has been done under the guidance of Mr.Manoj Vyas(external

guide).

(Signature)

NAME

Sunny Chauhan

BGIET, SANGRUR 3

CERTIFICATE OF APPROVAL

This is to certify that the project work entitled “Working Capital

Management in Dr. Reddy’s laboratories ltd.” is a bonafide

work carried out by Ms. / Mr. Sunny Chauhan in partial

fulfillment for the degree of Master Business Administration from

BGIET, Punjab Technical University, and Jalandhar. The project

report has been approved here with.

_______________

Designation (Internal guide)

BGIET, SANGRUR

BGIET, SANGRUR 4

ACKNOWLEDGEMENT

I feel immense pleasure to give the credit of my project work not only to one individual as this work is integrated effort of all those who concerned with it. I want to owe my thanks to all those individuals who guided me to move on the track.

This report entitled “ Working Capital Management.” is the

outcome of my summer training at “Dr. Reddy’s laboratories

ltd.., Baddi .

I would like to appreciate the pain staking effort of Mr. Manoj

vyas (finance Manager) for educating and guiding me at each and

every stage and providing me the information related to my chosen

topic. I am equally thankful to the whole team of Finance & IT

Department of Dr.Reddy’s Laboratories LTD., Baddi. who

extended their full co-operation and assistance. .

Last but not least, I owe my special regards to my parents and

my elders for their blessings and good wishes.

Sunny chauhan

BGIET, SANGRUR 5

PREFACE

A project work programme in industry is to get an overall view

and exposure of the industry and its working environment. It

enhances the confidence and boosts the morale of the students

who go for their project in the industry. These programmes are

included in the curriculum of studies for development of the

personality of the finance students and get a first hand experience

about the working of the industry.

This project helps the students to increase their job perspective.

Training can be done in industries, business-houses, sales and

income tax department of various central, state, local,

government societies etc.

BGIET, SANGRUR 6

EXECUTIVE SUMMERY

1 st chapter of the report contains introduction to Dr.Reddy’s, which

includes company profile showing the company status, ISO

certification etc., Historical background which shows how Dr.Reddy’s

comes into being?

It contains the brief information about the Dr.Reddy’s Baddi plant

like no. of employees, etc. Department overview, which shows how

various departments works for the company, Then comes Dr.Reddy’s

vision and mission which shows company’s dedication towards the

society and an overview about its financial and marketing implications.

2 nd chapter contains the Research Methodology, which includes

justification about the topic selected, the objective of the study, Unit

where the study is conducted, time period for which the study is

conducted. Scope of the study and sources of information (primary as

well as secondary). It also includes various limitations during the

course of the project.

3 rd chapter contains the introduction to topic Working Capital

Management this includes the information, as to what working capital

Management is all about, the aspects of working capital Management,

its importance, the objectives for working capital management and

scope, etc. and all this is well supported with the data of Dr.Reddy’s.

4 th chapter is about the analysis of the data which includes the

present scenario of working capital management in Dr.Reddy’s, Baddi,

the ways in which working capital could be utilized effectively.

5 th chapter of this report is about the findings and suggestions, the

various proposals that the company could apply for maintaining the

working capital and the suggestions for the improvement in it.

The last part of the report is that of Bibliography in which the various

books, web sites and articles consulted for the preparation of this report

are mentioned.

INTRODUCTION

COMPANY PROFILE:

Dr Reddy's Laboratories Ltd.

Type Public

Industry Pharmaceuticals

Founded 1984

Headquarters Hyderabad, Andhra Pradesh, India

Key peopleAnji Reddy, Chairman

GV Prasad, CEO

Revenue $1.5 billion (May 2007)

Net income $216 million (May 2007)

Employees 8,225

Website http://www.drreddys.com

INDUSTRY OVERVIEW :

Sector structure/Market size

India's pharmaceutical industry is now the third largest in the world in terms of volume and accounts for 10 per cent of the world’s production. According to the Mr Srikant Kumar Jena, Minister of State for Chemicals and Fertilisers, the Indianpharmaceutical industry is now over US$ 20 billion.India ranks fourteenth in terms of value. The country ranks fourth in terms of generic production and seventeenth in terms of export value of bulk actives and dosage forms, according to Mr Jena. By 2015, India is expected to rank among the top 10 globalpharmaceutical markets. The industry is typically growing at around 1.5-1.6 times the country’s gross domestic product (GDP) growth.Moreover, according to a FICCI-Ernst & Young study, the increasing populations of the higher-income group in the country will, by 2015, open a potential US$ 8 billion market formultinational companies selling costly drugs. Besides, the report said the domestic pharma market is likely to touch US$ 20 billion by 2015, making India a lucrative destination for clinical trials for global giants. The Indian pharmaceutical offshoring industry is slated to become a US$ 2.5 billion opportunity by 2012,

ExportsIndia's exports of drugs, pharmaceuticals and fine chemicals grew by 29 per cent in 2008-09 to US$ 8.25 billion compared to 2007-08. According to Mr Anand Sharma,Union Minister of Commerce and Industry, the Indian pharmaceutical sector has emerged as one of the major contributors to Indian exports with export earnings rising from a negligible amount in the early 1990s to US$ 6.08 billion by 2007-08.

A report by industry research firm, RNCOS, forecasts that pharmaceutical exports willgrow at a compound annual growth rate (CAGR) of 18.5 per cent between 2007-08 and 2011-12. This growth will be fuelled by

multi-billion dollar patent expirations and growth in the global generics market.

GrowthThe domestic pharma market will outshine the global market, growing at a compounded annual rate of 12-15 per cent as against a global average of 4-7 per cent during 2008-2013, according to a study by market research firm IMS.

According to detailed research by Angel Broking, socio-economic factors such as rising income levels, increasing affordability, gradual penetration of health insurance and the rise in chronic diseases would see the Indian formulation market touch US$ 13.7billion by 2013, at a CAGR of 12.2 per cent over the period from fiscal year 2008 to 2013 (estimated).

Denmark-based world leader in diabetes care, Novo Nordisk, is looking at making India the hub for manufacturing insulin for the sub-continent. The company has setup a dedicated facility with a capacity of 26 million vials per annum in partnership with Ahmedabad-based TorrentPharmaceuticals Ltd.

Rural MarketAccording to estimates, rural areas account for 21 per cent of the country's pharmaceuticals market. In 2006-07, the rural Indian pharmaceuticals market was estimated at around US$ 1.4 billion, having grown at about 40 per cent in 2006-07 against 21 per cent in the previous year. French company Aventis Pharma haslaunched a rural market division with 10 products and a sales team of 300 people as it eyes a bigger share of the fast growing Indian rural market.

Pharmaceutical Retail

The Indian drug retail market grew by a 29.24 per cent in value terms in October 2009 over the same period a year ago. This is more than double the average monthly revenue growth rate of 13-14 per cent posted in the recent past, as per market research firm ORG IMS.

GenericsAccording to a report by IMS Health, the Indian generic manufacturers will grow to more than US$ 70 billion as drugs worth approximately US$ 20 billion in annual sales faced patent expiry in 2008. With nearly US$ 80 billion worth of patentProtected drugs to go off patent by 2012, Indian genericmanufacturers are positioning themselves to offer generic versions of these drugs. Indian generic drug makers received half a dozen more approvals from the US Food and Drug Administration(FDA) in 2009, over the previous year. Dr Reddy's Laboratories received the highest number of tentative and final approvals in 2009 at 32, followed by Aurobindo at 26 and Wockhardt at 23.

Diagnostics Outsourcing/Clinical TrialsThe Indian diagnostics and pathology laboratory business is presently around US$ 864 million and is growing at a rate of 20 per cent annually, according to industry experts. Moreover, the US$ 200 million Indian clinical research outsourcing market isestimated to reach up to US$ 600 million by 2010, according to a joint study done by KPMG and the Confederation of Indian Industry (CII).

HISTORY -

Dr. Reddy's Laboratories is a 25-year old company catering  to the needs of the pharmaceutical sector. Dr Reddy's started its operation

in 1984 in the Actove Pharmaceutical Ingredients (API) segment, with a single drug in 60 tonne facility near Hyderabad. In 1986 its shipped its first consignment of Methyldopa drug to West Germany. It is among the top three API players in world .

INTRODUCTION -

Dr Reddy's, a global pharmaceutical company, has its headquarters located in India. It has a global presence in more than 100 countries, with subsidiaries in the US, UK, Russia, Germany and Brazil; joint ventures in China, South Africa and Australia; representative offices in 16 countries and third-party distribution set ups in 21 countries. It is first pharmaceutical company in Asia, outside Japan, to be listed on the NYSE. It is largest player in the custom pharmaceutical services (CPS ) business in India . Established in 1984, Dr. Reddy’s Laboratories pharmaceutical company committed to providing affordable and innovative medicines through its three core businesses: Global Generics, which includes branded and unbranded prescription and over-the-counter (OTC) drug products.Pharmaceutical Services and Active Ingredients (PSAI), comprising ActivePharmaceutical Ingredients and Custom Pharmaceutical Services.

Proprietary Products, comprising Generic Biopharmaceuticals, New ChemicalEntities (NCEs), Differentiated Formulations and a dermatology focused specialty company– Promius TM Pharma.The Company has a strong presence — in highly regulated markets such as the UnitedStates, the United Kingdom, Germany, as well

as in emerging markets including India,Russia, Venezuela, Romania and certain CIS countries

PRODUCT BRAND -

The pharma major has launched brands like Ciprolet, Nise, Enam, Stamlo, Omez, and Ketorol among others.

Businesses Pharma Services   and API business

Under this it offer over 100 molecules to customers across the world. APIs are its core strength, having a wide range of portfolio. It submits the largest number of US DMF from India. It entered into the custom pharmaceutical services (CPS) in 2001 .With acquisition of Roche’s API manufacturing unit Mexico in 2005, it got boost in the CPS business. It also acquired the small molecule business of Dow Pharma at its Mirfield and Cambridge sites, UK in 2008 , strengthening its CPS business.

Generics Medicines It also manufactures generic medicines with business spread across India, Russia, US and Germany. It is amongst the top ten players in India.

Proprietary Products Under this it includes NCE research, biologics business and differentiated formulations conducted in the US. Under this it has launched Grafeel(Filgrastim) and Reditux(Rituximab).

Milestones

It was ranked among top ten in ‘The Best Companies to Work for in India’ Survey conducted jointly by Business Today, Mercer Human Resource Consulting and TNS India. It received the Recruitment and Staffing Best in Class (RASBIC) Award for the ‘Best Use of Technology for Recruiting’ at the Asia Pacific HRM Congress. It received the Certificate of Merit for Innovative Training Practices among Indian organization by ISTD (Indian Society for Training and Development).

Outlook Dr Reddy’s Laboratories will use eco-friendly measures to manufacturing of drugs. It will focus on “green chemistry” to create the system of drug design and manufacture more environmental friendly. Dr Reddy’s Laboratories launched Imitrex (sumatriptan succinate) tablets in dosages of 25mg, 50mg, and 100mg in the US. It is the authorized generic version of GlaxoSmithKline’s Imitrex. It is first company to launch Imitrex  (generic version) in the US market.These tablets are for treatment of acute treatment of migraine in adults.

VISSION & MISSION OF COMPANY

Vission

To be an Institute of Academic Excellence known fortotal commitment to superiority in management andIT education and research with a holistic concern forquality of life, environment, society and ethics.

Mission

Our mission is to groom professionals of tomorrow by• Imparting high quality education in Management and Information Technology

• Developing intellectual capabilities through a challenging curriculum

• Providing training and development services• Fostering research

• Extending consultancy services to the industry

• Disseminating information through the publication of books, journals and magazines.

KEY PEOPLE:-

On March 31, 2006 board members and senior executives included.

Mr. Amit Patel - Vice President, Corporate Development & Strategic Planning

Dr. K Anji Reddy - Chairman Mr. GV Prasad - Vice Chairman & Chief Executive Mr. Satish Reddy - Managing director & COO Mr. B.Koteswar rao - Independent director Mr. Anupam Puri - Independent director Dr. Omkar Goswami - Independent director Mr. P N Devarajan - Independent director Mr. Ravi Bhoothalingam - Independent director Dr. V. Mohan - Independent director Dr. Rajinder Kumar - President, Research,

Development and Commercialization (joined on April 30, 2007)

Top-10 brands in India:

Omez Nise Stamlo Stamlo Beta Enam Atocor Razo Reclimet Clamp Mintop

PROJECT OBJECTIVES

1)To learn the effective management of working capital.

2)To study how to keep the capital that is tied up in the working capital cycle at a minimum and maximizing profit.

3)To study the different components of working capital and its impact on the performance of the firm.

4)To study how dr.reddy’s finances working capital requirements of the firms.

RESEARCH METHODOLOGY

Statement of the Problem:-

“To Study the method of working capital management and it’s financing for the dr.reddy’s laboratories with special reference to baddi Plant.”The pharma industry is going through a very critical phase, with prices of raw material rising, high demand both in domestic and international market, increasing pressure from the government and a production crunch.In such a situation, effective management of working capital is very essential for optimizing operating cost and to deal with such adverse situations efficiently. The project will be highlighting the various strategies and methods for managing of working capital and it’s financing.

Scope of the StudyA study on financial strategy of dr.reddy’s laboratories plant at baddi with the practical training on working capital management & it’s financing.

To find out the working capital management & it’s financing to Plant.

To gain familiarity with the components of working capital in dr.reddy’s plant.

To find how different components of working capital are managed atdr.reddy’s plant .

To come out with any solution for improvement in working Capital Management at baddi plant.

To know the practical practices.

Objectives of the Study

This study can help in following ways:

This study will help the new players to decide which method of working capital management and its financing they can adapt to fully utilize their resources, in the pharma industry.

The study will help the existing players to understand and implement an appropriate working capital management.

To find out the feasibility of the working capital management and financing method followed by dr.reddy’s laboratories at baddi Plant.This study will help players in the pharma industry to reduce costs incurred.The study will help in reducing the idleness of cash and provide efficient working capital through maintaining need based cash balance without distributing the liquidity needs of the business.

The study will also show the challenges that the steel industry will face and market share and growth rate they will have in the future.

Tools for Data Collection:-To have a proper understanding and defining the boundaries of research brainstorming was done within the team, discussion were held with experts in management fields, and a few relevant books and magazines were studied.I have prepared my project to collect both Primary data & Secondary data.

1. Primary DataThe data are taken from meetings and interviews with various managers and employees of finance department ofdr.reddy’s

laboratories at baddi. As per instruction of my external guide, I have visited to the following departments.

Main Cash Department Billing and Operation Department Cash & Budget Department Raw-Material Department Purchase Department Sales Department Project Management Department

2. Secondary DataThe other already available data were obtained from various sources namely.

Balance Sheet. Profit & Loss Account. Annual Report. Accounting Reports. Costs & Budgets Report. Cash Report. Creditors Report. Debtors Report. Raw Material Report. Stock Report. Production Report. Sales Report. Financial Report. Plant Account Books.

DURATIONWe have the time constraint of 45 days.

Contact Method :- Interview

Limitations1. Dr.reddy’s laboratories at baddi is a huge pharma plant so

that in 4 weeks it is not possible to study deeply.

2. Components of inventories are huge in number and are materials wise, so, it is not again possible to study deep into each of those inventories.

3. In some cases actual figure is not available.

4. Due to financial year ending, the concerns officers were not available at the time when needed.

WORKING CAPITAL

Meaning of Working Capital

Capital required for a business can be classified under two

main categories via,

1)     Fixed Capital

2)     Working Capital

       

Every business needs funds for two purposes for its establishment

and to carry out its day- to-day operations. Long terms funds are

required to create production facilities through purchase of fixed

assets such as p&m, land, building, furniture, etc. Investments

in these assets represent that part of firm’s capital which is

blocked on permanent or fixed basis and is called fixed capital.

Funds are also needed for short-term purposes for the purchase of

raw material, payment of wages and other day – to- day expenses

etc.

These funds are known as working capital. In simple

words, working capital refers to that part of the firm’s capital

which is required for financing short- term or current assets such as

cash, marketable securities, debtors & inventories. Funds, thus,

invested in current assts keep revolving fast and are being

constantly converted in to cash and this cash flows out again in

exchange for other current assets. Hence, it is also known as

revolving or circulating capital or short term capital .

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1.     Gross working capital

2.     Net working capital

The gross working capital is the capital invested in the total

current assets of the enterprises current assets are those

Assets which can convert in to cash within a short period

normally one accounting year.

CONSTITUENTS OF CURRENT ASSETS

1)     Cash in hand and cash at bank

2)     Bills receivables

3)     Sundry debtors

4)     Short term loans and advances.

5)     Inventories of stock as:

a.      Raw material

b.     Work in process

c.     Stores and spares

d.     Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

 

In a narrow sense, the term working capital refers to the net

working. Net working capital is the excess of current

assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS –

CURRENT LIABILITIES.

Net working capital can be positive or negative. When the

current assets exceeds the current liabilities are more than

the current assets. Current liabilities are those liabilities,

which are intended to be paid in the ordinary course of

business within a short period of normally one accounting

year out of the current assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1.     Accrued or outstanding expenses.

2.     Short term loans, advances and deposits.

3.     Dividends payable.

4.     Bank overdraft.

5.     Provision for taxation, if it does not amt. to app. Of profit.

6.     Bills payable. 7.     Sundry creditors.

The gross working capital concept is financial or going

concern concept whereas net working capital is an accounting

concept of working capital. Both the concepts have their own

merits.

The gross concept is sometimes preferred to the concept of

working capital for the following reasons:

1.     It enables the enterprise to provide correct amount of

working capital at correct time.

2.     Every management is more interested in total current assets

with which it has to operate then the source from where it is

made available.

3.     It take into consideration of the fact every increase in the

funds of the enterprise would increase its working capital.

4.     This concept is also useful in determining the rate of return

on investments in working capital. The net working capital

concept, however, is also important for following reasons:

OBJECTIVES OF WORKING CAPITAL

Every business needs some amount of working capital. It is

needed for following purpose:

• For the purchase of raw materials, components and spares.

•To pay wages and salaries.

• To incur day to day expenses and overhead costs such as fuel,

power, and office expenses etc.

• To provide credit facilities to customers .

SOURCES OF WORKING CAPITALThe working capital requirements should be met both from short

term as well as long term sources of funds.

1.Financing of working capital through short term sources of funds

has the benefits of lower cost and establishing close relationship

withbanks.

2. Financing of working capital through long term sources provides

the benefits of reduces risk and increases liquidity.

WORKING CAPITAL CYCLE

OPERATING CYCLE APPROACH: -

According to this approach, the requirements of working capital depend upon the operating cycle of the business.

The operating cycle begins with the acquisition of raw materials and ends with the collection of receivables

It may be broadly classified into the following four stages viz.

1. Raw materials and stores storage stage.2. Work-in-progress stage.3. Finished goods inventory stage.4. Receivables collection stage.

The duration of the operating cycle for the purpose of estimating working capital requirements is equivalent to the sum of the durations of each of these stages less the credit period allowed by the suppliers of the firm.

Symbolically the duration of the working capital cycle can be put as follows: -

O=R+W+F+D-C

Where,

O=Duration of operating cycle;

R=Raw materials and stores storage period;

W=Work-in-progress period;

F=Finished stock storage period;

D=Debtors collection period;

C=Creditors payment period.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o       On the basis of concept.

o        On the basis of time.

On the basis of concept working capital can be classified as

gross working capital and net working capital. On the basis

of time, working capital may be classified as:

     Permanent or fixed working capital.

     Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is

required to ensure effective utilization of fixed facilities and for

maintaining the circulation of current assets. Every firm has to

maintain a minimum level of raw material, work- in-process,

finished goods and cash balance. This minimum level of current

assets is called permanent or fixed working capital as this part of

working is permanently blocked in current assets. As the business

grow the requirements of working capital also increases due to

increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working

capital which is required to meet the seasonal demands and some

special exigencies. Variable working capital can further be

classified as seasonal working capital and special working capital.

The capital required to meet the seasonal need of the enterprise is

called seasonal working capital. Special working capital is that part

of working capital which is required to meet special exigencies

such as launching of extensive marketing for conducting research,

etc.

Temporary working capital differs from permanent working capital

in the sense that is required for short periods and cannot be

permanently employed gainfully in the business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE

WORKING CAPITAL

    SOLVENCY OF THE BUSINESS: Adequate working

capital helps in maintaining the solvency of the business by

providing uninterrupted of production.

     Goodwill: Sufficient amount of working capital enables a

firm to make prompt payments and makes and maintain the

goodwill.

     Easy loans: Adequate working capital leads to high

solvency and credit standing can arrange loans from banks

and other on easy and favorable terms.

     Cash Discounts: Adequate working capital also enables a

concern to avail cash discounts on the purchases and hence

reduces cost.

     Regular Supply of Raw Material: Sufficient working

capital ensures regular supply of raw material and continuous

production.

     Regular Payment Of Salaries, Wages And Other Day TO

Day Commitments: It leads to the satisfaction of the

employees and raises the morale of its employees, increases

their efficiency, reduces wastage and costs and enhances

production and profits.

     Exploitation Of Favorable Market     Conditions.

     Ability To Face Crises.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of

working capital to run its business operations. It should have

neither redundant or excess working capital nor inadequate nor

shortages of working capital. Both excess as well as short

working capital positions are bad for any business. However, it

is the inadequate working capital which is more dangerous from

the point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE

WORKING CAPITAL

1.     Excessive working capital means ideal funds which earn

no profit for the firm and business cannot earn the required

rate of return on its investments.

2.     Redundant working capital leads to unnecessary

purchasing and accumulation of inventories.

3.     Excessive working capital implies excessive debtors and

defective credit policy which causes higher incidence of

bad debts.

4.     It may reduce the overall efficiency of the business.

DISADVANTAGES OF INADEQUATE WORKING

CAPITAL:

Every business needs some amounts of working capital. The need

for working capital arises due to the time gap between production

and realization of cash from sales. There is an operating cycle

involved in sales and realization of cash. There are time gaps in

purchase of raw material and production; production and sales; and

realization of cash.

Thus working capital is needed for the following purposes:

       For the purpose of raw material, components and spares.

       To pay wages and salaries.

       To incur day-to-day expenses and overload costs such as

office expenses.

       To meet the selling costs as packing, advertising, etc.

       To provide credit facilities to the customer.

       To maintain the inventories of the raw material, work-in-

progress, stores and spares and finished stock.

FACTORS DETERMINING THE WORKING

CAPITAL REQUIREMENTS

1.  NATURE OF BUSINESS: The requirements of working

is very limited in public utility undertakings such as

electricity, water supply and railways because they offer

cash sale only and supply services not products, and no

funds are tied up in inventories and receivables.

2.  SIZE OF THE BUSINESS: Greater the size of the

business, greater is the requirement of working capital.

3.  PRODUCTION POLICY: If the policy is to keep

production steady by accumulating inventories it will

require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the

manufacturing time the raw material and other supplies

have to be carried for a longer in the process with

progressive increment of labor and service costs before the

final product is obtained. So working capital is directly

proportional to the length of the manufacturing process.

6.  WORKING CAPITAL CYCLE: The speed with which

the working cycle completes one cycle determines the

requirements of working capital. Longer the cycle larger is

the requirement of working capital.

 7. RATE OF STOCK TURNOVER: There is an inverse

co-relationship between the question of working capital and

the velocity or speed with which the sales are affected. A

firm having a high rate of stock turnover wuill needs lower

amt. of working capital as compared to a firm having a low

rate of turnover.

8.     CREDIT POLICY: A concern that purchases its

requirements on credit and sales its product / services on

cash requires lesser amt. of working capital and vice-

versa.

9.     BUSINESS CYCLE: In period of boom, when the

business is prosperous, there is need for larger amt. of

working capital due to rise in sales, rise in prices,

optimistic expansion of business, etc. On the contrary in

time of depression, the business contracts, sales decline,

difficulties are faced in collection from debtor and the firm

may have a large amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing

concern, we shall require large amt. of working capital.

.

MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the

problem that arises in attempting to manage the current

assets, current liabilities. The basic goal of working capital

management is to manage the current assets and current

liabilities of a firm in such a way that a satisfactory level of

working capital is maintained, i.e. it is neither adequate nor

excessive as both the situations are bad for any firm. There

should be no shortage of funds and also no working capital

should be ideal. ‘ WORKING CAPITAL MANAGEMENT

POLICES’ of a firm has a great on its probability, liquidity

and structural health of the organization. So working capital

management is three dimensional in nature as

1.     It concerned with the formulation of policies with regard

to profitability, liquidity and risk.

2.     It is concerned with the decision about the composition

and level of current assets.

3.     It is concerned with the decision about the composition

and level of current liabilities.

 

  WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre

of a business. Adequate amount of working capital is very

much essential for the smooth running of the business. And

the most important part is the efficient management of

working capital in right time. The liquidity position of the

firm is totally effected by the management of working

capital. So, a study of changes in the uses and sources of

working capital is necessary to evaluate the efficiency with

which the working capital is employed in a business. This

involves the need of working capital analysis.

The analysis of working capital can be conducted through a

number of devices, such as:

1.     Ratio analysis.

2.     Fund flow analysis .

3.     Budgeting .

 

1.    RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to

another. The technique of ratio analysis can be employed for

measuring short-term liquidity or working capital position of

a firm. The following ratios can be calculated for these

purposes:

1. Current ratio.

2. Quick ratio

3.  Absolute liquid ratio

4.  Inventory turnover.

5.  Receivables turnover.

6.  Payable turnover ratio.

7.  Working capital turnover ratio.

8.  Working capital leverage

9.  Ratio of current liabilities to tangible net worth.

 

2.    FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the

study the source from which additional funds were derived

and the use to which these sources were put. The fund flow

analysis consists of:

 

a.      Preparing schedule of changes of working capital

b.     Statement of sources and application of funds.

It is an effective management tool to study the changes in

financial position (working capital) business enterprise

between beginning and ending of the financial dates.

 

3.    WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of

business plans and polices to be pursued in the future period

time. Working capital budget as a part of the total budge ting

process of a business is prepared estimating future long term

and short term working capital needs and sources to finance

them, and then comparing the budgeted figures with actual

performance for calculating the variances, if any, so that

corrective actions may be taken in future. He objective

working capital budget is to ensure availability of funds as

and needed, and to ensure effective utilization of these

resources. The successful implementation of working capital

budget involves the preparing of separate budget for each

element of working capital, such as, cash, inventories and

receivables etc.  

 

ANALYSIS OF SHORT – TERM FINANCIAL

POSITION OR TEST OF LIQUIDITY

The short –term creditors of a company such as suppliers of

goods of credit and commercial banks short-term loans are

primarily interested to know the ability of a firm to meet its

obligations in time. The short term obligations of a firm can

be met in time only when it is having sufficient liquid

assets. So to with the confidence of investors, creditors, the

smooth functioning of the firm and the efficient use of fixed

assets the liquid position of the firm must be strong. But a

very high degree of liquidity of the firm being tied – up in

current assets. Therefore, it is important proper balance in

regard to the liquidity of the firm. Two types of ratios can

be calculated for measuring short-term financial position or

short-term solvency position of the firm.

1.     Liquidity ratios.

2.     Current assets movements ‘ratios.

 

A)   LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current

obligations as and when these become due. The short-term

obligations are met by realizing amounts from current,

floating or circulating assts. The current assets should either

be liquid or near about liquidity. These should be

convertible in cash for paying obligations of short-term

nature. The sufficiency or insufficiency of current assets

should be assessed by comparing them with short-term

liabilities. If current assets can pay off the current liabilities

then the liquidity position is satisfactory. On the other hand,

if the current liabilities cannot be met out of the current

assets then the liquidity position is bad. To measure the

liquidity of a firm, the following ratios can be calculated:

1.     CURRENT RATIO

2.     QUICK RATIO

3.     ABSOLUTE LIQUID RATIO

 

1.   CURRENT RATIO

Current Ratio, also known as working capital ratio is a

measure of general liquidity and its most widely used to

make the analysis of short-term financial position or

liquidity of a firm. It is defined as the relation between

current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS 

                                  CURRENT LIABILITES

The two components of this ratio are:

1)     CURRENT ASSETS

2)     CURRENT LIABILITES

Current assets include cash, marketable securities, bill

receivables, sundry debtors, inventories and work-in-

progresses. Current liabilities include outstanding expenses,

bill payable, dividend payable etc.

A relatively high current ratio is an indication that the firm

is liquid and has the ability to pay its current obligations in

time. On the hand a low current ratio represents that the

liquidity position of the firm is not good and the firm shall

not be able to pay its current liabilities in time. A ratio equal

or near to the rule of thumb of 2:1 i.e. current assets

double the current liabilities is considered to be

satisfactory.

 

CALCULATION OF CURRENT RATIO

                                                                 (Rupees in crores)

Example=

Year 2006 2007 2008

Current Assets 81.29 83.12 13,6.57

Current

Liabilities

27.42 20.58 33.48

Current Ratio 2.96:1 4.03:1 4.08:1

Interpretation:-

As we know that ideal current ratio for any firm is 2:1. If

we see the current ratio of the company for last three years

it has increased from 2006 to 2008. The current ratio of

company is more than the ideal ratio. This depicts that

company’s liquidity position is sound. Its current assets are

more than its current liabilities.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current

ratio. Quick ratio may be defined as the relationship

between quick/liquid assets and current or liquid liabilities.

An asset is said to be liquid if it can be converted into cash

with a short period without loss of value. It measures the

firms’ capacity to pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS

                               CURRENT LIABILITES

Where Quick Assets are:

1)           Marketable Securities

2)           Cash in hand and Cash at bank.

3)           Debtors.

A high ratio is an indication that the firm is liquid and has

the ability to meet its current liabilities in time and on the

other hand a low quick ratio represents that the firms’

liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It

is generally thought that if quick assets are equal to the

current liabilities then the concern may be able to meet its

short-term obligations. However, a firm having high quick

ratio may not have a satisfactory liquidity position if it has

slow paying debtors. On the other hand, a firm having a low

liquidity position if it has fast moving inventories.

CALCULATION OF QUICK RATIO

(e.g.)                                                      (Rupees in Crore)

Year 2006 2007 2008

Quick Assets 44.14 47.43 61.55

Current Liabilities 27.42 20.58 33.48

Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

Interpretation :

       A quick ratio is an indication that the firm is liquid and

has the ability to meet its current liabilities in time. The

ideal quick ratio is   1:1. Company’s quick ratio is more

than ideal ratio. This shows company has no liquidity

problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are

generally more liquid than inventories, yet there may be

doubts regarding their realization into cash immediately or

in time. So absolute liquid ratio should be calculated

together with current ratio and acid test ratio so as to

exclude even receivables from the current assets and findout

the absolute liquid assets. Absolute Liquid Assets includes :

ABSOLUTE LIQUID RATIO =      ABSOLUTE LIQUID

ASSETS

                                                   CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK

BALANCES.

e.g.                                               (Rupees in Crore)

Year 2006 2007 2008

Absolute Liquid

Assets

4.69 1.79 5.06

Current Liabilities 27.42 20.58 33.48

Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :

       These ratio shows that company carries a small amount

of cash. But there is nothing to be worried about the lack of

cash because company has reserve, borrowing power &

long term investment. In India, firms have credit limits

sanctioned from banks and can easily draw cash.

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to

make sales and earn profits. The efficiency with which

assets are managed directly affects the volume of sales. The

better the management of assets, large is the amount of sales

and profits. Current assets movement ratios measure the

efficiency with which a firm manages its resources. These

ratios are called turnover ratios because they indicate the

speed with which assets are converted or turned over into

sales. Depending upon the purpose, a number of turnover

ratios can be calculated. These are :

1.                 Inventory Turnover Ratio

2.                 Debtors Turnover Ratio

3.                 Creditors Turnover Ratio

4.                 Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if

current assets include high amount of debtors due to slow

credit collections and moreover if the assets include high

amount of slow moving inventories. As both the ratios ignore

the movement of current assets, it is important to calculate

the turnover ratio.

1.      INVENTORY TURNOVER OR STOCK

TURNOVER RATIO :

Every firm has to maintain a certain amount of

inventory of finished goods so as to meet the

requirements of the business. But the level of inventory

should neither be too high nor too low. Because it is

harmful to hold more inventory as some amount of

capital is blocked in it and some cost is involved in it. It

will therefore be advisable to dispose the inventory as

soon as possible.

INVENTORY TURNOVER RATIO =      COST OF

GOOD SOLD

                                                    AVERAGE INVENTORY

Inventory turnover ratio measures the speed with which

the stock is converted into sales. Usually a high

inventory ratio indicates an efficient management of

inventory because more frequently the stocks are sold ;

the lesser amount of money is required to finance the

inventory. Where as low inventory turnover ratio

indicates the inefficient management of inventory. A

low inventory turnover implies over investment in

inventories, dull business, poor quality of goods, stock

accumulations and slow moving goods and low profits

as compared to total investment.

AVERAGE STOCK  =   OPENING STOCK + CLOSING

STOCK

                                                                 2

                                                     

 (Rupees in Crore)

Year 2006 2007 2008

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover

Ratio

1.5 times 2.8 times 1.75 times

Interpretation :

       These ratio shows how rapidly the inventory is turning

into receivable through sales. In 2007 the company has high

inventory turnover ratio but in 2008 it has reduced to 1.75

times. This shows that the company’s inventory

management technique is less efficient as compare to last

year.

2.                 INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD =  

365 ( net working days )

                                       INVENTORY TURNOVER RATIO

e.g.

Year 2006 2007 2008

Days 365 365 365

Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion

Period

243 days 130 days 202 days

Interpretation :

       Inventory conversion period shows that how many days

inventories takes to convert from raw material to finished

goods. In the company inventory conversion period is

decreasing. This shows the efficiency of management to

convert the inventory into cash.

3.                 DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on

credit to increase its sales and a liberal credit policy may

result in tying up substantial funds of a firm in the form of

trade debtors. Trade debtors are expected to be converted

into cash within a short period and are included in current

assets. So liquidity position of a concern also depends

upon the quality of trade debtors. Two types of ratio can be

calculated to evaluate the quality of debtors.

a)       Debtors Turnover Ratio

b)     Average Collection Period

DEBTORS TURNOVER RATIO =

TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtor’s velocity indicates the number of times the

debtors are turned over during a year. Generally higher the

value of debtor’s turnover ratio the more efficient is the

management of debtors/sales or more liquid are the debtors.

Whereas a low debtors turnover ratio indicates poor

management of debtors/sales and less liquid debtors. This

ratio should be compared with ratios of other firms doing

the same business and a trend may be found to make a

better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING

DEBTOR

                                                        2

 

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Average Debtors 17.33 18.19 22.50

Debtor Turnover

Ratio

9.6 times 8.3 times 7.5 times

Interpretation :

       This ratio indicates the speed with which debtors are

being converted or turnover into sales. The higher the

values or turnover into sales. The higher the values of

debtors turnover, the more efficient is the management of

credit. But in the company the debtor turnover ratio is

decreasing year to year. This shows that company is not

utilizing its debtor’s efficiency. Now their credit policy

become liberal as compare to previous year.

4.     AVERAGE COLLECTION PERIOD :

Average Collection Period =    No. of Working Days

                                             Debtors Turnover Ratio

The average collection period ratio represents the

average number of days for which a firm has to wait before

its receivables are converted into cash. It measures the

quality of debtors. Generally, shorter the average collection

period the better is the quality of debtors as a short

collection period implies quick payment by debtors and

vice-versa.

Average Collection Period =    

365(NetWorkingDays)

Debtors Turnover Ratio                                   

Key Financial Ratios of Dr Reddys Laboratories

------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Investment Valuation RatiosFace Value 5.00 5.00 5.00 5.00 5.00Dividend Per Share 5.00 3.75 3.75 6.25 11.25Operating Profit Per Share (Rs) 41.34 79.05 34.65 44.99 64.47Net Operating Profit Per Share (Rs)

261.20 225.31 198.84 237.40 260.33

Free Reserves Per Share (Rs) 288.37 254.35 278.46 304.97 341.13Bonus in Equity Capital 45.60 66.54 66.43 66.34 66.19

Profitability RatiosOperating Profit Margin(%) 15.82 35.08 17.42 18.95 24.76Profit Before Interest And Tax Margin(%)

9.82 29.43 12.01 13.28 18.92

Gross Profit Margin(%) 18.65 38.66 12.58 14.11 19.70Cash Profit Margin(%) 15.39 32.30 17.59 19.10 22.17Adjusted Cash Margin(%) 15.80 33.50 17.59 19.10 22.17Net Profit Margin(%) 10.08 29.01 13.57 13.20 18.48Adjusted Net Profit Margin(%) 9.85 29.77 13.57 13.20 18.48Return On Capital Employed(%) 8.90 30.79 10.55 13.46 15.87Return On Net Worth(%) 9.33 26.91 9.87 10.66 14.30Adjusted Return on Net Worth(%) 9.12 27.60 9.00 11.37 13.07Return on Assets Excluding Revaluations

5.30 19.75 7.13 312.17 350.30

Return on Assets Including Revaluations

5.30 19.75 7.13 312.17 350.30

Return on Long Term Funds(%) 12.48 33.05 11.54 15.08 17.36

Liquidity And Solvency RatiosCurrent Ratio 1.29 2.56 1.82 1.85 1.49Quick Ratio 2.43 2.81 1.94 2.13 1.45Debt Equity Ratio 0.41 0.08 0.10 0.12 0.10Long Term Debt Equity Ratio -- -- -- -- --Debt Coverage RatiosInterest Cover 16.13 45.49 85.79 53.32 250.76Total Debt to Owners Fund 0.41 0.08 0.10 0.12 0.10Financial Charges Coverage Ratio 16.58 30.80 50.33 36.78 79.36

Financial Charges Coverage Ratio Post Tax

14.63 26.57 45.79 29.26 68.99

Management Efficiency RatiosInventory Turnover Ratio 4.73 8.32 5.90 6.09 5.39Debtors Turnover Ratio 4.01 4.62 3.42 3.45 3.54Investments Turnover Ratio 5.14 8.72 5.90 6.09 5.39Fixed Assets Turnover Ratio 3.31 4.95 1.97 1.91 1.86Total Assets Turnover Ratio 0.64 0.81 0.64 0.69 0.69Asset Turnover Ratio 2.01 3.06 1.97 1.91 1.86

Average Raw Material Holding 142.58 85.16 104.05 108.84 104.48Average Finished Goods Held 18.69 10.63 14.65 15.37 18.28Number of Days In Working Capital

287.52 263.93 211.04 217.13 144.48

Profit & Loss Account RatiosMaterial Cost Composition 39.57 30.26 40.29 38.35 36.38Imported Composition of Raw Materials Consumed

56.72 36.74 26.37 38.75 30.36

Selling Distribution Cost Composition

12.13 8.54 11.22 11.21 10.09

Expenses as Composition of Total Sales

60.40 81.74 70.77 78.09 71.92

Cash Flow Indicator RatiosDividend Payout Ratio Net Profit 20.71 6.25 15.52 21.94 26.19Dividend Payout Ratio Cash Profit 13.02 5.54 11.21 15.90 20.37Earning Retention Ratio 78.82 93.90 82.97 79.43 71.35Cash Earning Retention Ratio 86.79 94.58 88.02 84.84 78.17AdjustedCash Flow Times 2.79 0.24 0.75 0.79 0.55

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Earnings Per Share 27.53 70.09 28.26 33.29 50.11Book Value 294.95 260.45 286.12 312.17 350.30

REVENUES FROM TOP TEN BRANS IN INDIA

INRS. MILLIONS

Product 2009-10 2008-09 Growth

Omez 928 776 20%

NiseTM 690 605 14%

Stamlo 473 422 12%

Stamlo Beta 326 301 8%

Omez DR 310 210 48%

Atocor 274 269 2%

RazoTM 247 214 15%

RedituxTM 232 199 17%

MintopTM 196 172 14%

Razo DTM 169 138 23%

Others 6,313 5,172 22%

Total 10,158 8,478 20%

Dr. Reddy’s top-10 brands accounted for revenues of Rs.

3,845 million (38% of India formulations revenue).

REVENUES FROM TOP 5 BRANDS IN RUSSIA

INRS. MILLIONS

Key Products 2009-10 2008-09 Growth

Nise 1,862 1,249 49%

Omez 1,458 1,281 14%

Ketorol 1,287 1,078 19%

Ciprolet 760 701 8%

Cetrine 408 339 20%

DATA ANALYSIS & INTERPRETATION

The methodology, I have adopted for my study is the various tools,

which basically analyze critically financial position of to the

organization:

 

             I.               COMMON-SIZE P/L A/C          II.               COMMON-SIZE BALANCE SHEET

      III.               COMPARTIVE P/L A/C

       IV.               COMPARTIVE BALANCE SHEET

          V.               TREND ANALYSIS

       VI.               RATIO ANALYSIS

 

The above parameters are used for critical analysis of financial

position.  With the evaluation of each component, the financial

position from different angles is tried to be presented in well and

systematic manner. By critical analysis with the help of different

tools, it becomes clear how the financial manager handles the

finance matters in profitable manner in the critical challenging

atmosphere, the recommendation are made which would suggest

the organization in formulation of a healthy and strong position

financially with proper management system.

I sincerely hope, through the evaluation of various percentage,

ratios and comparative analysis, the organization would be

able to conquer its inefficiencies and makes the desired

changes.

 

ANALYSIS OF FINANCIAL STATEMENTS

 

FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistent accounting procedure to convey an under-standing of some financial aspects of a business firm. It may show position at a moment in time, as in the case of balance sheet or may reveal a series of activities over a given period of time, as in the case of an income statement. Thus, the term ‘financial statements’ generally refers to the two statements

(1) The position statement or Balance sheet. (2) The income statement or the profit and loss Account.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations) missing out of business activities.

4. To provide financial information that assets in estimating the learning potential of the business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final picture a final picture of a concern. The utility of these statements is dependent upon a number of factors. The analysis and interpretation of these statements must be done carefully otherwise misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these statements is only approximate. The actual value can only be determined when the business is sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year, during the life of a concern. The costs and incomes are apportioned to different periods with a view to determine profits etc. The allocation of expenses and income depends upon the personal judgment of the accountant. The existence of contingent assets and liabilities also make the statements imprecise. So financial statement are at the most interim reports rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and accurate position. The value of fixed assets in the balance sheet neither represent the value for which fixed assets can be sold nor the amount which will be required to replace these assets. The balance sheet is prepared on the presumption of a going concern. The concern is expected to continue in future. So fixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in the balance sheet which will realize nothing at the time of liquidation but they are shown in the balance sheets.

4. The financial statements are prepared on the basis of historical costs or original costs. The value of assets decreases with the passage of time current price changes are not taken into account. The statement are not prepared with the keeping in view the economic conditions. the balance sheet loses the significance of being an index of current economics realities. Similarly, the

profitability shown by the income statements may be represent the earning capacity of the concern.

 

FINANCIAL STATEMENT ANALYSIS

It is the process of identifying the financial strength and

weakness of a firm from the available accounting data and

financial statements. The analysis is done

CALCULATIONS OF RATIOSRatios are relationship expressed in mathematical terms between

figures, which are connected with each other in some manner.

 

CLASSIFICATION OF RATIOS

Ratios can be classified in to different categories depending upon

the basis of classification

The traditional classification has been on the basis of the financial

statement to which the determination of ratios belongs.

 

 These are:-

        Profit & Loss account ratios

        Balance Sheet ratios

        Composite ratios

Profit & Loss account of Dr Reddys Laboratories

------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

IncomeSales Turnover 2,101.97 3,872.92 3,428.40 4,080.40 4,469.60Excise Duty 98.71 89.66 84.51 80.90 74.00Net Sales 2,003.26 3,783.26 3,343.89 3,999.50 4,395.60Other Income 95.98 233.95 197.29 212.20 254.00Stock Adjustments 36.72 23.23 93.87 64.10 117.30Total Income 2,135.96 4,040.44 3,635.05 4,275.80 4,766.90

ExpenditureRaw Materials 792.87 1,144.82 1,347.33 1,534.00 1,599.40Power & Fuel Cost 48.23 57.83 77.12 90.00 104.10Employee Cost 205.85 299.04 366.28 412.50 516.40Other Manufacturing Expenses

74.95 155.63 130.35 105.90 117.30

Selling and Admin Expenses 567.59 777.06 896.54 1,117.90 1,036.60Miscellaneous Expenses 33.42 44.76 37.44 45.30 50.60Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00Total Expenses 1,722.91 2,479.14 2,855.06 3,305.60 3,424.40

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Operating Profit 317.07 1,327.35 582.70 758.00 1,088.50PBDIT 413.05 1,561.30 779.99 970.20 1,342.50Interest 24.63 51.96 14.69 27.40 16.00PBDT 388.42 1,509.34 765.30 942.80 1,326.50Depreciation 111.33 133.50 161.99 193.60 222.40Other Written Off 13.31 18.16 20.71 19.70 19.30Profit Before Tax 263.78 1,357.68 582.60 729.50 1,084.80Extra-ordinary items -0.01 -0.02 -0.06 -0.10 -0.10PBT (Post Extra-ord Items) 263.77 1,357.66 582.54 729.40 1,084.70Tax 52.64 188.99 108.88 168.60 238.70Reported Net Profit 211.12 1,176.86 475.22 560.90 846.10

Total Value Addition 930.04 1,334.32 1,507.73 1,771.60 1,825.00Preference Dividend 0.00 0.00 0.00 0.00 0.00

Equity Dividend 38.35 62.97 63.06 105.30 190.00

Corporate Dividend Tax 5.38 10.70 10.72 17.80 31.60Per share data (annualised)Shares in issue (lakhs) 766.95 1,679.12 1,681.73 1,684.69 1,688.45Earning Per Share (Rs) 27.53 70.09 28.26 33.29 50.11Equity Dividend (%) 100.00 75.00 75.00 125.00 225.00Book Value (Rs) 294.95 260.45 286.12 312.17 350.30

Balance Sheet of Dr Reddys Laboratories

------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Sources Of FundsTotal Share Capital 38.35 83.96 84.09 84.20 84.40Equity Share Capital 38.35 83.96 84.09 84.20 84.40Share Application Money 0.00 0.00 0.00 0.00 0.00Preference Share Capital 0.00 0.00 0.00 0.00 0.00Reserves 2,223.79 4,289.40 4,727.72 5,174.90 5,830.20Revaluation Reserves 0.00 0.00 0.00 0.00 0.00Networth 2,262.14 4,373.36 4,811.81 5,259.10 5,914.60Secured Loans 145.13 1.92 3.40 2.60 0.80Unsecured Loans 778.74 327.98 458.91 637.70 562.40Total Debt 923.87 329.90 462.31 640.30 563.20Total Liabilities 3,186.01 4,703.26 5,274.12 5,899.40 6,477.80

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Application Of FundsGross Block 1,052.90 1,291.19 1,750.21 2,157.30 2,425.70Less: Accum. Depreciation 491.08 609.15 762.80 946.50 1,110.10

Net Block 561.82 682.04 987.41 1,210.80 1,315.60Capital Work in Progress 112.92 280.61 245.71 411.20 745.40Investments 911.36 966.99 2,080.71 1,865.10 2,652.70Inventories 443.10 487.58 640.93 735.10 897.40Sundry Debtors 581.22 1,055.70 897.71 1,419.70 1,060.50Cash and Bank Balance 25.50 148.60 67.19 84.30 47.90Total Current Assets 1,049.82 1,691.88 1,605.83 2,239.10 2,005.80Loans and Advances 723.61 1,028.56 1,272.02 1,331.20 1,321.40Fixed Deposits 625.44 1,308.11 470.15 300.10 320.10Total CA, Loans & Advances

2,398.87 4,028.55 3,348.00 3,870.40 3,647.30

Deffered Credit 0.00 0.00 0.00 0.00 0.00Current Liabilities 624.25 731.96 786.36 1,163.30 1,543.80Provisions 174.70 522.97 601.38 294.80 339.40Total CL & Provisions 798.95 1,254.93 1,387.74 1,458.10 1,883.20Net Current Assets 1,599.92 2,773.62 1,960.26 2,412.30 1,764.10Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00Total Assets 3,186.02 4,703.26 5,274.09 5,899.40 6,477.80

Contingent Liabilities 2,409.27 1,896.92 1,892.55 1,934.80 2,016.10Book Value (Rs) 294.95 260.45 286.12 312.17 350.30

FINANCIAL HIGHLIGHTS

Consolidated revenues for 2009-10 was Rs. 70,277 million. Excluding revenues from sumatriptan — Dr. Reddy’s Authorized Generic version of Imitrex which was launched in 2008-09 — the Company’s overall revenue grew by 9%. In US dollar terms, 2009-10 revenue was US$ 1.56 billion, compared to US$ 1.37 billion in the previous year. It may be noted that the Company’s revenue has been rising at a CAGR of 23% over the last 10 years.Adjusted EBITDA of Rs. 15,828 million is highest among pharmaceutical companies in India in the year 2009-10.Return on Capital Employed (RoCE) at 17% for 2009-10 as against 14% in 2008-09.This increase is attributable to:• Core business growth of India, Russia and North America;• Rationalization of business model; and• Cost optimization and restructuring initiatives.

MANAGEMENT OF CASH

It is the duty of the finance manager to provide adequate cash to all segments of the organization. He also has to ensure that no funds are blocked in idle cash since this will involve cost in terms of interest to the business. A sound cash management scheme, therefore, maintains the balance between the twin objectives of liquidity and cost.

Meaning of cash

The term “cash” with reference to cash management is used in two senses. In a narrower sense it includes coins, currency notes, cheques, bank drafts held by a firm with it and the demand deposits held by it in banks.

In a broader sense it also includes “near-cash assets” such as, marketable securities and time deposits with banks. Such securities or deposits can immediately be sold or converted into cash if the circumstances require. The term cash management is generally used for management of both cash and near-cash assets.

Motives for holding cash

A distinguishing feature of cash as an asset, irrespective of the firm in which it is held, is that it does not earn any substantial return for the business. In spite of this fact cash is held by the firm with following motives.

1. Transaction motive

A firm enters into a variety of business transactions resulting in both inflows and outflows. In order to meet the business obligation in such a situation, it is necessary to maintain adequate cash balance. Thus, cash balance is kept by the firms with the motive of meeting routine business payments.

2.Precautionary motive

A firm keeps cash balance to meet unexpected cash needs arising out of unexpected contingencies such as floods, strikes, presentment of bills for payment earlier than the expected date, unexpected slowing down of collection of accounts receivable, sharp increase in prices of raw materials, etc. The more is the possibility of such contingencies more is the cash kept by the firm for meeting them.

3.Speculative motive

A firm also keeps cash balance to take advantage of unexpected opportunities, typically outside the normal course of the business. Such motive is, therefore, of purely a speculative nature.

.

4.Compensation motive

Banks provide certain services to their clients free of charge. They, therefore, usually require clients to keep a minimum cash balance with them, which help them to earn interest and thus compensate them for the free services so provided.

Business firms normally do not enter into speculative activities and, therefore, out of the four motives of holding cash balances, the two most important motives are the compensation motive.

Objectives of cash management

There are two basic objectives of cash management:

1.To meet the cash disbursement needs as per the payment schedule;2.To minimize the amount locked up as cash balances.

1.Meeting cash disbursements

The first basic objective of cash management is to meet the payments Schedule. In other words, the firm should have sufficient cash to meet the various requirements of the firm at different periods of times. The business has to make payment for purchase of raw materials, wages, taxes, purchases of plant, etc. The business activity may come to a grinding halt if the payment schedule is not maintained. Cash has, therefore, been aptly described as the “oil to lubricate the ever-turning wheels of the business, without it the process grinds to a stop.”

2.minimizing funds locked up as cash balances

The second basic objective of cash management is to minimize the amount locked up as cash balances. In the process of minimizing the cash balances, the finance manager is confronted with two conflicting aspects. A higher cash balance ensures proper payment with all its advantages. But this will result in a large balance of cash remaining idle. Low level of cash balance may result in failure of the firm to meet the payment schedule.

The finance manager should, therefore, try to have an optimum amount of cash balance keeping the above facts in view.

Cash management - - - - - basic problemsCash management involves the following four basic problems:

1. Controlling levels of cash;2. Controlling inflows of cash;3. Controlling outflows of cash;4. Optimum investment of surplus cash.

Cash Flow of Dr Reddys Laboratories

------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Net Profit Before Tax 263.76 1365.85 584.10 729.50 1084.80Net Cash From Operating Activities

79.67 893.79 555.87 481.30 1253.20

Net Cash (used in)/fromInvesting Activities

-913.94 -397.32 -1515.93 -743.60 -1111.10

Net Cash (used in)/from Financing Activities

592.99 316.59 46.15 105.60 -152.20

Net (decrease)/increase In Cash and Cash Equivalents

-240.78 805.77 -913.91 -156.70 -10.10

Opening Cash & Cash Equivalents

891.72 650.94 1451.25 541.10 378.10

Closing Cash & Cash Equivalents

650.94 1456.71 537.34 384.40 368.00

MANAGEMENT OF INVENTORIESInventories are good held for eventual sale by a firm. Inventories are thus one of the major elements, which help the firm in obtaining the desired level of sales.

Kinds of inventories

Inventories can be classified into three categories.

(i) Raw materials:

These are goods, which have not yet been committed to production in a manufacturing firm. They may consist of basic raw materials or finished components.

(ii) Work-in-progress:

This includes those materials, which have been committed to production process but have not yet been completed.

(iii) Finished goods:

These are completed products awaiting sale. They are the final output of the production process in a manufacturing firm. In case of wholesalers and retailers, they are generally referred to as merchandise inventory.

The levels of the above three kinds of inventories differ depending upon the nature of the business.

Benefits of holding inventories

Holding of inventories helps a firm in separating the process of purchasing, producing and selling. In case a firm does not hold sufficient stock of raw materials, finished goods, etc., the purchasing would take place only when the firm receives the order from a customer. It may result in delay in executing the order because of difficulties in obtaining/ procuring raw materials, finished goods, etc. thus inventories provide cushion so that the purchasing, production and sales functions can proceed at optimum speed.

The specific benefits of holding inventories can be put as follows:

(i) Avoiding losses of sales

If a firm maintains adequate inventories it can avoid losses on account of losing the customers for non-supply of goods in time.

(ii) Reducing ordering cost

The variable cost associated with individual orders, e.g., typing, checking, approving and mailing the order, etc., can be reduced if a firm places a few large orders than numerous small orders.

(iii) Achieving efficient production runs

Maintenance of large inventories helps a firm in reducing the set-up cost associated with each production run.

Risks and costs associated with inventories

Holding of inventories exposes the firm to a number of risks and costs. Risk of holding inventories can be put as follows:

(i) Price decline

This may be due to increase in the market supply of the product, introduction of a new competitive product, price cutting by the competitors, etc.

(ii) Product deterioration

This may due to holding a product for too long a period or improper storage conditions.

(iii) Obsolescence

This may be due to change in customers taste, new production technique, improvements in the product design, specifications, etc.

The costs of holding inventories are as follows:

(i) Materials cost

This includes the cost of purchasing the goods, transportation and handling charges less any discount allowed by the supplier of the goods.

(ii) Ordering cost

This includes the variable cost associated with placing an order for the goods. The fewer the orders, the lower will be the ordering costs for the firm.

(iii) Carrying cost

This includes the expenses for storing the goods. It comprises storage costs, insurance costs, spoilage costs, cost of funds tied up in inventories, etc.

Management of inventory

Inventories often constitute a major element of the total working capital and hence it has been correctly observed, “good inventory management is good financial management”.

Inventory management covers a large number of issues including fixation of minimum and maximum levels; determining the size of the inventory to be carried ; deciding about the issue price policy; setting up receipt and inspection procedure; determining the economic order quantity; providing proper storage facilities, keeping check on obsolescence and setting up effective information system with regard to the inventories.

However, management inventories involves two basic problems:

(i) Maintaining a sufficiently large size of inventory for efficient and smooth production and sales operations;

2) Maintaining a minimum investment in inventories to minimize the direct-indirect costs associated with holding inventories to maximize the profitability.

Inventories should neither be excessive nor inadequate. If inventories are kept at a high level, higher interest and storage costs would be incurred. On the other hand, a low level of inventories may result in frequent interruption in the production schedule resulting in underutilization of capacity and lower sales.

Techniques of inventory management

Effective inventory requires an effective control over inventories.

Inventory control refers to a system which ensures supply of required quantity and quality of inventories at the required time and the same time prevent unnecessary investment in inventories.

The techniques of inventory control/ management are as follows:

1)ABC 2)EOQ etc.

Finished Products

--------------------------- in Rs. Cr. ---------------------------

Mar 2010

Product Name Unit InstalledCapacity

ProductionQuantity

SalesQuantity

SalesValue

Active Pharma Ingredients

Metric Tonnes 3,831 3,267.00 3,794.00 1,731.90

Formulations Millions Numbers 5,581 4,282.00 4,856.00 1,693.20Generic Products Millions Numbers 10,014 6,578.00 6,178.00 1,136.30Pharmaceuticals (Others)

- NA NA 1,000,663.00

184.60

Biotech Products - NA 6,951.00 7,370.00 50.40

Service Income - NA NA NA 35.90Royalty Income - NA NA NA 1.00

Total 4,833.30

Raw Materials ------------------ in Rs. Cr. -------------------

Mar 2010

Product NameUnit Quantity Value

Others Not Reported NA 947.60Fluoro Quinolonic Acid Kgs 524,245 42.50

2 Acetyl 6 Methoxy Naphthalene Kgs 915,200 39.00Toluene Kgs 4,079,487 17.902,4 Dichloro 5 Fluoro Acetophenone Kgs 439,986 17.60Methanol Kgs 10,691,128 14.90Isopropyl Alcohol Kgs 2,057,419 10.904-R-Cis-1-1 Dimethylethyl-1-6-Cynaomethyl

Kgs 8,493 10.10

Total 1,100.50

MANAGEMENT OF ACCOUNTS RECEIVABLES

Accounts receivables (also properly termed as receivables) constitute a significant portion of the total currents assets of the business next after inventories. They are a direct consequences of “trade credit” which has become an essential marketing tool in modern business.

When a firm sells goods for cash, payments are received immediately and, therefore, no receivables are credited. However, when a firm sells goods or services on credit, the payments are postponed to future dates and receivables are created. Usually, the credit sales are made on open account, which means that, no, formal acknowledgements of debt obligations are taken from the buyers. The only documents evidencing the same are a purchase order, shipping invoice or even a billing statement. The policy of open account sales facilities business transactions and reduces to a great extent the paper work required in connection with credit sales.

Meaning of receivables

Receivables are assets accounts representing amounts owed to the firm as a result of sale of goods / services in the ordinary course of business.They, therefore, represent the claims of a firm against its customer

and are carried to the “assets side” of the balance sheet under titles

such as accounts receivables, customer receivables or book debts.

They are, as stated earlier, the result of extension of credit facility

to then customers a reasonable period of time in which they can

pay for the goods purchased by them.

Purpose of receivables

Accounts receivables are created because of credited sales. Hence

the purpose of receivables is directly connected with the objectives

of making credited sales.

The objectives of credited sales are as follows:

(i) Achieving growth in sales :

If a firm sells goods on credit, it will generally be in a position to sell more goods than if it insisted on immediate cash payments. This is because many customers are either not prepared or not in a position to pay cash when they purchase the goods. The firm can sell goods to such customers, in case it resorts to credit sales.

(ii) Increasing profits:Increase in sales results in higher profits for the firm not only

because of increase in the volume of sales but also because of the

firm charging a higher margin of profit on credit sales as compared

to cash sales.

(iii) Meeting competition:

A firm may have to resort to granting of credit facilities to its

customers because of similar facilities being granted by the

competing firms to avoid the loss of sales from customers who

would buy elsewhere if they did not receive the expected output.

The overall objective of committing funds to accounts receivables

is to generate a large flow of operating revenue and hence profit

than what would be achieved in the absence of no such

commitment.

Costs of maintaining receivables

The costs with respect to maintenance of receivables can be

identified as follows:

1. Capital costs:

Maintenance of accounts receivables results in blocking of the

firm’s financial resources in them. This is because there is a time

lag between the sale of goods to customers and the payments by

them. The firm has, therefore, to arrange for additional funds top

meet its own obligations, such as payment to employees, suppliers

of raw materials, etc., while awaiting for payments from its

customers. Additional funds may either be raised from outside or

out of profits retained in the business. In both the cases, the firm

incurs a cost. In the former case, the firm has to pay interest to the

outsider while in the latter case, there is an opportunity cost to the

firm, i.e., the money which the firm could have earned otherwise

by investing the funds elsewhere.

2. Administrative costs:

The firm has to incur additional administrative costs for

maintaining accounts receivable in the form of salaries to the staff

kept for maintaining accounting records relating to customers, cost

of conducting investigation regarding potential credit customers to

determine their creditworthiness, etc.

3. Collection costs: The firm has to incur costs for collecting the

payments from its credit customers. Sometimes, additional steps

may have to be taken to recover money from defaulting customers.

4. Defaulting costs:

Sometimes after making all serious efforts to collect money from

defaulting customers, the firm may not be able to recover the

overdues because of the of the inability of the customers. Such

debts are treated as bad debts and have to be written off since they

cannot be realized.

Factors affecting the size of receivables

The size of the receivable is determined by a number of factors.

Some of the important factors are as follows:

(1) Level of sales:

This is the most important factor in determining the size of

accounts receivable. Generally in the same industry, a firm having

a large volume of sales will be having a larger level of receivables

as compared to a firm with a small volume of sales.

Sales level can also be used for forecasting change in accounts

receivable.

(2) Credited policies:

The term credit policy refers to those decision variables that

influence the amount of trade credit, i.e., the investment in

receivables. These variables include the quantity of trade accounts

to be accepted, the length of the credit period to be extended, the

cash discount to be given and any special terms to be offered

depending upon particular circumstances of the firm and the

customer. A firm’s credit policy, as a matter of fact, determines the

amount of risk the firm is willing to undertake in its sales

activities. If a firm has a lenient or a relatively liberal credit policy,

it will experience a higher level of receivables as compared to a

firm with a more rigid or stringent credit policy.

This is because of two reasons:

(i) A lenient credit policy encourages even the financially strong customers to make delays in payments resulting in increasing the size of the accounts receivables;

(ii) Lenient credit policy will result in greater defaults in payments by financially weak customers thus resulting in increasing the size of receivables.

(3) Terms of trade:

The size of the receivables is also affected by terms of trade

(or credit terms) offered by the firm.

The two important components of the credit terms are:

(i) Credit period; (ii) Cash discount.

(i) Credit period:

The term credit period refers to the time duration for which

credit is extended to the customers. It is generally expressed in

terms of “net days”. For example,

If a firm’s credit terms are “net 15”, it means the customers

are expected to pay within 15 days from the date of credit sale.

(ii) Cash discount:

Most firms offer cash discount to their customers for encouraging

them to pay their dues before the expiry of the creditperiod.The

terms of the cash discounts indicate the rate of discount as well as

the period for which the discount has been offered.

Comparison of Balance Sheet

------------------- in Rs. Cr. -------------------

Dr Reddys Labs

Sun Pharma

CiplaRanbaxy

LabsMar '10 Mar '09 Mar '10 Dec '09

Sources Of FundsTotal Share Capital 84.40 103.56 160.58 210.21Equity Share Capital 84.40 103.56 160.58 210.21Share Application Money

0.00 0.00 0.00 175.85

Preference Share Capital

0.00 0.00 0.00 0.00

Reserves 5,830.20 5,047.86 5,744.54 3,748.54Revaluation Reserves 0.00 0.00 8.97 0.00Networth 5,914.60 5,151.42 5,914.09 4,134.60Secured Loans 0.80 23.60 0.41 175.83Unsecured Loans 562.40 0.00 4.66 3,172.55Total Debt 563.20 23.60 5.07 3,348.38

Total Liabilities 6,477.80 5,175.02 5,919.16 7,482.98Dr Reddys

LabsSun

PharmaCipla

Ranbaxy Labs

Mar '10 Mar '09 Mar '10 Dec '09Application Of FundsGross Block 2,425.70 1,061.90 2,895.44 2,620.92Less: Accum. Depreciation

1,110.10 362.64 884.27 1,027.52

Net Block 1,315.60 699.26 2,011.17 1,593.40

Capital Work in Progress

745.40 75.95 684.24 414.92

Investments2,652.70 2,694.59 265.10 3,833.69

Inventories 897.40 486.74 1,512.58 1,230.48Sundry Debtors 1,060.50 680.03 1,552.71 1,534.65Cash and Bank Balance 47.90 20.17 60.32 25.56Total Current Assets 2,005.80 1,186.94 3,125.61 2,790.69Loans and Advances 1,321.40 311.42 2,357.29 1,967.65Fixed Deposits 320.10 1,245.30 0.52 728.56Total CA, Loans & Advances

3,647.30 2,743.66 5,483.42 5,486.90

Deffered Credit 0.00 0.00 0.00 0.00Current Liabilities 1,543.80 696.34 1,177.11 3,082.89Provisions 339.40 342.10 1,347.66 763.03Total CL & Provisions 1,883.20 1,038.44 2,524.77 3,845.92

Net Current Assets1,764.10 1,705.22 2,958.65 1,640.98

Miscellaneous Expenses

0.00 0.00 0.00 0.00

Total Assets6,477.80 5,175.02 5,919.16 7,482.99

Contingent Liabilities 2,016.10 85.36 423.87 261.05Book Value (Rs) 350.30 248.72 73.55 94.16

Yearly Results of Dr Reddys Laboratories

------------------- in Rs. Cr. -------------------

Mar '07 Mar '08 Mar '09 Mar '10

Sales Turnover 3,738.38 3,301.98 4,197.53 4,553.21Other Income 334.21 254.35 100.21 171.44Total Income 4,072.59 3,556.33 4,297.74 4,724.65Total Expenses 2,525.27 2,800.05 3,356.07 3,406.31Operating Profit 1,213.11 501.93 841.46 1,146.90Profit On Sale Of Assets -- -- -- --Profit On Sale Of Investments -- -- -- --Gain/Loss On Foreign Exchange -- -- -- --

Total Extraordinary Income/Expenses

-- -- -- --

Tax On Extraordinary Items -- -- -- --

Net Extra Ordinary Income/Expenses

-- -- -- --

Gross Profit 1,547.32 756.28 941.67 1,318.34Interest 47.97 10.19 18.50 11.08PBDT 1,499.35 746.09 923.17 1,307.26Depreciation 133.50 161.99 193.63 222.43Depreciation On Revaluation Of Assets

-- -- -- --

PBT 1,365.85 584.10 729.54 1,084.83Tax 188.99 108.88 168.65 238.75Net Profit 1,176.86 475.22 560.89 846.08Prior Years Income/Expenses -- -- -- --Depreciation for Previous Years Written Back/ Provided

-- -- -- --

Dividend -- -- -- --Dividend Tax -- -- -- --Dividend (%) -- -- -- --Earnings Per Share 70.08 28.26 33.30 50.11Book Value -- -- -- --Equity 83.96 84.09 84.23 84.42Reserves 4,289.40 4,727.72 5,174.94 5,830.07Face Value 5.00 5.00 5.00 5.00

MANAGEMENT OF ACCOUNTS

PAYABLE

Management of accounts payable is as much important as

management of accounts receivable. There is a basic difference

between the approach to be adopted by the finance manager in the

two cases. Whereas the underlying objective in case of accounts

receivable is to maximize the acceleration of the collection

process, the objective in case of accounts payable is to slow down

the payments process as much as possible. But it should be noted

that the delay in payment of accounts payable may result in saving

of some interest costs but it can prove very costly to the firm in the

form of loss credit in the market.

Overtrading and undertrading

The concepts of overtrading and undertrading are intimately

connected with the net working capable position of the business.

To be more precise they are connected with the cash position of the

business.

OVERTRADING:

Overtrading means an attempt to maintain or expand scale of

operations of the business with insufficient cash resources.

Normally, concerns having overtrading have a high turnover ratio

and a low current ratio. In a situation like this, the company is not

in a position to maintain proper stocks of materials, finished goods,

etc., and has to depend on the mercy of the suppliers to supply

them goods at the right time. It may also not be able to extend

credit to its customers, besides making delay in payment to the

creditors. Overtrading has been amply described as “overblowing

the balloon”. This may, therefore, prove to be dangerous to the

business since disproportionate increase in the operations of the

business without adequate resources may bring its sudden collapse.

Causes of overtrading

The following may be the causes of over-trading:

(i) Depletion of working capital: Depletion of working capital

ultimately results in depletion of cash resources. Cash resources of

the company may get depleted by premature repayment of long-

term loans, excessive drawings, dividend payments, purchase of

fixed assets and excessive net trading losses, etc.

(ii) Faulty financial policy:

Faulty financial policy can result in shortage of cash and

overtrading in several ways:

(a)Using working capital for purchase of fixed assets.(b) Attempting to expand the volume of the business without raising the necessary resources, etc.

(iii) Over-expansion:

In national emergencies like war, natural calamities, etc., a

firm may be required to produce goods on a larger scale.

Government may pressurize the manufacturers to increase the

volume of production without providing for adequate finances.

Such pressure results in over-expansion of the business ignoring

the elementary rules of sound finance.

(iv) Inflation and rising prices: Inflation and rising prices make

renewals and replacements of assets costlier. The wages and

material costs also rise. The manufacturer, therefoe, needs more

money even to maintain the existing level of activity.

(v) Excessive taxation:

Heavy taxes result in depletion of cash resources at a scale higher

than what is justified.

The cash position is further strained on account of efforts of the

company to maintain reasonable dividend rates for their

shareholders.

Consequences of overtrading

The consequences of over-trading can be summarized as follows:

(i) Difficulty in paying wages and taxes:

This is one of the most dangerous consequences of

overtrading. Non-payments of wages in time create a feeling of

uncertainty, insecurity and dissatisfaction in all ranks of the labour.

2)Costly purchases: The company has to pay more for its

purchases on account of its inability to have proper bargaining,

bulk buying and selecting proper source of supplying quality

materials.

(iii) Reduction in sales:

The company may have to suffer in terms of sales because the

pressure for cash requirements may force it to offer liberal cash

discounts to debtors for prompt payments, as well as selling goods

at throwaway prices.

(iv) Difficulties in making payments:

The shortage of cash will force the company to persuade its

creditors to extend credit facilities to it. Worry, anxiety and fear

will be the management’s constant companions.

(v) Obsolete plant and machinery:

Shortage of cash will force the company to delay even the necessary repairs and renewals. Inefficient working, unavoidable breakdowns will have an adverse effect both on volume of production and rate of profit.

Dr. Reddy’s Consolidated Working Capital

INRS. MILLIONS

31 March 10

31 March 09

Change

Accounts receivable (A) 11,960 14,592 (2,632)Inventories (B) 13,371 13,226 145

Trade Accounts Payable (C) 9,322 5,987 3,335Working Capital (A+B-C) 16,009 21,831 (5,822)Other current Assets (D) 16,732 11,192 5,540Total Current Assets (A+B+D)

42,063 39,010 3,053

Short and long term loans and borrowings, current portion (E)

9,310 9,569 (259)

Other current liabilities (F) 10,389 10,973 (584)Total Current Liabilities (C+E+F)

29,021 26,529 2,492

CAPITAL STRUCTURE:-

Period Instrument Authorized Capital

Issued Capital

- P A I D U P -

From To (Rs. cr) (Rs. cr) Shares (nos) Face Value

Capital

2009 2010 Equity Share 120 84.42 168845585 5 84.422008 2009 Equity Share 100 84.23 168468777 5 84.232007 2008 Equity Share 100 84.09 168172746 5 84.092006 2007 Equity Share 100 83.96 167912180 5 83.96

2005 2006 Equity Share 50 38.35 76694570 5 38.352004 2005 Equity Share 50 38.26 76518949 5 38.262003 2004 Equity Share 50 38.26 76518949 5 38.262002 2003 Equity Share 50 38.26 76515948 5 38.262001 2002 Equity Share 50 38.26 76515948 5 38.262000 2001 Equity Share 50 31.59 31588780 10 31.591999 2000 Equity Share 30 26.49 26487238 10 26.491995 1999 Equity Share 30 26.49 26487238 10 26.491994 1995 Equity Share 30 46.47 23974176 10 23.971993 1994 Equity Share 30 6.56 6557700 10 6.561992 1993 Equity Share 10 6.56 6557700 10 6.561991 1992 Equity Share 5 3.28 3278850 10 3.281989 1991 Equity Share 3 2.19 2185900 10 2.191988 1989 Equity Share 3 1.37 1366050 10 1.371986 1988 Equity Share 1.5 1.37 1366250 10 1.371985 1986 Equity Share 1.5 0.24 243500 10 0.24

BUSINESS HIGHLIGHTS

In the US market, 2009 saw Dr. Reddy’s enter the list of the Top 10 generic companies. The Company has broken into the Top 10 league by improving its market share from 2.1%to 2.7%. This is a significant milestone, and corroborates Dr. Reddy’s longer term target of becoming a leading generics player in the US.

At 6.5%, the Company’s growth in the US generics market was one percentage point higher than the average growth recorded by

all the generic firms in the industry. In doing so, Dr. Reddy’s achieved a prescription growth of 40%.

Nine new products were launched in the US generics market in 2009-10, including one over-the-counter (OTC) product. The key launches include nateglinide, omeprazole magnesium(OTC), metformin glyburide and fluoxetine DR.

India & Russia, both key emerging markets for the Company, registered impressive performance. In India, branded formulation revenues grew by 20% to Rs. 10,158 million. New product revenues contributed to 5% of total revenues from India formulations. The Company’s new product rank improved from 25th in 2008-09 to 8th in 2009-10.In Russia, Dr. Reddy’s revenues grew by 25% — out-performing market growth of 8% in value terms (Pharmexpert MAT, March 2010).Germany Ongoing healthcare reforms and changing market dynamics continue to cause pricing pressures, leading to low margins. To remain competitive in this scenario, the Company has rationalized its field force and moved towards a lean operating model. In 2009-10, the Company recorded a one-time charge of Rs. 912 million related to termination benefits payable to a set of identified employees.Moreover, the results of additional tenders in Germany led to further deterioration in the market dynamics, thereby resulting in the Company recording an impairment loss of: • Rs. 2,112 million for the product related intangibles.• Rs. 5,147 million towards carrying value of goodwill, and• Rs. 1,211 million towards the trademark / brand, ‘beta’,

which forms a significant portion of the beta pharm cash generating unit.

Successful audits of the Company’s formulations and chemical plants 2009-10 saw successful US Food and Drug Authority (USFDA) audits of the Company’s formulation plants at Bachupally, Hyderabad and Vishakapatnam, the ANVISA audit of the formulation plant at Vishakapatnam and the MHRA audit of the chemical plants.

Product pipeline continues to show impressive growth potential• The Company has filed 158 cumulative Abbreviated New Drug Applications (ANDAs) up to date. As on 31 March 2010, there were 73 ANDAs pending approval at the USFDA, of which 38 are Para-IV filings and 12 have the status of ‘first to file’.• It has filed 19 Drug Master Files (DMFs) in the US during the year, taking the total filings to 156. It also filed five DMFs in Canada, eight in Europe, and four in the Rest of the World (RoW).

• In addition, Dr. Reddy’s has generated a sound near-term pipeline of limited competition / high margin opportunities of generic products and biosimilars.

TRENDS IN GLOBAL MARKETS

Global market share numbers referred to in this and subsequent sections are based on latest available reports from IMS Health Inc.

According to IMS Health Inc., the global pharmaceutical market grew by 7% in 2009 to reach US$ 837 billion on a constant-dollar basis — compared with 4.8% growth in 2008.In 2010, the market is expected to grow by 4% to 6% in constant dollar terms, thus exceeding US$ 850 billion. This growth will be largely driven by strong overall growth in the emerging countries, as well as the

rising influence of healthcare access and fundingon market demand. Moreover, the global market is expected to grow at 5% to 8% CAGR over the next five years, reaching an anticipated US$ 1.1 trillion in 2014.

REGIONAL PERFORMANCE

The US market’s growth to slow down in 2010 In 2009 , the US market grew by 5.5% to US$ 322 billion — thus crossing US$ 300billion mark for the first time. However, the growth is expected to slow down to some where between 3% and 5% in 2010. This is due to growing substitution, taking the margin away from innovator brands in favor of generics. Generics have been growing much faster than brands due to the enormous number of patent expiries. Consequently, generics now account for more than 70% of the total US prescriptions.

Other mature markets: Europe and Japan Europ e contributed US$ 247 billion to the total pharmaceutical market, and showed a growth of 4.8% in 2009 versus 7% in 2008, in constant dollar terms. The expected market growth in Europe is in the 3% to 5% range in 2010. While Europe is seeing increased demand from an ageing population and for preventive care, growth is being hindered by constrained government healthcare budgets, and payer agencies using contracting and auctions to control costs. The Japanese pharmaceutical market grew by 7.6% to US$ 90 billion in 2009,versus 2.1% growth in 2008.

‘Pharmerging’ markets in the aggregate sustain strong growth Seven ‘pharmerging’ countries — Brazil, Russia, India, China, SouthKorea, Turkey and Mexico — are expected in aggregate to

grow by 12% to 14% in 2010,and a CAGR of 13% to 16% over the next five years. China’s pharmaceutical market is expected to grow at over 20% annually, and contribute 21% of overall global growth right up to 2013. Russia and Turkey may be negatively impacted by new measures intended to reduce the level of healthcare spending.

TRENDS IN INDIA

Information in this section is based on the Indian Pharmaceutical Overview Report, published by ORG IMS Research Private Ltd. for the year ended December 2009, and other latest reports from ORG IMS.The Indian pharmaceutical market has seen a CAGR of about 14% in the last five years.It continues to be highly fragmented and dominated by Indian companies. The domestic pharmaceutical

industry grew by 18% in March 2010 (ORG’s moving annual total, or MAT) versus 10% in March 2009. Acute therapy dominates, with a share of over 75% of the total market value. Thechronic segment has registered a growth of 21%, versus 16% in the acute segment .Anti- infectives grew by 14%, respiratory and dermatology by 21%, cardiac by 21% and CNS by20%.The Government of India’s Vision 2015 statement indicates an 18% plus CAGR for the pharmaceutical sector, translating to a doubling of revenues over the next five years. According to this report, growth will be driven by all verticals: domestic formulations , generics exports, and outsourcing.

By 2015, the report expects specialty and super-specialty therapies to account for 45% of the market. Growing lifestyle disorders, particularly metabolic disorders like diabetes, obesity and hypertension, coronary heart disease, cardiovascular, neuropsychiatry and oncology drugs are likely to gain significance.

REVENUES

The Company’s consolidated revenues increased marginally by 1% to Rs. 70,277million (US$ 1.56 billion) in 2009-10. The relevant details are:

• Excluding sumatriptan , the Authorized Generic version of Imitrex , revenues grew by 9% from Rs. 62,253 million in 2008-

09 to Rs. 67,734 million in 2009-10.PSAI grew by 9% and Global Generics by 8%.

• In 2008-09, the Company launched sumatriptan tablets in North America. This contributed to Rs 2,543 million in 2009-10, versus Rs. 7,188 million in 2008-09. In2009-10, share of revenue from the international businesses stood at 82%, with 18% coming from India. The revenue composition between geographies changed considerably primarily due to sale of sumatriptan in the US. As a result, North America (US and Canada) contributed to 30% of total revenues in 2009-10, versus 35% last year.

Europe accounted for 24% of total sales in 2009-10, compared to 26% in 2008-09. Russia and other CIS countries contributed to 13% of total revenues.

India delivered 18% of total revenues in 2009-10from 17% in 2008-09.

COMPARISON WITH PEERS

Company

Market Cap(Rs. in

Cr.)

P/E (TTM)

(x)

P/BV (TTM

) (x)

EV/EBIDTA

(x)

ROE(%)

ROCE(%)

D/E(x)

Sun Pharma.Inds.

36,387 .88

33.09 6.36 16.06 27.0 27.4 0.01

Cipla 25,608 26.19 4.34 17.79 21.1 24.2 0.09

.50

Dr Reddy's Labs

22,528.60

26.10 3.81 16.44 15.1 17.8 0.

11

Ranbaxy Labs.

18,767.11

11.05 4.74 19.49 14.1 14.5

0.90

Cadila Health.

12,739.58

21.99 7.85 18.10 35.3 26.4 0.50

Piramal Health

10,074.85

23.09 6.71 13.09 33.0 29.3 0.61

Glenmark Pharma.

7,236.02

39.31 4.08 13.91 19.3 17.7 0.71

Biocon 6,238.

00 22.83 3.98 16.21 16.9 16.9 0.12

Aurobindo Pharma

5,629.29

12.20 2.76 9.40 10.1 7.5 1.52

Torrent Pharma.

4,617.71

15.18 5.24 12.06 25.7 26.2 0.62

Ipca Labs. 3,518.

12 17.74 4.02 10.91 27.6 25.2 0.60

Matrix Labs. 3,273.

19 18.91 3.76 8.29 24.4 23.9 0.70

SWOT Analysis:

Strengths In India DR.Reddy’s is amongst the top ten players. This year they have commissioned an integrated R&D facility, the “InnovationPlaza” and scaled up their generics

infrastructure to become one of the largestsuch manufacturing facilities in Asia. Dr. Reddy’s is the first pharmaceutical company in Asia outside of Japan to belisted on the NYSE.

Weaknesses Falling margins.

Opportunities Dr. Reddy’s had three molecules or New Chemical Entities (NCEs), of which two are in clinical development and one is in the pre-clinical stage.In Branded Formulations, a total of 307 dossiers have been filed for product registrations in various countries.The Company has made cumulative filings of 281 DMFs, with 127 in US.

ThreatsThe Company is facing temporary problems with thirdparty suppliers to both its German subsidiary.The company should address worst performance in Germany, probably over in terms of further margin pressures by migrating production of an increasing number of formulations to facility in India.

SYNOPSIS

Dr. Reddy's Laboratories is a leading India pharmaceutical company, with presence across the pharmaceutical value chain.

During the FY10, the company launched 103 new generic products, filed 121 new product registrations and filed 36 DMFs globally.

The company is planning to acquire brands in Russia and launch new products in India as it plans to expand businesses in upcoming markets.

Dr Reddy’s -GSK expects to launch first product out of this alliance in Mexico in FY11. We believe that this alliance will enable DRL to tap the emerging market opportunity more effectively.

DRL has forayed into aesthetics segment in India through the launch of Stera Professional. This is the first Bi-phasic superficial peel for specific imperfections available in the domestic markets.

DRL has built up an interesting pipeline of 34 Para I products, of which, 18 products have FTF status. The company has fair visibility of monetizing these opportunities going forward.

Net Sales and Net profit of the company are expected to grow at a CAGR of 11% & 53.42% over FY10 to FY12E.

CONCLUSION AND RECOMMENDATION

i. After analysis of various components of working capital and trend in last 4 year ,we can conclude that Dr.reddy’s laboratories is managing its working capital efficiently .It has

reduced inventory of raw materials and increased stock of finished and semi finished products it has also reduced stores and spares thus investing reasonable working capital. It has also reduced its current liability to a large extent.

ii. Again from working capital turnover ratio we can see that

performance of Dr.reddy’s is very close to ideal ratio 1.21:1. As plant has all capability, a good pool of managerial talent so very soon it will attain ideal ratio.

iii. I have also done inventory analysis and have shown, components of inventories separately and found that the stock of these different components remain unused in stores for very brief period. This reduces blockage of fund in terms of inventories.

Thus by making a component analysis of working capital management of Dr.reddy’s laboratories by giving individual focus on working capital turnover ratio , inventory analysis , trend of turnover of different products .Ultimately we conclude that Dr.reddy’s is having a good working capital management.

SUGGESTIONS

1. Dr.reddy’s should concentrate more on JIT technique of manufacturing and inventory management. This will minimize the blockage of fund by reducing holding cost.

2. Company should search for more supply sources (other than available sources). So that company can minimize cost of raw materials.

3. Company must develop a dynamic team of marketing professionals.

4. Company should have close watch over wastage of electricity, raw materials and labor hours etc.

5. The equity becomes an important tool of differentiation so company must incorporate TQM in all departments.

6. The security should be made sticker to control the losses due to theft.

7. Use security in case of import or export to control the losses due to theft.

8. Use new techniques to make the production good or more.

BIBLIOGRAPHY:

1. Financial Management, Dr. S N Maheshwari, Sulthan Chand & Sons.2007

2. Financial Accounting for Business Management, Ashish K. Battacharya.2007 3. Management Accounting, R P Trivedi, Pankaj Publications 2007

WEBSITES: 1. www.drreddys.com 2. www.investopedia.com 3. www.moneycontrol.com 4. Money.rediff.com 5. www.wikipedia.com

COMPANY LOGO

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