THE FINANCIAL AND OPERATING PERFORMANCE OF INDIAN PHARMACEUTICAL COMPANIES (WITH SPECIAL REFERENCE TO RANBAXY LTD AND DR. REDDY LABOURATORIES)

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1 THE FINANCIAL AND OPERATING PERFORMANCE OF INDIAN PHARMACEUTICAL COMPANIES (WITH SPECIAL REFERENCE TO RANBAXY LTD AND DR. REDDY LABOURATORIES) N. LOGANATHAN Assistant Professor, Department of Commerce CA, Nandha Arts and Science College, Erode. INTRODUCTION Finance is regarded as the life blood of all business enterprise. This is because, in the modern money- oriented economy, finance is one of the basic foundations on which all kinds of economic activities lies. It has rightly been said that business needs money to make more money. Hence, efficient management of every business enterprise is closely linked with efficient management of its finance. The performance of the firm can be measured by its financial results, i.e., by its size of earnings. Riskiness and profitability are two major factors which jointly determine the value of the concern. There has been a considerable debate about the ultimate objective of firm performance, whether it is profit maximization or wealth maximization. IMPORTANCE OF FINANCIAL EFFICIENCY More people like management, investors, creditors, employees, government and society are interested for a variety of purpose in the affairs of the business enterprises. SIGNIFICANCE OF THE STUDY Hence, the present study aims to create awareness among the management regarding the importance of financial performance analysis through various ratios of financial analysis As such, the study is expected to help the corporate management, the financiers, the investors and the government at large, to take valuable decisions at their own. Further, it would provide insight to banks, financial institutions and long-term lenders to understand the financial capability effectiveness of the companies. REVIEW OF LITERATURE According to Mr.KasushikChakraborty(2010) survivals of the multinational companies in the Indian pharmaceutical sector requires efficient fund management which is an integral part of the overall corporate strategy to create shareholder value. A though during the, in US, UK and some other developed countries a considerable number of studies have been conducted on the evolution of the interrelationship between management of fund and profitability, this important issue has not been considered with due importance in India. The study of the inter relation between FATR and profitability in a generally accepted rule that the higher the efficiency of fixed assets management, the higher the profitability. Karthikeyan.K(2012) Financial Performance of Pharmaceutical Industry in India using DuPont Analysis found that Cipla pharmaceutical Company s financial performance is high,followed by Dr.Reddy s Laboratories and then Ranbaxy Pharmaceutical. The three companies are significant at their level. In conclusion, ROE&ROI is the most comprehensive measure of profitability of a firm. Faruk Hossan and Ahsan Habiben titled Performance evaluation and ratio 9 icmrrjournal@gmail.com

2 analysis of Pharmaceutical Company in Bangladesh concluded that the Beximco Pharmaceutical Company shows the best performance than the Square Pharmaceutical Company. Vataliya.K.S.(2012) Profitability and Consistency Analysis of Pharmacy Sector in India revealed that performance of the companies for its profitability Cipla secured the first rank & Dr.Reddy s, SunPharma, Aurobindo followed by rest of companies. The performance of the companies forits consistency; Aurobindo secured the first rank & Sun Pharma, Dr.Reddy s, Cipla followed by rest of companies. Jayakumar,K.(2013)demonstrates the effectiveness of strategies in pharmaceuticals for realizing the desired objectives. The impact of acquisitions on the operating performance, of these firms, with respect to the pre-acquisition and post-acquisition financial ratios is presented. The result and analysis of the key financial ratios of the acquiring firms shows that there is no significant effect on the operating of the firms following acquisitions. The operating performance of Sun pharmaceutical was better compared to Ranbaxy laboratories ltd., though the Ranbaxy laboratories ltd operating profit was not satisfactory. Ramya.A., and Sekar.M.(2014) studied the Financial Analysis of selected Indian Pharmaceutical Companies analyzed by applying summary statistics, which is ANOVA and Mean performance. This study we concluded that the analys is of variance shows at significant level except the total debts where as the formulation companies stands as first and bulk companies stands at the last so it is known that the size of the companies plays a vital role in the financial analysis. The bulk companies should improve their financial position. The mean earnings per level are higher in the MNC companies. Whereas the mean total debts shows at the par level and it is non-significant. Vijayalakshmi.V. and Srividya.M.(2014) researcher is interested in undertaking an analysis to find the financial performance of Pharmaceutical Industry. Hence, the present study entitled a study on financial performance of Pharmaceutical Industry in India has been undertaken. Profitability of the selected pharmaceutical companies in India during the study period is satisfactory. During the period of study there were a few up sand downs in the profitability but it did not affect the operations of the company to a great extent. If the Pharmaceutical Industry has to perform well, it has to invested more capital and has to do more sales, only then it William prove its performance level. STATEMENT OF THE PROBLEM The present study attempts to the production trend, sales trend, Profitability and financial strength of the selected pharmaceutical companies in India. The study of the production performance is important to known the operating level of the business and financial efficiency of the enterprises. Sales can be enhanced only by the following good sales policy. Due to the pricing the policy of the government, the companies have to face some fluctuations in the sales. These fluctuations may lead to increase are decreases the financial risk of the companies. This ability is referred to as lending power or operating performance of the considered investment. Financial appraisal provides a method for assessing the financial strengths and weaknesses of the pharmaceutical companies in India using financial statements. OBJECTIVES OF THE STUDY The following are the objectives of the study 1. To analyze the production, sales and market share of the selected pharmaceutical companies icmrrjournal@gmail.com

3 2. To analyze the profitability of the selected pharmaceutical companies. 3. To make suggestions for further improvement. RESEARCH DESIGN Research design is considered as a blue print for research, dealing with at least four problems: Which questions to study, which data are relevant, what data to collect, and how to analysis the results. Every design has its positive and negative sides. The present study covers a period of to in selected pharmaceutical companies in India. This period is chosen in order to have a fairly long, cyclically well-balanced period for which reasonably homogenous reliable and upto - date financial data would be available. The data has been collected from published annual reports of selected companies, Beside Capitaline and PROWESS databases, relevant secondary data have also been collected from BSE Stock Exchange Official Directory, CMIE Publications, Annual Survey of Industry, Business newspapers, Reports on Currency and Finance, Libraries of various Research Institutions, through internet etc. TOOLS OF ANALYSIS In this section it is the intended to briefly outline the various statistical and economic techniques employed in the study. Mean INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW It gives a single value to describe the whole data. It has been obtained by adding the vales of all observations and dividing it by the number of observations. X x N Where x = sum of variables and N Number of observations. comparison of different profitability ratios, mean values should be computed. For the purpose of Co-efficient of variation It is used in problems which require comparing the variability of two or more than two series. Series, for which the co-efficient of variation is greater, is said to be more variable or less consistent. On the other hand, the series for which co-efficient variation is less is said to be less variable or more consistent. In the analysis of financial data, less co-efficient of variation in this ratio is taken to relatively better control of management on that ratio. It is determined as follows. CV X Where O is the standard deviation and X is mean ratio. Therefore, for the purpose of companies of variability in the profitability ratio, co-efficient of variation should be computed. Compound Annual Growth Rate To Estimate compound annual growth rate of various profitability ratios the following model has been used Y=AB t + e u 11 icmrrjournal@gmail.com

4 (or) INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW Log y=log A + t log B +u Where Y is the value of dependent variable, t is the time variable, A and B are constants and e u is error term. The compound annual growth rate is obtained as follows. r= (B-1) 100 Trend Analysis It = (y t / y o ) 100 Where r is the compound growth rate of Y In order to compute the index of change in a variable, the following formula has been used Where y t is the value of the variable in the year t for which the index is to be compounded, y o is the value of the variable in the base year. In order to measure the change in the profitability analysis of selected pharmaceutical Companies in India after liberalization such indices has been computed. Chi-square test In order to find out whether there is any association between actual and trend values of profitability analysis or not, chi-square test is applied, where chi-square is defined as 2 = Σ (O-E) 2 /E Where O refers to the observed frequencies and E refers to the expected frequencies. The calculated value of chi-square is compared with the tabulated value of chi-square at (c-a) (r-1) d.f., and results are interpreted. If the calculated value of chi-square is more than the tabulated value of chi-square, the difference between observed and expected values us considered to be significant i.e., it could not have arisen due to change factor. The technique of chi-square is applied for the analysis of production, sales, market share and profitability trend. Regression analysis Linear regression equations were fitted using Ordinary Least Square (OLS), by regressing dependent variable on the independent variable as Y = a + bx + u Where Y = dependent variable X = independent variable u = Error term The statistical significance of b was worked out by applying t and R 2 was computed to determining the percentage variation in the dependent variables by the independent variable. DATA ANALYSIS AND INTERPRETATION a. Analysis of Production Trend To test whether the difference between actual production and estimated production was significant or not, the following hypothesis is framed and tested icmrrjournal@gmail.com

5 H0 There is no significant difference between actual production and the trend values of production among different years.(or) Ha There is no significant difference between actual productions and the trend values of production among different years. TheproductiontrendfortheselectedpharmaceuticalcompaniesinIndiaduringthestudyperiodpresentedin Table4.1 Table4.1 -Actual production of pharmaceutical companies in India (Rs.in crores) RANBAXY Dr.REDDY Years Production Index Production Index Mean CV CAGR Source: Computed from the Annual reports of the respective companies The actual production of Ranbaxy Ltd has been increased from Rs crores in to Rs crores in ,registering increase of1.69 times during the study period (Table4.1). The production of Ranbaxy Ltd registered an increasing trend during the study period. The mean production of Ranbaxy Ltd has been worked out as Rs crores during the study period. The analysis of CV (0.39) showed that the production of Ranbaxy Ltd marked erratically fluctuation during the study period. Further, the production of Ranbaxy Ltd registered positive growth rate (6.01per cent) during the study period. The actual production of Dr.Reddy Labouratories has been increased from Rs crores in to Rs croresin , registering increase of 5.36 times during the study period (Table4.1). The production of Dr.Reddy Labouratories registered an increasing trend during the study period. The mean production of Dr.Reddy Labouratories has been worked out as Rs croresduringthestudy period. The analysis of CV(0.52) showed that the production of Dr.Reddy Labouratories marked erratically fluctuating during the study period. Further, the production of Dr.Reddy registered positive growth rate (20.51percent)during the study period

6 Table4.2 - Trend Value of production of selected pharmaceutical companies in India YEARS RANBAXY Dr.REDDY Chi-square(Ȥ 2 ) Source: Computed Trendequation: RANBAXY :Y = t Dr.REDDY:Y = It is evident from the Table4.2 that the least square trend values of production of Ranbaxy Ltd showed an average annual increase production comes tors.36.85crores.the difference in actual and trend values was positive in the year to , while they were negative during the years and during the study period. In Ranbaxy Ltd, the difference between the actual and trend value of profitability is significant because the calculated value of chi-square comes to which exceeds the table value of chi-square at 5percent level of significance. It is evident from the Table4.2 that the last square trend values of production of Dr.Reddy Labouratories showed an average annual increase of production comes to Rs crores.Thedifferencein actual and trend values was positive in the year to , and while they were negative during the years to In Dr.Reddy Labouratories, the difference between the actual and trend value of profitability is significant because the calculated value of chi-square comes to284.13which higher than the table value of chisquare16.92at5 percent level of significance. b. Analysis of Sales Trend To test whether the difference between actual sales and estimated sales was significant or not, the following hypothesis is framed and tested. H0 There is no significant difference between actual sales and the trend values of sales among different years.(or) Ha There is no significant difference between actual sales and the trend values of sales among different year. The sales trend for the selected pharmaceutical companies in India during the study period presented in Table icmrrjournal@gmail.com

7 Table4.3 Actual Sales of pharmaceutical companies in India (Rs.in crores) RANBAXY Dr.REDDY Years Sales Index Sales Index Mean CV CAGR Source:Computed from the Annual reports of the respective companies The actual sales of Ranbaxy Ltdhas been increased from Rs crores in to Rs crores, registering increase of 2.78 times during the study period(table4.3). The sales of Ranbaxy Ltd registered an increasing trend during from to except from to The mean sale of Ranbaxy Ltd has been worked out as Rs crores during the study period. The analysis of CV (0.49) showed that the sales of Ranbaxy Ltd marked erratically fluctuation during the study period. Further, the sales of Ranbaxy Ltd registered positive growth rate(7.62percent) during the study period. The actual sales of Dr.Reddy Labouratories has been increased from Rs crores in to Rs crores, registering increase of 4.80 times during the study period (Table4.3). The sales of Dr.Reddy Labouratories registered an increasing trend during the study period. The mean sale of Dr.Reddy Labouratories has been worked out as Rs crores during the study period. The analysis of CV (0.48) showed that the sales of Dr.Reddy Labouratories marked erratically fluctuation during the study period. Table4.4 -Trend Value of Sales of selected pharmaceutical companies in India (Rs.in crores) YEARS RANBAXY Dr.REDDY Chi-square(Ȥ 2 ) Source: computed 15 icmrrjournal@gmail.com

8 Trendequation: RANBAXY :Y = t Dr.REDDY:Y = t It is showed from thetable4.4 at the least square trend values of production of Ranbaxy Ltd showed an average annual increase of sales comes to Rs crores. The difference in actual and trend values was positive in the year to and while they were negative to , and In Ranbaxy Ltd, the difference between the actual and trend value of profitability is significant because the calculated value of chi-square comes to which exceeds the table value of chi-square16.92 at 5 percent level of significance. It is showed from the Table4.4 that the least square trend values of sales of Dr.Reddy Labouratories showed an average annual increase of sales comes to Rs crores. The difference in actual and trend values was positive in the year , , , and while they were negative to In Dr.Reddy Labouratories, the difference between the actual and trend value of profitability is significant because the calculated value of chi-square comesto which exceeds the table value of chi-square 16.92at5percentlevelof significance. c. Analysis of Market share Trend To test whether the difference between actual market share and estimated market share was significant or not, the following hypothesis is framed an d tested. H0 There is no significant difference between actual market share and the trend values of market share among different years.(or) Ha There is no significant difference between actual market share and the trend values of market share among different years. The marketshare trend for the selected pharmaceutical companies in India during the study period presented in Table4.5. Table 4.5- Actual Market share of pharmaceutical companies in India (Rs.in crores) RANBAXY Dr.REDDY Marketshare Index Marketshare Index Years Mean CV CAGR Source: Computed from the Annual reports of the respective companies 16 icmrrjournal@gmail.com

9 The actual market share of Ranbaxy Ltd has been increased from Rs crores in to Rs crores, registering increase of 1.14 times during the study period (Table4.5). The market share of Ranbaxy Ltd registered an increasing trend during the study period. The mean market share of Ranbaxy Ltd has been worked out as Rs crores during the study period. The analysis of CV (0.36) showed that the market share of Ranbaxy Ltd marked erratic fluctuation during the study period. Further, the market share of Ranbaxy Ltd registered positive growth rate (1.45 percent) during the study period. The actual market share of Dr.Reddy Labouratories has been increased from Rs crores in to Rs crores, registering increase of 2.22 times during the study period (Table4.5). The market share of Dr.Reddy Labouratories registered an increasing trend during the study period. The mean market share of Dr.Reddy Labouratories has been worked out as Rs crores during the study period. The analysis of CV (0.18) showed that the market share of Dr.Reddy Labouratories marked highly flexible during the study period. Further, the market share of Dr.Reddy Labouratories registered positive growth rate (9.27 per cent) during the study period. Trend Value of Market share of selected pharmaceutical companies in India (Rs.in crores) YEARS RANBAXY Dr.REDDY Chi-square(Ȥ 2 ) Source: Computed Trend equation: RANBAXY :Y = (-3.87)t Dr.REDDY:Y = t It is showed from the Table4.6 that the least square trend values of production of Ranbaxy Ltd showed an average annual increase of market share comes to Rs.-3.87crores. The difference in actual and trend values was positive in the year to while they were negative and In Ranbaxy Ltd, the difference between the actual and trend value of profitability is a significant because the calculated value of chi-square comes to39.52 which greater the table value of chi-square16.92at 5percentlevelof significance. It is showed from the Table4.6 that the least square trend values of market share of Dr.Reddy Labouratories showed an average annual increase of market share comes tors.2.64 crores. The 17 icmrrjournal@gmail.com

10 difference in actual and trend values was positive in the year to while they were negative , , and In Dr.Reddy Labouratories, the difference between the actual and trend value of profitability is significant because the calculated value of chi-square comes to19.20whichexceedsthetablevalueofchi-square 16.92at5percent levelof significance. FINDINGS INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW The comparison of production performance among the two companies revealed that the production of both the units were erratically fluctuation during the study period. Among the two companies registered positive compound annual growth rate in production during the study period. To conclude, the production performance of Dr.Reddy Labouratoriesis better than the RanbaxyLtd. The comparison of sales performance among the two companies revealed that the sales of both the units were erratically fluctuation during the study period. All the two companies registered positive compound annual growth rate in sales during the study period. To conclude, the sales performance of Dr.ReddyLabouratoriesis better than the Ranbaxy Ltd. The comparison of market share performance among the two companies revealed that the market share of both the units were erratic fluctuation and highly flexible during the study period. All the two companies registered positive compound annual growth rate in market share during the study period. To conclude, the market share performance of Ranbaxy Ltd is better than the Dr.Reddy Labouratories. SUGGESTIONS 1. The pharmaceutical companies would concentration rationalizing the forest policies of the irdomestic state government for making immediate attention for the solution of problems to the shortage of raw material. 2. At present, the profit and loss account of concerns is disclosed in a consolidated from which shows the negative result to the business operations. For better judgement for efficiency and operating performance, it can be prepared in an individual departmental or activity basis of company. 3. The pharmaceutical companies are likely to issue patent rights for improving the new innovation for their products. The patents rights are widely acknowledged as the primary source for an innovation in pharmaceutical. CONCLUSION The analysis of efficiency and operating performance in pharmaceutical companies has been to under growing strategy in study period. There are number of competitive business that make toughness to the pharmaceutical companies are comparatively low as compared to other sector units. The both the companies were effectively utilized their resource sing generating return to their shareholders during the study period. It has to conclude that the analysis edge of operations and selected companies have likely to concentrate on their liquidity position in forth coming years. REFERENCES 1) Mr. Kaushik chakra Borty (2010), Utilization of fund to improve Profitability of multinational companies in Indian pharmaceutical sector.a studyvol.2pp ) Karthikeyan.K and Christina Sheela.S, (2012) Financial Performance of Pharmaceutical Industry in India using DuPont Analysis, European Journal of Business and Management, 18 icmrrjournal@gmail.com

11 Vol4(14), 3) Dr.K.S.Vataliya(2012) Profitability and Consistency Analysis of Pharmacy Sector in India International Journal of Financial Research, Vol.3(3),p.17. 4) Jayakumar,K.(2013) Impact of Acquisition on Operating Performance inindianpharmaceuticalindustry,vol.1(3),pp ) Ramya.A and Sekar.M (2014) A Study On Financial Analysis Of Selected Indian Pharmaceutical Companies, Research Journal of Commerce,Vol2(5),Pp ) Vijayalakshmi.V. andsrividya.m. (2014) A Study On Financial Performanceof Pharmaceutical Industry in India, Journal of ManagementandScience,Vol.4(3),Pp Books Website INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW 1. Bhulla,V.K.(1997).Financial Management Policy, Anmul Publication Private Limited, NewDelhi. 2.Whittington,(1971).The Prediction of Profitability and the studies of Company, Behaviours, Cambridge University Press, London. 3. Kothari, C.R. (1990). Research Methodology: Methods and Techniques, Wiley Estern Ltd., NewDelhi. 1) 2) 3) 4) 5) in.finance.yahoo.com 19 icmrrjournal@gmail.com