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Group5 Pharmaceutical Industry DrReddys

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Dr. Reddys Financial Analysis

Text of Group5 Pharmaceutical Industry DrReddys

  • Financial Accounting-

    Analysis of Pharmaceutical

    Industry Final Report, Group-5

    Submitted to Dr. Lata Chakravarthy

    Murali Krishna Yamsani-1411032

    Naresh Goud Gadagoni-1411034

    Sabarni Sen-1411051

    Sheikh Farzyn -1411055

    Tanulekha Roy-1411062

    V Swapnika Nag-1411065

  • Table of Contents

    1. Industry Analysis ................................................................................................. 3

    1.1 Introduction Indian Pharmaceutical Industry ......................................................... 3

    1.2 Macro Economic Factors and Policy Pronouncements impacting Indian Pharma ................. 3

    Macroeconomic Factors: ........................................................................................ 3

    Policy Procurements: ........................................................................................... 3

    1.3 SWOT Analysis of Indian Pharma Industry ............................................................. 4

    1.4 Porters Analysis of Competitive Forces ................................................................. 4

    2. Evaluation Of Companys Performance ..................................................................... 5

    3. Trend Analysis ............................................................................................... 10

    Profit and Loss .................................................................................................. 10

    Balance Sheet ................................................................................................... 11

    4. Vertical Analysis ............................................................................................... 12

    Balance Sheet- Dr.Reddys ................................................................................... 12

    Profit and Loss Statement- Dr.Reddys .................................................................... 13

    Balance Sheet-CIPLA .......................................................................................... 14

    Profit and Loss Statement-CIPLA ........................................................................... 15

    5. Ratios used for Calculation................................................................................... 16

    6. References ...................................................................................................... 17

    7. Annual Report Sources ....................................................................................... 17

  • 1. Industry Analysis

    1.1 Introduction Indian Pharmaceutical Industry

    Indian pharmaceutical currently valued at ~ 70000 crores had shown a growth rate of 9.8 % in 2013.

    According to 2013 PWC (PricewaterhouseCoopers) report, Indian Pharmaceutical Industry market is

    expected to reach US $74 billion sales by 2020. In terms of volume, it ranks third and in terms of

    values, its rank is 10th globally. In terms of OTC market size, Indias rank is 11th globally. According to

    the report India Pharma 2020 by McKinsey & Co, Indian market has grown at the compound annual

    growth rate of 13% in FY2008-13.Indian industry accounts for 1.4% in terms of value and 10% in

    terms of volume of the global pharmaceutical industry.

    Major players of Indian Pharmaceutical industry

    1.2 Macro Economic Factors and Policy Pronouncements impacting Indian Pharma

    Macroeconomic Factors:

    The Growing Indian Economy: The Indian economy was valued at US$1.430 trillion in 2010. GDP

    growth, calculated on a PPP basis had reached 9.66% in the year 2010

    Growing Middle Class With Higher Purchasing Power: Huge and rapidly growing middle class

    population from 25 million people in 1996 to 153 million people in 2010.

    Changing Disease Profile: Disease profile is gradually shifting towards growth in chronic diseases

    segment - with increase in affluence, life expectancy and the onset of lifestyle related conditions

    Healthcare Insurance: Indias healthcare insurance industry is currently very small and limited, but is

    expected to grow at a CAGR of 15% till 2015.

    Policy Procurements:

    The Drugs Price Control Order (DPCO), 1995 is an order issued by the Government of India under

    Section 3 of the Essential Commodities Act, 1955 to regulate the prices of drugs. The Order inter alia

    provides the list of price controlled drugs, procedures for fixation of prices of drugs, method of

    implementation of prices fixed by Government and penalties for contravention of provisions among

    other things. Revision in 2013, 2014.

    The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provides for

    minimum norms and standards in respect of the following categories of intellectual property rights: -

    Copyrights and related rights, Trademarks, Geographical Indications, Industrial Designs, Patents, Lay

    out designs of integrated circuits, Protection of undisclosed information (trade secrets)

    Pharmaceutical Policy-2002 for cost effective quality production and exports of pharmaceuticals by

    reducing barriers to trade in the pharmaceutical sector.

    0 5000 10000 15000 20000 25000

    Dr Reddy

    Cadila Health

    Biocon

    Lupin

    Aurobindo Pharm

    Net Profit (millions)

  • 1.3 SWOT Analysis of Indian Pharma Industry

    STRENGTHS

    - Low labour and production costs Cost competitiveness

    - Strong generic industry experience in reverse engineering

    - Strong manufacturing base - Access to pool of highly trained and

    skilled scientists, both in India and

    abroad

    WEAKNESS

    - Low investment in innovative R&D - Inadequate regulatory standards - Low per capita healthcare & medical

    expenditure

    OPPORTUNITIES

    - Export potential to the developing & developed countries

    - Licensing deals and collaborations with MNCs

    - India can be niche player in global pharmaceutical R & D by developing

    world class infrastructure

    THREATS

    - R&D efforts hampered by lack of enabling regulatory requirement.

    - High ceilings on product prices and profitability set by DPCO

    - Procedural issues hampering export efforts

    1.4 Porters Analysis of Competitive Forces

    Branded generics market - entry barriers low

    Regulations from Indian Govt could be barrier to entry.

    Threat of New Entrants

    Majority suppliers produce products easy to manufacture

    Medium power of suppliers Power of Suppliers

    Generic drugs offer cost effective alternatives to innovator drugs

    High power of buyers

    Power of Buyers

    One generic easily substituted by other

    High threat of substitutes Threat of Substitutes

    About 24000 companies; around 330 are in organised sector.

    It is a highly fragmented,hence high competition

    Rivalry among existing Competitors

  • 2. Evaluation Of Companys Performance

    Is the business profitable? Is it more or less profitable as compared to previous years,

    competitor? Analyse the reasons for changes.

    Profit Margins:

    Dr. Reddys is showing a healthy net profit margin of 19.9% in the current year (FY14). This is a

    ~5% increase from 15% in FY 12-13. This is also higher than CIPLAs profit margin of 15% for

    FY14. This clearly indicates that the revenue earned by Dr. Reddys for FY14 for given expenses is

    higher than that of CIPLA.

    Dr. Reddys operating profit margin of 28.4% and gross profit margin of 24.5% for FY14 are both

    higher than the respective values for FY13: 23.5% & 19.8%. CIPLAs operating and gross profit

    margins for FY14 are 21.2% & 17.5% Hence Dr. Reddys is performing better than CIPLA in terms of

    profitability. This is because both revenues and profits have increased from FY13 to FY14 and

    operating expenses show only a slight increase, which has reflected in increase of all profit margins.

    Return on Assets:

    Dr. Reddys ROA for FY14 of 14.59% shows an increase from last year (11.33%), and is also much

    higher than both the industry average of 9.35% and ROA of CIPLA 11.37%. This shows that Dr.

    Reddys is employing its assets efficiently and getting more profit per unit of resource.

    Equity Multiplier (Leverage):

    The EM for Dr. Reddys (1.55) is slightly higher than the industry average of 1.50. Since profit

    margins are increasing, this is not necessarily a bad thing. We might infer that financing through debt

    might be more cost effective in this case.

    Return on Equity:

    The companys return on equity for FY14 of 23% is much higher than the industry average of 13.9%

    and CIPLAs 14.64%. It has also increased from a value of 17% from FY13. Hence, we can infer that

    Dr. Reddys is profitable and the profitability has been increasing steadily.

    Is the business liquid in the short-term? Comment on changes over the years. Is the business

    more liquid at the cost of profitability? Substantiate.

    Dr. Reddys has a quick ratio of 1.78 for FY14, which is much higher than the minimum expected

    value, i.e. 1:1. This implies that the business has sufficient easily liquefiable assets compared to its

    current obligations. And hence it will not have any difficulty in re-paying debts. The current ratio for

    FY14 is 2.17, which is higher than the rule of thumb value of 2:1. This further implies that the firm is

    in a position to re-pay its current liabilities