Project Report on Capital Structure

Summer Training, Report On STUDY OF CAPITAL STRUCTURE

Submitted to:

Table of contents Acknowledg Ackno wledgement ement Certif Cer tifica icate te Preface Abstract

02 03 04 07

INTRO TO RANBAXY LABORATORIES LTD

Company Comp any Profile Profi le Vision Operating Joint Ventures and Subsidies Object Obj ective ivess Various Vari ous divisions divisi ons of Ranbaxy Ranba xy Intro of Ranbaxy Plant in India and various depts. Product Produ ct Review Revi ew

08-10 10-11 12-15 16-18 16- 18 19-20 12-23 24-26

INTRO TO CAPITAL STRUCTURE THEORY AND ANALYSIS

Introducti Intr oduction on Literature of review on Capital Structure Method Met hodolo ology gy Theory Theo ry and Analysis Analy sis Optimal Capital Structure for Ranbaxy Capital Capi tal expenditur expend iture: e: an overview overvi ew Latest balance sheet and capital structure of Ranbaxy Recommendations and Suggestions for Industry Conclusion Biblog Bib lograp raphy hy

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ANUJ KUMAR SRIVASTAVA

27-28 29 30 31-38 39-58 59-80 81-82 82-90 91-92 93

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ABSTRACT A proj projec ectt wor work is a manda andato tory ry requi equirremen ementt for the Bus Busines inesss Management Programme. This type of study aims at exposing the young prospective executive to the actual business world.

This proj This projec ectt give givess me kn know owle ledg dgee abou aboutt the the capi capita tall stru struct ctur uree and and theory analysis.Financing analysis.Financing decisions involve raising funds for the firm. It is concerned with formulation and designing of capital structure or leverage. The most crucial decision of any company is involved in the formulati formulation on of its appropria appropriate te capital capital structure structure.. The best design design or structure of the capital of a company helps the management to achieve its its ultim ltimat atee objec bjecttives ives of minimi nimissing ing ov over eral alll cos cost of capi capita tall, maximising profitability profitability and also maximising the value of the firm. organization. It is very effective way to judge a company’s cash flow prospects, as cash is like blood life for any company. The report initially begins with the company profile, followed by the deta detail iled ed anal analys ysis is of comp compan any, y, like like bu busi sine ness sses es of the the comp compan any, y, products offered by the company, financials of the company, etc The repo The report rt invo involv lves es a lot lot of rese resear arch ch to un unde ders rsta tand nd what what exac exactl tly y capital structure of the company should be.thats , why companies require appropriate capital structure. The purpose is to develop an action plan that creates such a capital structure that will upgrades and standardize the quality of business analysis.



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INTRODUCTION TO RANBAXY

COMPANY PROFILE “A company empowered by one mission –to place itself on the world map. An enterprise propelled by one force-that synergizes its energies to charter unexplored markets. Organizations fuelled by one dream-to transform competition into opportunity.”

Ranbaxy Laboratories Ltd. was incorporated in June 1961, in the name of M/S LEPITIT RANBAXY LABORATORIES LTD and it commenced its business in MARCH 1962, in technical and financial collaboration with an international company named LEPTIT SPA, MILAN, ITALY. Ranbaxy Laboratories Laboratories Pvt. Ltd. merged with “Leptit Ranbaxy Laboratories Laboratories Pvt. Ltd.” in 1962 Ranbaxy Ranbaxy and company also also merged with this company company in 1966. 1966. The collaboration collaboration arrangement with M/S LEPTIT was terminated in 1966; after which Indian nationals acquired the entire share capital of the company.

Therefore the word Leptit was removed from the name of the company. The name name is kno known wn as RANBAX RANBAXY Y LABORA LABORATOR TORIES IES LIMITE LIMITED. D. In 19 1973 73 the the company issued shares to the general public and became a full fledged PUBLIC LIMITED COMPANY.

Today Today,, Ranba Ranbaxy xy has has emerg emerged ed as a Leadi Leading ng Phar harmac maceutic tical Com Company on the the Ind Indian ian firmam firmamen ent, t, with with the seco second nd large largest st mark market et share and enjoys an enviable reputation for its high standard of ethics and quality around its core strength of anti-infective, it has produced new brands in emerging therapeutic areas like cardiovascular, central nervous GJ-IMT,MOHALI GJ-IMT,M OHALI of 94 of 94


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system and nutritional. supporting this expansion, the company has invested in world class manufacturing infrastructure that leverages India’s comparative cost advantage and skilled manpower, while delivering international quality. The company’s drive for Internationalism is guided by the well planned brand strategy that covers some of the world emerging markets like China, cis, Central Europe and Latin America . Its position today is in league of the Top Ten Pharmaceutical companies of three world an decent ranking as the eleventh larg larges estt comp compan any y in the the inte intern rnat atio iona nall gene generi rics cs spac spacee is the the reso resoun undi ding ng endorsement of its strategic mind. It is clear that for a long time, the dominant share of revenues of the company would continue to come from the ever expanding global generics market. Hence the intent of Ranbaxy mission is to achieve a sustained growth rate through the continuous pursuit of innovation phase one trials trials for pervasion, a compound for treating prosthetic prosthetic males have been completed. Phase 1 trials with clafrinast, an asthma compound is an important step towards research based value creation.

This company also had success with Ciplofloxacine, Ciplofloxacine, an ingenious form, created through the novel drug delivery systems research. As the demand of the bulk drugs inside the country and abroad was increasingly rapidly a new, plant was set up at Toansa near Ropar in 1987. This was a higher capacity plant designed to cater to the present present and future needs, needs, initially initially antibioti antibiotics cs like Ampicillin Ampicillin,, Trihydrate and Doxycycline were manufactured. Later, on the other drugs like Cephalexin monohydrate and Ranitidine were also prepared. The plant at Toansa was designed to meet the stringent standards set by the Food and Drug Administration (FDA) of U.S.A. This plant has been approved by FDA and this will open up American and other newer markets for Ranbaxy’s products At present Ranbaxy have four plants for the manufacture of bulk drugs two at Mohali, one at Dewas (M.P) AND Another at Toansa near ROPAR. At present, Ranbaxy is the second most Indian company engaged in the manufacturing of Pharmaceuticals, Bulk Drugs and Fine Chemicals. RANBAXY’s vast range of highly pure laboratory laboratory reagent and chemicals enjoy a plac placee of prid pridee in the the mark market et.. IT tren trends ds,, has has rebu rebuil iltt As a step step towa toward rdss leveraging information for value creation using its information backbone around an ERP application, along the focus on reengineering several business processes around around the interne internett and has putting putting place busines businesss solutio solutions ns that challenge challenge existing ways of doing Business. The undying spirit of the company’s human assets and their intensive competitive and entrepreneurial energy has played a GJ-IMT,MOHALI GJ-IMT,M OHALI of 94 of 94


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great part in transforming the company into a multicultural and multiracial team. Today, Ranbaxy is the largest exporter accounting for 12% of the industry exports pharmaceutical substance and dosages forms to over 50 countries with the internationals sales comprising of 45% of the total turnover.

VISION: GARUDA

During the year 2002, the company has evolved a 10-year vision till 2012, for sustaining significant growth consistent with its mission to be an international research based Pharmaceutical Company, under the rubric ‘ Vision Garuda’, with increasing emphasis on Novel Drug Delivery Systems Research (DDR). In licensing and out licensing, relationship relationship with other important pharmaceutical pharmaceutical entit entities ies,, expan expansi sion on of manufa manufact cturi uring ng facil faciliti ities es bo both th in India India and and strat strateg egic ic overseas locations, revamping of organizational structures to cater to the wider and more dispersed span of operations, and streamlining and standardizing the business processes through out the global organization, are other areas that receive focus and attention of management on priority. GJ-IMT,MOHALI GJ-IMT,M OHALI of 94 of 94


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Mission

“To become a Research based International pharmaceutical company”

Vision-2012

Achieve significant business in Proprietary prescription products By 2012 With a strong presence in developed markets

Aspirations-2012

Aspire to be a$5 billion company Become a Top 5 global generics player Significant income from Proprietary products



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OPERATING JOINT VENTURES AND SUBSIDIARIES BRAZIL

:

Ranbaxy S.P. Medicamentos Ltd.

CHINA

:

Ranbaxy (Guangzhou China) Ltd.

EGYPT

:

Ranbaxy Egypt Ltd.

GERMANY

:

Basics Gmb H.

HONG KONG

:

Ranbaxy (Hong Kong) Ltd.

INDIA

:

Rexcel pharmaceuticals Ltd., Solus pharmaceuticals Ltd., Vidyut Travel Services ltd.

IRELAND

:

Ranbaxy Ireland Ltd.

MALAYSIA

:

Ranbaxy (Malaysia) Sdn. Bhd.

NETHERLANDS

:

Ranbaxy Pharmaceuticals B.V.

NIGERIA

:

Ranbaxy Nigeria Ltd.

PANAMA

:

Ranbaxy Panama SA.

POLAND

:

Ranbaxy Poland Sp. Zo.

SOUTH AFRICA

:

Ranbaxy (SA) (Pty.) Ltd.

THAILAND

:

Unichem pharmaceuticals LTD., Unichem Distributors Ltd. Part, Ranbaxy Unichem CO.Ltd.

U.K GJ-IMT,MOHALI GJ-IMT,M OHALI of 94 of 94

:

Ranbaxy (UK) Ltd ANUJ KUMAR SRIVASTAVA

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USA

:

Ranbaxy pharmaceuticals Inc. Ohm Laboratories Inc., Ranbaxy Schein Pharma, LLC

VIETNAM

:

Ranbaxy Vietnam Company Ltd.

ALLIED BUSINESSES Ranbaxy Animal Health

The Animal Health division saw an encouraging growth despite the prevailing poor market conditions. The division grew at twice the growth rate recorded in the industry. On the basis of having a vast dome satiated animal population, population, the livestock, poultry business and pets business are among the fastest growing secto sectors rs in India India.. A vast vast infra infrastr struc uctur turee of veter veterina inary ry colle college ges, s, agric agricult ultur ural al institutes, technologists and researchers are helping farmers to source healthy, cost cost effectiv effectivee produc products. ts. In conjunc conjunction tion with the presen presentt scenari scenario, o, the AHC divi divisi sion on of Ranb Ranbax axy y Labo Labora rato tori ries es Limi Limite ted d has has intr introd oduc uced ed seve severa rall late latest st generation products.



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Ranbaxy Fine Chemicals Limited (RFCL)

The divi The divission ion rank ranked ed 4 th in the industry and captured 11% market share. RANKEM is established as a powerful brand, RFCL's brand for its range of Reagents is now syno synony nymo mous us with with exce excell llen ence ce in reagents and fine chemicals in the coun countr try. y. Th Thee focu focuss of bu busi sine ness ss remai remains ns on deve develop loping ing exte extens nsive ive customer relations; enhancing service levels and enriching the product mix with the help of a qualified and competent marketing and sales team Diagnostics

The diag The diagno nost stic icss divi divisi sion on has has aggr aggres essi sive vely ly focu focuse sed d on mark market et expa expans nsio ion n activities based on strategy of reliability, quality products and efficient service. Introd Introduc uctio tion n of produ products cts in ‘Poi ‘Point nt of Care’ Care’ marke markets ts has expa expand nded ed marke markett presence and over the next 1 – 2 years this segment will see considerable expansion in line with world trends. The Dade Behring segment has increased its installation base by 60% in leading hosp ho spit ital alss and and labo labora rato tori ries es.. Plan Planss are are afoo afoott for for the the intr introd oduc ucti tion on of more more parameters for the ‘Point of Care’ market and the launch of Special Chemistries, a range of drug assays, plus an entry into automated microbiology in both the Base and Dade Behring business areas.

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The company has also witnessed significant milestones in the area of Novel Drug Drug Deliv Deliver ery y Syste Systems ms (NDDS (NDDS). ). Th Thee compa company ny has has ente entered red into into strat strateg egic ic business arrangements with companies such as Bayer AG, Glaxo-Wellcome, Eli-Lilly Eli-Lilly etc. for product production ion and co-mark co-marketin eting g operati operations ons.. Many Many innovat innovative ive developments have been taking place in recent times. The company’s research team is capable of developing one NDDS product every 12 to 18 months. Also, two new products: Roletra-D and Altiva-D, will soon be launched in India. In order to expand and promote global growth, the company opened several new markets during the year, notably in Brazil, where 25 filings were undertaken in a span of 2-3 months. The company has planned to build and protect intellectual property with the help of IPC, which addresses all matters pertaining to patents. CQA supervises the implem implemen enta tatio tion n of stand standard ard op oper erati ating ng proc procedu edures res (SOP) (SOP) and and ensur ensures es compliance compliance to corporate corporate quality assurance assurance policy in all technological technological operations of the organization. The company is committed to invest 6% of the sales in R and D by 2003, of which 7% of the expenditure will be earmarked for research on New Drug Discovery and Novel Drug Delivery Systems. There will be continuous emphasis on augmenting R and D performance and productivity with advanced scientific and technological tools.

VALUES OF RANBAXY LABORATORIES LIMITED

1. Achieving Achieving customer customer satisfaction satisfaction is fundamental fundamental to their their business. business. 2. Practice Practice dignity dignity and equity equity in relatio relationsh nships ips and provide provide opportuni opportunities ties for people to realize their full potential. 3. Ensure profitabl profitablee growth and enhance enhance wealth of of shareholders shareholders.. 4. Foster mutually mutually beneficia beneficiall relationships relationships with all their business business partners. partners. 5. Manage their operation operationss with concern for safety safety and environment. environment. 6. Be a responsible corporate citizen.



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OBJECTIVES

1. 2. 3. 4. 5. 6.

OF

RANBAXY

LABORATORIES

LTD.

To be a lead leader er in the the Phar Pharma mace ceut utic ical al indu indust stry ry.. To be a pro profi fita tabl blee com compa pany ny with with a ste stead ady y gro growt wth h in in ear earni ning ngs. s. To set set an an exa examp mple le as a soc socia iall lly y res respo pons nsib ible le comp compan any. y. To dive divers rsif ify y in heal health th care care rela relate ted d areas reas.. To str striv ivee for for exce excell llen ence ce and and con conti tinu nuou ouss impr improv ovem emen entt in all all sph spher eres es.. To imp impro rove ve the the qua quali lity ty of of life life of of peop people le by by prov provid idin ing g bett better er ser servi vice cess and and quality products.

Environment, Environment, Health and Safety [EHS] Caring for the Environment is a core corporate value and as a part of this commitment. The Company enunciated its EHS policy in 1993. The Company’s EHS policy provides for the creation of a safe and healthy workplace and a clean environment for employees and the community. It aims at high higher er inte intern rnat atio iona nall stan standa dard rdss in plan plantt desi design gn,, equi equipm pmen entt sele select ctio ion, n, maintenance and operations. The policy seeks to manufacture products safely and in an environmentally responsible manner. The implementation of the EHS Policy is ensured by institutionalizing a robust EHS Management Management system, adequately adequately supported by well defined organizational organizational structure. As a part part of EHS EHS proc proces esse sess at the the corp corpor orat atee leve level, l, besi beside dess layi laying ng do down wn guidelines on systems, policy and training, the corporate EHS office monitors compliance, maintains and disseminates information on laws and regulations. EHS performance review meetings are held on regular basis to monitor the progress against agreed EHS improvement plans. Close cooperation between all GJ-IMT,MOHALI GJ-IMT,M OHALI 12 of 94 of 94


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units and individuals is the key to maintaining high standards of environment protection and safety in all the plants. The key processes at location level comprise of regular safety surveillance, inspecti inspections ons & audits, audits, Permit Permit to work system for operati operationa onall / maintena maintenance nce safety, Fire prevention & protection activities, operation of the ETP/Incinerator, dispo disposa sall activ activiti ities es relate related d to haza hazardo rdous us waste wastes, s, regu regula larr monito monitorin ring g of the environment internally and also through approved laboratories. Monthly reports addre address ss EHS initi initiati ative ves, s, compli complian ance ce & vario various us recor records ds un unde derr the statut statutory ory requir requireme ement, nt, train training ing of emplo employe yees es inclu includin ding g contr contrac actt employ employee eess on EHS awareness, interaction with the residential associations/nearby community etc., celebration of National safety day, fire day, Environment day etc. for EHS awareness among employees. The manufacturing facilities for bulk drugs and dosage forms comply with the stringe stringent nt requirem requirements ents of Good Manufac Manufacturi turing ng Practice Practicess (GMP) (GMP) and Good Good Labor Laborato atory ry Pract Practice icess (GLP) (GLP) and and are are appro approve ved d by Inte Interna rnatio tiona nall healt health h and and regulatory Agencies like FDA - USA, MCA – UK, WHO etc. These practices and approvals ensure that an effective framework is always in place, not only for manufacture of high quality products, but also for effective use of resources and reduction of wastes as well as high safety & hygiene standards. Ranbaxy has made significant improvements in process safety of the existing manufacturing facilities by providing extensive instrumented safety protection systems. The intended safety features are incorporated in the basic design of the new projects. Inves Investme tments nts have have been been made made on proc proces esss impro improve vemen ments ts as well well as efflu effluen entt treatment plant up-gradation using the latest membrane based technology, multieffec effectt therma thermall evap evapor orati ation on syste system m and and state state-of -of-th -the-a e-art rt Incin Incinera erato tor. r. These These inve invest stme ment ntss have have help helped ed to redu reduce ce disc discha harg rges es of cont contam amin inan ants ts into into the the environment. With the facilities installed at Toansa for recycling of the treated effluent, the site has achieved the status of “zero discharge site”. The Compa Company ny also also enga engage gess with with the conc concer erne ned d autho authorit ritie iess and and indu industr stry y in devising responsible laws, regulations and standards and thus making safety, occupational health & environmental information and expertise available to its employees and the community at large. Ranbaxy has made EHS concerns and practices a necessary factor in appraising its employee performance. The Company also accords a very high priority to hygiene monitoring at work place and health assessment of all employees at site. The plant and processes are continuo continuously usly upg upgrade raded d to improve improve hygiene hygiene and health health standar standards. ds. Necessa Necessary ry training is imparted to the employees employees to enhance enhance their awareness towards health related matters.



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Safety Safety kn knowl owledg edgee of the the emplo employe yees es is cons constan tantly tly up upda dated ted throu through gh vario various us external and in-house training programs, including special training programs by overseas experts & consultants. Moving up the value chain, the company identified Consumer Healthcare as its new business area in the year 2001. Ranbaxy Global Consumer Healthcare (RGCH) was launched in October 2002 with a portfolio of 4 switch brands: Revita Revital, l, Pepf Pepfiz, iz, Gesdy Gesdyp p & Garlic Garlic Pearl Pearls. s. Since Since thes thesee bran brands ds were were alrea already dy popu popula larr amon amongs gstt cons consume umers rs and and repre represe sente nted d the leadin leading g commo common n ailme ailment nt categories like VMS (Vitamins & Minerals Supplement), this portfolio was care carefu full lly y crea create ted d for for the the intr introd oduc ucti tion on of RGCH RGCH to the the Indi Indian an mark market et.. Subsequently in 2004, RGCH launched its first herbal range of products through New Age Herbals (NAH) with products offering remedy in categories of Cough & Cold (Olesan Oil & Cough Syrups) and Appetite Stimulant (Eat Ease).



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VARIOUS DIVISIONS OF RANBAXY LABORATORIES LTD. . 1. 2. 3. 4. 5. 6. 7. 8. 9.

Chemical Division Diagnostic Division Stan care Division Curradia Division International Di Division Pharmaceutical Division Technical Di Division Corporate Division Animal He Health Ca Care Di Division

DIVISIONS IN VARIOUS GEOGRAPHICAL AREAS

1. 2. 3. 4.

Indi India a and and Midd Middle le East East Euro Eu rope pe,, CIS CIS and and Afri Africa ca Asia Asia Pacifi Pacificc and Latin Latin Ameri America ca Nort North h Amer Americ ica a



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JOINT VENTURE OF THE COMPANY.

2000 200 0 Ranba Ranbaxy xy files files IND Applica Applicatio tion n for for Asthma Asthma Molecu Moleculele- RBx46 RBx4638 38,, after after successful completion of pre-clinical studies.Ranbaxy acquires Bayer’s Generics business (trading under the Name of Basics) in Germany. Ranbaxy forays into Brazil, the largest pharmaceutical market in South America and achieves global sales of U.S. $ 2.5 million in this market. 2001 200 1 Ranba Ranbaxy xy took took a signi signific fican antt step step forwa forward rd in Vietna Vietnam m by initi initiati ating ng the the Setting up of a new manufacturing facility with an investment of U.S. $ 10 million. Ranbaxy achieved a turnover of U.S. $ 502 million for the year 2002 and moved closer to achieving a target of 1 billion dollar by 2004. 2002 Receive Receivess approva approvall from from FDA to market Midazo Midazolam lam Hydrochlo Hydrochloride ride Syrup Syrup 2 Mg base/ ml. Ranbaxy receives and approval from FDA FDA to manu manufa fact ctur uree and and mark market et Cefp Cefpod odox oxim imee Proxetil for Oral Suspension, Lisinopril + Hydrochlorothiazide Tablets Us, Terazosin Hydro drochlori lorid de Capsules les and Amox moxcilli illin n Ora Oral suspension USP.Heralding the company’s entry into the Indian OTC market. 2003 Ranbaxy Ranbaxy receiv received ed the economi economicc times times award award for corpor corporate ate excelle excellence nce-for the company for year.ranbaxy signed an agreement toacquire toacquire RPG(aventis) SA along with its fully owned subsidiary,OPIH SARL,in france Ranbaxy launched its first range of herbal projects. 2005 Acquisition of additional stake in Ranbaxy Farmaceutica Ltda., Brazil Ranbaxy announced the acquisition of Be-Tabs Pharmaceuticals (Pty) Limited 2008 Acquired by the Japanes Japanesee giant, the $9.62 $9.62 billion Daiichi Sankyo, ranked No. 3 in Japan



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BRIEF INTRO OF RANBAXY PLANTS IN INDIA

In the chemical division, various bulk drugs are manufactured. The chemical division had three units in Punjab. One is located at Toansa, two are located at Mohali and one unit is located at Dewas near Indore in Madhya Pradesh, where Ciprofloxacine is manufactured. In the plant of the chemical division, various drug drugss like like Anti Antibi biot otic ics, s, Anti Anti-m -mal alar aria ial, l, Anti Antiba bact cter eria iall and and Anti Anti-u -ulc lcer er are are manufactured. manufactured. One of the older plants of Ranbaxy was closed after the accident in June 2003.the second one is still working The 1991, the Toansa plant started functioning in 1992 and the Dewas plant started functioning in 1999. Various plant heads independently manage all these plants. In each unit, separate facilities with respect to the manufacture of drugs, along with their manufacturing areas have been provided. This is required to reduce the chances of any cross contamination under under the drug laws and to comply with good manufacturing practices. At Mohali plant, separate blocks have been provided for the preparation of each drug .The Toansa, Mohali and Dewas plants are planned in such a way that their system, facilities, manufacturing practices and standards meet the requirements of FDA. DA. Mohali Plan lant also main mainlly in the the manu nufa faccturing ring of Acti Activ ve Pharmaceutical Ingredients (API). The Plant is divided into two plant areas A8 and A9 GJ-IMT,MOHALI GJ-IMT,M OHALI 17 of 94 of 94


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THE VARIOUS DEPARTMENTS Human Resource Department

The basic function of the human resource department in the modern corporate world world is kn know owled ledge ge mana manage gemen ment. t. The HR depa departm rtmen entt striv strives es to maint maintain ain cohesiveness among employees. It also ensures interdepartmental cooperation in achieving targets. The appraisal system is also taken care by this department. The HR department delves deep into the employee’s psyche to analyze the positives positives and negatives negatives of each employee, so that a proper system of delegation and / or empowerment can be evolved. Finance Department

The finance department takes care of the regular financial needs of the company it ensures proper allocation of funds and takes care of the working capital requirements. It verifies capital raised by different departments and sends them for approval to the higher authorities. Stores Department

The function of this department is to provide adequate and proper storage and preservation of various items to meet the demand of various other departments by proper issues and maintaining accounts of consumption. It also keeps a track of stock accumulation and abnormal consumption. Erection and Fabrication Department

As the name suggests, this department identifies new projects and helps in erec erecti ting ng them them.. Th This is depa depart rtme ment nt also also un unde dert rtak akes es majo majorr modi modifi fica cati tion onss of equipment. ERP Department

ERP depa departm rtmen entt help helpss to integ integrat ratee the entir entiree enter enterpr pris isee start startin ing g from from the supplier to the customer, covering financial and human resources. This will enable the enterprise to increase productivity by reducing costs. It also ensures a single solution to the information needs of the whole organization.



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Production Department

As a part of their on going commitment to produce hi-tech quality drugs and phar pharmac maceu eutic ticals als that that take take care care of the the spec specifi ificc need needss of marke markets ts arou around nd the the world world,, Ranba Ranbaxy xy Labor Laborato atorie riess Limite Limited d has has increa increase sed d the inves investme tment nt in the production production department. It is the most important department of the company company and has the following objectives: 1. Improvi Improving ng volum volumee of produc production tion.. 2. Reduc Reducing ing rej rejec ectio tion n rate. rate. 3. Maint Maintai ainin ning g rewor rework k rate. rate. Engineering Department

This depa This depart rtme ment nt un unde dert rtak akes es bu buil ildi ding ng,, cons constr truc ucti tion on and and main mainte tena nanc nce. e. Maint Maintai ainin ning g servi service ce facili facilitie tiess such such as water, water, gas, gas, heati heating, ng, venti ventilat latio ion, n, air air conditioning, painting and plumbing are some of the other areas dealt by this department. This department also helps in maintaining electrical equipments such as generators, transformers, telephone system and electrical installation. Purchase Department

The purchase department provides material to the factory without which the wheels of machines cannot move. The various functions performed by this departme department nt include include:: Securin Securing g goo good d vendor vendor perform performanc ance, e, includi including ng prompt prompt deliveries of supplies of acceptable qualities. 1. To deve develo lop p sati satisf sfac acto tory ry sour source cess of supp supply ly and and main mainta tain inin ing g go good od relationships with the suppliers. 2. To pay pay reason reasonably ably low prices. prices.

Quality Control/Quality Assurance Department

The purpose of QC & QA departments is to ensure that the desired quality stand standard ard is achie achieve ved. d. It also also ensu ensures res that that the the proc proces essin sing g or fabric fabricat ation ion of material conforms to the specific characteristics selected, to assure that the resulting product will in fact perform its intended function.



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PRODUCT REVIEW Ranbaxy’s therapeutic width covers five of the top six categories including Anti-infective, Gastrointestinal, Nutritionals, Cardiovascular, Central Nervous System, Respiratory, Dermatological and others. While anti-infective contribute 56% of the total sales, Ranbaxy’s other brands like Simvotin and Storvas in the cardiovascular cardiovascular segment, Serlift in CNS and Revital and Riconia in Nutritionals, are on their way to success in multiple markets. Duri During ng Jan Jan - Dec Dec 20 2000 00,, amon amongs gstt the the top top prod produc ucts ts of Ranb Ranbax axy, y, Spor Sporid idex ex (Ce (Cephalexin) in) was was the the Numbe mber 1 bran rand, clos losely fol follow lowed by Cifra ifran n (Ciprofloxacin). Anti - Infectives

Anti- infective has been the main driver of Ranbaxy’s sales. The important brands brands in this categor category y are Cifran Cifran (Ciprof (Ciprofloxa loxacin) cin),, Sporide Sporidex x (Ciphale (Ciphalexin xin), ), Enhancin (Amoxyclav), Crixan (Clarithromycin), Vercef (Cefaclor), Oframax (Ceftriaxone), Cepodem (Cefpodoxime Proxetil), Zanocin (Ofloxacin), Ceroxim (Cefuroxime Axetil), and Loxof (Levofloxacin). Cifran (Ciprofloxacin) is the key brand in the anti- infective portfolio, with estimated sales of US $ 32 Mn, currently being marketed in 15 countries. Development of Ciprofloxacin once a day has been an important landmark achieved by Ranbaxy. The product has been licensed to Bayer. Cifran continues to be a dominant player in the quinolones market in India, China and Russia. Spor Sporid idex ex is anot anothe herr lead leadin ing g bran brand d in Ranb Ranbax axy’ y’ss prod produc uctt po port rtfo foli lio o with with worldwide annual sales of US $ 35 Mn. It is available in eight different dosage forms forms includi including ng capsul capsules, es, dry powder powder for suspen suspension sion,, redimix, redimix, dispersi dispersible ble tablets, paediatric drops, soft gelatin capsules, sachet and advanced advanced formulation for twice-daily administration. administration. It is currently marketed in 15 countries. countries. In India, Sporidex is the leading brand with a market share of 36% of the Cephalexin segment.



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Keflor is available in seven different dosage forms and is the third-largest selling brand for Ranbaxy worldwide. The dosage forms list includes capsules, dry syrup, modified release tablets, dispersible tablets, drops and redimix. Enhancin is expected to be the leading product in Ranbaxy’s product portfolio with estimated sales of US $ 45 Mn by the year 2005. The product will be rolled out to about 20 important markets during this period. Zano Zanoci cin, n, with with appr approx oxim imat atee sale saless of US $ 10 Mn Mn,, is the the seve sevent nthh-la larg rges estt contributor to Ranbaxy’s total sales. Cepodem is currently available in three different countries outside India, and will be rolled out to 13 different countries in the near future.

Cardiovasculars

Cardiovascular is projected to be the second-best category for Ranbaxy. Statins have been the key drivers for this segment. The sale of Simvastatin has grown substantially in the past few years, a trend that is likely to continue in the future. In India, Simvotin (Simvastatin) is the market leader in the cholesterol reducer segme segment. nt. Anothe Anotherr leadin leading g brand brand in this this cate catego gory ry is Storva Storvass (Ator (Atorva vasta statin tin). ). Storvas has been one of the fastest-ever to enter the top-300 brands list of the Indian Indian ph pharm armaa indus industry try.. Other Other globa globall cardi cardiov ovas ascu cula larr bran brands ds are are Covan Covance ce (Losartan) and Caslot (Carvedilol). Central Nervous System

The Central Nervous Segment is one of the important focus areas identified by Ranbaxy, Ranbaxy, with Serlift being the key brand. In India, Serlift is number 1 amongst Sertraline brands. New product introductions will be drivers of growth in this category. Gastrointestinal

Currently, gastrointestinal drugs are the second-largest category for Ranbaxy. The key brands in this category include Histac and Romesac. The current annual sales of Ranitidine are estimated to be around US $ 16 Mn and the product is marketed in more than 20 countries.

Rheumatologicals



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The first generation Cox-2 inhibitors principally drive worldwide growth in rheumatology. This category is estimated to grow exponentially for Ranbaxy, with brands like Celecoxib. Celecoxib. This year, Rofibax (Rofecoxib) (Rofecoxib) introduced in India, has has estab establis lishe hed d itsel itselff as a leade leaderr in the the Cox-2 Cox-2 inhibi inhibito torr categ category ory and and has has overtaken all Celecoxib brands. It has been identified as a key Global brand for the future.

Nutritonals

Nutritionals have been a major contributor to Ranbaxy’s sales. Two of the important products in this category are Revital and Riconia. With annual sales estimated at about US $ 10 Mn, Revital contributes a significant share of total sales. It is a leading brand brand in India and has done exceedingly exceedingly well in some parts of the world as an OTC product. Dermatologicals

The dermatology category is mainly driven by India region and is likely to show a good growth pattern in the future. Some of the key brands doing well in this segment are Mobizox, Silverex, Moisturex, etc.



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INTRODUCTION TO CAPITAL STRUCTURE THEORY AND ANALYSIS



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This is a Report on the ‘Capital Structure and Capital Expe Ex pend ndit itur ure e

of

Ranb Ra nba axy

Labor borato tor ries ies

Ltd.’ td.’..

The

purpose and scope of the project can be listed as: Unders Understand tanding ing the organiz organizatio ational nal struct structure ure and func functio tionin ning g of

•

Ranbaxy Laboratories Ltd. Analysing and comparing the financial health of the firms in the

•

Indian Pharma Industry. •

Identifying and analysing the capital structure of Ranbaxy.

•

Conducting a Review of the Capital Expenditure done at Ranbaxy

Laboratories Ltd. Identifying loopholes in the functioning and in the area of study

•

and recommending the suggestions for the same. Following are the limitations of the study: •

Balance sheets of only 3 years have been studied but the company is in operation for so many years.

•

Only On ly spec specif ific ic tool toolss (i.e. (i.e. ratio ratio anal analys ysis is)) have have be been en used used for for data data analysis, while so many other tools are also there.

•

Organizational rules & regulations.

•

Availability of data. Financial figures for 2008 of Ranbaxy were not available.

•

Limitations of the financial tools used.



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Litreture of review on Capital Structure CAPITAL STRUCTURE IS A MIX OF DEBT AND EQUITY CAPITAL MAINTAINED BY A FIRM. CAPITAL STRUCTURE IS ALSO REFERRED AS FINANCIAL STRUCTURE OF A FIRM. THE CAPITAL STRUCTURE OF A FIRM IS VERY IMPORTANT SINCE IT RELATED TO THE ABILITY OF THE FIRM TO MEET THE NEEDS OF ITS STAKEHOLDERS. MODIGLIANI AND MILLER (1958) WERE THE FIRST ONES TO LANDMARK THE TOPIC OF CAPITAL STRUCTURE AND THEY ARGUED THAT CAPITAL STRUCTURE WAS IRRELEVANT IN DETERMINING THE FIRM’S VALUE AND ITS FUTURE PERFORMANCE. ON THE OTHER HAND, LUBATKIN AND CHATTERJEE (1994) AS WELL AS MANY OTHER STUDIES HAVE PROVED THAT THERE EXISTS A RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND FIRM VALUE. MODIGLIANI AND MILLER (1963) SHOWED THAT THEIR MODEL IS NO MORE EFFECTIVE IF TAX WAS TAKEN INTO CONSIDERATION SINCE TAX SUBSIDIES ON DEBT INTEREST PAYMENTS WILL CAUSE A RISE IN FIRM VALUE WHEN EQUITY IS TRADED FOR DEBT. IN MORE RECENT LITERATURES, AUTHORS HAVE SHOWED THAT THEY ARE LESS INTERESTED ON HOW CAPITAL STRUCTURE AFFECTS THE FIRM VALUE. INSTEAD OF THE FIRM. MODIGLIANI AND MILLER (1963) ARGUED THAT THE CAPITAL STRUCTURE OF A FIRM SHOULD COMPOSE ENTIRELY OF DEBT DUE TO TAX DEDUCTIONS ON INTEREST PAYMENTS. HOWEVER, BRIGHAM AND GAPENSKI (1996) SAID THAT, IN THEORY, THE MODIGLIANI-MILLER MODIGLIANI-MILLER (MM) MODEL IS VALID. BUT, IN PRACTICE, BANKRUPTCY COSTS EXIST AND THESE COSTS ARE DIRECTLY PROPORTIONAL TO THE DEBT LEVEL OF THE FIRM. HENCE, AN INCREASE IN DEBT LEVEL CAUSES AN INCREASE IN BANKRUPTCY COSTS. THEREFORE, THEY ARGUE THAT THAT AN OPTIMAL CAPITAL STRUCTURE CAN ONLY BE ATTAINED IF THE TAX SHELTERING BENEFITS PROVIDED AN INCREASE IN DEBT LEVEL IS EQUAL TO THE BANKRUPTCY COSTS. IN THIS CASE, MANAGERS OF THE FIRMS SHOULD BE ABLE TO IDENTIFY WHEN THIS OPTIMAL CAPITAL STRUCTURE IS ATTAINED AND TRY TO MAINTAIN IT AT THE SAME LEVEL. THIS IS THE ONLY WAY THAT THE FINANCING COSTS AND THE WEIGHTED AVERAGE COST OF CAPITAL (WACC) ARE MINIMISED THEREBY INCREASING FIRM VALUE AND CORPORATE PERFORMANCE.

BOODHOO Roshan ASc Finance, BBA (Hons) Finance, BSc (Hons) Banking & International Finance (Email: [email protected] ; Tel: +230-7891888) GJ-IMT,MOHALI GJ-IMT,M OHALI ANUJ KUMAR SRIVASTAVA Page 25 of 94 of 94

Methodology Methodology The methodology adopted for the study was as follows: Familiarization, examination and evaluation of the procedures relating to capital structure and capital expenditure.

•

Collection Collection of relevant data form company company records and cross checking of this data. •

Calculations of financial ratios, parameter and norms, as also their financial implications. •

Broadly the data were collected for the report on the project work has been through the primary and secondary sources. The primary data is collected by various approaches so as to give a precise, accu accurat rate, e, realis realistic tic and and relev relevan antt data. data. The main main go goal al in the mind mind while while gathering primary data was investigation and observation. The ends were thus thus achie achieve ved d by a direc directt appr approa oach ch and and perso persona nall ob obse serva rvatio tion n from from the officials of the company. The other staff members and the employees were interviewed for the sake of maintaining reasonable standard of accuracy. The secondary data as it has always been important for the completion of any report provides a reliable, suitable equate and specific knowledge. The annual reports, the fixed asset register and the Capex register provided the knowledge and information regarding the relevant subjects. The valuable cooperation and continued support extended by all associated personnels, head of the department, division and staff members contributed a lot to fulfil the requirement in the collection of data in order to present a complete report on the project work.



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Capital Structure: Theory and Analysis Capital Structure Financing decisions involve raising funds for the firm. It is concerned with formulation and designing of capital structure or leverage. The most crucial decision of any company is involved in the formulation of its appropriate appropriate capital structure. structure. The best design design or structure structure of the capital of a company helps the management to achieve its ultimate objject ob ectives ves of minim inimis isiing ov over eral alll cos cost of capi capittal, al, maxim aximis isiing profitability and also maximising the value of the firm. Thee capi Th capita tall stru struct ctur uree deci decisi sion on of a firm firm is conc concer erne ned d with with the the determination of debt equity composition. Capital structure ordinarily implies the proportion of debt and equity in the total capital of a company. The term capital may be defined as the long – term funds of the firm. Capital is the aggregation of the items appearing on the left hand side of the balance sheet minus current liabilities. In other words capital may be expressed as follows: Capital = Total Assets – Current Liabilities. Further, capital of a company may broadly be categorised into equity and debt. The total capital structure of a firm is represented in the following figure:



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Total Capital

Equity Capital

Debt Capital

Equity Share Capital Preference Share Capital Share Premium Retained Earnings

Term Loans Debentures Deferred Payments Liabilities Other Long term Debt

Establ Establis ished hed compan companies ies genera generally lly have have track track record record of their their profi profitt earning capacity, which helps them to create their creditworthiness. The lenders feel safe to invest their funds in such companies. Thus, there is ample scope for this type of companies to collect debt. But a company cannot freely i.e. without having any limit. The company must have to chalk out a plan to collect a debt in such a way that the acceptance of debt becomes beneficial for the company in terms of increase in EPS, profitability and value of the firm. If the cost of capital is greater than the return, it will have an adverse effe effect ct on comp compan any’ y’ss prof profit itab abil ilit ity, y, valu valuee of the the firm firm and and its its EPS. EPS. Similarly, if company is unable to repay the debt within the scheduled period it will affect the goodwill of the company in the credit market and consequently may create problems in future for collecting further debt. Other factors remaining constant, the company should select its appropriate capital structure with due consideration.



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Capital structure involves a choice between risk and expected return. The optimal capital structure strikes the balance between these risks and returns and thus examines the price of the stock. Significant variations with regard to capital structure can easily be noticed among industries industries and firms firms within within the same industry. industry. So it is diff diffic icul ultt to gene genera rate te the the mode modell capi capita tall stru struct ctur uree for for all all bu busi sine ness ss undertakings. The following is an attempt to consolidate the literature on various methods to suggested by researchers in arriving at optimal capital structure. Notations used: •

V = value of firm

•

FCF = free cash flow

•

WACC = weighted average cost of capital

•

rs and rd are costs of stock and debt

•

r e and wd are percentages of the firm that are financed with stock and debt.

Operating and Financial Leverages The term leverage refers to the ability of a firm in employing long – term funds having a fixed cost, to enhance returns to the owners. In other words leverage is the employment of fixed assets or funds for which a firm has to meet fixed costs or fixed rate of interest obligation irrespective of the level of activities attained or the level of operating profit earned. Higher the leverage, higher the profits and vice – versa. But a higher levera leverage ge obv obviou iousl sly y impli implies es higher higher outsid outsidee borrow borrowing ingss and hence hence riskier if the business activity of the firm suddenly takes a dip. But a low low leve everage rage do does es no nott nece necess ssaaril rily ind ndiicat cate pru prudent dent finan inanccial ial management, as the firm might be incurring an opportunity cost for not having borrowed funds at a fixed cost to earn higher profits. GJ-IMT,MOHALI GJ-IMT,M OHALI 29 of 94 of 94


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Operating Leverage Operating leverage is concerned with the operation of any firm. The cost structure of any firm gives rise to operating leverage because of the existence of fixed nature of costs. This leverage relates to the sales and profit variations. Operating Leverage =

Contribution EBIT

Contribution = Sales – Variable Costs EBIT = Earnings Before Interest and Taxes. Disadvantages of Operating Leverages −

−

The reliability of operating ratios rests to a large extent on the correctness of the fixed costs identified with a product. Faulty apportionment would distort the usefulness of the ratio. The published accounts does not give details of the fixed cost incu incurr rred ed and and the the cont contri ribu buti tion on from from each each prod produc uctt and and for for an outsider it is difficult to calculate the firm’s operating leverage.

Firm Firm’s ’s cost cost stru struct ctur uree and and natu nature re of the the firm firm’s ’s bu busi sine ness ss affe affect ctss operating leverage. A degree change in sales volume results in more than proportionate change (+/-) in operating (or loss) can be observed by use of operating leverage. Financial Leverage

This ratio indicates the effects on earnings by rise of fixed cost funds. It refers to use the use of debt in the capital structure. Financial leverage arises when a firm deploys debt funds with fixed charge. The ratio is calculated with the following: GJ-IMT,MOHALI GJ-IMT,M OHALI 30 of 94 of 94


Page

•

•

Earnings before interest and tax / Earnings after interest – The higher the ratio, the lower the cushion for paying interest on borrowings. A low ratio indicates a low interest outflow and cons conseq eque uent ntly ly lowe lowerr bo borr rrow owin ings gs.. A high high rati ratio o is risk risky y and and constitutes a strain on profits. This ratio is considered along with the operating ratio, gives a fairly and accurate idea about the firm’s earnings, its fixed costs and the interest expenses on long term borrowings. Earnings per Share – Higher financial leverage leads to higher EBIT resulting in higher EPS, if other things remain constant. Financial leverage affects the variability and expected level of EPS . The more debt the firm employs the higher its financial leverage. Financial leverage generally raises expected EPS , but it also increases the riskiness of securities as the debt / asset ratio rises. Financial Leverage =

EBIT EBT

EBIT – Earnings Before Interest and Tax EBT – Earnings Before Taxes.

Consider Two Hypothetical Firms

Firm U

Firm L No debt

10,000 of 12% debt

20,000 in assets

20,000 in assets

40% tax rate

40% tax rate

Both firms have same operating leverage, business risk, and EBIT of 3,000. They differ only with respect respect to use of debt.



Page

Impact of Leverage on Returns

Firm U in Rs’000) EBIT EB IT Interest EBT Taxes (40%)

Firm L 3,00 3, 000 0 0 3,000 1, 200

3,000 3,00 0 1,200 1,800 720

NI

(Fig.

1,800

ROE

9.0%

10.

More EBIT goes to investors in Firm L. Total dollars paid to investors: •

U: NI = Rs.1,800.

•

L: NI + Int = Rs.1,080 + Rs.1,200 = Rs.2,280.

•

Taxes paid:

•

U: Rs.1,200; L: Rs.720.

Now Now cons consid ider er the the fact fact that that EBIT EBIT is not not know known n with with cert certai aint nty. y. Det Deter ermi mini ning ng the the impa impact ct of unce uncert rtai aint ntyy on stoc stockh khol olde der r profitability and risk for Firm U and Firm L Firm U: Unleveraged

Economy

(Fig.

in Rs’000)

Bad GJ-IMT,MOHALI GJ-IMT,M OHALI 32 of 94 of 94

Avg.


Good Page

Prob Pr ob..

0.25 0. 25

EBIT Interest EBT Taxes (40%) NI

2,000 0 2,000 800

0.50 0. 50 3,000 0 3,000 1,200 1,200

0.25 0. 25

4,000 0 4,000 1,600 1,800

2,400

Firm L: Leveraged

Economy (Fig. in Rs’000)

Bad

Prob.* EBIT* Interest EBT Taxes (40%) NI

Avg.

Good

0.25 2,000 1,200 800 320 480

0.50 3,000 1,200 1,800 720 1,080

Firm U BEP ROIC ROE TIE

Bad 10.0% 6.0% 6.0% n.a.

Avg. 15.0% 9.0% 9.0% n.a.

Firm L BEP ROIC ROE

Bad 10.0% 6.0% 4.8%

Avg.

0.25

4,000 1,200 2,800 1,120 1,680

*Same as for Firm U.


Good 20.0% 12.0% 12.0% n.a.

Good 15.0% 20.0% 9.0% 12.0% 10.8% 16.8%


Page

TIE

1.7x

2.5x

3.3x

U

Profitability Measures: Profitability E( B EP) 15.0% E(ROIC) 9.0% E(ROE)

15.0% 9.0% 9.0%

L

10.8%

Risk Measures:

sROIC sROE

2.12% 2.12%

2.12% 4.24%

Conclusions •

Basic earning power (EBIT/TA) and ROIC (NOPAT/Capital = EBIT(1-T)/TA) are unaffected by financial leverage.

•

L has higher expected ROE: tax savings and smaller equity base.

•

L has much wider ROE swings because of fixed interest charges. char ges. High Higher er expected expected return return is accompan accompanied ied by higher higher risk.

In a stand-alone risk sense, Firm L’s stockholders see much more risk than Firm U’s. U and L: sROIC = 2.12%. U: sROE = 2.12%. L: sROE = 4.24%. GJ-IMT,MOHALI GJ-IMT,M OHALI 34 of 94 of 94


Page

•

L’s financial risk is s ROE - sROIC = 4.24% - 2.12% = 2.12%. (U’s is zero.)

•

For leverage to be positive (increase expected ROE), BEP must be > r d.

•

If r d > BEP, the cost of leveraging will be higher than the inherent profitability of the assets, so the use of financial leverage will depress net income and ROE.

In the ex exam ampl ple, e, E(B (BE EP) = 15 15% % wh whil ilee int nter eres estt rat atee = 12 12% %, so leveraging “works.”

Choosing the Optimal Capital Structure for Ranbaxy Laboratories Ltd. Based on the ratio analysis done above it can be concluded that Ranbaxy is an unleveared firm with very less debt component in its capital structure. The company is in a position to increase its debt component by resorting to external debt financing. However it should be kept in mind that, there could be two opposite effects if debt is increased in the capita structure. The first effect may be an overall reduction in the cost of capital as the proportion of debt increases in the capital structure due to low cost of debt. On the other hand, bec becau ause se of fixe fixed d cont contra ract ctua uall ob obli liga gati tion on the the fina financ ncia iall risk risk of the the company increases. Thus, it is said that the optimum capital structure implies a ratio of debt and equity at which weighted average cost of capital would be least and the market value of the firm would be highest. Keeping the above thought in mind I have tried to compute what would be the optimal capital structure for Ranbaxy Labora Laborator tories ies Ltd., Ltd., based based on the follow following ing inform informati ation on as per the Annual Report 2005: GJ-IMT,MOHALI GJ-IMT,M OHALI 35 of 94 of 94


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EBIT being 37,273,800; Assuming that the firms expects zero growth 225,557,810 shares outstanding; r s = 12%; T = 35%; b = 1.0; r RF RF = 6%; RPM = 6%.

Estimates of Cost of Debt Percent financed with debt, wd 0%

r d -

20%

8.0%

30%

8.5%

40%

10.0%

50%

12.0%

If company recapitalizes, debt would be issued to repurchase stock. The Cost of Equity at Different Levels of Debt: Hamada’s Equation • •

•

MM theory implies that beta changes with leverage. bU is the beta of a firm when it has no debt (the unlevered beta) bL = bU [1 + (1 - T)(D/S)]

The Cost of Equity for w d = 20% GJ-IMT,MOHALI GJ-IMT,M OHALI 36 of 94 of 94


Page

Use Hamada’s equation to find beta: bL

= bU [1 + (1 - T)(D/S)] = 1.0 [1 + (1-0.35) (20% / 80%) ] = 1.16

Use CAPM to find the cost of equity: r s

= r RF RF + bL (RPM)

= 6% + 1.16 (6%) = 12.98% Cost of Equity vs. Leverage wd

D/S

bL

r s

0%

0.00

1.00

12.00%

20%

0.25

1.16

12.98%

30%

0.43

1.28

13.67%

40%

0.67

1.43

14.60%

50%

1.00

1.65

15.90%

The WACC for wd = 20% WACC = wd (1-T) r d + we r s WACC = 0.2 (1 – 0.35) (8%) + 0.8 (12.98%) WACC = 11.42% Repeat this for all capital structures under consideration. WACC vs. Leverage wd


r d

r s


WACC

Page

0%

0.0%

12.00%

12.00%

20%

8.0%

12.98%

11.42%

30%

8.5%

13.67%

11.23%

40%

10.0%

14.60%

11.36%

50%

12.0%

15.90%

11.85%

Corporate Value for w d = 20% V = FCF / (WACC-g) g=0, so investment in capital is zero; so FCF = NOPAT = EBIT (1-T). NOPAT = (Rs.37,273,800)(1-0.35) (Rs.37,273,800)(1-0.35) = Rs.24,227,970 V = Rs.24,227,970/ Rs.24,227,970/ 0.1142 = Rs.212,153,852.89 Rs.212,153,852.89

Corporate Value vs. Leverage wd

WACC

Corp. Value

0%

12.00%

Rs.201,899,750.00

20%

11.42%

Rs.212,153,852.89

30%

11.23%

Rs.215,791,315.97

40%

11.36%

Rs.213,274,383.80

50%

11.85%

Rs.204,455,443.04

Debt and Equity for w d = 20% The value of debt is: = wd V = 0.2 (Rs.212,153,852.89) = Rs.42,430,770.58. S=V–D S = Rs.212,153,852.89 Rs.212,153,852.89 – Rs.42,430,770.58 Rs.42,430,770.58 = Rs.169,723,082.31 Rs.169,723,082.31



Page

Debt and Stock Value vs. Leverage wd

Debt, D

Stock Value, S

0%

0

Rs.201,899,750.00

20%

Rs.42, 430,770.58

Rs.169,723,082.31

30%

Rs.64, 737,394.79

Rs.151,053,921.18

40%

Rs.85, 309,753.52

Rs.127,964,630.28

50%

Rs.102, 227,721.52

Rs.102,227,721.52

Wealth of Shareholders

Value of the equity declines as more debt is issued, because debt is used to repurchase stock. But total wealth of shareholders is value of stock after the recap plus the cash received in repurchase, and this total goes up (It is equal to Corporate Value on earlier slide).

Stock Price for wd = 20%

The firm issues debt, which changes its WACC, which changes value. The firm then uses debt proceeds to repurchase stock.



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Stock price changes after debt is issued, but does not change during actual repurchase (or arbitrage is possible). possible). The stock price after debt is issued but before stock is repurchased reflects shareholder wealth: S, value of stock Cash paid in repurchase.

D0 and n0 are debt and outstanding shares before recap. D - D0 is equal to cash that will be used to repurchase stock. S + (D - D 0) is wealth of shareholders’ after the debt is issued but immediately before the repurchase. P = S + (D – D 0) n0 P = Rs.169,723,082.31+ Rs.169,723,082.31+ (Rs. 42,430,770.58– 0) 225,557,810 P = Rs.94.06 per share. # Repurchased = (D - D 0) / P # Rep.

= (Rs. Rs.42,430,770.58 – 0) / Rs.94.06 = 45,116.

# Remaining = n = S / P n

= Rs. Rs.169,723,082.31 / Rs.94.06 = 1,804,462.

Price per Share vs. Leverage # shares GJ-IMT,MOHALI GJ-IMT,M OHALI 40 of 94 of 94

# shares


Page

wd Remaining

P

Repurch.

0%

Rs.89.51 0

2,255,578

20%

Rs.94.06 451,116

1,804,462

30%

Rs.95.67 676,673

1,578,905

40%

Rs.94.55 902,231

1,353,347

50%

Rs.90.64 1,127,789

1,127,789

Optimal Capital Structure wd = 30% gives: •

Highest corporate value

•

Lowest WACC

•

Highest stock price per share

But wd = 40% is close. Optimal range range is pretty pretty flat.

Modigliani and Miller Theory (Modern View) The trad The tradit itio iona nall view view of capi capita tall stru struct ctur uree expl explai aine ned d in weighted average cost of capital is rejected by the proponents Modigliani and Acco Accord rdin ing g to them them,, un unde derr comp compet etit itiv ivee Mill Miller er (M (MM) M) (195 (1958) 8).. conditions and perfect markets, the choice between equity financing and borrowing does not affects a firm’s market value because the individual investor can alter investment to any mix of debt and equity the investor desires.



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Assumptions of MM Theory The MM Theory is based on the following assumptions: • Perfect capital markets exist where individuals and companies can borrow unlimited amounts at the same rate of interest. • There are no taxes or transaction costs. • The firm firm’s ’s invest investme ment nt sched schedule ule and cash cash flows flows are assum assumed ed constant and perpetual. • Firms exist with the same business or systematic risk at different levels of gearing. • The stock markets are perfectly competitive. • Inve Invest stor orss are are rati ration onal al and and exce except pt othe otherr inve invest stor orss to beha behave ve rationally.

MM Theory: No Taxation The debt is less expensive than equity. An increase in debt will increase the required rate of return on equity. With the increase in the levels of debt, there will be higher level of interest payments affecting the cash flow of the company. Then equity shareholders will demand for more returns. The increase in cost of equity is just enough to offset the benefit of low cost debt, and consequently average cost of capital is constant for all levels of leverage as shown in Figure 1.

r

Cost of Equity

Cost of Capital

Average cost of Capital Cost of Debt

Leve Levell of leve levera ra e

Figure 1: MM view of Capital Structure GJ-IMT,MOHALI GJ-IMT,M OHALI 42 of 94 of 94


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In MM theory the following notations will be used: Vu = Market value of ungeared company i.e. company with 100% equity financing. Vg = Market value of a geared company i.e. capital stru struct ctur uree of the the comp compan any y incl includ udes es bo both th debt debt and and equity capital. D = Market value of debt in a geared company. Ve = Mark arket value alue of equ equity ity in a gea geared red com company. any. Vg = Ve + D K u = Cost of equity in an ungeared company. K g = Cost of of equity in in a geared co company. K d = Cost of Debt. M M Theory: Proposition I

The market value of any firm is independent of its capital structure, changing the gearing ratio cannot have any effect on the company’s annual cash flow. The assets in which the company has invested and not how those assets are financed determine the market value. Thus, the market value of a firm is unaffected by its financing decisions, its capital structure, or its debt-equity ratio. In simple words, M & M theory views the value of the company as a whole pie. The size of the pie does not depend on how how it is sliced i.e. the firm’s capital structure but rather the size of the pie pan i.e. the firm’s present value based on its future cash flows and its asset base. The value of the geared company is as follows: Vg = Vu Vg = Profit before interest WACC Vg = Vu = Earnings in ungeared company K u WACC is independent independent of the debt / equity equity ratio and equal to the cost of capital which the firm would have with no gearing in its capital structure.



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Proof by example Consider holding 1% of stock in an all-equity firm with value VU. Then your wealth is 0.01V U. Also Also,, yo you u rece receiv ivee a cash cash flow flow of 0.01 0.01CF CFt every period. Alternatively, consider holding 1% equity and 1% debt in levered version of the same firm with value Vg=E+D. Your wealth then is [0.01E+0.01D] = 0.01V g. Cash Cash Flow Flowss each peri period od?? Int)]=0.01CF t.

[0.0 [0.01( 1(In Int) t)+0 +0.0 .01( 1(CF CFt-

As the inherent risk of the firm is the same, then the discounted value of the cash flows must be the same, i.e., Vg= VU. WACC

Prop. I

M&M

Traditional

E

B E



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MM Theory: Proposition I

M M Theory: Proposition II

The rate of return required by shareholders increases linearly as the debt / equity ratio is increased i.e. the cost of equity rises exactly in line line with with any any incr increa ease se in gear gearin ing g to prec precis isel ely y offs offset et any any benefits conferred by the use of apparently cheap debt. MM went on arguing that the expected return on the equity of a geared company is equal to the return on a pure equity stream plus a risk premium dependent on the level of capital structure. The premium for financial risk can be calculated as debt / equity ratio multiplied by the difference between the cost of equity for ungeared company and risk – free cost of debt.

The cost of equity depends on the following three variables: 1. The required rate of return on the firm (K u ). 2. The requ quiired rate ate of retur eturn n on the fir firm’s debt ebt (K d d). ) . 3. The firm’s debt/equity ratio ( D/E )

g =

u +

D Vg

(

u −

d

)

MM proposition II can be summed up in following points: •

•

Equity holders require a premium over what everyone is paid if the firm has debt. The premium DOES depend upon the firm’s financing mix.

The wealth of equity holders, however, is unaffected. •

Any increase in leverage raises both the risk of equity and its required return.

Stockholders are indifferent to capital structure and to change in leverage.



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R E

Prop. II M&M Slope = R A �R D

Traditional

R A

B E

MM Theory: Proposition II M M Theory: Theo ry: Proposition Propos ition III

MM theory’s third proposition asserts that the cut-off rate for new investment will in all cases be average cost of capital and will be un affected by the type of security used to finance the investments. M M Theory: Arbitrage The cost of equity will rise by an amount just sufficient to offset any possible saving or loss. The lenders determine the supply of debt. The optimal level is simply the maximum amount of debt which lenders are prepared to subscribe in any given circumstances e.g. level of inflation, rate of economic growth, level of profits etc. the investors will exercise their own leverage by mixing their own portfolio with debt and equity. The investors call this the arbitrage process. Under these conditions of investment the average cost of capital is constant. If two different firms with same level of business risk but different levels of gearing sold for different values, then shareholders would move from over valued firm to the under value firm and adjust their level of borrowing through the market to maintain financial risk at the same level. The shareholders would increase their income through this method while maintaining their net investment and risk at the same level. This process of arbitrage would drive the price of the two firms to a common equilibrium total value. GJ-IMT,MOHALI GJ-IMT,M OHALI 46 of 94 of 94


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The word ‘arbitrage’ is a technical term referring to a situation where two identical commodities are selling in the same market for different prices, then the market will reach equilibrium by the dealers start at the lower price and sell at the higher price, thereby making profit. The increase in demand will force up the price of the lower priced goods and increase in supply will force down the price of the high priced commodities. theory ry show The arbitr arbitrage age in MM theo showss that that the the inve invest stor orss will will move move quickly to take advantage and will make profit in an equilibrium capital market, then this would represent an arbitrage opportunity.

MM Theory: Corporate Taxation

In above discussion, MM theory has ignored the tax relief on debt interest. MM has further modified their theory by considering tax relief available to a geared company when the debt component exists in the capital structure. The tax burden on the company will lessen to the extent of relief available on interest payable on the debt, which makes the cost of debt cheaper, which reduces the weighted average capital of the lower where capital structure of a company has debt component. Consider a firm with no debt (i.e. all equity or unlevered) with a value of Vu. Suppose firm changes capital structure by issuing debt and retiring some equity. The firm will realize gain since interest payments on debt are tax-deductible, so tax liability will decline! For perpetual debt: Yearly Tax Savings (Tax Shield) = Interest × TC = r ×D × T C = R D × B × TC Tax Tax shie shield ld will will be real realiz ized ed each each year year fore foreve ver. r. Sinc Sincee it go goes es to bondholders, it should be discounted at R D, thus PV of tax shield = (R D × B × TC)/ R D = B × TC Value of firm with debt V L (i.e. “levered firm”) will be : V L = Vu + B × TC GJ-IMT,MOHALI GJ-IMT,M OHALI 47 of 94 of 94


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Value increases by PV of tax shield. Tax advantage of debt increases as T C increases. In M&M world (T C = 0), VL = V

Slope = TC

VL

PV of Tax Shield M&M Value

VU

B MM Theory: Corporate Taxation

Under the assumption of tax relief being available on debt interest, the total market value of the company is increasing function of the level of gearing. MM theory cost of equity formula for a geared company: K g = K u + (1 – T) (K u – K d d ) MM theory assumes that the value of the geared company will always be greater than an ungeared company with similar business risk but only by the amount of debt – associated tax saving of the geared company. Value of geared company: V g = V u + DT When corporation taxation is introduced, the tax deductibility of debt interest creates value for shareholders via the tax shield, but this is a wealth transfer from taxpayers. The value of a geared company equals the value of an equivalent ungeared company’s shareholders is less than that in the all equity company, reflecting the tax benefits. A further effect of corporate taxation is to lower WACC , which falls continuously as gearing increases. GJ-IMT,MOHALI GJ-IMT,M OHALI 48 of 94 of 94


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MM Theory: Personal Taxation

MM theo theory ry cons consiider dered only nly cor corpo pora rate te taxes axes.. It was lef left to a subsequent analysis by Miller (1977) to include the effects of personal as well as corporate taxes. He argued that the existence of tax relief on debt interest but not on equity dividends would make debt capital more attractive than equity capital to companies. The market for debt capital under the laws of supply and demand, companies would have to offer a higher return on debt in order to attract greater supply of debt. When the company offers after personal tax return on debt at least as equal to the after personal tax return on equity, the equity supply will switch over to supply debt to the company. It is assumed that, from the angle of the company, it will be indifferent between raising debt or equity as the effective cost of each will be the same and there is no advantage to gearing.

Financial Distress and Capital Structure The assumption is that when firm has very high level of borrowing they are more likely to run into the cost of final distress and cost of bankruptcy. When the leverage of the firm is extremely high then it is very likely that at some stage it will not be able to make annual interest payments and loan repayments. Dividends for shareholders can be bypassed but failure to pay interest on loans often gives the lend lender er the the righ rightt to clai claim m on the the firm firmss op oper erat atin ing g asse assets ts ther thereb eby y preventing the firm’s continuity of activity. The following illustrative list of activities which may cause increase in cost of the firm. Successi sive ve borrow borrowing ingss beyond beyond the compan company’s y’s target target debt debt – • Succes equity ratio. • Borrowing higher levels of interest • Skip off or cut in dividend which may cause the fall of market rate of shares. GJ-IMT,MOHALI GJ-IMT,M OHALI 49 of 94 of 94


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• • • • • • •

Loss of trade credit from suppliers Distress sale of highly profitable instruments. Abandonment of promising new projects. Reduced credit period resulting in loss of business. Corporate image may be tarnished. Demand for withdrawal of loans made to the firm previously. Reduction in stock levels result in reduction in sales etc.

Bankruptcy Costs

The cost of bankruptcy may be of two types: • Direct costs —Those directly associated with bankruptcy, both legal and administrative. • Indirect costs —Costs associated with a firm experiencing financial distress (creditors, bankers, customers, employers, etc.) Bankruptcy costs = direct costs + indirect costs An increase in debt is associated with increased tax savings but also an increased probability of running into cost of financial distress and bankruptcy. The value of the leveraged firm is it’s capitalised after tax opera operatio tional nal cash cash flow flow plus the the pres presen entt valu valuee of the the tax tax savi saving ngss incorporating the anticipated cost of financial distress and bankruptcy. V = X + DT – BC R Where, V = Value of leverage firm X = Anticipated net operational cash flows R = Capitalisation Rate D = Market Value of Debt T = Corporate tax rate BC = Anticipated costs of bankrupting GJ-IMT,MOHALI GJ-IMT,M OHALI 50 of 94 of 94


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V

PV of Bankruptcy of Bankruptcy Cost

PV of Tax Shield VU Cost of Equity Optimum Capital Structure

B

Figu Figure re:: Op Opti timu mum m Capi Capita tall St Stru ruct ctur uree and and Cost Costss of Fina Financ ncia iall Distress

The existence of tax benefit for modest amounts of debt, and the need to avoid the costs of financial distress, suggest that there is an optimal capital structure as illustrated in figure which shows that there is an optimal capital structure at the point where the market value of the firm is maximized, that is where (DT – BC) is maximized.

Debt Financing and Agency Costs Agency theory models a situation in which a principal (a superior) delegates decision making authority to an agent (the subordinate) who receives reward in return for performing some activity on behalf of the principal. The outcome of the agents effects the principals welfare in some some way, way, for for exam exampl plee sale saless reve revenu nue, e, ou outp tput ut or cont contri ribu buti tion on margin. The principal attempts to combine a reward system with an info inform rmat atio ion n syst system em,, in orde orderr to moti motiva vate te the the agen agentt to choo choose se the the action, which maximizes the principal’s welfare. GJ-IMT,MOHALI GJ-IMT,M OHALI 51 of 94 of 94


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In respect of debt finance, the suppliers of debt are much concerned, about their investment in the company, about their investment in the company, about the risk involved in financing debt to the company. In order to minimize the risks in debt finance, the suppliers of loan will impo impose se rest restri rict ctiv ivee cond condit itio ions ns in loan loan agre agreem emen ents ts that that cons constr trai aint nt management’s freedom of action and it is known as agency costs. The more money the suppliers of debt lend to the company – then the more constraints they are likely to impose on the managements in order to secure their investments. investments. Therefore, agency costs are more in highly geared firms. Difficult to identify and estimate, but exist V = VU + BTC – PVBC – PV of agency costs PVBC + PVAC eventually dominate over PV of tax shield. PV of agency costs costs , as B generally.

PVBC + PVAC

V

PV of Tax Shield VU

B

Debt Financing and Agency Cost

Signaling Theory



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In a pioneering study published in 1961, Gordon Donaldson examined how companies actually establish their capital structure. The findings of his study are summarised below: 1. Firms prefer prefer to rely rely on internal internal accruals, i.e. on retained retained earnings earnings and depreciated cash flow. 2. Expected Expected future future investments investments oppurtunit oppurtunities ies and expected future future cash flow influence target dividend payout ratio. Firms set the target pay out ratio at such a level that capital expenditures, under normal circumstances, are covered by internal accruals. 3. Dividends tend tend to be sticky in the short run. Dividends Dividends are raised only when the firm is confident that the higher dividend can be maintained; dividends are not lowered unless things are very bad. 4. If a firm firm’s ’s inte intern rnal al accr accrua uals ls exce exceed ed its its capi capita tall expe expend ndit itur uree requirements, it will invest in marketable securities, retire debt, raise dividends, resort to acquisitions, or buyback its shares. 5. If a firm’ firm’ss intern internal al accrua accruals ls are less than its non non-po -post stpon ponabl ablee capi capita tall expe expend ndit itur ure, e, it will will firs firstt draw draw do down wn its its mark market etab able le securities portfolio and then seek external finance. Noting the inconsistencies in the trade – off theory, Myers proposed a new theory, called the signalling, or asymmetric information, theory of capital structure. The main points of the theory are: ♦ Managers often have better information. ♦ Sell stock if stock is overvalued. ♦ Sell bonds if stock is undervalued. ♦ Investors understand this, so view new stock sales as a negative signal.

Corporate Finance Practices The capital structure decision is a difficult decision that involves a complex trade – off among several considerations like income, risk, flexibility, etc. given the over – riding objective of maximising the market value of a firm, the following guidelines should be kept in mind while hammering out the capital structure of the firm. •

Avail of the Tax Advantage of Debt.



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Interest on debt finance is a tax – deductible expense. Hence finance scholars and practitioners agree that debt financing gives rise to tax shelter which enhances the value of the firm. •

Preserve Flexibility

Flexib Flexibili ility ty impli implies es that that the firm firm mainta maintains ins reserv reservee borro borrowin wing g power to enable it to raise debt capital to respond to unforeseen changes in business and political environment. Hence the firm must must main mainta tain in some some un unus used ed debt debt capa capaci city ty as an insu insura ranc ncee against adverse future developments. developments.

•

Ensure that the Total Risk Exposure is Reasonable

The affairs of the firm should be managed in such a way that the total risk borne by the equity shareholders is not unduly high.

•

Subordinate Financial Policy to Corporate Strategy

Financial policy and corporate strategy are often not integrated well. This may be because financial

•

Mitigate Potential Agency Costs.

Due to separate ownership and control in modern corporations, agency problems arise. Shareholders scattered and dispersed as they are not able to organise themselves themselves effectively. Hence, very little monitoring takes place in the security markets. Sinc Sincee agen agency cy cost osts are are borne orne bu buy y shar hareho eholder lderss and and the management, the financing strategy of a firm should seek to minim inimis isee thes hese cost ost by empl employ oyin ing g exter xterna nall agen agentts who who specialise in low cost – monitoring. •

Issue innovative Securities

Thanks Than ks to SEBI SEBI gu guid idel elin ines es intr introd oduc uced ed in 19 1992 92,, issu issues es have have considerable freedom in designing financial instruments. There is grea greate terr scop scopee for for empl employ oyin ing g inno innova vati tive ve secu securi riti ties es to the the advantage of the firm. The important securities innovations have GJ-IMT,MOHALI GJ-IMT,M OHALI 54 of 94 of 94


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been as follows: floating rate bonds (or notes), collateralised mortgage mortgage obligati obligations, ons, dual currency currency bonds, bonds, extendibl extendiblee notes, notes, medium term notes. •

Widen the Range of Financing Sources

In as dynamically evolving financial environment, traditional sources of financing may diminish in importance. They may not be adequate or optimal. Hence, it behoves on a firm to employ new modes of finance like commercial paper, factoring, Euro issues, and securitisation. securitisation.



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Capital overview

expenditure:

an

Factors Of Capex Organi Organizat zation ionss engage engaged d in manufa manufactu cturi ring ng and market marketing ing of goods or services require assets in their operations. An asset can be thought of as any expenditure, which creates or aids in creation of a revenue-generating revenue-generating base. Companies incur various expenditure to carry on standard flow of work, expenditure intended to yield returns over a period of time, and usually exceeding one year is regarded as capital expenditure. Various factors are considered before Board of Directors approves any expenditure. All that factors can further be divided into: Operational Factors I. To meet future requirements based on market forecast. II. To maintain coordination with the vision of the company as Ranbaxy vision Garuda states to be top five generic players in the world by 2012 and achieve sales of 5 billion. To achieve this target company has to incur heavy expenditure on acquisition of fixed assets. III. To increase market penetration. IV. To maintain, renew, expand, upgrade existing physical assets assets that that helps helps to facili facilitat tatee and enhanc enhancee revenu revenue-g e-gene enerat rating ing capacity. V. To create, acquire and develop revenue generating acti activi viti ties es// capa capaci citi ties es that that is impe impera rati tive ve for for an orga organi niza zati tion on’s ’s healthy growth and existence. Financial Factors In deci decidi ding ng whic which h asse assets ts to crea create te,, acqu acquir iree or deve develo lop, p, the the benefits to be gained from the expenditure have to be weighed against the costs that will be incurred. While costs can always be expressed in financial terms, the benefits may or may not be GJ-IMT,MOHALI GJ-IMT,M OHALI 56 of 94 of 94


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similarly quantifiable. Nevertheless, an attempt must be made to express the benefits expected, in a manner that facilitates comparison with costs and helps formulate a rational basis for the decision making process. Following are the financial tools that are taken into account for approving capital expenditure. expenditure. Discounted Cash Flow (DCF) This Th is is on onee of the the tech techni niqu ques es for for fina financ ncia iall eval evalua uati tion on of Capex’s. DCF techniques are based on the concept of time valu valuee of mone money y and and prov provid idee a meth method odol olog ogy y of taki taking ng into into account the timing of cash proceeds and outlays over the life of the investment. The procedure underscores the need to state cash cash flow flow stre stream amss aris arisin ing g in diff differ eren entt time time peri period odss thus thus differing in value and, hence comparable only in terms of a common denominator viz. present values. I.

Discounted Payback Period (DPP) DPP is the number of years it takes for the present value of inflows to equal the initial investment. Apart from giving due importance to time value of money it serves as a reasonable tool of risk approximation. It favors projects, which generate subs substa tant ntia iall cash cash infl inflow owss in init initia iall year years, s, and and disc discri rimi mina nate tess against those that bring in substantial inflows in later years (risk tending to increase with tenure). Thereby implying that an early resolution of uncertainty enables the decision maker to take prompt corrective action by modifying/ changing other investment decisions. However, However, by the same logic it cannot be used as a principal tool for for anal analys ysis is beca becaus usee it igno ignore ress any any subs substa tant ntia iall cash cash flow flowss arising after the pay back period.

II.

Internal Rate of Return (IRR) IRR is the discount rate that equates the present value of the expe expect cted ed futu future re cash cash infl inflow owss to the the pres presen entt valu valuee of the the expected future cash outflows. It is the post tax return from investment and hence the excess of IRR over the cost of capital indicates a surplus after paying for the capital employed. IRR presupposes an equivalent rate of return on the cash flows GJ-IMT,MOHALI GJ-IMT,M OHALI 57 of 94 of 94


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gene genera rate ted d du duri ring ng the the life life of the the asse assett i.e. i.e.,, it assu assume mess rereinvestment of intermediate cash flows at the rate of return equal to the project's IRR. Internal rates of return are most often used as useful additions to NPV computations. This has in turn justified the use of IRR as a good substitute to NPV. IRRs have the merit of indicating whether a project is worthwhile, in that - an IRR above the cost of capital represents a positive NPV project, an IRR equal to the cost of capital is a zero NPV project and an IRR less than the cost of capital is associated with a negative NPV project. Inspite of its merits, it needs to be understood that IRRs helps only to identify projects that maximizes the ratio of rupee-value to rupee-capital in percentage terms. What NPV will help in determining is the projects that maximizes the rupee-spread between value and capital. III.

Net Present Value (NPV) NPV is equal to the present value of cash inflows minus the present values of cash outflows. A positive NPV is a prerequisite for the 'acceptance' of the project. The primary tool of appraisal would be the NPV method. Its superiority over other methods arises out of its principal merit of incorporating all benefits and costs occurring over the life of the asset

IV.

Profitability Index (PI) The Profitability Index essentially measures the Present value of benefits times the initial investment. Under unconstrained conditions, the profitability index will accept and reject the same projects as the NPV criterion. It is possible that a project may have no critical risks. Or the financial are extremely favorable (high NPV, high IRR, high PI, low DPP etc.) and the occurrence of consequent risks may not compromise the success of the project. It is also possible that there is a conscious corporate decision to accept certain risks. In such cases, no measures are required. These risks, in any any cas case, must ust be expl explic iciitly state tated d in the the Quan uantit titativ ativee GJ-IMT,MOHALI GJ-IMT,M OHALI 58 of 94 of 94


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ass assess essment ent of Ris Risk Capi Capittal inv nveestm stments ents are are ess essent entiall ially y comm commit itte ted d in expe expect ctat atio ion n rath rather er than than in cert certai aint nty, y, whic which h impl implie iess that that inve invest stme ment ntss are are subj subjec ectt to risk risk cont contri ribu bute te to removing the shortcomings of an unstructured unstructured workings.

INTRODUCTION The term 'Capital expenditure' refers to expenditure intended to yield returns over a period of time, usually exceeding one year. This basically implies that any expenditure, which results in the creation of a new asset or substantially increases the capacity/benefits of an existing asset and is of a "long term" nature, should be classified as Capital expenditure. Since, the expression 'Capital expenditure' is not exhaustively defined, the facts of a particular case would decide whether expe expend ndit itur uree is capi capita tall or reve revenu nue. e. Gene Genera rall lly y spea speaki king ng,, the the expe expend ndit itur uree shou should ld be test tested ed on the the foll follow owin ing g crit criter eria ia to facilitate classification between capital and revenue. Expenditure would be deemed to be capital, if incurred for 

Initiation of business



Extension of business: Entry into new markets & products (including R&D and regulatory expenses). 

Modifi Modi fica cati tion on of asse asset/ t/ equi equipm pmen entt resu result ltin ing g in increased benefits from the existing asset



Bringing into existence a new asset.



Conver Conversel sely, y, expend expenditu iture re would would be deeme deemed d to be revenue, if incurred for




Routine repairs and maintenance of existing plant. ANUJ KUMAR SRIVASTAVA

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

Replacement of any part of the existing plant with capacities remaining unchanged



Shifting of plants



Making king alter lterat atiion onss

or reno enovat vations ions on

rent ented

premises 

Assets having life of less than one year

Classification Of Capital Investments Sinc Sincee the the anal analys ysis is for for appr apprai aisa sall of the the prop propos osed ed capi capita tall expenditure will largely depend upon the kind of investment, it is necessary to classify capital investments into the following categories: 1) Cost Reduction, Modernisation and Rationalisation. Expenditure to replace serviceable, but obsolete equipment. This may become necessary because of the expiry of normal life or change in technology. The purpose of this expenditure is to improve productivity, increase efficiency or reduce cost of labour, material or other items such as power. 2) Expansion of Existing Products/ Capacity Expenditures to increase plant capacity for existing products/equipment products/equipment or enhance multi-purpose flexibility. 3) Expansion into New Products/New Product Packs Expenditure necessary to produce new products/new product pack. pack. This also also includes includes expenditure expenditure on existing existing faciliti facilities es to han handle dle new new prod produ ucts cts which ich may res result ult in incr increm emen enta tall realizations / value additions. 4) New market development and Market Entry GJ-IMT,MOHALI GJ-IMT,M OHALI 60 of 94 of 94


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This his would uld incl nclud udee exp expendi enditture ure made ade for enter nterin ing g and and develo developin ping g new market markets. s. Such Such propos proposals als would would requir requiree the bus busin ines esss case case to be acco accomp mpan anie ied d with with deta detail iled ed fina financ ncia iall analysis. 5) Replacement: Maintenance of Business Expe Ex pend ndit itur uree nece necess ssar ary y to repl replac acee worn worn-o -out ut or dama damage ged d equipm equipment ent.. Th They ey are not likely likely to increas increasee capaci capacity ty or alter alter production significantly. significantly. Capital spares spares are included included here. 6) Quality, Good Manufacturing Practices, Safety, Health and Environment. Expe Ex pend ndit itur ures es nece necess ssar ary y to up upgr grad adee qu qual alit ity, y, comp compli lian ance ce of GMPs, government regulations, labour agreements, insurance policy terms, and environmental safety requirements. Financial evaluation/benefits from such expenditure may to the extent quantifiable, be provided. 7) Research & Development Expenditure on R&D projects/ equipment/ facilities. Financial evaluation/benefits from such expenditure may to the extent quantifiable, be provided. 8) Information Technology Expenditure on procurement of IT infrastructure (Hardware) and/or application software. Financial evaluation/benefits from such expenditure may to the extent quantifiable, be provided. 9) Others This Th is incl includ udes es offi office ce bu buil ildi ding ngs, s, vehi vehicl cles es,, furn furnit itur ure, e, offi office ce equipment, InfoTech related equipment and utilities, and all such assets, which provide infrastructures support. This also includes any capital expenditure not explicitly covered in the above classifications. classifications.

Capita Capitall Expend Expenditu iture re propos proposal als s are are not appli applica cable ble for GJ-IMT,MOHALI GJ-IMT,M OHALI 61 of 94 of 94


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1] Employee entitlements Capit Capital al expend expenditu iture re necess necessary ary to meet meet the commi commitme tments nts in respect of provision of assets to the employees in terms of personnel policies. Financial evaluation of such expenditure is not requir required. ed. Asset Assetss purcha purchase sed d by employ employees ees agains againstt their their hard/soft furnishing entitlements do not fall within the scope of this manual and hence, will not be included here as they are per policy. 2] Amounts less than Rs.10, 000/ $1,000 Segregation of Capex and Revenue Expenditure

Broadly, the following shall be considered as Revenue: All repairs to equipment in the normal course of business.   All annual maintenance contracts (AMC) to keep the said equipment/assets equipment/assets in working condition. All expenditures, which do not result in an  enduring/permanent enduring/permanent benefit to the assets. Modification to the existing assets, which does not result in  endu enduri ring ng bene benefi fit, t, are are to be trea treate ted d as Reve Revenu nuee afte afterr taki taking ng ratification of Technical Head of Plant.  Pipi Piping ng and and insu insula lati tion on of the the natu nature re of mino minorr repa repair ir or replacement.  Re-arr Re-arrang angem ement ent of assets assets or minor minor struct structur ural al change changess for regulatory batches. All All acce access sso ories ies / dies dies & pun uncches hes whic which h are are proc procu ured  subsequent to purchase of assets In case of certain expenditure the treatment of which is in doubt, the decision in this respect shall be exercised by the Plant Account Manager in consultation with the User/Technical Head.

Date Of Capitalisation Date of Capitalisation would be the date when the assets is certified by the concerned Engineering / E&F Department as ready to use or GRN date in case of assets which do not need commi commiss ssion ioning ing (that (that is comput computers ers,, furnit furniture ure,, fixtu fixtures res etc.) etc.).. GJ-IMT,MOHALI GJ-IMT,M OHALI 62 of 94 of 94


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Authority for fixing date of capitalisation would be with E&F department. Lead Lead-t -tim imee betw betwee een n cert certif ific icat atio ion n and and Comm Commen ence ceme ment nt of commercial production will not normally exceeds 30 days In cas case of lead ead-ti -time exc exceedi eeding ng 30 day days to take ake speci peciffic approvals from the Plant Head. Capitalization of Expenditure other than basic cost of assets

All All expe expend ndit itur uree dire direct ctly ly rela relate ted d to the the asse assets ts capi capita tali lize zed d including freight, Entry tax, Octroi, custom duty, and any such amount, which does not form part of the original invoice, is to be capitalized along with the relevant assets. All installation cost, service charges and labour cost, trial run cost (net of realizable value of the product), technician fee and any other expenditure directly attributable to the installation. Cenvat /CVD credits will be netted off from the cost of assets. As per accounting standard we have to capitalise the assets net of Modvat. E&F E&F depart departme ment nt operat operation ional al cost cost will will be direct directly ly identi identifie fied d with the projects or allocated to the projects on equitable basis. For all this expenditure it is important to book at the stage of initiation at SAP locations through the same capital internal order number, which has been uniquely given to the Capex proposal at the time of initiation of the particular asset. Regard Regarding ing Cenvat Cenvat// CVD credit creditss netti netting ng off, off, specia speciall care care is requ requir ired ed to be take taken n towa toward rdss year year ends ends to ensu ensure re meet meetin ing g technical requirements as per the Accounting Standards and ensure maximum depreciation (including higher depreciation allowe allowed d is account accounted ed for on capita capitaliz lizati ation, on, as applicab applicable le & there is no Cenvat (cash flow) loss.

Capex Numbering The numbering scheme is as under GJ-IMT,MOHALI GJ-IMT,M OHALI 63 of 94 of 94


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Entity/Division/Cost Center No./ Year/ Serial No. of CEP raised by that RCC/ Running Serial No. of Capex of the Division/ Plant, to be given by the Accounts department. In case of Head Office, H.O will appear against division's name.

At the beginning of the year capital budget prepared by every cost center (RCC) for the particular year in every business area. This budget prepared every department and submitted to the division. Then division decided and finalized the budget and given to the management committee for the final approval. Capital budget is three type prepared by the company. Divisional Info tech Employee entitlement The whol The wholee proc proces esss work workss in a very very syst system emat atic ic mann manner er wher wheree firstly engineers working at operational level locate the requ requir irem emen entt of any any new new mach machin iner ery. y. Afte Afterr iden identi tify fyin ing g need need at operational level process of capital budgeting commence. Currently whole Capex system is followed manually. The whole organization is divided plant wise. Plan Plants ts loca locate ted d at Mo Moha hali li 1 &2, &2, To Toan ansa sa,, Dewa Dewass are are hand handle led d division wise. Division consists of head from each department and they control API Manufacturing plants from one division. API manufacturing acts as a coordinator between above 4 plants. They are responsible for communicating reports generated by each plant head that comes under API manufacturing to higher authorities. For each Plant responsible cost center head are assigned who looks after operational need. Different RCC’s are prepared depending upon the functions. These head can be divided into following categories 

Production



Engineering



Personnel/security



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

Safety/ETP



QA/QC



Stores For For abov abovee diff differ eren entt func functi tion onss RCC’ RCC’ss head head prep prepar ared ed thei their r requirement chart specifying



RCC’s number



Desc Descri ript ptio ion n

(whe (wheth ther er

prod produc ucti tion on,,

engi engine neer erin ing, g,

QA/QC) 

Classification Classification (Replacement, Upgradation)



Kind of expenditure (capital or revenue)



Justification



VED



Quantity RCC’s number is unique for each function. Description about the the func functi tion on whet whethe herr it fall fallss in prod produc ucti tion on,, engi engine neer erin ing, g, personnel etc. Revenue or capital expenditure can be further divided as per RCC’s requirements: requirements:

CAPITAL EXPENDITURE

Regulation GMP (Goods Manufacturing Manufacturing Practices) EHS (Environment Health Safety) Replacement Capacity Upgradation GJ-IMT,MOHALI GJ-IMT,M OHALI 65 of 94 of 94


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Additional

REVENUE EXPENDITURE

Operating Expenses Stores Repairs Building Repairs and Maintenance Staff Welfare VED is a management science tool, which is used by various depa depart rtme ment nt depi depict ctin ing g vita vitali lity ty of part partic icul ular ar need need rais raised ed at operational level where V stands for VITAL E stands for ESSENTIAL D stands for DESIRABLE The abov The abovee requ requir irem emen entt char chartt prep prepar ared ed by RCC RCC head head then then consolidated by Divisional Finance Accounts Department and bud budge gets ts are are prep prepar ared ed.. For For each each plan plantt this this char chartt is prep prepar ared ed where requirement of various functions are shown and also respective RCC head gives justification. Finance department review the expenditure type whether capital or revenue again as it could be classified wrong by RCC head. Finance department then modifies this chart into budget based on Plant wise requirement Kind of function In plan plantt wise wise requ requir irem emen entt vari variou ouss exce excell file filess are are prep prepar ared ed which is as follows Summery statement GJ-IMT,MOHALI GJ-IMT,M OHALI 66 of 94 of 94


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Revenue expenditure Capital expenditure RCC wise Simila Similarly rly depend depending ing upo upon n the functi functions ons variou variouss budget budgetss is pre prepa pare red. d. Basi Basica call lly y here here for for prod produc ucti tion on and and engi engine neer erin ing g requ requir irem emen ents ts send send by RCC RCC head head is prov provid ided ed in plan plantt wise wise description chart but for others such as Personnel/security Safety/ETP QA/QC Stores In abov abovee func functi tion onss divi divisi sion on wise wise bu budg dget etss are are also also made made for for example QA/QC -> Division -> PDL QA Contract Manufacturing Manufacturing Personnel/security Personnel/security -> Division -> Personnel/security Division Management Division Accounts

Sepa Separrate ate bud udg gets ets are are prepar epared ed and and then then sanct anctiion oned ed by respective head. Now the budgets prepared by finance department is further send send to resp respec ecti tive ve depa depart rtme ment ntal al head head.. Th Then en plan plantt head heads, s, foll follow owed ed by Vice Vice Pres Presid iden entt & on onwa ward rdss as per per the the Cape Capex x amount, approves these capex’s.



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As explai explained ned earlie earlierr Finan Finance ce manage managerr mainta maintain in the bud budget get inform informati ation, on, follow following ing manuf manufact acturi uring ng locati locations ons of API API are catered at Mohali Division MOHALI TOANSA DEWAS After preparation of Budgets, BOD approves Capital Expenditure by initiating CAPEX form by Plant head that is appropriately signed by requisite authorities. In CAPEX Form itself amount is classified into various categories A. Replacement/Cost Reduction B. Expansion into New Product/New Product Packs C. Quality, Safety, Environmental Environmental D. Expansion of Existing Products Packs E. Replacement: Maintenance of Business F. Others All kinds of expenditure are classified into above head for API Manufacturing Manufacturing for approval of Capital Expenditure

Accounting Route for API Manufacturing Capital Expenditure

When top authorities approve the Capex requirement then an internal order number is created by Plant department. After the creation of internal order number finance department inform respective accounts department about the same. On receipt of the the IO, IO, inde indent nter er will will crea create te the the pu purc rcha hase se requ requis isit itio ion n that that subsequently go to purchase department. Purchase department will float enquires and prepare comparative charts for at least 3 vendors. After selecting the vendor, purchase department will place a purchase order (PO) on the vendor for supply of the GJ-IMT,MOHALI GJ-IMT,M OHALI 68 of 94 of 94


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asset. In case, as per the terms of the PO, any advance is to be given to vendor, the same is released by accounts department, after passing the necessary entries in the vendor account under respective business area (BA). The purchase department while preparing the PO would ensure to mention complete name as “RANBAXY LABORATORIES LIMITED, API MANUFACTURING” and address/ location of delivery of the asset. On receipt of the goods, the Stores department will arrange to prepare the GRN and get the same approved by the user department. On approval of the GRN, the stores department will send the bill to accounts for invoice verification. The accounts department will verify the invoice with PO and release the balance payment to vendor. Material Cost

The purchase requisition (PR) for domestic materials i.e. Solvents, Chemicals and other Consumables required for project completion will will be rais raised ed by scie scient ntis ists ts afte afterr ob obta tain inin ing g appr approv oval al from from the the respec respecti tive ve head, head, the purcha purchase se requis requisiti ition on (PR) (PR) will will be send send to purchase department for procurement of the material. Purchase department will float enquires and prepare comparative charts for at least 3 vendors. The purchase department will place the PO on the vendor for supply of the materials. In case, as per the terms of the PO, any advance is to be given to vendor, the same will be released by accounts department after passing the necessary entries in the vendor account under Business Area (BA). The purchase depa depart rtme ment nt whil whilee prep prepar arin ing g the the PO woul would d ensu ensure re to ment mentio ion n comple complete te name name as “RANBA “RANBAXY XY LABOR LABORATO ATORIE RIES S LIMITE LIMITED, D, API MANUFACTURING” and address/ location of delivery of the the asse asset. t. On rece receip iptt of the the go good ods, s, the the stor stores es depa depart rtme ment nt will will arrange to prepare the GRN and do the respective head approve the same. On approval of the GRN, the stores department will send the the bill bill to acco accoun unts ts depa depart rtme ment nt for for invo invoic icee veri verifi fica cati tion on.. Th Thee accounts department verifies the invoice with PO and releases the balance payment to vendor. The cost of material will be booked in the API MANUFACTURING cost center under Business Area 1000. GJ-IMT,MOHALI GJ-IMT,M OHALI 69 of 94 of 94


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In case of imported material on receipt of approved PR from the API MANUFACTURING, purchase department, Mohali will send the PR to international purchasing department (ID Purchase) at Devika Tower, Delhi. The ID Purchase, while preparing the PO would ensure to mention the complete as “RANBAXY LABORA LABORATOR TORIE IES S LIMITE LIMITED, D, API MANUFA MANUFACTU CTURIN RING” G” and address/ location of delivery of the asset. On receipt of the material, the purchase department will arrange to prepare the GRN and do the respective head approve the same. On approval Of the GRN, the ID Purchase department will send the bill to accounts department will only verify for invoice verification. The acco accou unts nts depar eparttment ent will ill ver verify the the inv nvoi oice ce with with PO .the .the verification of Custom duty; Overseas fright etc. will be done by ID accounts and will arrange to release the payment to vendor. The cost of material will be booked in the API MANUFACTURING cost center under Business Area 1000. In the SAP system, a separate storage location (Storage Location 1075 plant 1030) for material required by API MANUFACTURING should be created so that at any given point the material purchased & consumed may be identified. Physically, the the capi capita tall asse assets ts as well well as the the mate materi rial alss pu purc rcha hase sed d for for API API MANU MANUFA FACT CTUR URIN ING G shou should ld be stor stored ed in a sepa separa rate te stor storag agee preferably within API MANUFACTURING MANUFACTURING storage location. Revenue Expenditure

Apart from material, to carry on the API MANUFACTURING, certain expenses will be incurred under various accounting heads. These expenses either may be incurred directly by API MANUFACTURING, or may be incurred by other locations. The accounting of these expenses would be made as under: The manp The manpow ower er i.e. i.e. lab lab tech techni nici cian an and and othe otherr supp suppor orti ting ng staf staff f working for the API MANUFACTURING should be identified. All All dire direct ct & indi indire rect ct expe expens nses es incu incurr rred ed in conn connec ecti tion on with with recruitment, salaries, allowances and other benefits related the said manpower be charged to the cost center for API GJ-IMT,MOHALI GJ-IMT,M OHALI 70 of 94 of 94


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MANUFA MANUFACTU CTURIN RING G e.g. e.g. Repair Repairss & mainte maintenan nance ce of buildi building, ng, AMC’ AMC’ss ho hous usek ekee eepi ping ng,, Hort Hortic icul ultu ture re,, Book Bookss & Peri Period odic ical als, s, Conference & Meeting, training, traveling lab assistant, Gifts & pr presen esentts etc, etc, sho hou uld be cha charged rged to the the cos cost cent center er of API API MANUFACTURING. Utilities cost such as Electricity, Water, Power, and Stream etc, incurred for API MANUFACTURING, based upon the actual bills received from the supplier. In case the utilities are provided by any of the the exis existi ting ng manu manufa fact ctur urin ing g faci facili liti ties es,, the the supp supply ly shou should ld be monitored by separate meter/sub meter etc, and charges for the same based upon the actual units consumed should be debited to the cost center of API MANUFACTURING. The other supplies/facilities such as Telephone, Fax, Telex etc., should be directly in the name of API MANUFACTURING. In case, any common facility is used, charges on reasonable basis should be debited to the cost center of API MANUFACTURING, Moha Mo hali li.. Th Thee supp suppli lies es from from comm common on cant cantee een n shou should ld also also be char charg ged on a reas easonab nable basis asis i.e. i.e. link linked ed to the nu num mber ber of employees working in API MANUFACTURING. The charges for Tea, coffee, snakes etc, consumed by API MANUFACTURING. Guest would be charged on reasonable basis to the Cost Center of API MANUFACTURING. MANUFACTURING. In case any materials/consumables are provided by any of the manufacturing location to the API MANUFACTURING. A stock tran transsfer fer no notte will will be rais raised ed on API MANUF ANUFAC ACT TURI URING. NG. Similarly if any services are provided by marketing facility to API MANUFACTURING, cost there of at arms length basis will be debited to the API MANUFACTURING. Statutory Compliances (For Duties & Taxes):

[a] Excise:

1. The CENVAT credit shall not be available in respect of the Inputs received from the vendors. 2. Transfer of any excisable inputs as such or intermediate from manufacturing locations the same should be on payment/reversal of appropriate duty, on which CENVAT is not applicable GJ-IMT,MOHALI GJ-IMT,M OHALI 71 of 94 of 94


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[b] Sales Tax :

1. The premises stand already declared for the purpose of sales tax registration. 2. As no direct sale activity is involved from the premises, hence no payment on account of sales taxes. [c] Other taxes:

As applicable on the items procured for the purpose (Octroi, etc.)

SAP Programming Route For Approval Of Capex SAP stands for System Application Products in Data Processing. Before giving the route of SAP for Capex an introduction about what actually is SAP Ranbaxy is an ERP organization that uses the SAP software syst system em in thei theirr orga organi niza zati tion on.. Ranb Ranbax axy y has has adop adopte ted d SAP SAP R/3 R/3 vers versio ion. n. Syst System em Appl Applic icat atio ion n Prod Produc uctt (SAP (SAP)) is a prod produc uctt of GERMANY that helps in data processing. In this SAP software there are various modules, which deal with different business activities. Configuration of inventory under SAP system In the SAP system various materials master codes are maintained to iden identi tify fy the the mate materi rial alss whet whethe herr it is raw raw mate materi rial al,, work work in progress, finished goods or semi finished goods. For this purpose a 7-digit code is maintained.

RAW MATERIAL

3******

PACKING MATERIAL

5******

WORK IN PROGRESS

8******

FINISHED GOODS

1******



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STORE AND SPARES

4******

Material module under SAP consist of the following 

Organization structure



Master data



Procurement process



Inventory management

Organization structure

Client Company code Business Area Plant Controlling area Operating concern Cost center Client & Company Code

Client - Application-independent unit: Top level Physical structure Client is a self-contained unit in SAP R/3 System with Separate Master Records and its own set of tables Company Code Represents an independent legal accounting unit, wherein a Balance sheet, and P&L statement can be prepared. Several company codes can be set up for each client, thus enabling acco accoun unti ting ng data data to be mana manage ged d simu simult ltan aneo eous usly ly for for seve severa rall independent organizations. organizations. Example: a subsidiary company, member of a corporate group



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RANBAXY organization has different client and company codes for its companies. Such as Ranbaxy laboratories LTD Ranbaxy fine chemical LTD Ranbaxy UK LTD



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Business Area

Line of Business: e.g. API Manufacturing, Pharmaceuticals. An orga organi niza zati tion onal al enti entity ty that that is no nott inde indepe pend nden entt from from a Lega Legall standpoin standpoint. t. Internal Internal balance sheets sheets and income income Statemen Statements ts can be created at Business Area level. Business Area configured in RLL • API

MANUFACTURING MANUFACTURING

• API

MARKETING

• FORMULATION

MANUFACTURING

• FORMULATION

MARKETING

• TRADING • ALLIED

BUSINESS

• PHARMA

BUSINESS SUPPORT

• REASEARCH

& DEVELOPMENT DEVELOPMENT

Plant

A plan plantt is an orga organi niza zati tion onal al un unit it with within in a comp compan any. y. A plan plantt produ produces ces goo goods; ds; render render servic services, es, or makes makes goo goods ds avail availabl ablee for distribution. distribution. A plant can be one of the following types of locations Manufacturing Manufacturing facility e.g. MFG (Mohali) Warehouse distribution center Branch office Controlling Area

This is orga This organi niza zati tion onal al cont contro roll llin ing g un unit it.. Tran Transa sact ctio ions ns with within in Controlling area is possible GJ-IMT,MOHALI GJ-IMT,M OHALI 75 of 94 of 94


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Operating Concern

Top-level logical unit in SAP. It is superset of all Cost Center, Business Area and Controlling Area etc Cost Center

Cost center is the smallest unit in Phase I. In SAP for handling various costs, there are different types of cost centers. Examples, Personal Cost Center, Amoxy Cost Center, Utility Cost Center. For Financ Financial ial purpos purposes es Cost Cost Center Center are class classifi ified ed into into variou variouss head headss such such as admi admini nist stra rati tive ve cost cost cent center er,, work workss cost cost cent center er,, Utility / Production cost center. SAP Route

SAP functioning in the system begins by creating internal order. Internal order number is created by finance department by using SAP command is Acco Accoun unti ting ng -> Inve Invest stme ment nt Mana Manage geme ment nt -> inte intern rnal al orde orderr -> Master data -> special functions -> KO02 The above path command is KO02 that creates an internal order for which following information need to be filled General data, Applicant, Person Responsible, Processing group, Esti Estima mate ted d cost costs, s, Appl Applic icat atio ion n data data,, Depa Depart rtme ment nt,, Cont Contro roll data data,, System status, User status, Assignments, Company code, Business area, Plant, Object class To make certain changes in internal order the command is GJ-IMT,MOHALI GJ-IMT,M OHALI 76 of 94 of 94


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Acco Accoun unti ting ng -> Inve Invest stme ment nt Mana Manage geme ment nt -> inte intern rnal al orde orderr -> Budgeting -> Original Budget -> KO22 In above command is used to verify the amount and text of internal order. The report created by finance department can be viewed by using command S_ALR_8701301. It is not mandatory to fill up certain fields in the internal order at the time of its creation with the result that the cost over-runs are not reflec reflected ted automa automati tical cally ly by SAP SAP syste systems ms.. For exampl example, e, the system provides that where the expenditure under any internal order exceeds 2.5% of the budgeted amount, the same is reflected in the reports. After creating the internal order the finance manager will mail the CAPEX CAPEX amount amount sancti sanctione oned d by higher higher author authoriti ities es and also also the inte intern rnal al orde orderr nu numb mber er to resp respec ecti tive ve Plan Plantt Head Head.. Inde Indent nter er will will inde indent nt the the requ requir ired ed mate materi rial al.. Inde Indent nter er is the the pers person on who who at operational level requires the material In SAP next step is creation of Purchase Requisition that can further be prepared in 2 ways Cost Center CAPEX-IO For the purpose of capitalization we have to focus on CAPEX route. Here, after getting mail from finance department Plant Head will authorizes the indenter to raise indent that is the indenter will create create Purchase Purchase Requisition. Requisition. From the departmen departmentt the SAP route com comes to Purch urchas asee Depa Depart rtm ment ent that that in Moh ohal alii han handles dles the Purc Purcha hasse Requ Requiisition tion for Moh ohal alii and To Toan anssa. In pu purrchas chasee department three documents are prepared in order to raise final PURCHASE ORDER that is initiate to supplier.



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1 REQUEST FOR QUOTATION (RFQ) – Purchase Department afte afterr rece eceivin iving g the Purch urchas asee Requ Requiisition tion will will plac placee order der depe depend ndin ing g up upon on requ requir irem emen ents ts.. In syst system em,, for for diff differ eren entt item itemss different staff person receives particular Purchase requisition that is differen differentiate tiated d by unique unique purchasi purchasing ng group. group. For Example 505 is the purchasing group that handled Purchase Requisition for items related to Electrical and instruments. instruments. For each item Purchase Department is required to send RFQ to 3 vendors. Three is the minimum limit for every item but in case where Purchase Requisition (PR) specify the brand of particular need to be acquired, in that case only one RFQ need to send. For example if PR specifies one LG T.V then only one RFQ need to send to dealers dealing in LG commodities. For CAPEX PR starts from from 30 3000 0000 0019 1987 87.. RFQ RFQ is the the 10 10-d -dig igit it nu numb mber er.. In SAP SAP for for creating a RFQ ME41 is the command used by purchase depa depart rtme ment nt.. Th Then en a appl applet et wind window ow come comess wher wheree info inform rmat atio ion n regarding RFQ type Language key RFQ date Quotation deadline RFQ Organizational data Purchase organization Purchasing group Default data for items Item category Delivery date Plant Material Group Storage location. GJ-IMT,MOHALI GJ-IMT,M OHALI 78 of 94 of 94


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Balance sheet Dec Dec ' 08 Dec Dec ' 07 Dec Dec ' 06 Dec Dec ' 05 Dec Dec ' 04

Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus

210.19 186.54 186.34 186.22 185.89 175.66 1.18 0.88 0.28 2.83 3,330.92 2, 2 ,350.68 2, 2 ,162.79 2, 2 ,190.80 2, 2 ,320.79

Loan funds Secured loans Unsecured loans Total

162.07 365.07 224.29 353.49 133.37 3,563.30 3, 3,137.96 2, 2,954.31 67 676.31 2.49 7,442.14 6,041.42 5,528.61 3,407.10 2,645.38

Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital wo work-in-progress Investments

2,386.75 2, 2,261.48 2, 2,133.57 1, 1,799.32 1, 1,402.79 930.07 791.96 699.54 599.35 525.21 1,456.68 1,469.52 1,434.03 1,199.97 877.58 428.77 327.42 301.88 432.84 264.16 3,618.03 3,237.55 2,679.95 762.78 679.07

Net current assets Current as assets, lo loans & ad advances Less ess : curr curren entt lia liabi bili liti ties es & pro provi visi sion onss Total net current assets Miscellaneous expenses not written Total Total

6,509.97 2,922.42 2,620.99 2,409.08 2,366.89 4,57 4,571. 1.31 31 1,91 1,915. 5.49 49 1,50 1,508. 8.24 24 1,39 1,397. 7.56 56 1,54 1,542. 2.33 33 1,938.67 1,006.93 1,112.76 1,011.52 824.57 7,442.1 7,442.14 4 6,041.4 6,041.42 2 5,528.61 5,528.61 3,407.10 3,407.10 2,645.38 2,645.38

Notes: Book value of of unquoted in investments 3,372.60 3,106.69 2,659.94 762.77 Market value of quoted investments 280.46 14.27 0.01 Contingent liabilities 252.85 201.00 159.40 202.40 Num Number ber of equit equity y share sharesou souts tstan tandin ding g (Lac (Lacs) s) 420 4203. 3.70 70 373 3730. 0.71 71 372 3726.8 6.87 7 372 3724.4 4.42 2



679.07 0.01 307.95 1858.9 185 8.91 1

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Capital structure From Year

2 0 08 2 0 07 2 0 06 2 0 05 2 0 04 2 0 03 2 0 02 2 0 01 2 0 00 1 9 99 1 9 97 1 9 96 1 9 95 1 9 95 1 9 94 1 9 93 1 9 92

To Class Of Authorized Year Share Capital Equity 2 00 8 299.00 Share Equity 2 00 7 299.00 Share Equity 2 00 6 299.00 Share Equity 2 00 5 299.00 Share Equity 2 00 4 199.00 Share Equity 2 00 3 199.00 Share Equity 2 00 2 199.00 Share Equity 2 00 1 150.00 Share Equity 2 00 0 150.00 Share Equity 1 99 9 150.00 Share Equity 1 99 8 6 9 .0 0 Share Equity 1 99 7 6 9 .0 0 Share Equity 1 99 6 6 9 .0 0 Share Equity 1 99 6 6 9 .0 0 Share Equity 1 99 5 6 9 .0 0 Share Equity 1 99 4 6 9 .0 0 Share Equity 1 99 3 4 9 .0 0 Share


Issued Capital

Paid Up Paid Up Paid Up Shares (Nos) Face Value Capital

210.18

4 2 0 3 6 9 7 53

5

210.18

186.54

3 7 3 0 7 0 8 29

5

186.54

186.34

3 7 2 6 8 6 9 64

5

186.34

186.22

3 7 2 4 4 2 1 90

5

186.22

185.89

1 8 5 8 9 0 7 42

10

185.89

185.54

1 8 5 5 4 3 6 25

10

185.54

185.45

1 8 5 4 5 2 0 98

10

185.45

115.90

1 1 5 8 9 5 4 78

10

115.90

115.90

1 1 5 8 9 5 4 78

10

115.90

115.90

1 1 5 8 9 5 2 50

10

115.90

53.73

5 37 2 6 2 5 2

10

53 .7 3

49.41

4 94 1 4 7 1 7

10

49 .4 1

48.13

4 31 3 2 2 5 3

10

43 .1 3

48.13

5 00 0 0 0 0

3

1.25

43.13

4 31 3 2 2 5 3

10

43 .1 3

35.33

3 53 3 0 2 6 9

10

35 .3 3

21.79

2 17 9 3 0 5 0

10

21 .7 9


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Recommendations and Suggestions for the Indian Pharma Industry. The achi The achiev evem emen ents ts of the Indi Indian an ph phar arm maceu aceuttical cal indu indusstry are are spectacular in recent times and are praise worthy, which has evolved as model industry of the country in performance. But, in the 21st century, the pharmaceutical value chain would depend on the ability of ph phar arma mace ceut utic ical al comp compan anie iess to make make the the tech techno nolo logi gica call shif shiftt necessary to maintain and increase their competitive positions. Also for the MNCs, India provides not just the possibility – but the unique unique & tangib tangible le opp oppor ortun tunity ity to make make the desire desired d ‘techn ‘technolo ologic gical al shif shift’ t’ – in proc proces ess, s, and and in loca locati tion on!! Th Thee qu ques esti tion on befo before re Phar Pharma ma Company CEOs the world over today is not: ‘Should my company go to India?’ but ‘Can my company afford not to go to India’?” STEPS REQUIRED TO BOOST THE COMPETITIVENESS OF THE PHARMA INDUSTRY •

•

•

•

Exte Extens nsio ion n of de dedu duct ctio ion n of 150% 150% of R&D R&D expe expens nses es.. This would encourage more and more companies to invest in R&D.

The government has earmarked 150 crores for R&D. This is just not enough. It should be augmented to at least 2000 crores. To rati ration onal aliz izee Drug Drug Pric Pricee Cont Contro roll Or Orde derr (DPC (DPCO) O).. The objective of the price control was to ensure adequate availability of quality medicines at affordable prices. The product patent regime will make it obligatory for Indian companies to compete in R&D if they want to survive. Similarly, WTO led global trading system will result in import tariffs coming down. For Indian companies to compete with cheap imports, they will have to invest in cost effective technology and processes. Therefore, it is imp imperat eratiive that hat the the ph phar arm ma ind ndus usttry has has surp urplus lus for investment. In this context, a liberalized price control regime becomes more important. An aca acade dem mic –ind –indu ustr strial ial re rellati ationsh onshiip can can be furt rthe herr explored, on the lines of the US model, where the universities are the sites of innovation and the industry commercializes the



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product. The universities are permitted to own the Intellectual Property Rights (IPR) and get a share of the profits. Academic institutions will then become the engines of entrepreneurship. This also requires setting up of greater number of centres of academic excellence throughout India in different states, so that people people from across across the country can avail of such education education and make their contributions without feeling the need to look beyond India for achieving academic excellence. •

•

Income tax exemptions should be given on clinical trials and contra contract ct resear research ch done done outsid outsidee the compan company y and abroad abroad.. This is because India is seen as emerging as a major centre for outsourcing of clinical trials for the Pharmaceutical MNCs. The problem of spurious drugs has to be tackled. 

The procedure for procurement of licence should be made made more more strin stringen gent, t, includ including ing extens extensive ive disclo disclosur suree of detailed personal, financial and business information and a thor thorou ough gh back backgr grou ound nd chec check. k. Th Ther eree is a stro strong ng need need to stre streng ngth then en and and stre stream amli line ne the the Cent Centra rall and and Stat Statee Drug Drug Control Organizations. State drug controllers should take measures like setting up of separate intelligence-cum-legal machinery with police assistance. Faking should be made non-bailable and cognizable offence and the prosecution should be instituted by any police or Central Bureau of Inve Invest stig igat atio ion n offi office cerr no nott less less than than the the rank rank of a subsubinspector (instead of an inspector in the extant provision). provision). 

Most of the cases relating to spurious drugs remain unde un deci cide ded d for for year years. s. Henc Hencee ther theree is a stro strong ng need need for for setti etting ng up separ eparat atee cou courts for speed peedy y trials ials of such uch offences. The case should be tried by the court of the rank of a Session Judge or above whereas the extant provision provides for a trial by a metropolitan magistrate or a first class judicial magistrate or above. Each state should set up accredited testing laboratories that are well equipped and adequately staffed. The staff should be trained well for drawing samples for





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test and monitoring the quality of drugs and cosmetics moving in the State. It is most important and essential to have training programmes for technical staff of central and state tate drug rug con control trol lab laborat orator oriies and and pri privat vate testi esting ng laboratories as it is based on the report of these testing laboratories that a manufacturer releases his product or otherwise. Legal action against the manufacturer is likely to be taken on the basis of the test report given by a government analyst. •

•

India should exploit its know-how in herbal medicines. Since these medicines do not come under the purview of the TRIPS regi regime me and and the the rese resear arch ch in new new chem chemic ical al enti entiti ties es invo involv lves es millions of dollars of investment, the Indian companies should engage in R&D in herbal medicine. The companies should try to exploit the Indian traditional knowledge in ayurveda and herbal cures and file as many patents for herbal medicine as they can. For For this this the the go gove vern rnme ment nt shou should ld set set up R&D R&D labo labora rato tori ries es undertaking research exclusively in the area of herbal medicines and support the companies in their research and patent filing. The govern governmen mentt shoul should d enc encour ourage age setti setting ng up of USFDAUSFDAcompliant plants by providing tax holidays for a specified period (as given in regions like Baddi), so that the Indian companies can exploit the opportunity arising out of patented drug drugss and and take take up mark market etin ing g of gene generi rics cs in the the deve develo lope ped d countries like USA.

TRENDS AND STRATEGIES The Indi The Indian an do dome mest stic ic ph phar arma mace ceut utic ical al indu indust stry ry is incr increa easi sing ngly ly becoming globally competitive to counter the weaknesses and threats. The key trends and strategies being adopted by the local pharmaceutical industry are: Increased R&D Focus

Driven by the imminent change to a product patent regime at home from 2005 the leading pharmaceutical companies in India have been increasing their R&D budgets over the years. Indian pharmaceutical GJ-IMT,MOHALI GJ-IMT,M OHALI 84 of 94 of 94


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companies are likely to double their expenditure on R&D over the next 2 years.



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Exports Driven Growth

Indian Indian pharm pharmace aceuti utical cal compan companies ies are on a global global beat. beat. Curren Currently tly,, exports contribute more than half the total revenues for most of the Indian pharmaceutical majors. Exports have increased in recent years as Indian pharmaceutical companies have made deep inroads into the regu regula late ted d gene generi ricc mark market etss of the the US and and Eu Euro rope pe,, in addi additi tion on to unregulated markets. MNCs Showing Growing Interest in India

The share of MNCs in the Indian pharmaceuticals market is expected to increase with the recognition of product patents in the country from 2005, as they will be able to freely introduce top of the line, patented pro produ duct ctss in the the do dome mest stic ic mark market et.. Mo More reov over er,, with with the the new new pric pricee control order expected to be passed soon, DPCO coverage will be substantially reduced and margins of most MNCs with strong brands will drastically improve. The Indian Government’s decision to allow 100 per cent Foreign Direct Investment into the drugs and pharmaceutical industry is expected to aid increased investment in R&D infrastructure by MNCs in India.

Recom commen mendatio ation ns Laboratories Ltd.

and

Suggestion ions

for

Ranbaxy axy

This paper describes a methodology for deriving the optimum capital structure for an unlevered equity driven firm. Using a hypothetical model for computing optimal capital structure, the idea is to determine the optimum level of debt which Ranbaxy can for maximisising its market market value value and shareh sharehold olders ers wealth wealth.. Variou Variouss method methodss throug through h which Ranbaxy can raise debt are: Debentures

Debentures are loans that are usually secured and are said to have either fixed or floating charges with them. A secured debenture is one that is specifically tied to the financing of a particular asset such as a building or a machine. Then, just like a mortgage for a private house, the debenture holder has a legal interest in that hat asset set and and the the com company pany cann canno ot dis dispo posse of it unles nlesss the GJ-IMT,MOHALI GJ-IMT,M OHALI 86 of 94 of 94


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debenture holder agrees. If the debenture is for land and/or buildings it can be called a mortgage debenture. Debenture holders have the right to receive their interest payments before any dividend is payable to shareholders and, most importantly, even if a company makes a loss, it still has to pay its interest charges. If the the bu busi sine ness ss fail fails, s, the the debe debent ntur uree ho hold lder erss will will be pref prefer eren enti tial al creditors and will be entitled to the repayment of some or all of their money before the shareholders shareholders receive anything. Other Loans

The term debenture is a strictly legal term but there are other forms of loan loan or loan oan stock. ock. A loan loan is for a fixed xed amo amoun untt with with a fixe fixed d repayment schedule and may appear on a balance sheet with a specific name telling the reader exactly what the loan is and its main details. Overdraft Facilities

Many companies have the need for external finance but not necessarily on a long-term basis. A company might have small cash flow problems from time to time but such problems don't call for the need need for for a form formal al long long-t -ter erm m loan loan.. Unde Underr thes thesee circ circum umst stan ance ces, s, a company will often go to its bank and arrange an overdraft. Bank overdrafts are given on current accounts and the good point is that the interest payable on them is calculated on a daily basis. So if the company borrows only a small amount, it only pays a little bit of interest. Lines of Credit from Creditors

This source of finance really belongs under the heading of working capital management since it refers to short term credit. By a 'line of credit' we mean that a creditor, such as a supplier of raw materials, will allow us to buy goods now and pay for them later. Why do we include lines of credit as a source of finance? Well, if we manage our creditors carefully we can use the line of credit they provide for us to finance other parts of our business. Grants

Grants can be an attractive aspect of a company's financing structure. If a company has a specific issue that it wants or needs to deal with GJ-IMT,MOHALI GJ-IMT,M OHALI 87 of 94 of 94


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then it could find that there are grants available from local councils and other bodies that will help to pay for it. Venture Capital

Venture Capital has become a vital aspect of the source of finance market over the last 10 to 15 years. Venture Capital can be defined as capital contributed at an early stage in the development of a new enterprise, which may have a significant chance of failure but also a significant chance of providing above average returns and especially where the provider of the capital expects to have some influence over the direction of the enterprise. Venture Capital can be a high risk strategy. Factoring

Factoring allows you to raise finance based on the value of your outst outstand anding ing invoic invoices. es. Factor Factoring ing also also gives gives you the opp opport ortuni unity ty to outsourc outsourcee your sales ledger ledger operation operationss and to use more sophisti sophisticated cated credit rating systems. Once you have set up a factoring arrangement with a Factor, it works this way: Once you make a sale, you invoice your customer and send a copy of the invoice to the factor and most factoring arrangements require you to factor all your sales. The factor pays you a set proportion of the invoice value within a pre-arranged time - typically, most factors offer you 80-85% of an invoice's value within 24 hours. Leasing

Leasing is a contract between the leasing company, the lessor, and the customer (the lessee). The leasing company buys and owns the asset that the lessee requires. The customer hires the asset from the leasing company and pays rental over a pre-determined period for the use of the asset. There are two types of leases: •

Finance Leases

Under a finance lease the rental covers virtually all of the costs of the asset therefore the value of the rental is equal to or greater than 90% of the cost of the asset. The leasing company claims writing down allowances, whilst the customer can claim both tax relief and VAT on rentals paid. GJ-IMT,MOHALI GJ-IMT,M OHALI 88 of 94 of 94


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•

Operating Leases

The lease will not run for the full life of the asset and the lessee will not be liable for its full value. The lessor or the original manufacturer or supplier will assume the residual risk. This type of lease is normally only used when the asset has a probable resale value, for instance, aircraft or vehicles. The most common form of operating lease is known as contract hire. Essentially, this gains the customer the use of the asset together with added services. A very common example of an asset on contract hire would be a fleet of vehicles. Indian pharmaceutical scene is fast changing. Consumer expectations are going up leading to more difficulties for pharmaceutical marketing profe profess ssion ionals als.. Change Change in the charac character ter profi profile le of the doctor doctorss with with sociosocio-eco econom nomic ic change changess have have also also affect affected ed many many pharm pharmace aceuti utical cal companies. Thus Ranbaxy should also concentrate on following areas to strengthen market position: Do Market Audit

The comp The compan any y shou should ld carr carryo yout ut an audi auditt of all all its its acti activi viti ties es.. Th This is activity analyses different marketing activities and suggest the bench mark for the company. This is a self supportive study as the marketing audit gives lot of avenues in streamlining the operations and cutting the cost. It also helps to remove unnecessary activities, which may be redu redund ndan antt for for tomo tomorr rrow ow.. Th This is give givess also also an insi insigh ghtt to the the futu future re scenario. Sales Management Audit and Preparation of New Sales Strategy

Sales Sales Manage Manageme ment nt plays plays a very very import important ant role role in pharm pharmace aceuti utical cal industry. Medical Representative or Area Manager is the key person in improving the sales. Medical Representative and Manager, if are not happy, and not properly directed can lead to chaotic conditions. GJ-IMT,MOHALI GJ-IMT,M OHALI 89 of 94 of 94


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Training

Reorientation of the field force and manager is a must. Training plays a very very impo import rtan antt role role in moti motiva vati ting ng repr repres esen enta tati tive vess as well well as managers. It helps them to sharpen their tools and develop confidence. A series of refresher course should be organized in order to update managers on the medical skills and the selling skills. The net benefits of a training program may be summarized as under: i.

Conf Confid iden ence ce leve levell of the the medic medical al repr repres esen enta tati tive vess goes goes up. up. They They added lot of key customers whom they were not meeting earlier. Incr ncreas ease in cus customer omer base ase with with als also regu egular lar vis visit to key customers led to improvement in output.

ii.

Prescribi ibing ng Impr Improv ovem emen entt in stri strike ke rate rate – conv conver erti ting ng Non Prescr Potential Doctors to Irregular Prescribing Doctors Quicker. This leads to improvement in the productivity.

iii. iii.

Traini Training ng help helpss in acce acceler lerati ating ng produ producti ctivit vity y and overal overalll growt growth h in the Company.

Morale of the people if kept high then anything can be achieved. Today as per the study conducted in India, majority of the people works at 40% of its energy level. A positive attitude with proper work cult cultur uree will will no nott come come on only ly thro throug ugh h lect lectur ures es bu butt ther theree shou should ld be adequate reward systems. Optimization Optimization of Resources

Resources available today are becoming scarce. Therefore, for turning arou around nd the the comp compan any, y, op opti timi miza zati tion on of reso resour urce cess do does es play play a very very important role. The activities like rationalizing of tour programme, defining the head quarters working norms, proper planning of input plans plans like like sample samples, s, gifts gifts based based on contri contribut bution ion,, core core doctor doctorss visit visit analysis, application of ACE approach and input-output model led to increase in profitability. profitability.



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CONCLUSION The successful strategy for Ranbaxy Laboratories Ltd. in a post 2010 world will include: (a)

Att Attain ain righ ghtt pro produ ducct-m t-mix

(b)

Augment skills

(c) (c)

Use Use M&A M&A opti option onss for for eith either er com compa pani nies es or or prod produc ucts ts..

(d) (d)

Buil Buildi ding ng ‘In ‘Inno nova vati tion on’’ Engi Engine ne at R&D R&D

(e) (e)

Sust Sustai ain n gro growt wth h mom momem emen entu tum m in in USA USA..

(f) (f)

Atta Attain in crit critic ical al mas masss in in Eur Europ opee and and Lati Latin n Ame Ameri rica ca..

(g) (g)

Spec Specia ialt lty y produ product ctss focu focuss for for “Bra “Brand nd”” mark market etin ing. g.

(h) (h)

Fort Fortif ifyi ying ng hom homee busi busine ness ss – lev lever erag agee Indi Indiaa Base Base..

(i)

See Seeding ding the Japan apanes esee market rket..

(j) (j)

Netw Networ orki king ng,, lice licens nsin ing g and and acqu acquis isit itio ions ns..

(k) Tech Techno nolo logy gy,, new new mark arket ent entry veh vehicl icles, es, bran brand ds/ proprietary products (l)

Glo Global bal tal taleent po poo ol to to fue fuell gr growt owth.

The incr The increa easi sing ng impo import rtan ance ce of biot biotec ech h indu indust stry ry and and its its symb symbio ioti ticc rela relati tion onsh ship ip to ph phar arma ma will will also also be very very rele releva vant nt in Ranb Ranbax axy’ y’ss strategy. However Ranbaxy should not close its eyes on the ever increasing Global competition, which is a big threat for the company. The entry of international and new domestic players would intensify the competition significantly. significantly. Further there is threat from other low cost countries like China and Israel. However, on the quality front, India is better placed relative to China. China. So, differ different entiat iation ion in the contr contract act manufa manufactu cturi ring ng side side may wane. The short-term short-term threat for the pharma pharma industry is the the uncertainty regarding the implementation of VAT. Though this is likely to have a GJ-IMT,MOHALI GJ-IMT,M OHALI 92 of 94 of 94


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negative impact in the short-term, the implications over the long-term are positive for the industry. The Indian pharmaceutical industry is at the center stage in the global healthcare arena and Ranbaxy endeavors to be at the forefront in del deliver iverin ing g the Ind ndia ia cent centri ricc adva advan ntag tages to the adva advan nced ced and and developing countries of the world. From a small domestic company at inception, Ranbaxy has grown formidably to be a Billion dollar institution that was envisioned by Late Dr Parvinder Singh, Chairman and Managing Director, Ranbaxy in early 90's. It is with the unwavering ' dedication ' and the ' will to win ' of Team Ranbaxy Ranbaxy across across the globe that Ranbaxy has traversed traversed this journey journey so far. The management feels that the next league is a greater challenge, as the company has other milestones to achieve. Whilst Ranbaxy continues to enhance the momentum of its generics business in its key geographies, parallel to that it is also accelerating its drug discovery program. The company is committed to provide quality generics at affordable prices to the patients worldwide with a view to help bring down the healthcare costs. Ranbaxy’s management is confident that its efforts would see the Company emerge as a leading player in the global generic space in the years to come. As the the comp compan any y move movess ahea ahead d towa toward rdss its its miss missio ion n to beco become me a Res Resear earch bas based Inter nterna nattion onal al Phar harmaceu aceuttical ical Com Company pany.. The management believes that, it is the spirit of Team Ranbaxy that would enable Ranbaxy to reach out to Vision 2012



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Bibliography •

WEBSITES:-

•

www.ranbaxy.com

ONLINE JOURNALS:- Cygnus Cygnus Busine Business ss Consul Consultin ting g & Resear Research ch

Indian Pharmaceutical Industry-Oct-Dec 2008 - FICCI FICCI Report Report for for Nationa Nationall manufac manufactur turing ing Compe Competi titiv tivene eness ss Council (NMCC) •

BOOKS:- Fina Financ nciial Man Manaagem gement ent (ICFAI University) - Fina Financ nciial Man Manaagem gement ent (Fourth edition) By M.Y.Khan & P.K.Jain (Tata McGraw Hill Publishing Company Ltd.) - Fina Financ nciial Man Manaagem gement ent (Sixth edition) By Prasanna Chandra (Tata McGraw Hill Publishing Company Ltd.) - Fina Financ nciial Man Manaagem gement ent (Fourth edition) By Ravi M Kishore



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Project Report on Capital Structure

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