Ranbaxy final project

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Shree Agrasain College 2012

FINAL REPORT

Leverage Analysis in Financial Management

OF

RANBAXY LABORATORIES LIMITED

Submitted by-:

RAHUL RAI

Roll No: 434-BBA10M-0008

Reg No: 4341121003809

SHREE AGRASAIN

COLLEGE

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Leverage Analysis in Financial Management

OF

USING CAPITAL STRUCTURE & LEVERAGE

By

RAHUL KR. RAI

A Report Submitted in partial fulfillment

of the requirement for the Bachelor of Business Administration

(BBA) Program of

Under the guidance of

Mr. NIBIR GOSWAMI Mr.AMOD GUJRAL

College Guide Company Guide

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Acknowledgement

I am profoundly thankful to MR. Amod Gujral, HR. Manager, Ranbaxy

Laboratories Limited, for his cordial treatment and also for his expert guidance

and constant assistant given in the course of this project with a deep sense of

gratitude. It’s my real honor and pleasure, to be associated with Ranbaxy

Laboratories. I deeply express my gratitude to the company for giving me an

opportunity to work as winter trainee at their corporate office under Winter

Internship Program (WIP). Also special thanks to Sr. Prof Nibir Goswami For

special guidance and all the respected teachers of BBA(H) department. Our

also goes to the kind Co-operation of our college library from where we could

collect a vast treasure of knowledge. We would like to thanks the countless

number peoples especially who helped get this work out of door. While

developing this project we had to consult many people from different grounds

of activity. We would like to thank our parents without whom this project

would never have been completed. The kind and ready help and advice

extended by them is greatly acknowledged. We also express our whole hearted

thanks to our friends who criticized and motivated us during the tenure of the

study and to all my elders for the inspiration and encouragement through the

course.

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Topics Page No

1. Introduction 6

2. Objective 7

3. Importance 8

4. Methodology 9

5. Company Profile

a. Introduction to Ranbaxy Laboratories Ltd. 10

b. World Wide Operation 12

c. Company Products 13

i. Theoretical Background on Financial Analysis

a. Leverage 15

b. Capital Structure 17

c. CVP Analysis 19

d. EBIT/EPS Analysis 21

ii. Analysis &Interpretation 23

iii. 10 year at a glance 39

6. Recommendations 40

7. Advantages 43

8. Limitations 45

9. Conclusion 46

10. Bibliography 47

11. Attachments 48

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Every financial manager is involved in financial decision making and financial

planning in order to take right decision at right time, he should be equipped with

sufficient past and present information about the firm and its operations and how it

is changing overtime. Much of this information that is used by financial manager to

take various decisions and to plan for the future is derived from the financial

statements

For selecting a target debt –equity mix, the firm analyses a number of factors. One

such factor is leverage. The capital structure decision involves a choice between risk

and expected returns. The use of more and more debt capital raises the risk factor of

the firm’s earnings stream but it also tends to provide a higher expected rate of

return to the shareholders. In this chapter, we consider the various aspects of

leverage and risks in planning the capital structure of a firm.

Financial management has assumed greater importance today as the financial

strategies required to survive in the competitive environment have become very

important. In the financial markets also new instruments and concepts are coming

and one must say that a finance manager of today is operating in a more complex

environment. A study of theories and concepts of financial management has therefore

become a part of paramount importance for academics as well as for practitioners

but there are many concepts and theories about which controversies exist as no

unanimous opinion is reached as yet.

The project, Leverage Analysis in Financial Management. further aims at

discussing and understanding the concepts of financial management of Ranbaxy

Laboratories Limited.; the functions expect to be performed by the financial

management as well as the objectives of financial managements

INTRODUCTION

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It shows relation between variousa spects-particularly Risk & Reward

Leverage is a relation of your efforts and rewards

Some factors like fixed cost resources etc. have impact on increase or decrease in profit.

Objective

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Leverage is some tool to help you accelerateyour

speed.

It increases your speed and also your risk.

It improves returns on equity.

IMPORTANCE

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Personal Interview

Printed and Digital Sources

Questionnaire

METHODOLOGY

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Ranbaxy Profile

About Ranbaxy

Profile Ranbaxy Laboratories Limited (Ranbaxy), India's largest pharmaceutical company, is an integrated, research based, international pharmaceutical company, producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. Ranbaxy today has a presence in 23 of the top 25 pharmaceutical markets of the world. The Company has a global footprint in 43 countries, world-class manufacturing facilities in 8 countries and serves customers in over 125 countries. In June 2008, Ranbaxy entered into an alliance with one of the largest Japanese innovator companies, Daiichi Sankyo Company Ltd., to create an innovator and generic pharmaceutical powerhouse. The combined entity now ranks among the top 20 pharmaceutical companies, globally. The transformational deal will place Ranbaxy in a higher growth trajectory and it will emerge stronger in terms of its global reach and in its capabilities in drug development and manufacturing. Ranbaxy was incorporated in 1961 and went public in 1973.

Mission

Ranbaxy's mission is 'Enriching lives globally, with quality and affordable pharmaceuticals'.

Financials

For the year 2011, the Company recorded Global Sales of US $ 2.1 Bn. The Company has a balanced mix of revenues from emerging and developed markets that contribute 47% and 46% respectively. In 2011, North America, the Company's largest market contributed sales of US $ 791 Mn, Europe contributing US $ 297 Mn and Asia clocking sales of US $ 503 Mn.

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Strategy

Ranbaxy is focused on increasing the momentum in the generics business in its key markets through organic and inorganic growth routes. Growth is well spread across geographies with focus on developed and emerging markets. It is the Company's constant endeavour to provide a wide basket of generic and innovator products, leveraging the unique Hybrid Business Model with Daiichi Sankyo. The Company will also increasingly focus in high growth potential segments like Vaccines and Biogenerics. These new areas will add significant depth to the existing product pipeline.

R&D

Ranbaxy views its R&D capabilities as a vital component of its business strategy that will provide a sustainable, long-term competitive advantage. The Company has a pool of over 1,200 R&D personnel engaged in path-breaking research. Ranbaxy is among the few Indian pharmaceutical companies in India to have started its research program in the late 70's, in support of its global ambitions. A first-of-its-kind world class R&D centre was commissioned in 1994. Today, the Company has multi-disciplinary R&D centers at Gurgaon, in India, with dedicated facilities for generics research and innovative research. The R&D environment reflects its commitment to be a leader in the generics space offering value added formulations and development of NDA/ANDAs, based on its Novel Drug Delivery System (NDDS) research capability. Ranbaxy's first significant international success using the NDDS technology platform came in September 1999, when the Company out-licensed its first once-a-day formulation to a multinational company. In July 2010, Ranbaxy's New Drug Discovery Research (NDDR) was transferred to Daiichi Sankyo India Pharma Private Limited as part of the strategy to strengthen the global Research and Development structure of the Daiichi Sankyo Group. NDDR is now an integral part of Daiichi Sankyo Life Science Research Center in India, based in Gurgaon. However, Ranbaxy continued to independently develop the anti-malarial new drug, arterolane maleate + piperaquine phosphate that has been approved by the Indian Drug Regulator, Drug Controller General of India (DCGI) for manufacturing and marketing in India. In April 2012, Ranbaxy launched India's first new drug, SynriamTM, for the treatment of uncomplicated Plasmodium falciparum malaria, in adults. The company will also explore the further development of late stage programs developed by NDDR in the last few years, including the development programs in the GSK collaboration. Within Ranbaxy, R&D of Generics will now get a sharper focus, as the Company is increasingly working on more complex and specialist areas

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Worldwide Operations

Global Pharma Companies are experiencing an ever changing landscape ripe with challenges and opportunities. In this challenging environment Ranbaxy is enhancing its reach leveraging its competitive advantages to become a top global player.

Driven by innovation and speed to market we focus on delivering world-class generics at an affordable price. Our unwavering determination to achieve excellence leads us to new global benchmarks. Our people have consistently risen above all challenges maximized opportunities and positioned Ranbaxy as a leader in the global generics space.

Ranbaxy's global footprint extends to 43 countries embracing different locales and cultures to form a family of 50 nationalities with an intellectual pool of some of the best minds in the world.

Africa

Asia Pacific

CIS

Europe

Global API

Global Consumer Healthcare

India

Latin America

Middle East and Sri Lanka

North America

http://www.ranbaxy.com/operations/operationinterregion.aspx?id=76&flag=










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Products

Using the finest R&D and Manufacturing facilities, Ranbaxy Laboratories Limited manufacture and

markets generic pharmaceuticals, value added generic pharmaceuticals, branded generics, active

Pharmaceuticals (API) and intermediates.

The Company remains focused on ascending the value chain in the marketing of pharmaceutical

substances and is determined to bring in increased revenues from dosage forms sales.

Ranbaxy's diverse product basket of over 5,000 SKUs available in over 125 countries worldwide,

encompasses a wide therapeutic mix covering a majority of the chronic and acute segments. Healthcare

trends project that the chronic treatment segments will outpace the acute treatment segments, primarily

driven by a growing aging population and dominance of lifestyle diseases. Our robust performance in

Cardiovasculars, Central Nervous System, Respiratory, Dermatology, Orthopedics, Nutritionals and

Urology segments, clearly indicates that the Company has strengthened its presence in the fast-growing

chronic and lifestyle disease segments.

Top 10 Molecules (2010)

• Valacyclovir

• Simvastatin

• Donepezil

• Atorvastatin & Combinations

• Co-amoxyclav & Combinations

• Ciprofloxacin & Combinations

• Ketorolac Tromethamine

• Imipenem+Cilastatin

• Ginseng+Vitamins

• Loratadine & Combinations

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For selecting a target debt –equity mix, the firm analyses a number of factors. One such factor is leverage. The

capital structure decision involves a choice between risk and expected returns. The use of more and more debt

capital raises the risk factor of the firm’s earnings stream but it also tends to provide a higher expected rate of

return to the shareholders. In this chapter, we consider the various aspects of leverage and risks in planning the

capital structure of a firm.

The concept and nature of leverage:-

The term leverage is also used in business terminology. It describe the ability of a firm to used fixed cost

assets or funds to magnify the return to the shareholders, in other words, it implies that, other things

remaining, a relatively small changes in sales results in a large change in income(profit before interest & tax).it

may be mentioned that leverage may occur in a varying degrees. The higher the degree of leverage, the greater

is the risk. But at the same time, it also increased the possibility of higher rate of return to the shareholders.

The term “risk” implies the degree of uncertainty that the firm has to face in meeting fixed-payment obligation

(i.e. operating fixed costs and costs of pref. and debt capital).

Two types of leverage are used in business terminology viz.: (i) operating leverage arising out of fixed

operating cost, and (ii) financial leverage arising out of fixed financial charges. Operating leverage indicates the

degree of operating risk while financial leverage signifies the degree of financial risk of the firm. The combined

effect of operating and financial leverage provides a risk profile or the total risk of the firm. Before we take up

leverage for discussion it is important to discuss briefly various types of risk—business or operating risk and

financial risk.

Introduction

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Various risks

Operating risks

This represents the variability in earnings before interest and taxes (EBIT) due to the risk inherent in the operation

of the firm. It is also called business risk. Variability in EBIT may be due in sales. Variability in sales depends on the

nature of the firm’s market, the industry and economy at large. Similarly, variability in EBIT also depends on the

variability of the operating cost of the firm. The various factors that contribute to the operating and business risk

are discussed below:-

(i) Variability in demand,

(ii) Variability in selling price,

(iii) Variability in input prices and firm’s capacity to adjust out prices accordingly,

(iv) Ability to develop new products,

(v) The extent of fixed costs in the total cost structure of the firm.

(vi) The asset structure of the firm.

Financial risk:-

Financial risk is associated with the financing decisions of the firm. This risk essentially refers to the use of debt

and prep, capital in the capital structure of the firm. Since the debt capital is usually cheaper than equity, the use

of debt increase the rate of return on equity as long as the rate of return on equity as long as the rate of return

exceeds the cost of debt capital. Financial risk an umbrella term for multiple types of risk associated with

financing, including financing transaction that include company loans in risk of default Risk is a term often

used to imply downside risk meaning the uncertainty of a return and the potential for financial loss. There are

various types of risk which are discussed below:-

(i) Asset-backed risk, (ii) Credit risk,

(iii) Foreign investment risk,

(iv) Liquidity risk,

(v) Market risk,

(vi) Operational risks.’

Since financial risk is associated with debt or pref. capital, if no debt or pref. capital is used in the

capital structure of the firm, there is no financial risk. Thus, a firm that finances by equity only does not

face any financial risk.

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Capital structure

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells 20 billion in equity and 80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc.

A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity.

The capital structure is how a firm finances its overall operations and growth by using different

sources of funds.

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as

common stock, preferred stock or retained earnings. Short-term debt such as working capital

requirements is also considered to be part of the capital structure.

The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for

modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it

disregards many important factors in the capital structure decision. The theorem states that, in a perfect

market, how a firm is financed is irrelevant to its value. This result provides the base with which to

examine real world reasons why capital structure is relevant, that is, a company's value is affected by

the capital structure it employs. Some other reasons include bankruptcy costs, agency costs, taxes, and

information asymmetry. This analysis can then be extended to look at whether there is in fact an optimal

capital structure: the one which maximizes the value of the firm.

4,4

6,4

2,2

2,12

capital structure

EQUITY

DEBT

PREFERENCE

OTHER

http://en.wikipedia.org/wiki/Finance

http://en.wikipedia.org/wiki/Corporation

http://en.wikipedia.org/wiki/Assets

http://en.wikipedia.org/wiki/Stock

http://en.wikipedia.org/wiki/Debt

http://en.wikipedia.org/wiki/Hybrid_security

http://en.wikipedia.org/wiki/Leverage_%28finance%29

http://en.wikipedia.org/wiki/Modigliani-Miller_theorem

http://en.wikipedia.org/wiki/Franco_Modigliani

http://en.wikipedia.org/wiki/Merton_Miller

http://en.wikipedia.org/wiki/Bankruptcy_costs

http://en.wikipedia.org/wiki/Agency_costs

http://en.wikipedia.org/wiki/Taxes

http://en.wikipedia.org/wiki/Information_asymmetry

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Types of leverage

Operating leverage

Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales. Operating leverage acts as a multiplier. If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income. It is high near the breakeven point and decreases as the sales and profit increase.

The degree of operating leverage (DOL) is a measure, at a given level of sales of how a percentage change in sales volume will affect profits.

[Degree of operating leverage (DOL) = Contribution margin ÷ Net operating income]

This can also be computed as Total Contribution Margin over Operating Income:

Financial leverage

Financial leverage can be defined as the degree to which a company uses fixed-income securities, such as debt

and preferred equity. With a high degree of financial leverage come high interest payments. As a result, the

bottom-line earnings per share is negatively affected by interest payments. As interest payments increase as a

result of increased financial leverage, EPS is driven lower.

As mentioned previously, financial risk is the risk to the stockholders that is caused by an increase in debt and

preferred equities in a company's capital structure. As a company increases debt and preferred equities, interest

payments increase, reducing EPS. As a result, risk to stockholder return is increased. A company should keep its

optimal capital structure in mind when making financing decisions to ensure any increases in debt and preferred

equity increase the value of the company.

Degree of Financial Leverage

This measures the percentage change in earnings per share over the percentage change in EBIT. This is known as

"degree of financial leverage" (DFL). It is the measure of the sensitivity of EPS to changes in EBIT as a result of

changes in debt.

DFL = 𝑬𝑩𝑰𝑻

𝑬𝑩𝑰𝑻−𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕

Or

http://www.accounting4management.com/net_operating_income.htm

http://www.accounting4management.com/net_operating_income.htm

http://www.accounting4management.com/break_even_point_definition.htm

http://en.wikipedia.org/wiki/Contribution_Margin

http://en.wikipedia.org/wiki/Operating_Income

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Operating leverage and C-V-P analysis

1. The cost-volume - profit (CVP) analysis is a device to study the behavior of profit in response to changes in volume, costs and price. 1. The break-even analysis - a popular form of the CVP analysis indicates the level of sales at which revenues equal costs. The equilibrium point is called the break-even point. In the CVP analysis, costs are separated into fixed and variable costs. Variable costs changes in direct proportion to change in volume while fixed costs remain constant. The different between sales (selling price) and variable costs (variable cost per unit is called contribution (contribution per unit. ) A firm should generate sufficient contributions from the sale of its products to recover fixed costs and leave a reasonable amount of profit. As the break-even sales, profit is defined to be zero; therefore, contribution will be equal to fixed cost. If contribution per unit (vie, selling price minus variable cost per unit) and fixed costs are known, the break-even point in units can be computed as follows: Break - even point (in units) = Fix cost / Contribution per unit The contribution ratio, also called P/V ratio , is equal to contribution ( contribution per unit ) divided by sales ( selling price ) , Using contribution ,or P/V ratio, the breakeven point in rupees can be found as follows; Break even point ( in units ) = Fixed costs / Contribution Unit The excess of actual or budget sales over the break even sales is called the margin of safety. It indicates the extent to which sales may fall before the firm suffers a loss. An important concept in context of the CVP analysis is the operating advantage. Operating advantage refers to the use of fixed costs in the operation of a firm. And it accentuates fluctuations (increasing or decreases) in the firm operating profit due to changes in sales. Thus the degree of operating advantage DOL may be defined as the percentage change in operating profit (earnings before interests and taxes EBIT) on account of a change in sales: DOL = (EBIT - Sales) Alternatively, DOL can be measured as follows: DOL = Contribution / EBIT

2. The CVP analysis is a very useful technique to reflect the effect of changes in volumes, costs and prices on profits. The break - even point will be lowered and profit increased whenever fixed costs and /or variable costs decrease or selling price increase. Profit will also increase when volume increase and other factors remain constant.

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The CVP analysis has the following advantages

(1) it is a simple device to understand accounting data. (2) It is a useful diagnostic (3) it provides basic information for further profit improvement studies. (4) It is a useful method for considering the risk implication of alternative sections. It should be noted that the CVP analysis is based on a number of assumptions that may not be realistic at times. Therefore, it should be used with caution.

The use of the CVP analysis may be limited because of the following reasons

(1) it is difficult to separate costs into fixed and variable components. (2) Fixed costs may not remain constant over the entire range of volume. (3) Selling price and variable cost per unit may not remain constant. (4) It is difficult to use the CVP analysis for a multi product firm. (5) It is a short run concept. (6) It is a static tool.

profit 40

Area 30 profit ( Rs. ‘000s)

Break even point 20

Sales(Rs. ‘000s) 10

50 100 150 200

TFC 20

(‘000) 30

40 Profit-Volume Graph

50

Loss area

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Breakeven chart

A breakeven chart is a strategic tool used to plot the financial revenue of a business unit against time or sales to determine the point when sales output is equal to revenue generated. This is recognised as the breakeven point. The information used to determine and analyze the breakeven point includes fixed, variable and total costs and the associated sales revenues. They are defined as:

Fixed costs: costs that do not vary in relation to the level of sales output, for example rent. Variable costs: costs that vary in proportion to the level of sales output, for example materials. Total costs: the sum of all costs, including fixed and variable. Associated sales revenues: the total revenue made by the company from sales. It can be derived by

multiplying price by output.

The analysis of a breakeven chart considers whether a venture runs at a profit or a loss. A sale above the breakeven point indicates continued and profitable growth. The principle of break-even theory is that during the early stages of a business venture, total costs, both fixed and variable, exceed sales. As output increases, sales begin to rise faster than costs and, eventually, they become equal (breakeven point). If sales continue to rise and exceed total costs, the business achieves profitability.

The tool assumes that all the goods which are produced will be sold and that costs, namely the price, will remain constant. Likewise, it also relies on the capacity in terms of output to remain unchanged.

Breakeven charts are universally applied to simply and graphically illustrate and forecast a company's projected revenue, and to calculate the time for profitability to be reached. It is used by financial and marketing strategists to predict the effect that changes in price will have on the percentage change in sales over time. It is also a useful tool to analyze the relationship between fixed and variable costs and to predict the effect on profitability of changes to those costs.

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Certain assumption need to be made for the purpose of construction of a BEC. They are:

Fixed costs tend to remain constant. In other word, there is no change in cost factor, such as, change in property tax rate, insurance rate, salaries of staff, etc. or in management policy.

Prices of variable costs factors, i.e. wage rates, price of materials, surplice, services, etc. remain unchanged so that variable costs are truly variable.

Semi- variable costs can be segregated into variable and fixed elements.

Product specification and methods of manufacturing and selling do not undergo a change.

Operating efficiency does not increase or decrease.

There is no change in pricing policy due to change in volume, competition, etc.

The number of units of sales coincides with this unit produced so that there is no closing or opening stock. Alternatively, the change in opening and cl. Stock are insignificant and are valued at the same prices, or variable costs.

Product-mix remains unchanged.

The BEP can be determined from a BEC or can be calculated as follows :

(i) BEP (units) =total fixed costs / unit contribution

(ii) BEP (sales value) :

(a) TFC / unit contribution * sppu

(b) TFC / unit contribution * total sales value

EBIT/EPS Analysis

EBIT - Earnings before Interest and Taxes. Accountants like to use the term Net Operating Income for this income statement item, but finance people usually refer to it as EBIT (pronounced as it is spelled - E, B, I, T). Either way, on an income statement, it is the amount of income that a company has after subtracting operating expenses from sales (hence the term net operating income). Another way of looking at it is that this is the income that the company has before subtracting interest and taxes (hence, EBIT).

EAT - Earnings After Taxes. Accountants call this Net Income or Net Profit After Taxes, but finance people usually refer to it as EAT (pronounced E, A, T).

EPS - Earnings per Share. This is the amount of income that the common stockholders are entitled to receive (per share of stock owned). This income may be paid out in the form of dividends, retained and reinvested by the company, or a combination of both. (It is pronounced E, P, and S).

I need to raise additional money by issuing either debt, preferred stock, or common stock. Which alternative will allow me to have the highest earnings per share?

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This question calls for an EBIT/EPS analysis. The EBIT-EPS analysis, as a method to study the effect of leverage, essentially involves the comparison of alternative methods of financing under various assumptions of EBIT. A firm has the choice to raise funds for financing its investment proposals from different sources in different proportions. For instance, it can (i) exclusively use equity capital (ii) exclusively use debt, (iii) exclusively use preference capital, (iv) use a combination of (i) and (ii) in different proportions; (v) a combination of (i), (ii) and (iii) in different proportions, (vi) a combination of (i) and (iii) in different proportions, and so on. The choice of the combination of the various sources would be one which, given the level of earnings before interest and taxes, would ensure the largest EPS

The graph showing highest EBIT &EPS under optimum combination of capitals.

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Capital structure

The data are extracted from the Standalone Balance Sheet Of the given

years

Ranbaxy Laboratories (Rupees in millions)

SOURCES OF FUNDS

31 Dec

2011

31 Dec

2010

31 Dec

2009

31Dec

2008

31 Dec

2007

Share Sapital

Preference capital

Reserves and surplus

Loan funds

-Secured Loans

-Unsecured Loans

2,110.00

Nil

38,242.71

3,373.41

41,533.88

2,105.20

Nil

53,876.00

2,369.38

40,978.67

2,102.09

Nil

39,573.29

2,186.62 34,108.60

2,101.85 Nil 39,104.03 2,109.35 41,005.04

1,865.35 Nil 26,156.77 4,102.55 37,313.17

Total 85260.00 99329.25 77970.6 84320.27 69437.84

In the above data it is seen that every year company increases it share capital capital upto amounting 2110 million , reserve and surplus increases upto year 2010 amounting Rs. 53,876.00 million but in year 2011 its decreases to 38,242.71 million, but in case of loan funds its increases and decreases as per companies needs. The various chart and graph showing trends of capital structure:-

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Capital structure for the year 2011

above data are shown in percentage mix of capital funds .

From the above data, it is clearly seen that company has small percentage of equity share capital and secured loan in its capital structure and company belief in large amount of unsecured loan in its capital structure to finance the organisation but company has also having a greater percentage of reserve & surplus which ultimately keeps company strong in opting any financial decision regarding any investment which is made through its internal funds.

Share CapitalPreference

ShareReserve and

SurplusSecured loan

Unsecuredloan

Capital structure for the year 2011 2,48% 0 44,85% 3,96% 48,71%

2,48%0

44,85%

3,96%

48,71%

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

Mix

of

cap

ital

str

uct

ure

Capital structure for the year 2011

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Chart showing flow of capital funds.

0,00

10000,00

20000,00

30000,00

40000,00

50000,00

60000,00

31-12-2007 31-12-2008 31-12-2009 31-12-2010 31-12-2011

Share Sapital

Preference capital

Reserves and surplus

Secured Loans

Unecured Loans

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Trend of Total Fund in last five year

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

year 2007year 2008

year 2009year 2010

year 2011

69437,8484320,27

77970,6

99329,25

85260

Títu

lo d

el e

je

year 2007 year 2008 year 2009 year 2010 year 2011

Total Funds 69437,84 84320,27 77970,6 99329,25 85260

Total Funds

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Table Showing Profit before Tax for Last Five Years

Particulars 31 dec

2011

31 dec

2010

31 dec

2009

31 dec

2008

31 dec

2007

Sales

(Less) Variable Cost—Material

Contribution

(Less) Fixed Cost

Personnel Exp.

Operating & Other Exp.

Depreciation

EBIT

(Less) Interest

Profit before Exceptional Items

(Add/ Less) Exceptional Items

Profit before Tax / EBT

80363.82

23861.06

66738.84

21709.34

52381.87

20480.28

46817.70

18792.58

47783.22

17813.13

56502.76 8647.87 31842.33 2740.83

45029.5 7761.38 14712.20 2283.53

31901.59 7284.04 13614.82 1482.03

28025.12 4730.25 18743.73 1544.69

29970.09 4216.14 15888.32 1187.31

13271.73 6035.58

20272.39

541.94

9520.7

394.66

3006.45

1458.28

8678.32

934.26

7236.15 37722.85

19730.45

4078.00

9126.04

(1493.13)

1548.17

17738.98

7744.06

Nil

(30486.7)

15652.45

10619.17 (16190.81) 7744.06

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Table showing DOL, DFL, & DCL of Last Five Years

Particulars 31-Dec

2011

31-Dec

2010

31-Dec

2009

31-Dec

2008

31-dec

2007

Contribution

EBIT

EBT

(millions) 56502.76 13271.73 (30486.7)

(millions) 45029.5

20272.39

15652.45

(millions) 31901.59

9520.7

10619.17

(millions) 28025.12

3006.45

(16190.81)

(millions) 29970.09

8678.32

7744.06

DOL = 𝑪𝑶𝑵𝑻𝑹𝑰𝑩𝑼𝑻𝑰𝑶𝑵

𝑬𝑩𝑰𝑻


𝑬𝑩𝑻

DCL = 𝑪𝑶𝑵𝑻𝑹𝑰𝑩𝑼𝑻𝑰𝑶𝑵

𝑬𝑩𝑻

4.257

(0.435)

(1.853)

2.221 1.295

2.87

3.357

0.897

3.005

9.322

(0.186)

(1.731)

3.453

1.121

3.871

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Graph showing trend of DOL, DFL & DCL

3,453

9,322

3,357

2,221

4,2571,121

-0,186

0,897

1,295-0,435

3,871

-1,7313,005

2,87

-1,853

0

1

2

3

4

5

6

7

8

9

10

31-03-2007 31-03-2008 31-03-2009 31-03-2010 31-03-2011

DCL

DFL

DOL

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SOURCES OF FUNDS

Particulars Rs. Amount

(in millions)

SOURCES OF FUNDS

Shareholders’ Funds

Share Capital

Reserves and Surplus

Loan Funds

Secured Loans

1,035.6

65,769.7

505.3

sources of funds (in millions)

Share Capital

Reserve & Surplus

Secured loans

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Table showing EBIT & EBT

particulars

Details Rs. (in millions)

Amount Rs. (in millions)

Sales (less) Material Cost (variable) Contribution (less) Fixed Cost Personnel Cost Operating and Other Expenses Operating and Other Expenses Research and Development Expenditure Depreciation / Amortisation / Impairment EBIT (Less) Interest EBT

32,988.7 8,969.3

8,969.3 2,140.6 5,340.4 1,355.9 642.3

24019.4 18448.5

5570.9 5.9

5565

Sun Pharmaceutical Industries

DOL = 𝑪𝑶𝑵𝑻𝑹𝑰𝑩𝑼𝑻𝑰𝑶𝑵

𝑬𝑩𝑰𝑻


𝑬𝑩𝑻

DCL = 𝑪𝑶𝑵𝑻𝑹𝑰𝑩𝑼𝑻𝑰𝑶𝑵

𝑬𝑩𝑻

4.312 1.001 4.316

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Comparison of DOL, DFL, & DCL of Ranbaxy Laboratories &

Sun Pharmaceutical Industries.

4,22

4,23

4,24

4,25

4,26

4,27

4,28

4,29

4,3

4,31

4,32

RANBAXY LABORATORIESLTD

Sun PharmaceuticalIndustries Limited

4,257

4,312

DOL

RANBAXY LABORATORIES LTD

Sun Pharmaceutical Industries Limited

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-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

1,2

RANBAXY LABORATORIESLTD

Sun PharmaceuticalIndustries Limited

1,001

DFL

RANBAXY LABORATORIES LTD


-100% -50% 0% 50% 100%

Ranbaxy Laboratories Limited

Sun Pharmaceutical IndustriesLimited

-1,853

4,316

DCL

Ranbaxy Laboratories Limited


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Particulars Ranbaxy Laboratories


Sales EBIT Capital Employed

80363.82

13271.73 80,753.65

32988.7

5570.9

68,595.7

Return on capital employed =

𝑬𝑩𝑰𝑻

𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅 × 𝟏𝟎𝟎 = 16.43% 8.12%

………………………………………………………………………………………

Profit Margin =

𝑬𝑩𝑰𝑻

𝑺𝒂𝒍𝒆𝒔× 𝟏𝟎𝟎 16.51% 16.88%

……………………………………………………………………………………………

Assets Leverage =

𝑺𝒂𝒍𝒆𝒔

𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅 0.995 0.481

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Comparison of EPS of Ranbaxy Laboratories &


Years EPS EPS

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

-72.32 27.28 13.61 -24.85 16.56 10.21 5.69 28.38 42.84 33.62

13.36 43.39 61.09 48.96 32.52 24.83 16.48 25.84 24.83 36.33

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Graph showing trend of EPS in last 10 years

Ranbaxy Laboratories & Sun Pharmaceutical

Industries

-80

-60

-40

-20

0

20

40

60

80

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Ranbaxy Laboratories


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Graph showing trend of Sales of Ranbaxy Laboratories:

0

10000

20000

30000

40000

50000

60000

70000

80000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sales (in millions)

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

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Recomrere

Regarding Capital Structure :

As we can easily see that company RANBAXY LABORATORIES , has huge capital funds

available but these fund are available for operating business is mainly acquired from

loan funds i.e. from unsecured loan from external world as compared to Equity capital

and secured loan. Company also has huge amount of reserve & surplus. Having huge

amount of Unsecured loan in capital funds reflects high much burden of fixed financial

charges i.e. Interest. From the above given data’s, it is clearly seen that company has

small percentage of equity share capital and secured loan in its capital structure and

company belief in large amount of unsecured loan in its capital structure to finance the

organisation but company has also having a greater percentage of reserve & surplus

which ultimately keeps company strong in opting any financial decision regarding any

investment which is made through its internal funds.

Here the mix of capital funds is not Adequate, and company doesn’t have any

preference share capital which may can affect the Earning Per Share (EPS) of RANBAXY

LABORATORIES.

The company should go for better mix of capital funds. Company should raise its capital

funds and cut down its Unsecured loan funds but its not need to raise preference share

capital being of non-tax advantage.

Recommendation

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Need to Raise Funds

(Capital budgeting decision)

Capital Structure Decisions

Debt-Equity mix

Financial Risk Trade off NEDC Risk

Market value of firm’s

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Regarding Leverage:

In the income statement of RANBAXY LABORATORIES, company has low lavel of

variable costs but company has greater Fixed Cost which ultimately turns to high

Operating Leverage

As shown above. High much fixed costs reflects high level of Break Even Point which

means company have to sale more units of products.

In the income statement of company there is an exceptional item which may reduce

the Profit before Tax ultimately reduce the financial leverage.

As a matter of prudent financial policy, a low operating leverage followed by a high

financial leverage is considered to be an Ideal situation for the maximization of the

company’s profit with minimum risk but RANBAXY LABORATORIES is running on inverse

situation having low profit with greater risks.

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As Eugene F. Brigham explained in Fundamentals of Financial Management, "The optimal capital structure is the one that strikes a balance between risk and return and thereby maximizes the price of the stock and simultaneously minimizes the cost of capital."

The primary advantage of debt financing is that it allows the founders to retain ownership and control of the company. In contrast to equity financing, the entrepreneurs are able to make key strategic decisions and also to keep and reinvest more company profits. Another advantage of debt financing is that it provides small business owners with a greater degree of financial freedom than equity financing. Debt obligations are limited to the loan repayment period, after which the lender has no further claim on the business, whereas equity investors' claim does not end until their stock is sold. Debt financing is also easy to administer, as it generally lacks the complex reporting requirements that accompany some forms of equity financing. Finally, debt financing tends to be less expensive for small businesses over the long term, though more expensive over the short term, than equity financing.

The main advantage of equity financing for small businesses, which are likely to struggle with cash flow initially, is that there is no obligation to repay the money. Equity financing is also more likely to be available to concept and early stage businesses than debt financing. Equity investors primarily seek growth opportunities, so they are often willing to take a chance on a good idea. But debt financiers primarily seek security, so they usually require the business to have some sort of track record before they will consider making a loan. Another advantage of equity financing is that investors often prove to be good sources of advice and contacts for small business owners.

Leverage is both one of the biggest advantages and disadvantages in Forex. Depending on the broker you’re using, leverage can be up to 200:1 or even 400:1. A 400:1 leverage means that you can trade up to 400 times the money you have on your account. So, for each Rs. 1000 you have on your account, you can trade up to Rs. 400.000.

ADVANTAGE

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Advantages:

Considering you can trade up to 200 times or even 400 times your money, one of the advantages is that you can make huge profits even if you don’t have much money on your account. Considering for example the maximum 400:1 leverage, with just 0.25% of movement in your direction, you can double your account. So, when you’re right about a trade, leverage really pays off. No other market in the world offers so much leverage, and that’s why Forex has been attracting many traders

you're probably all too familiar with how leverage works and the benefits it can have on your trading success. Prolific traders across the world are using leverage to gear up their potential winnings, and to boost their incomes beyond capital restraints, maximising their trading advantage with the help of their brokers and financing partners. Indeed, high-risk investment funds are leveraging billions in principal capital to deliver a return for investors, and with careful and rigorous management of risk leverage can add significant value to your trading endeavours.

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Very much complex data: The data in Annual Report of RANBAXY LABORATORIES

is very much complex which raise various difficulties in making projects.

Lack of adequate data: data in the annual report is lack of some data which

reflects inadequate info:

Comparative study required : leverage are useful in judging the efficiency of the

business only when they are compared with past results of the business. However,

such a comparison only provide glimpse of the past performance and forecasts for

future may not prove correct since several other factors like market conditions,

management policies, etc. may affect the future operations.

Personal bias: leverage are only means of financial analysis and not an end in itself.

leverage have to interpret and different people may interpret the same ratio in

different way.

Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.

LIMITATION

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In order to survive in the long run, every company needs to plan about capital structure and very decide the combination of sources of funds after observing the factors affecting capital structures. With the help of strong capital structure planning, companies can strengthen their balance sheets. If you select the right capital structure then it will also increase your company’s power to face the losses and changes in financial market. Effective capital structure also helps companies to reduce the overall risk of the companies.

Before making capital structure, companies ‘managers must analyze their profitability position and find out that either the demand of debt investor is high then the expectation of shareholders regarding dividend or not. Proper planning of capital structure also helps companies to enlarge their area for getting funds as well as creates the mobility of sources of the funds. Companies should also include the different and maximum alternatives in their capital structure.

Concepts of financial and operating leverages are important for evaluating business and financial risk of a firm. Operating leverage refers to the use of fixed costs in operations and it is related to the firm's production processes. The greater the operat-ing leverage the higher is the risk in operations. At the same time, a high degree of operating leverage causes profits to rise rapidly after the break-even point is reached. Financial leverage refers to the use of debt in financing non-current assets. If the return on assets exceeds the cost of debt, the leverage is successful i.e., it improves returns on equity. While this being so, a high financial leverage magnifies financial risk. At some degree of financial leverage the cost of debt rises because of increased risk with the higher fixed charges. When this happens, riskiness of the firm also increases in the eyes of equity investors who start expecting a higher return to compensate for the increased risk burden. Financial leverage and operating leverage are related with each other. Both have similar effects on profits. A greater use of either i.e., operating or financial leverage leads to following results:

a) The break-even point is raised

b) The impact of change in the level of sales on profits is magnified

The impact of change in the level of sales on profits is magnified. Operating and financial leverages have reinforcing effects. Operating, or first-stage leverage affects earnings before interest and taxes (i.e., net operating income) while financial, or second-stage leverage affects earnings after interest and taxes (i.e., net income available to equity shareholders).

Conclusion

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Web Sites

www.Google.Com

www.wikipedia.com

www.moneycontrol.com

www.NSEINDIA.com

www.indiabulls.com

book references

Financial Policy and Management Accounting by B. Banarjee

An Introduction to Financial Management by Majumdar-Ali-Nisha

Financial Management by Robi M kishore

From College:

Prof. Lal Saheb Verma

Prof. Nibir Goswami

S.P

A. S

Bibliography

http://www.indiabulls.com/

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Ranbaxy final project

Documents

Transcript of Ranbaxy final project