Analysis of Financial Statements of Pharma Sector

(Cipla and Cadila Healthcare)

By Section D Group 10
Suraj Khanna (12P235) Sameera V (12P236) Venkatesh Mahapatra (12P237) Venkatesh Vasudev Vellur ( 12P238) Vikash V (12P239) Deepak Gupta (12P240)
1

INDEX
Topic
Industry Overview Company Overview Analysis from Long Term Investment perspective Analysis from Short Term Investment perspective Analysis from Long Term Lending perspective Analysis from Short Term Lending Perspective Strategic Analysis References and Acknowledgement Annexure (Financial Statements)

Page No.
3 4 6 10 14 18 24 32 34

Industry Overview
The Indian pharmaceutical industry is estimated to be worth US$ 4.5 billion, growing at about 8 to 9 percent annually. The domestic pharma market witnesses a growth of 22% in March, highest in the last 18 months. The revenue CAGR (compund annual growth rate) over the past three years had been 12.4%, but it is expected to be up at 15.3% from FY12 to FY14 according to Barclays Capital Equity Research report India Healthcare & Pharmaceuticals. India's pharmaceutical market grew at 15.7 per cent during December 2011. Globally, India ranks third in terms of manufacturing pharma products by volume. According to McKinsey, the Pharmaceutical Market is ranked 14th in the world. By 2015 it is expected to reach top 10 in the world beating Brazil, Mexico, South Korea and Turkey. More importantly, the incremental market growth of US$ 14billion over the next decade is likely to be the third largest among all markets. The US and China are expected to add US$ 200bn and US$ 23bn respectively. The Pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectables. There are approximately 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units).

Company Overview
Cipla:
Cipla was founded by Khwaja Abdul Hamied as The Chemical, Industrial & Pharmaceutical Laboratories in 1935. It is today the largest single supplier of HIV and anti-malarial drugs in the world in terms of volume. Cipla's products include: Pharmaceuticals: Cipla manufactures anabolic steroids, analgesics/antipyretics, antacids, anthelmintics, anti-arthritis, anti-inflammatory drugs, anti-TB drugs, antiallergic drugs, anticancer drugs, antifungal, antimalarials, antispasmodics, antiulcerants, immunosuppressants etc, Animal Health Care Products: These include: aqua products, equine products, poultry products, products for companion animals, and products for livestock animals. OTC: These include child care products, eye care products, food supplements, health drinks, life style products, nutraceuticals & tonics, skin care products, and oral hygiene products. Flavour & Fragrance: Cipla manufactures a wide range of flavours, which are used in foods and beverages, fruit juices, baked goods, and oral hygiene products. Cipla fragrances have wide ranging applications such as in personal care products, laundry detergents and room fresheners. The company has a sales turnover of Rs. 6,977.50 Cr. (FY12) which makes it the second largest Indian Pharmaceutical company by revenue after Ranbaxy Labs. The market capitalization of the company as on 31stAugust is Rs 30,362 Cr which is second to Sun Pharma.

Cadila Healthcare:
Cadila Healthcare is an Indian pharmaceutical company head quartered at Ahmedabad in Gujarat state of western India. The company is the fifth largest pharmaceutical company in India. Cadila Laboratories was founded in 1952 by Ramanbhai Patel (19252001 and his business partner Shri Indravadan Modi. The company evolved over the next four decades into one of India's established pharmaceutical companies. Cadilas products include: It develops and manufactures a large range of pharmaceuticals as well as diagnostics, herbal products, skin care products and other OTC products. The company also makes EverYuth Naturals Walnut Scrub & Ultra Mild Scrub -India 's leading scrub brand, EverYuth Naturals Golden Glow PeelOff, the number one in the peel-off category and a face wash range. It is also the maker of Sugar Free, India's most popular artificial sweetener and Nutralite, India's most popular cholesterol-free margarine. The company has a sales turnover of Rs. 3,152.20 Cr. (FY12) which makes it the sixth largest Indian Pharmaceutical company by revenue. The market capitalization of the company as on 31 stAugust is Rs 18,752 Cr which is sixth in the Indian Pharmaceutical Industry.

Analysis from Long Term Investment Perspective

The primary factors that drive long term investments are risk the investment will exposed to and the expected returns. An investor may opt for low risk and low to moderate returns in the form of regular dividends or for high risk and high returns on investment in the form of growth in value. Risk and returns on investments can be evaluated using trend analysis and comparative analysis by means of financial ratios. The companies to be evaluated for investment opportunities are the pharmaceutical market leader Cipla and another player in the pharmaceutical industry Cadila Healthcare.

Debt/Equity Ratio:
0.6 0.5 Long Term Debt/Equity 0.4 0.3 0.2 0.1 0 Cipla Cadila

Mar-08 0.00452 0.53075

Mar-09 0.00064 0.51647

Mar-10 7E-05 0.34166

Mar-11 0.00045 0.25441

Mar-12 0.00029 0.29299

The debt-equity ratio for Cipla is much less than that of Cadila. Cadilas debt-equity is showing a declining trend over the years except 2011-12 during which there is a marginal increase to 0.29 from 0.25. The notable fall in the debt-equity ratio in FY2010 might be an attempt by Cipla and Cadila to expedite their recovery by regaining confidence of the investors confidence by lowering their debt accumulated during recession. The reserves in the corresponding period have also increased in both companies. Overall the debt equity ratio suggests that Cadila is a relatively risky investment. Interest Coverage Ratio: The interest cover for Cipla is much higher than that of Cadila, it does however take a decline during recession yet it remains at sustainable levels due to Ciplas enormous market share. Cadilas interest cover presents the story of a growing company; its interest is on the higher side due to high debt. Looking at the Interest coverage ratio of both the companies, long term debt held by Cipla is low and also the PBDIT is high as compared to Cadila. But both the companies have a positive interest cover showing their credibility of paying back the interests.

160 140 120 Interest Coverage 100 80 60 40 20 0 Cipla Mar-08 54.686 8.9793 Mar-09 21.163 6.1989 Mar-10 53.238 15.16 Mar-11 127.98 19.585 Mar-12 139.67 12.268

Cadila

P/E Ratio: This ratio denotes whether the Stock is undervalued or overvalued. P/E ratio of both the companies shows a similar increasing trend with a marginal dip in FY2012.
30 25 20 P/E Ratio

15
10 5 0 Cipla Cadila

Mar-08 25.32 14.12

Mar-09 22.77 14.54

Mar-10 25.65 22.88

Mar-11 27.92 27.2

Mar-12 22.28 24.31

Dividend per Share: The sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued. Lesser the DPS, more is the company thinking in terms of expanding its business thereby reinvesting a major share of profits in the business operations. 7

Cadila pays a higher dividend per share than Cipla as any small player would attract investors which increases over the years on account of increase in both sales volumes and operating income. Cipla being an established company in its maturity phase pays regular but fixed dividends.
8 7 Dividend per share(Rs.) 6 5

4
3 2 1 0 Cipla Cadila Mar-08 2 4.5 Mar-09 2 4.5 Mar-10 2 5 Mar-11 2.8 6.25 Mar-12 2 7.5

Dividend Payout Ratio: The percentage of earnings paid to shareholders in dividends.

30.00 25.00 Dividend Payout Ratio 20.00

15.00 10.00
5.00 0.00 Cipla Cadila

Mar-08 22.17 23.94

Mar-09 20.02 23.10

Mar-10 14.85 13.56

Mar-11 23.41 20.97

Mar-12 14.29 23.36

During the FY2010, both the companies have declined in terms of dividend payout ratio to overcome the recession scenario. However there is an increase in Cadilas dividend payout on account of higher dividends which maybe a strategy employed to entice the investors after recession.

Dividend Yield %: A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Higher the dividend yield for a company, investor will be more likely to invest in the stocks of that company. Post FY2010, dividend yield of both the companies is aligned with each other.
3 2.5 Dividend Yield % 2 1.5 1 0.5 0 Cipla Cadila

Mar-08 0.91 2.65

Mar-09 0.91 2.48

Mar-10 0.59 0.91

Mar-11 0.87 0.79

Mar-12 0.66 0.99

Return on Equity:
0.35 0.3 Return on Equity 0.25 0.2 0.15 0.1

0.05
0 Cipla Cadila Mar-08 0.1868 0.2241 Mar-09 0.1785 0.2157 Mar-10 0.1829 0.3103 Mar-11 0.1452 0.2921 Mar-12 0.1489 0.2571

The return on equity brings forth the kind of returns that can be expected on investments for the given companies. In case of Cadila which is a growing company has higher ROE than Cipla as it is an established company in its maturity phase.

Analysis: After a thorough analysis of the companies, it can be concluded that Cipla presents a safe low return investment opportunity with constant dividends, whereas Cadila provides a moderately high risk investment with attractive returns. This is reinforced by the respective market shares of the companies which clearly reflect that Cipla is the dominant market player which has been in the industry for a long time and is in its maturity stage whereas Cadila is a relatively new player on the growth path with a presently low market share.

Analysis from Short Term Investment Perspective

For an investor to invest in a company for short term there are two parameters of interest Risk Return

In evaluating the Risk in short term investment the following ratios are considered. Beta: The Beta value is a measure of a stock volatility in relation to the whole industry. It simple terms, it is number describing how does a stock price of a company moves relative to the overall market. Stocks with beta value greater than 1 have greater price volatility, involve high risk and hence should expect high returns. Stocks with beta value equal change at the same rate as the market. Stocks with beta value less than 1 have lesser price volatility, involve less risk and hence expect low returns.
0.6 0.5 0.4 Beta Value 0.3 0.2 0.1 0 Cipla Cadila

FY 08

FY 09

FY 10

FY11

FY 12

0.46
0.36

0.49
0.26

0.47
0.27

0.45
0.32

0.36
0.21

Beta value of Cipla has always been higher than Cadilas which indicates that former's stock is more volatile than later's. Since both the values are below 1 and has been consistently decreasing, which means from a short-term investment perspective their stocks are getting less volatile and less risky. For Long-term investment purview, beta value is not a good indicator for investment because of many flaws like historic data may not be a good indicator of future always. 10

Earnings per Share The earnings per share is a good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. EPS ratio calculated for a number of years indicates whether or not the earning power of the company has increased.
40 35 30 Earnings Per Share 25 20 15 10 5 0 Cipla Cadila FY 08 9.02 18.8 FY 09 9.99 19.48 FY 10 13.47 36.87 FY 11 11.96 29.81 FY 12 14 32.11

A peak in the value during the 2010 indicates that both Cipla and Cadila are in synchronous trend with the sector. EPS plays a crucial role in determining the market price per share. Comparing this trend with the market price of the companies, the steep increase in 2010 explains the reason for the increase in market price per share of the two companies. P/E Ratio: This is a valuation ratio of a company's current share price compared to its per-share earnings. A high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. This ratio denotes whether the Stock is undervalued or overvalued. P/E reflects the expectations of investors. If P/E is increasing with decreasing or constant Earnings per share, the stock is overvalued. If P/E is decreasing with increasing or constant Earnings per share, the stock is undervalued.

Cipla: For Cipla, comparing the above graph with the trend in Earnings per Share, with the increasing value in EPS, the P/E ratio has been decreasing in the past year which signifies that the stock is undervalued. Cadila: In case of Cadila, the pattern for both EPS and P/E has been similar. This means that the stock is neither overvalued, nor undervalued, but fairly priced.

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Cipla
30 25 20 15 10 5 0 P/E EPS FY 08 22.95 9.02 FY 09 25.44 9.99 FY 10 24.57 13.47 FY 11 26.07 11.96 FY 12 23.15 14

Cadila
40 35 30 25 20 15 10 5 0 P/E EPS FY 08 10.19 18.8 FY 09 13.85 19.48 FY 10 16.75 36.87 FY 11 27.2 29.81 FY 12 23.35 32.11

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In evaluating the Return in Short term investment the following ratios are considered. Share Price: In the past two years, Cadilas share prics has increased significantly, especially in 2010 growing more than a 100% rate. Ciplas share price has been growing consistently too. This is in line with our analyses that it is a fairly priced stock.
900 800 700 600 Share Price 500 400 300 200 100 0 Cipla Cadila FY 08 207.04 189.83 FY 09 254.11 269.77 FY 10 331.86 617.4 FY 11 311.86 810.81 FY 12 324.22 749.76

ROA ROA means how efficient a firm is in using its assets to generate earnings. ROA for public companies can vary significantly and depends on the industry.
1.2 1 0.8 ROA 0.6 0.4 0.2 0 Cipla Cadila

FY 08 0.98 0.85

FY 09 0.97 0.75

FY 10 0.97 0.76

FY 11 1.08 1.04

FY 12 1.06 0.81

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The higher the ROA the better is the company as it is earning more money on less inverstment. In other words, the lower the profit per unit of assets, the more asset-intensive a business is. The higher the profit per unit of assets, the less asset-intensive a business is. All things being equal, the more asset-intensive a business, the more money must be reinvested into it to continue generating earnings. In all the past five years, Cipla's ROA has always been more than Cadila which implements that Cipla is better in converting its investments into profit. ROA being lesser than 1 indicates that Cadila has not been able to produce upto the optimal capacity of its total assets. Analysis: For an investor planning to choose one of these two firms for a short term investment, Cadila would be advised to go for. With regard to the analyses on the basis of risk and return, the beta value of Cadila is not only less than one, but in comparison to Cipla, its volatility has been relatively much lower. This is also supported by the steady increase in the EPS and P/E ratios. For a short term investment perspective, the market price of Cadilas shares has been growing extremely effectively compared to that of Cipla's. As Cadila is in the mid segment of the industry and looking at the trend in the Market share price, investing in Cadila is risky on a very slight level.

Analysis from Long Term lending perspective

If we go to a bank for loan, the question that a banker will think is what are the Risk and Return (in terms of interest) in giving the loan and Why company need the money. The possible reasons could be Expansion Plans (Red Ocean Strategy) Entering New Market (Blue Ocean Strategy) To Pay off old Debt

We will evaluate which company is better for lending Long term loan by analysing there Financial statements over the last five financial years. Long term Debt/ Equity Ratio: This ratio defines the risk of the firm, the higher the value higher is the risk of company in market as higher debt in comparison to equity increases the interest burden of the company there by reducing net profit.

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0.6 0.5 Long Term Debt/Equity 0.4 0.3 0.2 0.1 0 Cipla Cadila

Mar-08 0.00452 0.53075

Mar-09 0.00064 0.51647

Mar-10 7E-05 0.34166

Mar-11 0.00045 0.25441

Mar-12 0.00029 0.29299

Here we observe that for Cipla the Debt Equity ratio is close to zero for all the years but for Cadila it is on a decreasing trend from 2008 to 2012 but much higher as compared to Cipla (market leader). Hence, Cipla is less leveraged compare Cadila, so Cadila is riskier compared to Cipla. Interest Coverage Ratio (PBDIT/Interest): Interest cover defines the multiple times which a company earns in terms of its interest expense. It shows the ability or the ease with which the firm is able to pay its interest, the higher the value the better it is.
160 140 120 Interest Coverage 100

80
60 40 20 0 Cipla Cadila Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

54.686
8.9793

21.163
6.1989

53.238
15.16

127.98
19.585

139.67
12.268

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From the above graph, it is evident that Cipla (leader in pharmaceutical industry) is clearly way ahead of Cadila in terms of interest coverage ratio which is sign of a healthy company. But its value has decreased during the period of 2008-09(can be attributed to recession). When we look at Cadila its Interest coverage has increased over the years consistently till 2011 but decreased during 2011-12. The margin of increase has been very small when we compare it with Cipla. So we can say Cipla has a strong financial base in comparison to Cadila. Fixed Asset growth: Increase in Fixed Assets of the company is an indicator of growth plans of the company. As a growing company or company with possible plans of expansion go for increasing the production capacity by acquiring new assets so that they can increase production as per market demand.
45
40 Fixed Asset Growth % 35 30 25 20 15 10 5 0 Cipla Cadila Mar-09 19.93 6.761 Mar-10 0.9375 13.562 Mar-11 42.605 9.07 Mar-12 4.695 17.471

As observed in the chart above, the fixed asset growth for both the companies have been positive and fluctuating over the years (Cipla showing a huge increase in 2011 because of its expansion plans over the year 2010-11). Fixed Asset Turnover Ratio: It is an Indicative of the efficiency of company it determines how efficiently company is utilizing its asset for realizing its annual sale. As seen here the Fixed Asset Turnover ratio of Cipla has been decreasing since 2010, but the asset Growth rate for Cipla is particularly very high during the year 2010-11. So, Fixed assets are increasing every year but the revenue or sales is not increasing in the same proportion showing some inefficiency in its operations over the year.

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3.00 2.50 Sales/Fixed Asset 2.00 1.50 1.00 0.50 0.00 Cipla Cadila

Mar-08 2.53 2.15

Mar-09 2.63 2.13

Mar-10 2.79 1.98

Mar-11 2.20 2.10

Mar-12 2.32 2.59

But in case of Cadila, the asset turnover is increasing consistently over the year which shows company sales are increasing year on year with increasing Assets. So Cadila operations are more efficient then Cipla over the past five years in terms of fixed asset utilization. This can be justified by the small size of Cadila as compared to Cipla which results in efficient utilization of resources. Analysis: Besides these core ratios, the credibility of the company in market is determined by proportion of unsecured loans (Loans without collateral) compared to total loans of the company. It is an indicator of risk of loan default, the higher the credibility lower is the risk. Here market credibility of Cipla is very high compared to Cadila which is quite evident seeing the size of Cipla and its long existence in market. This also has a disadvantage in terms of return as a company with high credibility will negotiate for lower rate of interest. When comparing Cipla and Cadila, it is observed that both companies have growth plans, secured and can give good returns. Cipla being low in debt equity ratio and high interest coverage will have less risk while lending but it will have high negotiation power in terms of interest rate so the returns will be considerably lower. On the other hand when we look at Cadila financials the Loan is comparatively more risky so bank can negotiate for higher interest rate thereby higher returns. Considering efficient operations of Cadila as compared to Cipla, I would recommend the long term lending to Cadila as it is considerably safer and returns will be higher in this case.

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Analysis from Short Term Lending Perspective

For a Banker to lend to a company for short term there are two parameters of interest Why the company requires loan? Whether the company will be able to pay it back?

This is checked by looking at the operating cycle, if the company has its cash stuck in the Inventory and receivables then the company has less cash to run its daily operations. So the company might be looking for short term funding for more liquidity. Current Ratio - Current assets/ Current liabilities: The below given graph shows that Cipla has relatively better current ratio than Cadila which indicates better liquidity but we must also consider whether the Current Assets comprise more of Inventory and Receivables or Cash.

3.5 3 2.5 Current Ratio 2 1.5 1 0.5 0 Cipla Cadila FY08 2.64 1.47 FY09 2.8 1.64 FY10 2.65 1.48 FY11 3.01 1.46 FY12 2.85 1.35

Inventory Turnover Ratio

Inventory turnover ratio refers to the rate of conversion of stock into sales. Usually a high inventory turnover rate indicates efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. A low inventory turnover ratio indicates an inefficient management of inventory. The inventory turnover ratio is also an index of profitability, where a high ratio signifies more profit, a low ratio signifies low profit.

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18 16 14 Inventory Turnover 12 10 8 6 4 2 0 Cadila Cipla FY08 12.97 1.57 FY09 15.17 1.27 FY10 14.85 1.26 FY11 13.7 1.17 FY12 14.11 1.75

In the above graph, it can be noted that the ITR of Cipla is almost constant and had shown a slight rise toward the end, which signifies the increase in profit. As for Cadila, there has been a steady dip in ITR and has recently shown a rise. Cadila should take into account not to stock inventories more than the required level as it increases the storage expenses. Receivables Turnover Ratio: By maintaining this ratio of credit to accounts receivable, a firm is indirectly extending interest-free loans to their clients. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.
16

14
Receivables Turnover Ratio 12 10 8 6 4 2 0 FY 08 1.26 15.2 FY 09 1.07 13.89 FY 10 1.22 14.11 FY11 1.48 13.4 FY12 2.1 12.17

Cipla
Cadila

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There has been a steady decrease of the ratio in case of Cadila, while that of Cipla has been displaying a meager but constant increase. This could be because of the effective collection of the receivable accounts or it operates on cash basis. Interest Coverage Ratio: The ratio measures debts servicing capacity of a business so far as interest on long-term loans is concerned. This ratio shows how many times the interest charges are covered by the earnings
160 140 Interest Coverage Ratio 120 100 80 60 40 20 0 Cipla Cadila FY 08 54.68 8.97 FY 09 21.16 6.19 FY 10 53.23 15.16 FY 11 127.97 19.58 FY 12 139.67 12.26

On observing the steep rise in the value of this ratio in Cipla, it can be said that there is no concern for Cipla about the repayments as even if the current value reduces, long-term creditors interest repayments is safe. Cadila on the other hand, being a relatively newer player, is not as good as Cipla, but is still doing increasingly well. Quick Ratio It is the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due. It measures the firm's capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio. The values of quick ratio in case of Cipla consistently being greater than 1 indicates that the firm is liquid and has the ability to meet its current and liquid liabilities. On the other hand a low liquidity ratio for Cadila represents that the firm's liquidity position is not good.

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1.8 1.6 1.4 1.2 Quick Ratio 1 0.8 0.6 0.4 0.2 0 Cipla Cadila FY 08 1.5 0.79 FY 09 1.6 0.75 FY 10 1.37 0.77 FY 11 1.37 0.86 FY 12 1.32 0.69

Working Capital Turnover Ratio: The working capital turnover ratio is a measure of the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation.
4

3.5
Sales/Working Capital 3 2.5 2 1.5 1

0.5
0 FY 08 1.79 3.58 FY 09 1.83 3.69 FY 10 1.89 3.6 FY 11 1.88 3.18 FY 12 2.24 3.54

Cipla
Cadila

Payable days: This is an indicator of how long a company is taking to pay its trade creditors. As observed, Cadila is marginally better than Cipla which implies that it has better credibility as more credit days are available for them.

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100

90
80 70 Payable Days 60 50 40 30 20 10 0 Cipla FY 08 47.63 74.3 FY 09 59.16 77.54 FY 10 69.32 88.44 FY 11 57.23 82.63 FY 12 62.5 79.04

Cadila

Receivable days: A measure of the average time a company's customers take to pay for purchases.
140 120 100 80 60 40 20 0 Cipla Cadila FY 08 98.46 85.34 FY 09 107.88 89.83 FY 10 118.23 104.32 FY 11 114.35 103.87 FY 12 112.73 98.72

Upon observation of the graph, ratios for both the companies have shown an upward trend and now on a dip. This signifies that the creditors have recently been taking comparatively lesser time to repay the credit.

Receivable Days

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Inventory Days: A financial measure of a company's performance that give investors an idea of how long does it take for a company to turn its inventory (including goods that are work in progress, if applicable) into sales. Generally, lower the DSI, the better.

120 100 Inventory Days 80 60 40 20 0 Cipla Cadila

FY 08 97.3 71.83

FY 09 97.5 71.06

FY 10 98.5 73.71

FY 11 108.8 77.8

FY 12 95.4 58.03

Both Cipla and Cadila have shown a constant DSI. But for the last year, it has gone down by roughly 10% which is good. This means that the time taken for the inventories to convert back into cost is now reducing. Effectively, the operation cycle, which is the time taken for money to get into the system and return back as money is now reducing. Analysis: In comparison between the two companies, Cadila would be a better choice for short term lending. This can be backed from the steady trend in the Inventory turnover ratio. Also, there is a need to improve quick ratio of the company in order to increase liquidity. Cadila also utilizes its working capital better than Cipla. This is reflected in the working capital turnover ratio. Finally, the operating cycle is lower than that of Cipla. This implies that, the money that is lent for the process would come out at a faster pace in comparison to the operating cycle of Cipla.

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Strategic Analysis
Operational Efficiency
Total Asset Turnover Ratio This ratio measures a company's ability to generate sales given its investment in total assets. For example, a ratio of 3 will mean that for every rupee invested in total assets, the company will generate 3 rupees in revenues.
1.2 1 Total Asset Turnover 0.8 0.6 0.4 0.2 0

FY 08 0.9693 0.9381

FY 09 0.9893 0.8493

FY 10 0.947 0.8508

FY 11 0.8958 0.8211

FY 12 0.9227 0.8629

Cipla
Cadila

The trend analysis from the graph for the two companies shows that both the companies are able to maintain their Fixed Asset Turnover Ratio, with a slight decline, when compared financial year 2012 with financial year 2008. When we look at the balance sheet of both the companies, it is evident that the sales for both the companies has been increasing over the years but at the same time the percentage increase in Total Assets is greater than the corresponding percentage increase in Net Sales, thus following a decrease in Total Fixed Asset Ratio. Fixed Asset Turnover Ratio
This ratio is similar to total asset turnover; the difference is that only fixed assets are taken into account.

By comparing with the previous years, there is a slight decrease inthe ratio which means that both Cipla and Cadila have not used their fixed assets very efficiently.

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3 2.5 Fixed Asset Turnover 2 1.5 1 0.5 0

Mar-08 2.53 2.1454

Mar-09 2.627 2.131

Mar-10 2.7873 1.984

Mar-11 2.2034 2.1022

Mar-12 2.3238 2.5887

Cipla
Cadila

Working Capital Turnover Ratio

It is a measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales.

4 3.5 Working Capital Turnover 3 2.5 2 1.5 1 0.5 0 Cipla Cadila FY 08 1.7908 3.581 FY 09 1.836 3.688 FY 10 1.8947 3.6067 FY 11 1.879 3.182 FY 12 2.248 3.5486

This ratio shows the number of time the working capital has been rotated in producing sales. In both the cases it is high as compared to previous years which depict efficient use of working capital and quick turnover of current assets like stock and debtors.

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Shareholder Equity Turnover Ratio This ratio measures a company's ability to generate sales given its investment in total equity (common shareholders and preferred stockholders). A ratio of 3 will mean that for every rupee invested in total equity, the company will generate 3 rupees in revenues.
1.8 1.6 Shareholder Equity Turnover 1.4

1.2
1 0.8 0.6 0.4 0.2 0 Cipla Cadila FY 08 1.119 1.596 FY 09 1.203 1.414 FY 10 0.9479 1.1624 FY 11 0.9556 1.0427 FY 12 0.924 1.2327

Analysing from the graph above, we get to know that the Shareholder Equity Turnover Ratio is decreasing for both the companies over the years, when corresponding figures are checked in the balance sheet, we realise that the Net Sales for both the companies has been increasing over the years but Shareholder Equity is increasing at a greater percentage increase than the percentage increase in Net Sales, a possible reason for this is that both the companies are increasing their Reserves and Surplus, that might be because the companies might to enter new markets or expand their business or they want to keep the reserves so as to counter the increasing competition in the market or to account for the fluctuating conditions of the global market.

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Payable Days
100 90 80 70 Payable Days 60 50 40 30 20 10 0 Cipla Cadila FY 08 47.63 74.3 FY 09 59.16 77.54 FY 10 69.32 88.44 FY 11 57.23 82.63 FY 12 62.5 79.04

Receivable Days
140 120 100 Receivable Days 80 60 40

20
0 Cipla Cadila FY 08 98.46 85.34 FY 09 107.88 89.83 FY 10 118.23 104.32 FY 11 114.35 103.87 FY 12 112.73 98.72

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Financial Efficiency
Short Term
Accounts Receivable Turnover Ratio An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.

7 6 5 4

Account Receivable Turnover

3
2 1 0 Cipla Cadila FY 08 FY 09 FY 10 FY 11 FY 12

3.016
5.953

2.849
4.565

3.61
4.705

4.22
4.587

4.593
5.424

Analysing from the graph, we get to know that the Account Receivable Turnover Ratio is greater for Cadila than Cipla, this means that Cadila operates on a cash basis while Cipla operates more on credit basis.

Long Term
Long term Debt/ Equity Ratio: This ratio defines the risk of the firm, the higher the value higher is the risk of company in market as higher debt in comparison to equity increases the interest burden of the company there by reducing net profit.

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0.6 0.5 Long Term Debt/Equity 0.4 0.3 0.2 0.1 0 Cipla Cadila

Mar-08 0.00452 0.53075

Mar-09 0.00064 0.51647

Mar-10 0.00007 0.34166

Mar-11 0.00045 0.25441

Mar-12 0.00029 0.29299

Here we observe that for Cipla the Debt Equity ratio is close to zero for all the years but for Cadila it is on a decreasing trend from 2008 to 2012 but much higher as compared to Cipla (market leader). Hence, Cipla is less leveraged compare Cadila, so Cadila is riskier compared to Cipla. Interest Coverage Ratio (PBDIT/Interest): Interest cover defines the multiple times which a company earns in terms of its interest expense. It shows the ability or the ease with which the firm is able to pay its interest, the higher the value the better it is.
160 140 Interest Coverage Ratio 120 100 80 60 40 20 0 Cipla Cadila Mar-08 54.686 8.9793 Mar-09 21.163 6.1989 Mar-10 53.238 15.16 Mar-11 127.98 19.585 Mar-12 139.67 12.268

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ROA: ROA means how efficient a firm is in using its assets to generate earnings. ROA for public companies can vary significantly and depends on the industry.
1.2 1 0.8 ROA

0.6
0.4 0.2 0 Cipla Cadila

FY 08 0.98 0.85

FY 09 0.97 0.75

FY 10 0.97 0.76

FY 11 1.08 1.04

FY 12 1.06 0.81

The higher the ROA the better is the company as it is earning more money on less inverstment. In other words, the lower the profit per unit of assets, the more asset-intensive a business is. The higher the profit per unit of assets, the less asset-intensive a business is. All things being equal, the more asset-intensive a business, the more money must be reinvested into it to continue generating earnings. In all the past five years, Cipla's ROA has always been more than Cadila which implements that Cipla is better in converting its investments into profit. ROA being lesser than 1 indicates that Cadila has not been able to produce upto the optimal capacity of its total assets.

Return on Equity: The return on equity brings forth the kind of returns that can be expected on investments for the given companies. In case of Cadila which is a growing company has higher ROE than Cipla as it is an established company in its maturity phase.

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0.35 0.3 Return on Equity 0.25 0.2 0.15 0.1

0.05
0 Cipla Cadila Mar-08 0.1868 0.2241 Mar-09 0.1785 0.2157 Mar-10 0.1829 0.3103 Mar-11 0.1452 0.2921 Mar-12 0.1489 0.2571

Analysis: Considering the growth of the pharmaceutical sector and therefore the opportunities in the market, we suggest that both the companies should expand their business. Also, we saw that Cipla operates more on Credit basis as compared to Cadila. Also, both the companies should keep a check on their decreasing Total Asset Turnover Ratio, which might be a concern if it continues to fall steadily, in the long run. Cipla should also try to improve its Working Capital Turnover Ratio. And lastly, Cadila shall try to increase its Payable-Receivable Days, so as to increase total benefit for the company.

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Bibliography
www.cipla.com www.zyduscadila.com www.cadilapharma.com www.moneycontrol.com www.capitaline.com www.investopedia.com www.wikipedia.com

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Acknowledgement
We would like to thank Prof. Shailendra Kumar Rai for the invaluable guidance. We would also like to acknowledge the staff and infrastructure at the MDI library which has proved most useful to us for this project.

33

Annexure
Balance Sheet of Cipla
Mar '12 Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets 4,298.18 1,295.52 3,002.66 420.73 1,035.15 1,824.50 1,519.31 53.82 3,397.63 1,136.14 1.48 4,535.25 0 1,190.78 240.53 1,431.31 3,103.94 0 7,562.48 3,929.00 1,060.98 2,868.02 253.07 570.28 1,883.16 1,497.04 83.56 3,463.76 2,558.23 0.57 6,022.56 0 1,150.72 1,508.87 2,659.59 3,362.97 0 7,054.34 2,895.44 884.27 2,011.17 684.24 265.1 1,512.58 1,552.71 60.32 3,125.61 2,357.29 0.52 5,483.42 0 1,177.11 1,347.66 2,524.77 2,958.65 0 5,919.16 2,693.29 700.8 1,992.49 366.32 81.32 1,398.32 1,837.15 52.84 3,288.31 1,131.10 0.16 4,419.57 0 1,177.00 391.71 1,568.71 2,850.86 0 5,290.99 2,201.79 540.43 1,661.36 233.12 94.75 1,120.49 1,393.91 79.12 2,593.52 1,150.30 0.16 3,743.98 0 980.05 416.81 1,396.86 2,347.12 0 4,336.35 160.58 160.58 0 0 7,380.73 8.97 7,550.28 10 2.2 12.2 7,562.48 160.58 160.58 0 0 6,443.40 8.97 6,612.95 2.95 438.44 441.39 7,054.34 160.58 160.58 0 0 5,744.54 8.97 5,914.09 0.41 4.66 5.07 5,919.16 155.46 155.46 0 0 4,186.32 8.97 4,350.75 2.79 937.45 940.24 5,290.99 155.46 155.46 0 0 3,591.39 8.97 3,755.82 16.98 563.55 580.53 4,336.35 Mar '11 Mar '10 Mar '09 Mar '08

Contingent Liabilities Book Value (Rs)

608.8 93.92

478.26 82.25

423.87 73.55

730.75 55.86

1,664.58 48.2

Cash Flow of Cipla

Cash Flow in Rs. Cr. Mar '12 Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents 1421.46 1645.09 -1046.78 -627.23 -28.92 83.98 55.06 Mar '11 1151.39 987.49 -1136.26 172.06 23.29 60.84 84.13 Mar '10 1324.99 1041.68 -562.23 -471.61 7.84 53 60.84 Mar '09 901.31 373.27 -578.47 178.92 -26.28 79.28 53 Mar '08 838.36 380.2 -687.25 254.84 -52.21 131.49 79.28

34

Profit and Loss Account of Cipla

Profit & Loss account in Rs. Cr. Mar '12 Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) 2,903.95 188.18 644.79 259.56 1,217.79 154.27 0 5,368.54 1,597.72 1,694.22 12.13 1,682.09 261.08 0 1,421.01 0.45 1,421.46 297.5 1,123.96 2,464.59 0 160.58 26.05 8,029.21 14 100 93.92 3,085.90 164.42 464.2 270.08 999.68 179.49 0 5,163.77 1,281.32 1,391.12 10.87 1,380.25 228.86 0 1,151.39 0 1,151.39 191 960.39 2,077.87 0 224.81 36.72 8,029.21 11.96 140 82.25 2,687.54 92.15 318.87 259.67 867.98 182.64 0 4,408.85 1,380.93 1,506.64 28.3 1,478.34 165.25 0 1,313.09 11.9 1,324.99 243.5 1,081.49 1,721.31 0 160.58 26.67 8,029.21 13.47 100 73.55 2,513.11 91.71 271.33 262.65 887.28 76.92 0 4,103.00 1,244.84 1,105.33 52.23 1,053.10 151.79 0 901.31 0 901.31 124.5 776.81 1,589.89 0 155.46 26.42 7,772.91 9.99 100 55.86 2,162.48 96.9 255.45 233.9 547.1 96.66 0 3,392.49 852.17 987.09 18.05 969.04 130.68 0 838.36 0 838.36 136.93 701.43 1,230.01 0 155.46 26.42 7,772.91 9.02 100 48.2 7,074.73 97.23 6,977.50 96.5 -11.24 7,062.76 6,368.06 48.71 6,319.35 109.8 125.74 6,554.89 5,657.85 52.16 5,605.69 125.71 184.09 5,915.49 5,295.33 61.04 5,234.29 -139.51 113.55 5,208.33 4,293.95 90.66 4,203.29 134.92 41.37 4,379.58 Mar '11 Mar '10 Mar '09 Mar '08

Per share data (annualised)

35

Balance Sheet of Cadila

Balance Sheet Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities in Rs. Cr. Mar '12 102.4 102.4 0 0 2,454.70 0 2,557.10 749.2 346.6 1,095.80 3,652.90 Mar '12 Mar '11 102.4 102.4 0 0 1,987.50 0 2,089.90 531.7 32.3 564 2,653.90 Mar '11 Mar '10 68.2 68.2 0 0 1,553.90 0 1,622.10 554.2 39.9 594.1 2,216.20 Mar '10 Mar '09 68.2 68.2 0 0 1,164.60 0 1,232.80 636.7 183.2 819.9 2,052.70 Mar '09 Mar '08 62.8 62.8 0 0 991 0 1,053.80 559.3 179.6 738.9 1,792.70 Mar '08

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

2,016.20 798.5 1,217.70 334.7 1,212.20 501.2 581.2 118.3 1,200.70 799.6 0 2,000.30 0 884.9 227.1 1,112.00 888.3 0 3,652.90 361.7 124.89

1,732.50 695.9 1,036.60 233.7 698.8 464.5 475.1 14.1 953.7 537.2 28.3 1,519.20 0 654 180.4 834.4 684.8 0 2,653.90 122.4 102.07

1,556.70 606.3 950.4 142.9 598.9 380.8 400.8 7.6 789.2 395.9 20.6 1,205.70 0 531.2 151.7 682.9 522.8 1.2 2,216.20 530.6 118.84

1,358.50 521.6 836.9 117.3 595.4 349 381.9 9.9 740.8 274.1 15.7 1,030.60 0 452.6 105.3 557.9 472.7 30.4 2,052.70 523.7 90.32

1,241.00 457.1 783.9 96.4 442.7 331 282.5 7.7 621.2 357 11.3 989.5 0 421.5 98.3 519.8 469.7 0 1,792.70 73.4 83.89

Cash Flow of Cadila

Cash Flow Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents in Rs. Cr. Mar '12 670.4 371.7 -815.2 519.4 75.9 42.4 118.3 Mar '11 637.2 549.4 -357.5 -177.7 14.2 28.2 42.4 Mar '10 520.3 513.5 -213.2 -297.7 2.6 25.6 28.2 Mar '09 296.4 268.1 -261.1 5.9 12.9 12.7 25.6 Mar '08 278.5 41.5 -267.4 232.5 6.6 12.4 19

36

Profit and Loss Account of Cadila

Profit & Loss account Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) in Rs. Cr. Mar '12 3,194.00 41.8 3,152.20 169.2 57.1 3,378.50 1,157.80 94 455 49.1 762.2 12.7 0 2,530.80 678.5 847.7 69.1 778.6 108.2 0 670.4 0 670.4 12.9 657.5 1,373.00 0 153.6 17

Mar '11 2,213.70 34.6 2,179.10 806.9 34.6 3,020.60 934.8 71.9 371.1 48.7 746.1 74.4 0 2,247.00 -33.3 773.6 39.5 734.1 96.9 0 637.2 10.6 647.8 37.4 610.4 1,312.20 0 128 14.6

Mar '10 1,908.00 22.4 1,885.60 538.6 11.2 2,435.40 806.2 57.9 266.9 38.9 554 58.1 0 1,782.00 114.8 653.4 43.1 610.3 90 0 520.3 0 520.3 17 503.3 975.8 0 102.4 11.6

Mar '09 1,781.50 38.1 1,743.40 201.8 -18.7 1,926.50 649.1 46.3 197.2 38.3 488.9 54.8 0 1,474.60 250.1 451.9 72.9 379 82.6 0 296.4 0 296.4 30.5 265.9 825.5 0 61.4 10.5

Mar '08 1,758.20 76.4 1,681.80 118.2 -4 1,796.00 650.6 41.9 181.5 30 440.3 61.1 0 1,405.40 272.4 390.6 43.5 347.1 73.4 0 273.7 3.2 276.9 40.7 236.2 754.8 0 56.5 9.6

2,047.49 32.11 150 124.89

2,047.49 29.81 125 102.07

1,364.99 36.87 100 118.84

1,364.99 19.48 90 90.32

1,256.14 18.8 90 83.89

37