INTRODUCTION

FINANCIAL STATEMENT ANALYSIS

The financial statements just provide the financial ingredients of a firm.

One should analyze to identify where the strengths and weakness of the company
are hiding. So the study on ratio analysis have been taken by me in order o know
efficiency and liquidity of a firm.

Financial statement is the process of identifying the financial strengths and

weaknesses of the firm. It is done by establishing relationships between the items
of financial statements like balance sheet and profit and loss account. Financial
analysis can be undertaken by management of the firm or by parties outside the
firm.

Financial statement analysis may be done for a variety of purpose, which may
range from simple analysis of short term liquidity position of the firm in various
areas. It is helpful in assessing corporate excellence, judging credit worthiness,
forecasting bond ratings, evaluating intrinsic value of equity shares, and assessing
the market risk

Financial management is a process of identification, accumulation, analysis,

preparation, interpretation communication of financial information and
communication of financial information to plan, evaluate, and control business
firms. Financial management is the specialized function of general management,
which, is relates to the procurement of finance, and its effective utilization for the
achievement of the goal of the organization.

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MEANING AND DEFINITIONS OF FINANCIAL MANAGEMENT:

MEANING:

Financial Management is an organizational activity that is concerned with

the management of financial resources. In common parlance is described as
providing monetary resources at the time they are required. But financial
management covers the mobilization and effective utilization of funds.

DEFINITIONS:

(1) Financial Management is defined as “that business activity which is

concerned with the acquisition and conservation of capital funds in meeting
the financial needs and overall objectives of business enterprises”
-WHEELER.

(2) “Business finance can be broadly defined as the activity concerned with the
planning, raising, controlling and administrating the funds used in the
business”.
-GUTHMANN AND DOUGALL.

(3) “Finance Management is concerned with the efficient use of an important

economic resources, namely capital funds”.
­ SOLOMON.

(4) “Financial management is an area of financial decision making

harmonizing individual motives and enterprises goals”.
-WESTON & BRIGHAN.

Financial management is concerned with the effective use of an economic

resource namely capital fund.

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Financial Functions:
Initially the finance managers were considered advent of an event requiring
funds. The finance manager was given a target amount of funds to rise and was
given a target amount of funds to raise and was given the responsibility of
procuring those funds. So his function was limited to raising funds as and when the
need arise. Once the funds were procured, his function was over.

However, over a period the scope of his function has tremendously

widened. His presence is required at every moment whenever any decision having
involvement of funds is to he be taken. Now it is the F.M require looking into the
financial implication, of any decision in the firm.

The functions of F.M are to manage the funds. Any act , procedures, decision
relating to funds comes under the purview of the F.M. since every activity in the
business organization, be it purchases , production .marketing or capital
expenditure has a financial implication, the finance function is interlinked with all
other areas. In particular, the F.M has to focus his attention on:

1. Procurement the required quantum of funds as and when necessary, at the

lowest cost.
2. Investing those funds in various assets in the most profitable way, and
3. Distribute returns to the shareholders in order to satisfy their expectations
from the firm.

The FM is usually faces with the following distinct scenario

1. What should be the size of a firm and how fast should it grow?
2. What are the various types of assets to be acquired? (Investment decision)
3. What should be the pattern of raising funds from various sources? (Financing
decision)

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Depending upon the nature and size of the firm, the finance manager is required to
perform all or some of these functions from time to time. While performing the
functions he is required to take different decisions, which can be broadly classified
into three groups:-

1. Those relating to the resource allocation (the investment decision)

2. Those covering the financing of these investments (the financing or capital
structure decisions)
3. Those determining how much cash to be taken out and how much to be
reinvested (the dividend decision)

Financing decision:-
Requirement of funds at a proper time is most important. Identifying the
right source and amount that can be raised from each source and costs and other
consequences involved have to be done.

Investment decision:-
This relates, to investment in capital assets and current assets.
Evaluating of different capital investment proposals and selection of the best,
keeping in view the overall objectives of enterprise. Investment in current
assets depends upon the credit and inventory policy of the business. Credit
policy depends upon the production, prices of raw materials and availability of
funds etc.

Dividend decision: -
Determining of dividend policy is an important task. The dividend
decision involves what percentage of profits to be paid to the share holders. A
number of factors effecting the dividend decision such as market price of the share,
earnings, tax position etc.

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OBJECTIVES OF FINANCIAL MANAGEMENT:

Financial decisions can be mjake keeping in view the basic objective of

maximization of owner’s economic welfare. It can be achieved through two widely
accepted criteria.

PROFIT MAXIMISATION:

The efficiency of the firm is measured through the volume of profits earned
by it. It means maximizing the rupee income of the firm. Profit maximization
objective may be started in terms of return on investment or profit - to - sales
ratios. This would help in profitable utilization of society’s economic resources,
since the financial manager is responsible for the efficient utilization of resources,
increasing of revenues, controlling costs, Minimizing risks.

WEALTH MAXIMISATION:

Wealth maximization objective is a widely recognized criterion with which

the performance of business enterprise is devalued. The word “wealth” refers to
the net present worth of the firm. The net present worth is the difference between
gross present worth and the amount of capital investment required to achieve the
benefits. Gross present worth represents the present value of expected cash flows
(benefits) discounted at a rate.

IMPORTANCE OF FINANCIAL MANAGEMENT:

Finance is very essential for the smooth running of the business. It has
been rightly termed as universal lubricant, which keeps the enterprise dynamic. It
is indispensable in any organization as it helps in;

(1) Financial planning and successful promotion of an enterprise.

(2) Acquisition of funds as and when required at the minimum possible cost;
(3) Proper use and allocation of funds.
(4) Taking sound financial decisions.
(5) Improving the profitability through financial controls;

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 (6) Increasing the wealth of the investors and the nation; and
(7) Promoting and mobilizing individual and corporate savings.

Financial statements:
The accountant prepares two principal statements, the balance sheet and
the profit and loss account, and an ancillary statements, the cash flow statement.
1. Balance sheet
2. profit and loss account

Balance sheet:
The balance sheet shows the financial condition of a business at a given
point of time. It consists of mainly two objects these are as fallows
1. Assets
2. Liabilities
The balance sheet is also called statement of financial position. Its shows
the assets, liabilities and capital as a particular date. It indicates what the firm owns
and how these assets are financed in the form of liabilities or owner ship interest.
Features of balance sheet:
1. Balance sheet is prepared as specific date. Hence, it shows financial position of
the enterprise on that date.
2. Balance sheet is usually in two columns which illustrate relation ship between
the assets and liabilities,
3. Financial position of the firm is shown in the balance sheet on going concern
value.

Evaluation of balance sheet:

Balance sheet provides the useful information about the firm’s resources
and obligation. It reflects economic results of management policies. It contains
information about liquidity as well as solvency position of the firm which is useful
to creditors.

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Income statement:
Income statement is also called profit and loss statement, is a performance
report which records changes in income, expenses, profit and loss, as a result of
business operations during the year between the two balance sheet dates.
The income statement is commonly divided into four types.
1. Gross profit section.
2. Operating profit section.
3. Final net profit or net loss section.
4. Appropriation section.

The gross profit section shows the profit on the cost of goods Sold. The
operating profit section list the operating income, expenses and residual as
operating profit. In final net profit section, all adjustment in respect of non
operating surplus/ deficit are made to this figure of profit which gives of profit or
net loss. The lost section depicts the disposal of final net profit in the form of
divided declared and the darning retained. The amount retained earnings increases
the aggregate ownership interest in the enterprise.

Importance of financial analysis:

Analysis of financial statement is carried out to measure the enterprise
liquidity, profitability, solvency and other indicators to assess its operator
efficiency, financial position and performance. Financial analysis serves the
following purpose.

To know the operational:

The financial analysis enables the management to find out the overall
efficiency of the firm.

Helpful in measuring the solvency of the firm:-

It should satisfy it self that is current resource are sufficient to meet its
current liabilities. This is possible through the calculation of liquid ratios.

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Comparison of past and present results:
Financial statement of the previous years can be compared and the trend
regarding various expenses, purchases, sales, gross profit and net profit can be
ascertained.

Help in measuring the profitability:

Financial statements show the gross profit, net profit and debt and other
expenses. The relationship of these can be established with sales by calculating
operating ratios.

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 OBJECTIVES OF THE STUDY

The main objective of the study is to analyze the financial information of

the Dr Reddys Laboratories.

1. To know the performance of the company in different time periods.

2. To known the historical performance of the Dr Reddys Laboratories.

3. To offer suggestion, if any for better financial performance of the company.

4.To know the future liquidity of the company.

5. To verify liquidity analyse and its impact on ratio analyse.

6. To know the profitability and activity position of Dr Reddys Laboratories.

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 METHODOLOGY OF THE STUDY

Methodology is scientific and systematic search for pertinent information

on specific topic. The reliability of management decision depends upon the quality

of data. Basically we have two types of data:

 Primary data.

 Secondary data.

PRIMARY DATA:-

Primary data can be collected either through experience of through survey.

Those which are collected a fresh and for the first time and thus happen to be

original in character that is called primary data. Primary data can be collected in

the following ways:

 By observation.

 Through personal interview.

 Through telephone interviews.

SECONDARY DATA:-

Secondary data means data that are already available that is they refer to the

data which have already been collected and analyzed by some one else and which

have already been pass through the statistical process is called secondary data.

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 SCOPE OF THE STUDY

1 An extensive study is done on the financial transaction and financial

information of the Dr Reddys Laboratories.

2 The study covers the historical financial information of the company to find

growth, strength and weakness of the company.

3 The study covers all the transactions of the Dr Reddys Laboratories in the ratio

analysis.

4 The study covers the measurement of profitability of the firm and its operating

efficiency and the relationship between different financial aspects.

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 NEED FOR THE STUDY

The main need of the study is to analyze the financial information of the Dr

Reddys Laboratories.

1 To find out the liquidity or short term solvency of the ML ltd.

2 To know the different types of ratio analyse and how it shows impact on

different organisation.

3 To allows the relationship between aspects in such a way that it allows

drawing conclusion about the performance, strength and weaknesses of the

company.

4 To know the short term serving ability of the company.

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 LIMITATIONS OF THE STUDY

While the study is undertaking about the ratios of the ML groups of

industries .the following limitations were encountered.

1 Due to shortage of time the overall analyse of the financial information of

Dr Reddys Laboratories becomes difficult.

2 Since the current year was not completed it is not possible to compare the

current year information with the previous information.

3 Some of the information was with registered office of the company due to

some statutory requirements so it became difficult to get the overall

information of the company.

4 Since we are new to the company, company was refused to provide its

financial information.

5 The calculated ratios are not compared with competitor’s ratios.

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 INDUSTRY PROFILE
PHARMACEUTICALS

Pharmaceuticals are medicinally effective chemicals, which are converted

to dosage forms suitable for patients to imbibe. In its basic chemical form,
pharmaceuticals are called bulk drugs and the final dosage forms are known as
formulations. Usage of pharmaceuticals is governed by the underlying medical
science. The four primary medical sciences are as under.

 Allopathy or modern medicine has gained global popularity.

 Ayurveda, an ancient Indian science, mainly used herbal remedies.

 Unani, having Chinese origin, is prevalent in South East Asia.

 Homeopathy, founded by a German physician, was fairly popular in the

early 19th century.

World – Over, the pharmaceuticals industry is focused on Allopathy, the

most modern medical science. Other modes of medical treatment such as
Homeopathy, Ayurveda and Unani are more prevalent in third world countries.

BULK DRUGS

Bulk drugs are medicinally effective chemicals. They are derived from 4
types of intermediates (Raw materials), namely

 Plant derivatives (herbal products)

 Animal derivatives e.g. insulin extracted from bovine pancreas
 Synthetic chemicals
 Biogenetic (human) derivatives e.g. Human insulin

Bulk drug discovery requires intensive and expensive research. So new

drugs are patented 1 by the innovator to ensure commercial gains on his R & D
investment. When a drug goes off patent it becomes generic. Bulk drugs can be
broadly categorized as

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  Under patent

 Generic or off patent.

A patent provides exclusivity of manufacturing / licensing tot he discoverer

i.e. patent holder for a stipulated time period.

FORMULATIONS

Doctors Post-diagnose to cure a disease or disorder in the patient

primarily prescribes formulations. To prevent misuse/incorrect administration,
most formulations are disbursed by pharmacies only under medical prescription
and these are called ethical products. However, some formulations such as pain
balms, health tonics etc. can also be purchased by users directly. These are called
over-the-counter (OTC) products.

Formulations can be categorized as per the route of administration to

patients, viz.

 Oral i.e. tablets, syrup, capsules, powders etc. taken internally.

 Topical i.e. ointments, creams, liquids, aerosols that are applies on the skin.
 Parenterals i.e. sterile solutions injected in an intravenous or intramuscular
fashion.
 Others such as eye-drops, pessaries, surgical dressings etc.

INDIAN PHARMACEUTICAL INDUSTRY

The Indian Pharmaceutical Industry today is in the front rank of India’s

science-based industries with wide ranging capabilities in the complex field of
drug manufacture and technology. It ranks very high in the third world, in terms of
technology, quality and range of medicines manufactured. From simple headache
pills to sophisticated antibiotics and complex cardiac compounds, almost every
type of medicines is now made in India. The organized sector of the
Pharmaceutical Industry has played a key role in promoting and sustaining

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development in this vital field. International companies associated with this sector
have stimulated, assisted and spearheaded this dynamic development in the past
fifty-three years and helped to put India on the pharmaceutical map of the world.
The Pharmaceutical Industry in India provides excellent facilities. It has quality
producers and regulatory authorities in USA and UK approve many units. It has a
pool of personnel with high managerial and technical competence as also skilled
workforce. Its track record of development, particularly in the area of improved
cost-beneficial chemical synthesis for various drug molecules are excellent. It
provides a wide variety of bulk drugs and exports Sophisticated bulk drugs.

The Indian market has some unique advantages. India has a 53-year-old
democracy. It has an educated work force and English is commonly used. It has a
solid legal framework and strong financial markets. Professional services are
easily available. There is already an established international industry and business
community. It has a good network of world-class educational institutions and
established strengths in Information Technology. The country is now committed to
a free market economy and globalization. Above all, it has a 70 million middle
class market, which is continuously growing. For the first time in many years the
international pharmaceutical industry is finding great opportunities in India. The
process of consolidation, which has become a generalized phenomenon in the
world pharmaceutical industry, has started taking place in India. The
Pharmaceutical Industry, with its rich scientific talents and research capabilities,
supported by Intellectual Property Protection regime, is well set to mark its place
as a Sunrise industry.

India is on the threshold a biotechnology resolution vast changes to

facilities growth are taking place in the country the advantages the country was are
the large pool of scientific talent available at reasonable cost a wealth of R &D
institutions.
The respondent of Bio-technology under the ministry of science &
technology Govt.of India, set up in 1986 has promoted and accelerated the pace of
development of Bio-technology in India. The department has founded several R

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&D project, demonstrating and infrastructure facilities around the country. The
India pharmaceutical industry today is in the front rank of India’s today is in the
front rank of India’s science based Industries with wide ranging capacities in the
complex field of drug mfg& tech at ranks very high in this world, in term of
technology, quality and range of medicines mfg.

HISTORY

Phase I The beginning

1850 – MNC’s Import bulk drugs and self formulations.

1954 - Indian Govt. intervenes in the industry of restrict import and promote self –

reliance

1958 - soviet union recommends that India set up units to Mafg.

 Antibiotics

 Synthetic drugs

 Vitamins

 Surgical and medical equipment

Phase 2 Restrictive policy

1970- Process potent act introduced

1975-FERA limits foreign holdings in Indian companies to 40%

1976-MNC’s are required to produced 20% of the bulk drug in India

1979-Drug and price control introduced.

Phase -3

1994-DPCO Reloxed

 Fera reloxed

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  MNC’s not forced to Mfg bulk drugs

 Govt. to recognize product contents by year 2005

1995- MNC Interests in India Setup

Indian Pharma R&D Swot Analasis

Strong Chemistry

STRENGTHS
 Mature Industry with strong mfg base with capacity to produce quality
drugs at relatively lower costs.
 A very rich base of Traditional knowledge in the Therapentics ie Ayurveda,
Sidha, Unani.
 Well developed Engg. Base to produce wide range of Pharmaceutical
equipment and machinery
 Abundance of S&T talent and infrastructure
 Successful experience in innovative process chemistry
 Access to branch bank of internationally acclaimed NRI, S&T
Professionally

WEAKNESS
 Sub- Critical R&D Investments
 Lock of Innovative R &D culture in industry.
 Poor networking among constituents in the innovation chain
 Inadequate framework for clearance of new drug investigation &
registration
 Inadequate trained manpower in emerging areas.

OPPORTUNITIES
 Due to rising cost of R &d overseas greater tendency towards out sourcing
and networking.
 Expertise to blend knowledge of traditional medicine with modern sciences
 Increasing competence in biology, ammulogy, and biotech

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  Early R&D wins boosting confidence
 Large no. Of Patients covering wide range of diseases
 Potential for clinical research and initiating clinical trail
 Opportunities to improve quality standards

THREATS
 Inability to cope-up units the rapidly charging new drug discovery tech and
process at the global level
 Rapidly changing standards of quality and Mfg at the international level
 Lack of clearly articulated and facilitative national IPR policies.
 Lack of strategy to bring convergence between aspirations of the “Small”
and Big players.
 Reducing tariff levels and dumps can be treat to survivals of products and
industry

FACTORS FAVORING INDIAN PHARMACEUTICAL INDUSTRY

 Competent work force

 Cast-effective chemical synthesis
 Legal & financial frame work
 Information & technology
 Globalization
 Consolidation

INDUSTRY STRUCTURE
The P.I is very aptly described as a ‘Life-line’ industry it plays vital role in
alleviating the sufferings of millions of people and controlling various oilmen’s
that afflict human beings

3 main sectors
 The public sector
 The Indian Private sector
 The foreign sector

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There are 24,000 firms engaged in the production of drugs and pharmaceuticals

POLICIES & REGULATIONS

 Drugs prices control order (DPCO-1979)
 General Agreement on tariff and trade (GATT- April 1994)
 Implications of the WTO
 On prices of Drugs
 On R&D
 The Indian Patent act (IPA -1970)

VISION AFTER 2006

With the mark of industrial revolution in the 19 th century there came LPG
i.e., Liberalization, Globalization, Privatization, as obvious is led way to trade
Mal-practices. Thus the need for some International agreements and between the
various Nations to protect and safeguard the trading rights & interest i.e. was felt.

The most remarkable of this is the GATT. Which came into existence in the year
1947. through International trade was regulated in accordance with the terms of
this agreement but a need to upgrade it to meet the ends of international trade.
India opted for a manufacturing process patent regime that was carefully
designed to make drugs available at lower prices to consumers. The policy led to a
sound base for drug manufacturing in the country. Of course, it hindered
innovation and research-based drug development.

The situation has changed with the emergence of innovation-driven global

drug markets. At the international level, the pharmaceutical market accounts for
nearly a quarter of the entire healthcare sector and has been growing impressively
owing to changing demographics and patient profiles (ageing, lifestyles and
obesity-lined disorders) and increased health awareness amongst patients. The
industry is providing innovative cures for various ailments. Per capital spending on
pharmaceuticals around the world increased from $72 in 2000 to $87 in 2002.

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 Indian’s $10-billion worth pharmaceutical industry ranks fourth globally in
terms of volume and thirteenth in terms of value. The country also accounts for the
largest number of drugs approved by the United States Food and Drug
Administration (FDA) outside America.
However, India, which has 16 percent of the world population, produces
only 1.2 per cent of the global output of pharmaceuticals and the annual per capita
consumption of drugs in India is one of the lowest in the world at $3.

OUTSOURCING OF CLINICAL TRIALS AND DRUG RESEARCH

India is becoming the world’s back office. The question now arises whether
the country will also become a powerhouse for the outsourcing of drug research,
clinical trials and manufacturing.
Trends already emerging suggest the answer is ‘yes,’ but significant
underlying differences indicate that India’s IT experience may not prove cal
industry. One difference between these two industries relates to out-put
characteristics. Indian IT industry outsourcing growth has been driven almost
entirely by the sales of commodity services as a result of its incredible cost
advantage.

In contrast, India’s leading pharmaceutical firms already have achieved a

level of sophistication that goes well beyond the ability simply to perform routine
tasks for contractors in other countries. As a result, these companies are becoming
welcome partners with some of the world’s leading pharmaceutical firms.

Ranbaxy, for example, has recently signed an agreement with

GlaxSmithKline (GSK) to commercialise compounds they develop together-
although the two companies were locked in a patent ously. Prospects for the Indian
pharmaceutical industry will be bright if it can move beyond the commodity
production model and share in the significant financial benefits stemming from co-
development and ownership of new, patented products.

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 Another difference is the high degree of regulation the pharmaceutical
industry faces. Unlike IT mutually all aspects of the pharmaceutical industry are
tightly regular from R&D through production, sales and marketing. The most by
hurdle to clear is getting marketing approval, both locally and in many markets
abroad and, in particular in the United States, where the firm and Drug
Administration erects barriers to entry by requiring cost and time-consuming
clinical tribal demonstrate new product safety a efficacy.

But while regulation poses challenges, it also brings opportunities. In the

recent past, India has become a major centre fro administers clinical trials. The
main attraction is the potential to save time and money, with drug tests requiring
on one-third to one-half of the cost and duration that would be involved in Europe
or the United States. To the extent that Indian pharmaceutical companies maintain
a competitive advantage with respect to clinical trials, and regulation could be
viewed as the cloud with the silver lining.

A final difference relates to International competition. In global

outsourcing, India is the undisputed leader. In contrast, the Indian pharmaceutical
industry is likely to face fierce competition from Chinese pharmaceutical and
biotech companies.
If China emerges a key force in this industry, it could exert a huge
downward pressure on prices. Particularly in the development of biotech drugs,
China appears to the ahead of India, having been the only country in the
developing world to participate in the international Human Genome Project.
Thanks to heavy state investment, Chinese companies can now produce hepatitis
vaccines, recombinant insulin. Interferon and other generic therapeutic biologics,
India’s biotechnology sector is growing rapidly, however, with initial emphasis on
vaccine production and bio-services.

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SPURIOUS DRUGS
The spurious drug industry is becoming well established in India.
According to the World Health-organization (WHO) 2001 statistics, 35 per cent of
the world’s spurious drugs are produced in India, followed by Nigeria at 23
percent. Spurious drugs are life threatening, and not life-saving, drugs.
Unlike other cases, where the consumers knows is intent, the spurious drug
industry thrives on consumers ignorance, lack of stiff penalty for indulging in such
activity and finally on lax regulatory system. Packaging is so perfect that
distinguishing a spurious drug from a genuine one is almost impossible.
Reusage of drugs past their expiry date is yet another menace. Nearly seven
out of ten drugs have been found to be of less potency. Generally, state
governments settle for tenders quoting the lowest bid. But quality is more
important than price. Filling spurious drugs in used medicine bottles is another
modus operandi. Cheaper substitutes for biotech drugs constitute another area of
concern. Thus, spurious drugs clam a market share of 20 percent of the total drug
market in India.

HERBAL MEDICINES
Currently, India exports herbal materials and medicines worth around Rs 12
billion in comparison to China’s Rs 200 billion equivalents of plant-based exports
including raw drugs and therapeutics. Of course, while most of the Chinese plant
drug products are made from herbs grown commercially on farms, thereby giving
them standardization in quality, Indian plant drugs are normally made from herbs
collected from the wild. The centre has set up the National Medicinal Plants Board,
under which 13 state boards have been setup. The ever-increasing need for
medicinal plants has prompted states like kerala to consider agri-export zones
exclusively for medicinal plants.

IMPRESSIVE PROGRESS
There are around 250 large units and 8000 small-scale units that form the
core of the pharmaceutical industry in India. These meet around 70 percent of the

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country’s demand for bulk drugs, drug intermediates, pharmaceutical formulations,
chemicals, tablets, capsules, orals and injectibles.

The Indian pharmaceutical industry reportedly has over 20,000 licenced

units in the large, medium and small sectors. The top 50 account for over 80 per
cent of the turnover, and also bulk of the exports. These units are mainly
responsible for R&D investments and introduction of new drugs.

Though R&D expenditure as a percentage of the total industry turnover

remains low at two per cent, the leading R&D companies in India, which have
formed the Indian Pharmaceutical Alliance, spend 5 to 7 per cent of their sales on
R&D.
The strength of India’s pharmaceutical industry lies in developing cost-
effective technologies in the shortest possible time for drug intermediates and bulk
actives without compromising on quality. With higher patent protection, it is
expected that more and more medical research would take place in India, given the
cost advantage and large pool of technical and scientific talent in India. In the next
five years, the industry may experience a three-fold increase in output to reach a
level of Rs 600 billion or four per cent of the global output of drugs.

PRICE CONTROL NOT VIABLE

There is an opinion that patents ordinance in its present form will lead to a
hike in drug prices. The government, however, thinks that drug prices will not be
affected as 97 per cent of the drugs in use in the country at present are off-patent.
The government feels that price control is not an effective way to ensure
cheap medicines as it would discourage companies from selling discourage
companies from selling unprofitable products.
As of now, only 74 bulk drugs and their formulations are under price
control. This constitutes around 30 per cent of all drugs in the Rs 330-billion
market.

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 An attempt is being made to explore non-price control measures, repealing
an outdated drug pricing law of 1950. Stricter price control would only mean firms
going to court more frequently to delay or nullify government’s price notifications.
(There are over 240 cases in various courts.)

FOREIGN INVESTMENT
The industry is not happy over the government’s decision to raise the
foreign direct investment (FDI) ceiling limit from 74 per cent to 100 per cent.
With unconditional opening up of the pharma sector, multinationals may route
their new products through their 100 per cent subsidiary, thus jeopardizing the
interests of the existing units and their share-holders.

IMPACT OF GLOBALIZATION
Beginning January 1, 2005, India opted fro a new world order and
abandoned its decades-old drug policy. The union government issued an ordinance
o amend the Indian Patents Act 1970 to introduce product patent for drugs. In the
past, the government granted patents to companies only on the process used to
manufacture them, and not on the final product.
When the patents act was amended—first in 1999 and then in 2002—the
government promised that the third amendment would address social concerns.
Critics say that the government has paid no attention to this objective.
After January 1, 2005, India has been obliged to implement a globally
harmonized product patent regime. Now, the country is not allowed to manufacture
market or import a patented drug, except under license from the patentee. Of
course, the Doha declaration at eh Fourth Inter-ministerial Conference of the
World Trade Organization (WTO) reiterated that public health needs, would be
given priority over private rights granted under the patent system.
Drugs worth around Rs 30 billion, representing around 15 per cent of the
domestic pharmaceutical market, have come under patent protection. This
essentially means that generic versions of the se drugs being sold in the domestic
market will have to be withdrawn. The country’s official version is that

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globalization is not going to raise drug prices, the reason 97 per cent of the drugs
in India are off patents. The twelve anti0retro-viral drugs, most used for AIDS and
manufactured in India, cannot be patented as they are pre-1995 inventions. India
will continue to manufacture, use and export them without hindrance.
With lower production costs owing to indigenously manufactured raw
material s and comparative lower costs of R&D, India would be able to offer
pharmaceuticals rentidina, famotidine, astemezole and ondansetom are priced in
the US around 50 times higher than in India.

TOUGH COMPETITION AHEAD

India ‘s drug industry is going to face tough competition, given the rising
costs of developing new molecules and the long gestation period—put by some
experts at $1 billion, and eight to ten years, respectively.
Under the new rules that came into effect in December 2004, the inspection
fees and charges for supplying photocopies of documents have been raised 27
times, making patent information inaccessible to many. Any body wanting to
inspect a patent application will have to pay Rs 800 per application. A photocopy
will cost Rs 4 per page. This may amount to a substantial figure as patent
applications usually run into hundreds of pages.

TACKLING THE CHALLENGE

The Pharma sector requires common facilities for research, testing and
trials, and a special drive of human resource development training to professionals.
The unit budget for 2005-06 has earmark Rs 1500 million for R&D in the pharma
industry. Of this, Rs 8 million would be allotted to the industry at a nominal
interest rate three per cent while the rest will to institutions as grant-in aid.In 2003,
the Supreme Court disfavored the government pharma pricing policy. The court
declared that the government’s criterion of turnover for selecting drug for price
control was not acceptable. The Department of Chemicals and Petrochemicals has
proposed nationwide implementation of the Rajasthan model of Medicare societies
in which essential drugs, antibiotics, injectibles and IV fluids and made available

26
to patients at almost 30 to 50 per cent of their market price. The model eliminates
trade margins given to dealers and retailers as the drugs are acquired through open
tenders directly from the manufactures.
The Mashelkar Committee, looking into the menace of spurious drugs,
proposed death penalty as one of the deterrent measures needed to check the
manufacture and distribution of such drugs. The committee declared “Apart from
penalties of fines and imprisonment for life specially in those cases which had
resulted in grievous body harm or loss of life, death penalty was required to be
provided.”

FUTURE OUTLOOK
The growth potential for India’s pharmaceutical industry is immense because
modern drugs reach only 40 per cent or less of the population mainly in the urban
and semi-urban areas, and the per capital annual consumption of drugs is as low as
$3.5.

27
Market survey
World Pharmaceutical Market
Major Segments 2000 2001 2002 2003 2008 2003-
2008
Ethical 317.1 363.4 301 437.6 677.6 9.1

Generics 24.0 27.0 30.5 37.0 64.0 11.6

Over the Counter 70.5 73.8 78.5 82 101.0 4.3

Biopharmaceuticals 22.1 26.3 31 36.5 58.6 9.9

Total world Market 433.7 490.5 541.0 593.1 901.4 8.7

Company Market share(Percent)

28
Glaxo smith kline 5.82

Cipla 5.40

Ranbaxy 4.70

Nicholas Piramal 3.56

Pfizer 3.50

Sun Pharma 3.23

Dr Reddy’s 2.90
Laboratories
Zydus-Cadila 2.45

Abbott India 2.46

Aventis Phrama 2.42

Alkem Laboratories 2.08

Wockhardt 2.10

Aristo Pharma 2.12

Lupin Labs 1.99

Novaris India 1.91

Torrent Pharma 1.92

Alembic 1.59

U.S.V 1.77

Micro Labs 1.69

Unichem Labs 1.65

DR.REDDY’S LABORATORIES LTD.,

29
 Type: public

Founded : 1984

Headquarters: Hyderabad

Key people: Anji Reddy(chairman)

Industry : pharmaceuticals

Revenue : $502 million(jul 2006)

Employees:7,525

Website : www.drrreddys.com

COMPANY PROFILE
INTRODUCTION

30
Dr Reddy’s laboratories was founded by Dr. Anji Reddy, a entrepreneur-scientist,
in 1984. The DNA of the company is drawn from its founder and his vision to
establish India’s first discovery led global pharmaceutical company. In fact, it is
this spirit of entrepreneurship that has shaped the company to become what it is
today.

Dr. Anji Reddy, having moved out of Standard Organics Limited, a

company he had successfully co-founded, started Dr. Reddy’s Laboratories with $
40,000 in cash and $120,000 in bank loan! Today, the company with revenues of
Rs.1947 crore (US $446 million), as of fiscal year 2005, is India’s second largest
pharmaceutical company and the youngest among its peer group.

The company has several distinctions on its credit. Being the first
pharmaceutical company from Asia Pacific (outside Japan) to be listed on the New
York Stock Exchange (on April 11, 2001) is only one among them. And as always.
Dr. Reddy’s chose to do it in the most difficult of circumstances against
widespread skepticism. Dr. Reddy’s chose up trumps not only having its stock
oversubscribed but also becoming the best performing IPO that year.

Dr. Anji Reddy is well known for his passion for research and drug
discovery. Dr. Reddy’s started its drug discovery programme in 1993 and within
three years it achieved its first breakthrough by outlicensing as anti-diabetes
molecule to Novo Nordisk in March 1997. With this very small but significant
step, the Indian industry went through a paradigm shift in its image from being
known as just ‘copycats to ‘innovators’! Through its success, Dr. Reddy’s
pioneered drug discovery in India. There are several such inflection points in the
company’s evolution from a bulk drug (AP) manufacturer into a vertically
integrated global pharmaceutical company today.

Today, the company manufactures and markets API (Bulk Actives),

Finished Dosages and Biologics in over 100 countries worldwide, in addition to
having a very promising Drug Discovery Pipeline. When Dr. Reddy’s started its
first big move in 1986 from manufacturing and marketing bulk actives to the

31
domestic (Indian) market to manufacturing and exporting difficult-to-manufacture
bulk actives such as Methyldopa to highly regulated overseas markets, it had to not
only overcome regulatory and legal hurdles but also battle deeply entrenched
mind-set issued of Indian Pharma being seen as producers of ‘cheap’ and therefore
‘low quality’ pharmaceuticals. Today, the Indian pharma industry, in stark contrast,
is known globally for its proven high quality-low cost advantage in delivering safe
and effective pharmaceuticals. This transition, a tough and often-perilous one, was
made possible thanks to the pioneering efforts of companies such as Dr. Reddy’s.

Today, Dr. Reddy’s continues its journey. Leveraging on its ‘Low Cost,
High Intellect’ advantage. Foraying into new markets and new businesses. Taking
on new challenges and growing stronger and more capable. Each failure and each
success renewing the sense of purpose and helping the company evolve.
With over 950 scientists working across the globe, around the clock, the
company continues its relentless march forward to discover and deliver a
breakthrough medicine to address an unmet medical need and make a difference to
peoples lives worldwide. And when it does that, it would only be the beginning
and yet it would be the most important step. As Lao Tzu wrote a long time ago.
‘Even a 1000 mile journey starts with a single step.
MISSION
The high cost of many medicines puts them out of the reach of
millions of people who desperately need them. As a global pharmaceutical
company, we take very seriously our responsibility to help alleviate the
burden of disease on individuals and on the world. Through our Global
Generics business, we provide high quality, lower-cost alternatives to
innovator drugs. Our wide range of generic medicines bring hope and health
to people around the globe.

VISION
Despite the great advances of medical science, there are still far too
many diseases for which there are no cures or no satisfactory treatments. We

32
believe that innovation – in research, processes and technologies – holds the
key to finding solutions for unmet or inadequately met medical needs. Our
Proprietary Products business is dedicated to discovering new or better
treatments than currently exist. In addition, our Custom Pharmaceutical
Services business works with Innovator companies and emerging biotech
firms to accelerate the development of new molecules, while lowering
research costs.

LOCATION
DRL was recently restructured Into SBU’s ( Strategic Business unit)as followings
1. SBU Bulk activities
2. SBU Branded Formulations.

3. SBU generic formulations

4. SBU emerging business

5. SBU R & D

Based on the nature of business each SBU is defined as a separate entity on the
lines of profit center concept.

The corporate office of Dr.Reddy's Laboratories ltd. is located at Ammepet,

Hyderabad. The SBU bulk is having six units out of which

3 units are located at Bollaram, Medak district.

1 unit at Jeedimetla, Qutubllapur mandal, Hyderabad.

1 unit at Paidibheemavaram, Srikakulam district.

1 unit at Miriyalaguda, Nalgonda district.

33
Punch line

Life.Research.Hope.

DRL’s core purpose

To help people lead healthier lives.

DRL’s mission

To be the first Indian pharmaceutical company that successfully takes its

products from discovery to commercial launch globally.

DRL’s core values

We strive for excellence in everything we think, say and do. The values
that guide our thoughts and actions are

1. Quality

2. Innovation and continuous learning

3. Truth and Integrity

4. Respect for individual

5. Harmony and Social Responsibility

FINANCIAL POSITION

DRL began as a bold venture into the private pharmaceutical market and
is today the third largest pharmaceutical company in India. The initial investment
of the project was Rs.15 crore. The current annual turn over are about Rs.900
crore & the current annual turning over of SBU bulk is about Rs.470 crore.

34
 DRL has sufficient technical infrastructure and trained manpower for
converting its core strengths into opportunities.

RESEARCH & DEVELOPMENT

DRL has been one of the pioneers of R&D in India. Established in late
1980’s the research & development division has acquired the status of full-
fledged research organization, developed proprietary processors for organic &
custom made intermediates. R&D plays an active role in selection of new
products & non-infringing routes to manufacture products. It also sets the pace
for development & launch of products at right time in the right form & at right
place.

It has nearly 200 qualified scientists working a process innovation &

simplification, cycle & manufacturing, time reduction, waste & energy reduction
& continuous process improvement. It is also planning to open a satellite
research centre at Atlanta. This centre will focus specifically on target based
research that will be a step ahead in its values chain of basic research that is
currently analogue based. Ten scientists will man this centre. DRL's biotech
research laboratory is to start functioning in the US soon.

INTERNATIONAL OPERATIONS

DRL Ltd. has a total of six wholly owned subsidiaries in US, France,
Netherlands, Singapore & Hongkong besides three joint ventures in Brazil,
Moscow & republic of Uzbekistan & manufacturing facility in China. It also has
representative offices in Romania, Ukraine, Vietnam & Kazakistan. The
company is in the final stage of setting up a joint venture in China. It has
registered 470 products in 28 countries so far & 80 products are in advanced
stage of registration. DRL exports its reverse engineered underpatent bulk drugs,
which give higher margins, compared to generics, to countries without stringent
patent laws.

35
SERVICES TO THE SOCIETY

Apart from making great strides in Indian pharmaceutical industry

Dr.Reddy had also made significant contributions to the society. He established
Dr.Reddy’s foundation, which touched the lives of thousands of rural women and
their families and hundreds of street children in the twin cities of Hyderabad and
Secunderabad. This foundation has also undertook child and police (CAP) project
which is aimed at withdrawing children from hazardous jobs as getting them into
main streams of the society by eradicating child labour.

DR. REDDY’S FOUNDATION

At Dr. Reddy’s we believe that for any development to be sustainable. People need
to be empowered to support themselves in the first place. The company also
believes that in every human being and organization there is a latent need to ‘give
back to society’.

It is with this perspective that Dr. Reddy’s Foundation was incepted by Dr. K. Anji
Reddy, Chairman of Dr. Reddy’s Laboratories, in 1996.

In Dr. K. Anji Reddy’s own words, “The Foundation is a laboratory for catalyzing
innovative, reproducible and sustainable experiments for social change. For social
metamorphosis to be faster and sustainable we realized the need for collective
ownership, and identified our role in catalyzing the process. The Foundation is a
realization of my childhood dream to help in poverty alleviation. It is also an
expression of my gratitude to the society that has been supporting my company’s
meteoric growth. The highest patriotism and philanthropy consists in helping and
stimulating men and women elevate and improve themselves by their own free and
independent individual action.”

The foundation acts as a social change catalyst that fosters, develops and promotes
initiatives at individual / group / organization levels to promote sustainable human
and social development. Believing in the inherent motivation and capacity of the
human being for progress – given the appropriate and adequate environment - the

36
Foundation innovates and tries out novel concepts in pilot models that are
continuously refined and scaled up to cover larger groups of deprived populations.

MANPOWER POSITION

All together there are about 2000 employees in bulk SBU. The manpower
strength of DRL’s unit II is 285 all belonging to management & staff. Contract
labour of about 75-80 is being employed for storage & handling, gardening,
housekeeping.

OTHER ALLIED ACTIVITIES

1. Maintaining statistical data & preparing reports

2. Apprenticeship, appointment & attendance control.

3. Activities like payment of provident fund, gratuity, increments, disciplinary

matters, issuing of memos, preparation of pay sheets, accident reports, attendance
calculation bonus, loans sanction, retrenchment, lay off etc.

DR.REDDY’S GROUP HR PHILOSOPHY

Dr.Reddy's group as a company will

 Continuously strive towards having a diverse workforce for bringing in

different perspectives to work.
 Provide equal opportunity for employment development & advancement
based only on merit
 Attract, develop & retain multi-skilled high performers regardless of
national origin & provide them with the resources that are necessary for
them to give their best.
 Build an organization that is continuously learning & changing itself to
meet the dynamic business environment.
 Involving employees & their families in developing networks of talented
people for creative work & long-term relationships.

37
  Develop & nurture leaders who shall bring out the best in themselves &
others who are builders & enablers of system's & work culture.
 Promote the sprit of teamwork & sharing in workplace in recognition that
contribution of many is necessary for innovation to occur.

DRL'S Ltd. QUALITY POLICY

DRL is committed to provide customer’s products meeting or exceeding

expectations consistently in terms of specifications, delivery, technical support,
regulatory compliance & competitiveness.

 Constantly improve the procedure, technologies & infrastructure to

continuously better the quality of products produced.
 Ensure optimum training to all personnel accountable for quality related
activities.
 Maintain mutually beneficial relationship with vendors, enrich the quality
of life of employees & provide lasting value to shareholders.

SAFETY, HEALTH& ENVIRONMENT(SHE) PHILOSOPHY

 All injuries can be prevented & adverse environmental impacts can be

minimized. Every employee should make his or her personal contribution
and share responsibility to prevent injuries and minimize environmental
pollution.
 All accidents, fires & environmental accidents shall be reported and
investigated to prevent their recurrence.
 Every employee should be familiar with the company's guidelines and
codes of safe practices of safety, health & environment & follow them.
 Training & communication at every level in organization through meetings,
publications, and suggestion scheme etc.
 The company lays emphasis on safety of contractor employees working on
its behalf

38
  Every employee should contribute in keeping the workplace clean & tidy.

ENVIRONMENT
At Dr. Reddy’s the management of the environment is not an appendage to its
business; it is integral to it.

This commitment to the environment goes beyond statutory requirements

for an important reason; at the company we have consistently believed that
environment protection and enrichment are not just preferred responses because
the ecological fabric of our world is now more fragile than ever, but because this is
man’s basic responsibility and its protection is the right way to do business. The
company’s commitment is reflected in various initiatives that enhance employee
awareness leading to extra-statutory requirements.

At Dr. Reddy’s there is as much of a focus on reduction of pollution load as

there is on the achievement of financial and production targets. This objective has
been continuously achieved through the discipline of a progressive benchmarking,
prudent target setting and ongoing review. Environmental performance is
measured across a number of parameters, Some of them being

 Water Usage
 Energy Usage
 Wastewater Discharge
 COD & TDS Load Discharge
 Hazardous & non-hazardous waste disposal
 Green house gas emissions

ANKUR - INHOUSE LEARNING CENTRE

39
 Ankur stands for SPROUT, which means beginning of growth or
germination from a bud. Ankur, the learning centre of Dr.Reddy’s group aims at
providing learning resources for self development & potential in folding through
shared learning & self learning. Vision of Ankur is to involve people to unable
Dr.Reddy's family to be the best learning organization.

OUTLOOK

DRL forecasts 20-25% growth in near future. DRL's strategic intent is to

widen its formulations business through investment in brand building, launching
new products, acquisition & revamping of marketing networks.

DRL has consolidated its position in domestic formulation market through

aggressive product launches as well as acquisitions. The recent takeover of
American remedies will help it achieve the targeted growth of 25% pa with focus
being on formulations. The company has written off all its dud investments in
unrelated areas.

Logo

BOARD OF DIRECTORS

The Board of Directors of Dr. Reddy's currently consists of 9 Directors. Six

Directors are Non-Executive, Independent Directors while the other three are
Executive Promoter Directors. Dr. K. Anji Reddy, who is one of the Promoters of
the company, is the Executive Chairman of the Company. The Board consists of
the following members

40
 Independent & Non Whole Time
Whole Time Directors
Directors
Dr. K. Anji Reddy Dr. Sathyanarayana Rao

Mr. G. V. Prasad Dr. V. Mohan

Mr. Satish Reddy Dr. Omkar Goswami

Mr. P. N. Devarajan

Mr. Ravi Bhoothalingam

Dr. A .Venkateshwarlu

Whole Time Directors

Dr. K. Anji Reddy Mr. G. V. Prasad Mr. Satish Reddy

Chairman Vice Chairman & CEO Chief Operating Officer

Independent & Non Whole Time Directors

41
 Dr. Omkar Goswami Mr. P. N. Devarajan Mr. Ravi Bhoothalingam

Dr. P.Satyanarayana Rao Dr. A. Venkateswarlu Dr. V. Mohan

Dr. Kallam. Anji Reddy

Chairman,
Dr. Reddy’s Laboratories Limited
K. Anji Reddy (B.Sc.-Tech in Pharmaceuticals and Fine
chemicals from Bombay University and PhD in Chemical Engineering from
National Chemical Laboratory, Pune, 1969) is the founder Chairman of Dr.
Reddy’s Laboratories Limited (Dr. Reddy’s). He served in the state-owned Indian
Drugs and Pharmaceuticals Limited (1969-75), was founder-Managing Director of
Uniloids Ltd (1976-80) and Standard Organics Limited (1980-84), before founding
Dr. Reddy’s in 1984.

42
 Under Dr. Anji Reddy’s leadership, Dr. Reddy’s has become a pioneer and
a trendsetter in the Indian Pharmaceutical industry. Its has turned the Indian bulk
drug industry from import-dependent in mid-80s to self-reliant in mid-90s and
finally into the export-oriented industry that it is today. Dr. Reddy’s has become
the first company to take up drug discovery research in India (1993) and has led
the industry from being-dubbed as ‘copycats’ for several years to now being
acknowledged as ‘Innovators’. Dr. Reddy’s was listed on the New York Stock
Exchange – the first non-Japanese Asian pharmaceutical company to list on NYSE
– in April 2001 (RDY).
Dr. Reddy is a serving member of the Prime Minister’s Council on Trade &
Industry, Government of India, and has been nominated to the Board of National
Institute of Pharmaceutical Education and Research (NIPER). He is also a Member
of the Board of Governors of institute of Chemical Technology, University of
Mumbai. Dr. Reddy chairs the Governing Body of Hyderabad Eye Research
Foundation and also serves on the Board of Vision Research Foundation, Chennai.
Naandi Foundation, a not-for-profit development institution that strives for
eradication of poverty has Dr. Reddy as its founding father. He is also founder-
Chairman of Dr. Reddy’s Foundation for human $ Social Development, a social
arm of Dr. Reddy’s, which acts as a catalyst of change to achieve sustainable
development. Dr. Reddy has been the recipient of several awards and honors.
Notable among them are the Sir PC Ray award, twice conferred on Dr. Reddy be
Indian Chemical Manufactures Association (1984, 1992) and the Federation of
Asian Pharmaceutical Associations (FAPA)’s FAPA- Ishidate Award for
Pharmaceutical Research in 1998. He was voted Businessman of the Year by
India’s leading business magazine Business India in the year 2001. For his
pioneering work and introduction of affordable medicine, CHEMTECH
Foundation has bestowed on him the Achiever of the Year award in the year 2000
and the ‘Hall of Fame’ award in 2005, for his Entrepreneurship, Leadership and
thrust on Innovation.
AWARDS & ACCOLADES

43
 The Appreciation Certificate of the District Collector for being the “Best
Clean Production Industry” for the year 2006 awarded to API Unit-V.
 The Cll “Southern Region Leadership Excellence Award” is won by Dr.
Reddy’s for the year 2005.
 The Cll “National Award for ‘Excellence in Water Management” for the
year 2005 is won by both API Unit-ll as well as API Unit-VI.
 The Generics Unit or Dr. Reddy’s achieves the new
ISO 140012004 standard on 9th June, 2005.
 The “Greentech
Environmental Excellence
Silver Award” for the year 2004-05 is won by API-Global

ORGANIZATIONAL CHART

BOARD OF DIRECTORS

CHAIRMEN

MANAGING DIRECTOR

44
SENIOR ACCOUNTING SENIOR PRODUCTION
MANAGER MANAGER MANAGER

MANAGER

DARIY MANAGER

SUPER VISORS

WORKERS

THEORETICAL FRAMEWORK

Capital budgeting is the process of making investment decisions in capital

expenditures. A capital expenditure may be defined as an expenditure the benefits
of which are expected to be received over period of time exceeding one year. The
main characteristic of a capital expenditure is that the expenditure is incurred at
one point of time whereas benefits of the expenditure are realized at different
points of time in future. In simple language we may say that a capital expenditure
is an expenditure incurred for acquiring or improving or improving the fixed

45
assets, the benefits of which are expected to be received over a number of years in
future.

This project presents two versions of heuristic algorithm to solve a model of

capital budgeting problems I a decentralized multidivisional firm involving no
more than two exchanges of information between headquarters and divisions.
Head quarter make an allocation of funds to each division based upon its cash
demand and its potential growth rate. Each division determines which projects to
accept. Then, an additional iteration is performed to define the solution.

To take up a new project, involves a capital investment decision and it is the

top management’s duty to make a situation and feasibility analysis of that
particular project and means of financing and implementing it financing is a
rapidly expanding field, which focuses not on the credit status of a company, but
on cash flows that will be generated by a specific project.

The capital budgeting decisions procedure basically involves the evaluation

of the desirability of an investment proposal. It is obvious that the firm must have
a systematic procedure for making capital budgeting decisions. The procedure for
making capital budgeting decisions must be consistent with objective of wealth
maximization.

Need of capital budgeting:

The importance of capital budgeting can be well understood from the fact
that unsound investment decision may prove to be fatal to the very existence of the
concern. The need, significance or importance of capital budgeting arises mainly
due to the following.

 Large investments

 Long – term commitment of funds

46
  Irreversible nature

 Long – term effect on profitability

 Difficulties of investment decisions

 National importance

Objectives for capital budgeting:-

1. It determines the capital projects on which work can be started during

the budget period after taking into account their urgency and the
expected rate of return on each project.

2. It estimates the expenditure that would have to be incurred on capital

projects approved by the management together with the sources from
which the required funds would be obtained.

3. It restricts the capital expenditure on projects with in authorized limits.

Types of capital budgeting decisions:-

Capital budgeting decisions are of paramount importance in financial

decision making. In first place they affect the profitability of the firm. They also
have a bearing on the competitive position of the firm because they relate to fixed
assets. The fixed assets are true goods than can ultimately be sold for profit.
Generally the capital budgeting of investment decision includes addition,
disposition, modification and replacement of fixed assets.

Diagram 1.1:
EXPANSION OF
EXISTING
BUSINESS

TYPES OF EXPANSION OF
CAPITAL NEW BUSINESS
BUDGETING 47
REPLACEMENT
&
MODERNIZATIO
EXPANSION OF EXISTING BUSINESS:
A company may add capacity to its existing product lines to expand
existing operations. For example Sri.Dhanalakshmi cotton & rice mills ltd may
increase its plant capacity to manufacture more detergents soaps & powder. It is
an example of related expansion.

EXPANSION OF NEW BUSINESS:

A firm may expand its activities in a new business expansion of a new
business requires investment and new kind of production activating with in the
firm. If packing manufacturing company invests in a new plant and machinery to
produce ball bearings, which the firm has not manufactured before, this represents
expansion of new business or unrelated diversification. Sometimes accompany
acquires existing firms to expand its business.

REPLACEMENT AND MODERNIZATION:

The main objective of modernization and replacement is to improve
operating efficiency reduce costs. Cost saving will reflect in the increased profits,
but the firm’s revenue may remain unchanged. Assets become outdated and
absolute with technological changes. The firm must decide to replace those with
new assets that operate more efficient and economical assets and therefore, are also
called cost – reduction investment.

48
 However replacement decision that involve substantial modernization and
technological improvements expand revenues as well as reduce costs. Yet another
useful way to classify investment is as follows:

 Mutually exclusive investment

 Independent investment

 Contingent investment

CAPITAL BUDGETING INVOLVES:

 Committing significant resources

 Planning for the long term 5 to 50 years.
 Decision making by senior management
 Forecasting long term cash flows
 Estimating long term discount rates & analyzing risk.

FACTORS PERCAPITAL INCOME:-

 Cost of acquisition of permanent asset as land and building, plant and
machinery, goodwill etc.
 Cost of addition, expansion, improvement or alteration in the fixed assets.
 Cost of replacement of permanent assets.
 Research and development projects cost, etc.

SIGNIFICANCE OF CAPITAL BUDGETING:-

Capital budgeting decisions deserve to be treated in a different manner

as there are conceptual problems involved which necessarily makes the decision
process more complex, which this makes things more difficult for the decision
process maker, it also makes the problem more challenging. There are several

49
practical reasons for placing greater emphasis on capital expenditure decisions.
These are:

1. LONG TERM PERIOD:-

The consequences of capital expenditure decisions extended far into
future. The scope of current manufacturing activities of a organization is governed
largely by capital expenditures in the past. Likewise, current capital expenditures
decision provides the frame work for future activities. Capital investment decisions
have an enormous bearing on the basic character of a organization.

2. IRREVERSIBILITY:

The markets are used for capital equipment in general is ill –

organized. Further, for some types of capital equipment, custom made to meet
specific requirements, the market may virtually be non – existent.

3. SUBSTANCIAL OUTLAY:

Capital expenditure usually involves substantial outlays. An integrated

steel plant, for example, involves an outlay of several thousand millions. Capital
costs tend to increase with advanced technology.

CAPITAL BUDGETING PROCESS:

The preparation of the capital budget is a process that lasts many months
and is intended to take into account neighborhood and bough needs as well as
organization wide. The process begin in the fall, when each of the segment holds
public hearings, each community board submits a statements of its capital
priorities for the next fiscal year to the managing director and appropriate borough

50
chairmen. The capital budgeting process involves 8 steps explained in theoretic as
follows:

 Identification of investment proposals

 Screen proposals
 Evolution of various proposals
 Fixing priorities
 Final approval
 Implementing proposals
 Performance review
 Feed back.

1) IDENTIFICATION OF INVESTMENT PROPOSALS:-

The capital budgeting process begins with the identification of
investment proposals. The investment proposals may originated from the top
management or from any officer of the organization. The department head
analyses the various proposals in the light of the corporate strategies and submit
the suitable proposal to the capital budgeting committee in case of the
organizations concerned with process of long – term investment proposals.
Identification of investment ideas it is helpful to:

o Monitor external environment regularly to scout investment

opportunities.

o Formulate a well defined corporate strategy based on through analysis of

strengths, weaknesses, opportunities and threats

o Share corporate strategy and respective with persons.

o Motivate employees to make suggestions.

2) SCREEN PROPOSALS:-

51
 The expenditure planning committee screen the various proposals
received from different departments in different angles to ensure that these are in
selection criteria of the organization and also do not lead to department
imbalances.

3) EVALUTION OF VARIOUS PROPOSALS:-

The next steps in capital budgeting process in to evaluate the probability

of various probability the independent proposals are those which do not complete
with one another and the same way be either accepted or rejected on the basic of a
minimum return on investment required.

4) FIXING PRIORITIES:-
After evaluating various proposals, the unprofitable or uneconomic
proposals may be rejected straight away. But it may not be possible for the
organization to invest immediately in all the acceptable proposals due to
limitations of funds. Hence, it is very essential to rank the various proposals and
to establish priorities after considering urgency, risk & profitability involved the
criteria.

5) FINAL APPROVAL:-
Proposals meeting the evaluation and other criteria are finally approved
to be included in the capital expenditure budget. However proposals involving
smaller investment may be decided at the lower levels for expeditious action. The
capital expenditure budget lay down the amount of estimated expenditure to be
incurred on fixed assets during the budget period.

6) IMPLEMENTING PROPOSALS:-
Preparation of a capital expenditure budgeting & incorporation of a
particular proposals in the budget does not itself authorize to go ahead with

52
implementation of the project. A request for authority to spend the amount should
be made to be the capital expenditure committee which may like to review the
profitability of the project in changed circumstances. In the implementation of the
projects networks techniques such as PERT & CPM are applied for project
management.

7) PERFORMANCE REVIEW:-
In this stage the process of capital budgeting is the evaluation of he
performance of the project. The evaluation is made through post completion audit
by way of comparison of actual expenditure on the project with the budgeted one
and also by comparing the actual return from the investment with the anticipated
return. The unfavorable variances if any should be looked into and the causes the
same be identified so that identified so that corrective action may be taken in
future.

It throws light on how realistic were the assumptions underlying the
project.

It provided a documented log of experience that is highly valuable for

decision making.

8) FEEDBACK:-

The last step in the capital budgeting process is feedback from employee
involved in the organization. If any consequences are there the process come to 1 st
step of the process.

GUIDELINE FOR CAPITAL BUDGETING:-

There are many guidelines for capital budgeting process either it is long
– term plan.
The major points are:

 Need and objectives of owner

53
  Size of market in terms of existing & proposed product lines and
anticipated growth of the market share

 Size of existing plants & plans for new plant sites and plant

 Economic conditions which may affect the firm’s operations and

 Business and financial risk associated with the replacement & existing
assets of the purchases of new assets.

CONTENTS OF THE PROJECT REPORT:-

Raw material

Market and marketing

Site of project

Project engineering dealing with technical aspects of the project

Location and layout of the project building

Building

Production capacity

Work schedule

CRITERIA FOR CAPITAL BUDGETING:-

Potentially, there is a wide array of criteria for selecting projects. Some
shareholders may want the firm to select projects that will show immediate surges
in cash flow, others may want to emphasize long - term growth with little
importance on short – term performance viewed in this way, it would be quite
difficult to satisfy the differing interests of all the shareholders. Fortunately, there
is a solution.

54
METHODS FOR EVALUATION:-
In view of the significance of capital budgeting decisions, it is
absolutely necessary that the method adopted for appraisal of capital investment
proposals is a sound one. Any appraisal method should provide for the following.

a) A basis of distinguishing between acceptable and non acceptable project.

b) Ranking of projects in order of their desirability.

c) Choosing among several alternatives

d) A criterion which is applicable to nay conceivable project.

e) Recognizing the fact that bigger benefits are preferable to smaller ones and
early benefits to later ones.

There are several methods for evaluating the investment proposals. In case
of all these methods the main emphasis is one the return which will be derived on
the capital invested in the project.

The following are the main methods generally used:

Diagram 1.2:
Capital Budgeting Techniques

DCF criteria DCF criteria

55
 Pay back period (PBP) Net present value (NPV)
Accounting rate of return (ARR) Internal rate of return (IRR)
Profitability index (P.I)

(a) DCF criteria:

Pack Back Period:

The pay back period one of the most popular and widely recognized
additional method of evaluation investment proposals. Pay back period is number
of years required to recover the original cash outlay invested in a project.
If the project generates constant annual cash flows, the pay back period can
be computed by dividing cash outlay by the annual cash inflows.

Initial investment
 C0 
Pay back period = Annual cash inf lows  C 
 

Co = Initial investment
C = Annual cash inflows
In the case of un equal cash inflows, the pay back period can be found out
by adding up the cash inflow until the total is equal to the initial cash outlay.

Merits:-

1) This method is simple to understand and easy to calculate.

2) Surplus arises only if the initial investment is fully recovered. Hence,

there is no profit on any project unless the pay back period is over.

3) Administrative difficulties may be faced in determining the maximum

acceptable pay back period.

56
(b) Accounting Rate of Return (ARR):

The accounting rate of return (ARR) also known as the return on investment
(ROI) uses accounting information, as revealed by financial statements, to measure
to profitability of an investment. The accounting rate of return is the ratio of the
average after fax profit divided by the average investment if it were depreciated
constantly.

AverageIncome
ARR = X 100
Averageinvestment

Merits:-

1) This method is simple to understand

2) It is easy to operate and compute

3) Income throughout the project life is considered.

4) It can be readily calculated using the accounting data.

Limitations:-

1) It does not consider cash inflows which is important project evaluation

rather than PAT

2) It takes the rough average of profits of future years. The pattern or

fluctuations in profits are ignored.

3) It ignores time value of money, which is important in capital budgeting

decisions.

57
DCF Criteria:

(a) Net Present Value (NPV)

The Net Present Value (NPV) method is the classic method of evaluating
the investment proposals. If is a DCF technique that explicitly recognizes the time
value at different time periods differ in value and comparable only when their
equipment present values – are found out.

C1 C2 C3 Cn
NPV =    C
1  k  1  k   1  k 
2 3
1  k  n 0
n
C1
NPV =  1  k 
i 0
1
 C0

Where

NPV = Net Present Value

Cfi = Cash flows occurring at time

K = The discount rate

Co = Cash outlay.

Merits:

1) NPV method takes account the time value of money

2) All cash inflows are considered

3) All cash inflows are converted into present value

58
 4) It satisfies value additively principle i.e., NPV of two or more projects can
be added.

Limitations:

1) It may not satisfactory answer when the projects being compared involved
different amounts of investment.

2) It is difficult to use

3) It may mis lead when dealing with alternative projects or limited funds.

4) It involves difficult calculations

5) In involves forecasting cash flows and applications of discount rate.

(b) Internal Rate of Return (IRR):

The internal rate of return (IRR) method is another discounted cash flow
technique which takes account of the magnitude and thing of cash flows, other
terms used to describe the IRR method are yield on an investment, marginal
efficiency of capital, rate of return over cost, time – adjusted rate of internal return
and so on.

n C fi SV  WC
NPV =  1  k 
i 0
1

1  k  n

Where
Cfi = Cash flows occurring at different point of time
K = The discount rate
N = Life of the project in year
Co = Cash out lay
SV & WC = Salvage value and working capital at the end of the n years.

59
 A
IRP = L   a  b  H  L

Where
L = Lower discount rate at which NPV is positive
H = Higher discount rate at which NPV is negative
A = NPV at lower discount rate, L
B = NPV at higher discount rate, H

Merits:-

1) This method considers the time value of money

2) All cash flows are considered

3) It has psychological appeal to the users.

4) The percentage figure calculated under this method is more meaningful and
acceptable, because it satisfies them in terms ofrate of return on capital.

Limitations:

1) It may not give unique answer in all situations.

2) It is difficult to understand and use in practices.

3) It implies that the intermediate cash inflows generated by the project.

(c) Profitability index (PI)

Yet another time – adjusted method of evaluating the investment proposals

is the benefit – cost (B/C) ratio or profitability index (PI) required rate of return, to
the initial cash out of the investment.

PVofCash inf low

PI = InitialCashoutlay

60
 Where

PV = Present Value

Merits:-

1) This method considers the time value of money.

2) All cash inflows are considered.

3) It is better evaluation technique than NPV.

Limitations:-

It fails as a guide in resolving capital rationing when projects are

indivisible.

Diagram 1.3

COMMITTEE IN CAPITAL BUDGETING:-

CHIEF
EXECUTIVE

BUDGET 61 BUDGET
PRODUCTION OFFICER
SALES FINANCECOMMITTEE
ACCOUNTS PERSONNEL R&D
MANAGER MANAGER MANAGER MANAGER MANAGER MANAGER
CAPITAL COMMITMENT PLAN:-

The progress of project included in the capital budget, a capital commitment

plan is issued three times a year. The commitment plan lays out the anticipated
implementation schedule for there current fiscal and the next three years. The first
commitment plan is published within 90 days of the adoption of the capital budget.
Updated commitment plans are issued in January & April along with the
company’s budget proposals.

The commitment plan translates the appropriations approved under the

adopted capital budget into schedule for implementing individual projects. The
fact that funds are appropriated for a project in the capital budget does not
necessarily mean that work will start or be completed that fiscal year. He choice of
priorities and timing f projects is decided by office management & budget in
consultation with the agencies along with considerations of how much the
managing director thinks the organization can afford to append on capital projects
overall.

The capital commitment plan lays out the anticipated implemented schedule
for capital projects and is one source of information on how far along projects are
although not a consistent or always useful one. The adopted commitment plan is
usually published in September, & then updated in January & April.

62
 In the capital budgeting for every two adjacent years there will be gap. The
gap between authorized commitments and the target is presented in capital
commitment plan as diminishing over the course of the year plan, in practice many
of the “Unattained commitments” will be rolled over into the next year’s plan, so
that the current year gap will remain large. The gap has grown in recent year
exceeding in last two executive capital plants.

KINDS OF CAPITAL BUDGETING:-

Capital budgeting refers to the total process of generating, evaluating,
selecting and following up an capital expenditure alternatives. The firm allocates
or budgets financial recourses to new investment proposals. Basically, the firm
may be confronted with three types of capital budgeting decisions:-
 The accept or reject decision
 The mutually exclusively decision and
 The capital rationing decision

DIFFICULTIVES OF CAPITAL BUDGETING:-

While capital expenditure decisions are extremely important, they also pose
difficulties which stem from three principal sources:
 Identifying & measuring the costs & benefits of a capital expenditure
proposal tends to be difficult
 There is great deal of uncertainty for capital expenditure decision which
involves cost & benefits that extend far into the future.
 It is impossible to product exactly what will happen in the future.
 The time period creates some problems in estimating discount rates &
establishing equivalences.

LIMITATIONS OF THE STUDY

Capital budgeting techniques suffer from the following limitations:

63
 1) All the techniques of capital budgeting presume that various investment
proposals under consideration are mutually exclusive which may not
practically be true in some particular circumstances.

2) The techniques of capital budgeting require estimation of future cash

inflows and outflows. The future is always uncertain and the data collected
for future may not be exact. Obliviously the results based upon wrong data
may not be good.

3) There are certain factors like morale of the employees, good will of the
firm, etc., which cannot be correctly quantified but which other wise
substantially influence the capital decision.

4) Urgency is another limitation in the evaluation of capital investment

decisions.

5) Uncertainty and risk pose the biggest limitation to the techniques of capital
budgeting.

COST EFFECTIVE ANALYSIS:-

In the cost effectiveness analysis the project selection or technological

choice, only costs of two or more alternatives choices are considering treating the
benefits as identical. This approach is used when the acquisition of how to
minimize the costs for undertaking an activity at a given discount rates in case the
benefits and operating costs are given, one can minimize the capital cost to obtain
given discount.

PROJECT PLANNING:-
The planning of a project is technically pre – determined set of inter related
activities involving the effective use of given material, human, technological and
financial resources over a given period of time. Which in association with other

64
development projects result in the achievement of certain predetermined objectives
such as the production of specified goods and services.
Project planning is spread over a period of time and is not a one shot
activity. The important stages in the life of a project are:

 It’s identification

 It’s initial formulation

 It’s evaluation

 It’s final formulation

 It’s implementation

 It’s completion and operation

The time taken for the entire process is the gestation period of the project.
The process of identification of a project begins when we are seriously trying to
over come certain problems. They may be non – utilization to overcome available
funds. Plant capacity, expansion etc.

CRITERIAN TABLE:-
In the evaluation process or capital budgeting techniques there will be a
criteria to accept or reject the project. The criteria will be expressed as:
Table 1.1:
Criterian / Method Accept Reject
Pay Back Period <Target Period > Target Period
Accounting Rate of Return (ARR) >Target Rate < Target Rate
Net Present Value (NPV) >0 <0
Internal Rate of Return (IRR) > Cost of Capital <Cost of Capital
Profitability Index (PI) >1 <1
DATA ANALYSIS

IMPORTANCE OF INVESTMENT DECISION

Investment decisions require special attention because of the following
reasons.
 They influence the firm’s growth in the long term.

65
  They affect the risk of the firm.
 They involve commitment of large amount of funds
 They are irreversible, or reversible at substantial loss.
 They are among the most difficult decisions to make.

INVESTMENT EVALUATION CRITERIA:

Three steps are involved in the evaluation of investment.

1. Estimation of cash flows
2. estimation of the required rate of return (the opportunity cost of capital)
3. application of a decision rule for making the choice.

EVALUTION OF INVESTMENT PROPOSAL:

At each point of time a business firm has a number of proposals regarding

various projects in which it can invest funds. But the funds available with the firm
are always limited and it is not possible to invest funds in all the proposals at a
time. Hence, it is very essential to select from amongst the various competing
proposals, those which give the highest benefits. The crux of the capital budgeting
is the allocation of available non – economic, which influence the capital
budgeting decision is the profitability of the prospective investment. Yet the risk
involved in the proposal cannot be ignored because profitability and risk are
directly related, i.e., higher profitability, the risk vice – versa.

There are many evaluating profitability of capital investment proposals.

The various commonly used methods are as follows:

Non DCF criteria:

(A) Pay Back Period:

66
 The pay back period one of the most popular and widely recognized
traditional methods of evaluation investment proposals. Pay back period is the
number of years required to recover the original cash outlay invested in a project.
If the project generates constant annual cash flows, the pay back period can
be computed by dividing cash outlay by the annual cash inflows.

Initialinvestment  C 0 
Pay Back Period =  
Annualcash inf lows  C 

Co = Initial investment
C = Annual cash inflows
In the case of un equal cash inflows, the pay back period can be found out
by adding up the cash inflow until the total is equal to the initial cash outlay.

(B) Accounting Rate of Return (ARR)

The accounting rate of return (ARR) also known as the return on investment
(ROI) uses accounting information, as revealed by financial statements, to measure
to profitability of an investment. The accounting rate of return is the ratio of the
average after fax profit divided by the average investment. The average investment
would be equal to half of the original investment if it were depreciated constantly.

AverageInc ome
ARR = x100
Averageinv estment

DFC Criteria:

(a) Net Present Value (NPV):

The Net Present Value (NPV) method is the classic method of evaluating
the investment proposals. If is a DCF technique that explicitly recognizes the time
value at different time periods differ in value and comparable only when their
equipment present values – are found out.

67
 C1 C2 C3 Cn
NPV =      C
1  k  1  k  1  k 
2 3
1  k  n 0
n
C1
NPV =  1  k 
i 0
1
 C0

Where
NPV = Net Present Value
Cfi = Cash flows occurring at time
K = The discount rate
n = Life of the project in year
Co = Cash outlay

(b) Internal Rate of Return (IRR):

The internal rate of return (IRR) method is another discounted cash flow
technique which takes account of the magnitude and thing of cash flows, other
terms used to describe the IRR method are yield on an investment, marginal
efficiency of capital, rate of return over cost, time – adjusted rate of internal return
and so on.

n C fi SV  WC
NPV =  1  k 
i 0
1

1  k  n

Where
Cfi = Cash flows occurring at different point of time
K = The discount rate
n = Life of the project in year
Co = Cash outlay.
SV & WC = Salvage value and working capital at the end of the n years.

68
 A
IRP = L  H  L
 a  b
Where
L = Lower discount rate at which NPV is positive
H = Higher discount rate at which NPV is negative
A = NPV at lower discount rate, L
B = NPV at higher discount rate, H

(c) Profitability Index (PI)

Yet another time – adjusted method of evaluating the investment proposal is
the benefit – cost (B/C) ratio or profitability Index (PI) profitability index is the
ratio of the present valued of cash inflows, at the required rate of return, to the
initial cash out of the investment.

PV of Cash inf low

PI = Initial Cashoutlay

Where
PV = Present Value

CRITERIAN TABLE:
In the evaluation process or capital budgeting techniques there will be a
criteria to accept or reject the project. The criteria will be expressed as:

Criterian / Method Accept Reject

Pay Back Period (PBP) <Target Period > Target Period
Accounting Rate of Return (ARR) >Target Rate < Target Rate
Net Present Value (NPV) >0 <0
Internal Rate of Return (IRR) > Cost of Capital <Cost of Capital
Profitability Index (PI) >1 <1

69
NON DCF CRITERIA:

Table 3.1
(a) PAY BACK PERIOD (PBP)

Initial outlay = 42,86,36,698

3,83,23,917
Pay back period = 4
20,79,39,665

= 4+0.18
4.18 Months

Criteria for evaluation:-

The pay back period computed for a project is less than the pay back period
set by management of the company, it would be accepted. A project actual pay
back period is more than the determined period by the management, it will be
rejected.

Decision:-

The standard pay back period is set by Dr Reddys Laboratories for

considering expansion project is six years, where as actual pay back period is 4.18
months. Hence we accept the project.

70
Table 3.2

(b) AVERAGE RATE OF RETURN (ARR)

YEARS INCOME DEPRECIATION CASH IN FLOWS
2012-13 8,55,63,456 3,34,32,278 5,12,38,313
2013-14 3,13,32,218 3,43,24,543 -29,92,325
2014-15 3,00,76,560 3,63,65,282 -62,88,722
2015-16 9,63,75,756 4,28,42,688 5,35,33,068
2016-17 16,07,26,312 4,72,13,353 11,35,12,959
2017-18 16,32,00,297 6,21,69,556 10,10,30,741

Average profit
ARR = X 100
Average investment

31,00,34,034
Average Profit =  5,16,72,339
6
42,86,36,689
Average investment = = 21,43,18,349
2

5,16,72,339
ARR = X 100
21,43,18,349

= 0.2411 x 100
= 24.11

Average profit
ROI = Initial investment X 100

71
 5,16,72,339
= X 100
42,86,36,698

= 0.1205 x 100
= 12.05

Criteria for evaluation:-

According to this method ARR is higher than minimum rate of return

established by the management are accepted. It reject the project have less ARR
then the minimum rate set by the management.

Decision:-
The standard ARR set by Dr Reddys Laboratories management is 21%. The
actual ARR is 24.11% is higher than the standard ARR set by the management,
hence we accept the project.

DCF criteria:-

Table 3.3:
(a) Net Present Value:-
PRESENT
YEAR CASH INFLOWS DCF (12%)
VALUE
2012-13 11,89,95,734 0.893 10,62,63,190.5
2013-14 6,56,56,761 0.797 5,23,28,438.52
2014-15 6,64,41,842 0.712 4,73,06,591.5
2015-16 13,92,18,444 0.636 8,85,42,930.38
2016-17 20,79,39,665 0.567 11,79,01,790.1
2017-18s 22,53,69,853 0.507 11,42,62,515
TOTAL 52,33,05,456

NPV = 52,33,05,456 - 42,86,36,698

= 9,79,68,758

72
Criteria for evaluation:-

In case of calculated NPV is positive or zero, the project should be

accepted. If the calculated NPV is negative, the project is rejected.

Decision:-

The project is accepted due to calculated NPV is positive.

Table 3.4
(b) INTERNAL RATE OF RETURN:-

PRESENT
YEARS CASH INFLOWS DCF (10%)
VALUE
2012-13 11,89,95,734 0.909 10,81,67,122.2
2013-14 6,56,56,761 0.826 5,42,32,484.59
2014-15 6,64,41,842 0.751 4,98,97,823,34
2015-16 13,92,18,444 0.683 9,50,86,197.25
2016-17 20,79,39,665 0.621 12,91,30,532
2017-18 22,53,69,853 0.564 12,71,08,597.1
TOTAL 56,36,22,756.5

PRESENT
YEARS CASH INFLOWS DCF(14%)
VALUE
2012-13 11,89,95,734 0.877 10,43,59,258.7

73
 2013-14 6,56,56,761 0.769 5,04,90,049.21
2014-15 6,64,41,842 0.675 4,48,48,243.35
2015-16 13,92,18,444 0.592 8,24,17,319
2016-17 20,79,39,665 0.519 10,79,20,686
2017-18 22,53,69,853 0.423 9,53,31,447
TOTAL 48,53,31,447

56,36,22,756.5 - 52,33,05,456
IRR = 14  X 14  10 
56,36,22,756.5 - 48,53,67,003.26

3,70,17,300.5
= 10  X4
7,82,55,753.24

= 10+0.473(4)
= 10+1.892
= 11.892

Criteria for evaluation:-

In this method the project is accepted when IRR is higher than its cost of
capital or cut out rate. If the project is not accepted when the IRR is less than cost
of capital

Decision:-
The project is accepted because of the calculation IRR is higher than its cost
of capital. The cost of capital fixed by management is 10%, the actual is more than
its standard. Hence, the project is accepted.

Table 3.5:

(c) PROFITABILITY INDEX:-

YEARS CASH IN FLOW (Rs)
2012-13 11,89,95,734
2013-14 6,56,56,761

74
 2014-15 6,64,41,842
2015-16 13,92,18,444
2016-17 20,79,39,665
2017-18 22,53,69,853

PV of cash inf low

PI = Initial cash outlay

82,36,22,299
= 42,86,36,698

= 1.92

Criteria for evaluation:-

A project can be accepted if its PI index is greater than one. If the PI is less
than one we should reject the project.

Decision:-

Profitability index of proposed expansion project is found our 1.92 this is

more than the PI. Hence we accept the project.

FINDINGS

 The calculated payback period is 4 years and 2 months. But standard

payback period was 5 years and 2 months by Dr Reddys Laboratories

management.

75
 The ARR is fixed by BSW is 21%. The actual ARR is 24.1% and its return

on investment is 12.05%.

 The NPV is actually getting 9,79,68,758 is positive.

 The IRR is worked for project is 11.89% cut off rate is 10% less than the

actual IRR.

 The PI is getting actual for the expansion project is 1.92 (or) 2.

SUGGESTIONS

 It has been suggested that the Dr Reddys Laboratories to consider the

investment / accept the investment proposal is actual PBP is less than the

standard PBP.

76
  It is suggesting to Dr Reddys Laboratories management that is better to fix

ROI is more than the standard ROI. So it is advisable to maintain same

consideration of project in the future also.

 The NPV of the project is positive it is advisable to suggest selecting the

same type of the projects.

 The cutoff rate / cost of capital for the company is 10% where as the actual

IRR is worked for the proposal is 11.89%, which is below the accepted

level. The cost of capital is taken into consideration on the basis of

weighted average cost of capital.

 It is safer to accept proposal it is 2 times more than it’s investment. So it is

advisable to select the same type of project in the future also.

CONCLUSION

Based on the study in Dr Reddys Laboratories there is forecasting project

cash flow involves numerous estimates and many individuals and departments

participate in this exercise. The role of the finance manager in to coordinate the

efforts of various departments and obtain information from them, ensure that the

77
forecasts are based on a set of consistent economic assumptions, keep to the

exercise focused on relevant variables and minimize the bias is inherent in cash

flow forecasting.

In the study I know that the company is following pay back period. Based

on the data shows that the company can use any criteria to get return on the

investment.

The project “A study on Capital Budgeting” in Dr Reddys Laboratories, it is

suggested to hold the company is the same situation.

BALANCE SHEET AS AT 31 MARCH, 2012-11

Sche Figures as at
Particulars dule 31 Mar, 2012 31 Mar, 2011
No. Rs. Rs. Rs. Rs.
SOURCES OF FUNDS
Share Holders Funds
Share Capital A 1,30,00,000 1,30,00,000
Reserves & Surplus B 13,02,70,036 14,32,70,036 13,51,67,525 14,81,67,525
Loan Funds
Secured Loans C 39,03,64,244 46,52,13,017
Unsecured Loans D 19,92,39,493 58,96,03,737 17,55,51,214 64,07,64,231
Deferred Tax Liability 57,69,209 55,23,622
Total 73,86,69,982 79,44,55,378
APPLICATION OF
FUNDS

78
Fixed Assets E
Gross Block 71,15,51,528 70,33,48,927
Less Depreciation 10,54,78,021 7,12,09,082
Net Block 60,60,73,507 63,21,39,845
60,60,73,507 63,21,39,845
Investments F 29,83,165 37,19,965
Current Assets, Loans &
Advances
Inventories G 18,79,34,012 17,22,56,321
Sundry Debt ere H 2,68,60,540 2,49,37,024
Cash & Bank Balance I 60,59,037 3,34,65,753
Other Current Assets J 4,86,79,846 2,86,56,816
Loans & Advances K 1,17,23,019 1,49,28,012
28,12,56,454 27,42,43,926
Less: Current Liabilities
& Provisions
Current Liabilities L 13,96,24,184 10,83,91,431
Provisions M 1,20,18,960 72,56,927
15,16,43,144 11,56,48,358
Net Current Assets 12,96,13,310 15,85,95,568
Total 73,86,69,982 79,44,55,378
Contingent Liabilities N
Notes to the Accounts O
The Schedules referred to above form an integral part of the Balance Sheet.
This is the Balance Sheet referred to in our report of even date.

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2012-11
Figures for the year ended
Schedule
Particulars 31 Mar, 2012 31 Mar, 2011
No.
Rs. Rs.
INCOME
Sales 9,66,95,127 13,17,72,745
Threshing & Redrying Charges 12,27,56,852 6,48,95,977
Other Income P 5,42,19,836 4,11,45,403
Closing Stock 17,78,27,787 15,85,48,517
Total 45,14,99,602 39,63,62,642
EXPENDITURE
Opening Stock 15,85,48,517 12,47,93,178
Purchases 11,11,21,750 15,58,80,478
Manufacturing & Trading Q 7,40,69,521 4,79,14,280
Expenses

79
Administrative Expenses R 2,57,96,364 2,03,53,905
Selling Expenses S 16,76,574 10,73,226
Rent on Buildings & Machinery 37,62,398 46,08,518
Repairs to Buildings 67,72,217 24,49,847
Interest and Bank Charges 3,44,69,107 1,42,33,479
Depreciation 3,46,55,522 57,70,797
Loss on Sale of Asset 66,750 -
Total 45,09,38,720 37,70,77,706
Net Profit Before Taxation (+) 5,60,882 1,92,84,936
Provision for Tax
Current Tax (-) 70,00,000

50,00,000
Deferred Tax (-) 2,72,587 (+) 1,61,048
Brought forward Profit (+) 4,67,525 4,18,090
Excess/Short provision for
Income Tax in the earlier years (-) 1,85,784 1,03,451
Transferred from General Reserve (+) 1,25,00,000

45,00,000
Balance Profit carried to Balance 70,036 4,67,525
Sheet

The Schedules referred to above form an integral part of the Profit & Loss Account.
This is the Profit & Loss Account referred to in our report of even date.

BALANCE SHEET AS AT 31 MARCH, 2013-12

Sche Figures as at
Particulars dule 31 Mar, 2013 31 Mar, 2012
No. Rs. Rs. Rs. Rs.
SOURCES OF FUNDS
Share Holders Funds
Share Capital A 1,30,00,000 1,30,00,000
Reserves & Surplus B 15,11,36,957 16,41,36,957 13,02,70,036 14,32,70,036
Loan Funds
Secured Loans C 37.94.75.270 39,03,64,244
Unsecured Loans D 19,30,40,880 57,25,16,150 19,92,39,493 58,96, 03,737
Deferred Tax Liability 62,47,531 57,96,209
Total 74,29,00,638 73,86,69,982
APPLICATION OF
FUNDS

80
Fixed Assets E
Gross Block 72,61,14,635 71,14,92,129
Less Depreciation 14,50,33,137 10,54,78,021
Net Block 58,10,81,498 60,60,14,108
Capital Work in Progress 51,65,551 59,399
Investments F 29,83,165 29,83,165
Current Assets, Loans
& Advances
Inventories G 23,98,80,075 18,79,34,012
Sundry Debt ere H 3,59,92,686 2,68,60,540
Cash & Bank Balance I 71,50,276 60,59,037
Other Current Assets J 6,96,40,943 4,86,79,846
Loans & Advances K 1,25,29,745 1,17,23,019
36,51,93,725 28,12,56,454
Less: Current
Liabilities & Provisions
Current Liabilities L 20,24,49,314 13,96,24,184
Provisions M 90,73,986 1,20,18,960
21,15,23,300 15,16,43,144
Net Current Assets 15,36,70,425 12,96,13,310
Total 74,29,00,639 73,86,69,982
Contingent Liabilities N
Notes to the Accounts O
The Schedules referred to above form an integral part of the Balance Sheet.
This is the Balance Sheet referred to in our report of even date.

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2013-12
Figures for the year ended
Schedule
Particulars 31 Mar, 2013 31 Mar, 2012
No.
Rs. Rs.
INCOME
Sales 25,57,62,587 9,66,95,127
Threshing & Redrying Charges 12,13,48,304 12,27,56,852
Other Income P 4,57,75,357 5,42,19,836
License Fee and Amenities from IT Park 6,50,01,628 26,64,844
Closing Stock 22,79,17,226 17,78,27,787
Total 71,58,05,102 45,14,99,602
EXPENDITURE
Opening Stock 17,78,27,787 15,85,48,517
Purchases 28,03,14,175 11,11,21,750
Manufacturing & Trading Expenses Q 9,27,67,953 7,40,69,521
Administrative Expenses R 3,23,12,207 2,58,03,581

81
Selling Expenses S 25,33,525 16,69,357
Rent on Buildings & Machinery 82,17,482 37,62,398
Repairs to Buildings 87,74,221 67,72,217
Interest and Bank Charges 4,03,57,291 3,44,69,107
Depreciation 3,99,16,748 3,46,55,522
Impairment of Assets 16,288 -
Loss on Sale of Asset - 66,750
Exchange Fluctuation Loss 84,24,550 -
Total 69,14,62,227 45,09,38,720
Net Profit for the year 2,43,42,874 5,60,882
Add : Prior period items 7,98,695 -
Net Profit Before Taxation (+) 2,51,41,569 (+) 5,60,882
Provision for Tax
Current Tax (-) 28,50,000 (-) 50,00,000
Deferred Tax (-) 4,51,322 (-) 2,72,587
Fringe Benefit Tax (-) 7,70,000 -
Wealth Tax (-) 25,670 -
Profit after Tax 2,10,44,577 -
Brought forward Profit (+) 70,036 (+) 4,67,525
Excess/Short provision for
Income Tax in the earlier years (-) 1,77,656 (-) 1,85,784
Transferred from General Reserve (+) 2,08,00,000 (+) 45,00,000
Balance Profit carried to Balance Sheet 1,36,957 70,036
Earning per Share 15,574 -
The Schedules referred to above form an integral part of the Profit & Loss Account.
This is the Profit & Loss Account referred to in our report of even date.

BALANCE SHEET AS AT 31 MARCH, 2014-13

Sche Figures as at
Particulars dule 31 Mar, 2014 31 Mar, 2013
No. Rs. Rs. Rs. Rs.
SOURCES OF FUNDS
Share Holders Funds
Share Capital A 1,30,00,000 1,30,00,000
Reserves & Surplus B 19,42,00,158 20,72,00,158 15,11,36,957 16,41,36,957
Loan Funds
Secured Loans C 47,86,82,475 37.94.75.270
Unsecured Loans D 8,15,95,729 56,02,78,204 19,30,40,880 57,25,16,150
Deferred Tax Liability 55,23,988 62,47,531
Total 77,30,02,348 74,29,00,638
APPLICATION OF
FUNDS
Fixed Assets E
Gross Block 73,89,03,208 72,61,14,635

82
Less Depreciation 18,24,91,726 14,50,33,137
Net Block 55,54,11,482 58,10,81,498
Capital Work in Progress 18,55,829 51,65,550
Investments F 29,83,165 29,83,165
Current Assets, Loans
& Advances
Inventories G 23,69,75,762 23,98,80,075
Sundry Debt ere H 3,62,58,591 3,59,92,686
Cash & Bank Balance I 1,39,98,934 71,50,276
Other Current Assets J 9,36,87,132 6,96,40,943
Loans & Advances K 1,08,64,119 1,25,29,745
39,17,84,538 36,51,93,725
Less: Current Liabilities &
Provisions
Current Liabilities L 15,84,52,146 20,24,49,315
Provisions M 2,15, 80,520 90,73,986
18,00,32,666 21,15,23,300
Net Current Assets 21,17,51,872 15,36,70,425
Total 77,30,02,348 74,29,00,638
Contingent Liabilities N
Notes to the Accounts O
The Schedules referred to above form an integral part of the Balance Sheet.
This is the Balance Sheet referred to in our report of even date.

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2014-13
Sched Figures for the year ended
Particulars ule 31 Mar, 2014 31 Mar, 2013
No. Rs. Rs.
INCOME
Sales 25,79,93,866 25,57,62,587
Threshing & Redrying Charges 10,26,39,420 12,13,48,304
Exchange Fluctuation Gain 1,43,88,067 -
Other Income P 6,02,06,090 4,57,75,357
License Fee and Amenities from IT Park 9,00,07,058 6,50,01,628
Closing Stock 22,16,60,415 22,79,17,226
Total 74,68,94,916 71,58,05,102
EXPENDITURE
Opening Stock 22,79,17,226 17,78,27,787
Purchases 21,16,40,666 28,03,14,175
Manufacturing & Trading Expenses Q 10,05,18,972 9,27,67,953
Administrative Expenses R 3,41,06,300 3,23,12,207
Selling Expenses S 10,45,901 25,33,525
Rent on Buildings 54,50,732 82,17,482

83
Repairs to Buildings 1,30,61,646 87,74,221
Impairment of Assets 1,04,232 16,288
Exchange Fluctuation Loss - 84,24,550
Loss on Forward Contracts 75,15,978 -
Depreciation 3,77,81,694 399,16,748
Interest and Bank Charges 4,91,32,743 4,03,57,291
Total 68,82,76,090 69,14,62,227
Net Profit for the year 5,86,18,826 2,43,42,875
Add : Prior period items 14,84,643 7,98,694
Profit Before Taxation (+) 6,01,03,469 (+) 2,51,41,569
Provision for Tax
Current Tax (-) 1,81,00,000 (-) 28,50,000
Deferred Tax (+) 7,23,545 (-) 4,51,322
Fringe Benefit Tax (-) 6,08,880 (-) 7,70,000
Wealth Tax (-) 21,640 (-) 25,670
Profit / Loss after Tax 4,20,96,494 2,10,44,577
Brought forward Profit/Loss (+) 1,36,957 (+) 70,036
Excess/Short provision for taxation in earlier years (+) 9,66,707 (-) 1,77,656
Balance of Profit 4,32,00,158 2,09,369,957
Appropriations
Transfer to General Reserve 4,30,00,000 2,08,00,000
Carried forward Profit to Balance Sheet 2,00,158 1,36,957
Earning per Share 323.82 155.74
The Schedules referred to above form an integral part of the Profit & Loss Account.
This is the Profit & Loss Account referred to in our report of even date.

BALANCE SHEET AS AT 31 MARCH, 2015-14

Sche Figures as at
Particulars dule 31 Mar, 2015 31 Mar, 2014
No. Rs. Rs. Rs. Rs.
SOURCES OF FUNDS
Share Holders Funds
Share Capital A 1,30,00,000 1,30,00,000
Reserves & Surplus B 34,59,01,071 35,89,01,071 19,42,00,158 20,72,00,158
Loan Funds
Secured Loans C 42,91,26,132 47,86,82,475
Unsecured Loans D 8,33,86,203 51,25,12,335 8,15,95,729 56,02,78204
Deferred Tax 4,21,51,888 55,23,986
Total 91,35,65,294 77,30,02,348
APPLICATION OF FUNDS
Fixed Assets E
Gross Block 77,25,53,600 73,89,03,208
Less Depreciation 21,85,01,632 18,24,91,726

84
Net Block 55,40,51,968 55,64,11,482
Capital Work in Progress 15,50,361 18,55,829
Investments F 29,83,165 29,83,165
Current Assets, Loans &
Advances
Inventories G 32,74,12,543 23,69,75,762
Sundry Debtors H 2,23,61,498 3,62,58,591
Cash & Bank Balance I 7,38,91,461 1,39,98,934
Other Current Assets J 15,15,68,707 9,36,87,132
Loans & Advances K 1,39,66,691 1,08,64,119
58,92,00,900 39,17,84,538
Less: Current Liabilities &
Provisions
Current Liabilities L 14,33,60,960 15,84,52,146
Provisions M 9,08,60,140 2,15, 80,520
23,42,21,100 18,00,32,666
Net Current Assets 35,49,79,800 21,17,51,872
Total 91,35,65,294 77,30,02,348
Contingent Liabilities N
Notes to the Accounts O
The Schedules referred to above form an integral part of the Balance Sheet.
This is the Balance Sheet referred to in our report of even date.

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2015-14
Figures for the year ended
Schedu
Particulars 31 Mar, 2015 31 Mar, 2014
le No.
Rs. Rs.
INCOME
Sales 28,06,78,564 25,79,93,866
Threshing & Redrying Charges 14,78,16,539 10,26,39,420
Exchange Fluctuation Gain 3,05,83,174 1,43,88,067
Other Income P 14,39,13,688 6,02,06,090
License Fee and Amenities from IT Park 13,69,87,132 9,00,07,058
Closing Stock 31,54,63,618 22,16,60,415
Total 105,54,42,716 74,68,94,916
EXPENDITURE
Opening Stock 22,16,60,415 22,79,17,226
Purchases 33,68,88,367 21,16,40,666
Manufacturing & Trading Expenses Q 8,58,87,573 10,05,18,972
Administrative Expenses R 4,28,88,670 3,41,06,300
Selling Expenses S 20,69,214 10,45,901

85
Rent on Buildings 69,28,277 54,50,732
Repairs to Buildings 1,73,10,485 1,30,61,646
Impairment of Assets - 1,04,232
Loss on Forward Contracts - 75,15,978
Loss on Derivative Transactions 80,06,077 -
Depreciation 3,66,68,496 3,77,81,694
Interest and Bank Charges 3,66,90,054 4,91,32,743
Total 79,49,95,628 68,82,76,090
Net Profit for the year 26,04,47,088 5,86,18,826
Add : Prior period items - 14,84,643
Profit Before Taxation (+) 26,04,47,088 (+) 6,01,03,469
Provision for Tax
Current Tax (-) 7,15,00,000 (-) 1,81,00,000
Deferred Tax (+) 3,66,27,902 (+) 7,23,545
Fringe Benefit Tax (-) 6,31,000 (-) 6,08,880
Wealth Tax (-) 20,260 (-) 21,640
Profit / Loss after Tax 15,16,67,926 4,20,96,494
Brought forward Profit/Loss (+) 2,00,158 (+) 1,36,957
Excess/Short provision for taxation in earlier years (+) 32,987 (-) 9,66,707
Balance of Profit 15,19,01,071 4,32,00,158
Appropriations
Transfer to General Reserve 15,10,00,000 4,30,00,000
Carried forward Profit to Balance Sheet 9,01,071 2,00,158
Earning per Share 1,166,68 323.82
The Schedules referred to above form an integral part of the Profit & Loss Account.
This is the Profit & Loss Account referred to in our report of even date.

BALANCE SHEET AS AT 31 MARCH, 2016-15

Sche Figures as at
Particulars dule 31 Mar, 2016 31 Mar, 2015
No. Rs. Rs. Rs. Rs.
SOURCES OF FUNDS
Share Holders Funds
Share Capital A 1,30,00,000 1,30,00,000
Reserves & Surplus B 42,45,99,303 43,75,99,303 34,59,01,071 35,89,01,071
Loan Funds
Secured Loans C 60,06,91,795 42,91,26,132
Unsecured Loans D 5,17,37,891 65,24,29,686 8,33,86,203 51,25,12,335
Deferred Tax 4,69,84,472 4,21,51,888
Total 1,13,70,13,461 91,35,65,294
APPLICATION OF
FUNDS

86
Fixed Assets E
Gross Block 82,77,17,465 77,25,53,600
Less Depreciation 25,68,13,736 21,85,01,632
Net Block 57,09,03,729 55,40,51,968
Capital Work in Progress 15,50,361
Investments F 29,83,165 29,83,165
Current Assets, Loans
& Advances
Inventories G 34,19,06,868 32,74,12,543
Sundry Debtors H 8,30,13,168 2,23,61,498
Cash & Bank Balance I 15,60,07,572 7,38,91,461
Other Current Assets J 21,98,55,601 15,15,68,707
Loans & Advances K 1,62,18,624 1,39,66,691
81,70,01,823 58,92,00,900
Less: Current
Liabilities & Provisions
Current Liabilities L 12,59,82,205 14,33,60,960
Provisions M 12,78,93,051 9,08,60,140
25,38,75,256 23,42,21,100
Net Current Assets 56,31,26,567 35,49,79,800
Total 1,13,70,13,461 91,35,65,294
Contingent Liabilities N
Notes to the Accounts O

The Schedules referred to above form an integral part of the Balance Sheet.
This is the Balance Sheet referred to in our report of even date.

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2016-15
Figures for the year ended
Schedule
Particulars 31 Mar, 2016 31 Mar, 2015
No.
Rs. Rs.
INCOME
Sales 58,86,55,944 28,06,78,564
Threshing & Redrying Charges 12,65,95,125 14,78,16,539
Exchange Fluctuation Gain - 3,05,83,174
Profit on Forward Contracts / Underlying Options 1,29,86,303 -
Other Income P 5,29,84,780 14,39,13,688
License Fee from IT Park 14,53,31,345 13,69,87,132
Closing Stock 32,70,75,443 31,54,63,618
Total 1,25,36,28,940 105,54,42,716
EXPENDITURE
Opening Stock 31,54,63,618 22,16,60,415
Purchases 44,10,26,464 33,68,88,367
Manufacturing & Trading Expenses Q 9,79,48,079 8,58,87,573

87
Administrative Expenses R 4,62,04,417 4,28,88,670
Selling Expenses S 39,41,191 20,69,214
Rent on Buildings 66,92,952 69,28,277
Repairs to Buildings & Maintenance Charges 1,725,42,062 1,73,10,485
Premium Charges on FC Forward
Contracts/Underlying Options 3,88,96,275 -
Loss on Forward Contracts / Underlying Options - 80,06,077
Depreciation 3,83,14,867 3,66,68,496
Bad Debts Written off 15,19,504 -
Interest and Bank Charges 4,65,43,858 3,66,90,054
Loss due to Exchange Fluctuations 7,92,51,867 -
Total 1,13,30,45,154 79,49,95,628
Net Profit for the year 12,05,83,786 26,04,47,088
Profit Before Taxation (+) 12,05,83,786 (+) 26,04,47,088
Provision for Taxation
Current Tax (-) 3,65,00,000 (-) 7,15,00,000
Deferred Tax (-) 48,32,584 (-) 3,66,27,902
Fringe Benefit Tax (-) 5,37,000 (-) 6,31,000
Wealth Tax (-) 15,970 (-) 20,260
Profit / Loss after Tax 7,86,98,232 15,16,67,926
Brought forward Profit/Loss (+) 9,01,071 (+) 2,00,158
Excess/Short provision for taxation in earlier years (-) 32,987
Balance of Profit 7,95,99,303 15,19,01,071
Appropriations
Transfer to General Reserve 7,90,00,000 15,10,00,000
Carried forward Profit to Balance Sheet 5,99,303 9,01,071
Earning per Share 605.37 1,166.68

The Schedules referred to above form an integral part of the Profit & Loss Account.
This is the Profit & Loss Account referred to in our report of even date.

BIBLIOGRAPHY

 Financial Management, I.M.Pandey, Vikas Publishing House, 2003.

 Financial Management, M.Y. Khan and P.K.Jain, : Text and Problems, Tata
Mc Graw Hill Publishing Co, 2003.

88
  Financial Management,V.K.Bhalla, and Policy, Anmol publications Pvt.
Ltd., New Delhi.

 ML COMPANY ANNUAL REPORTS.

 www.indiantobacco.com

 www.pogakuvedika.com

 www.icra.in

www.agriculture

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