A DESCRIPTIVE STUDY OF CAPITAL STRUCTURE AND PROFITABILITY OF

SELECTED PHARMACEUTICAL COMPANIES IN INDIA

-Mr. Jaykishan P. Arora1 and Dr. Ankur D. Amin2

____________________________________________________________________

ABSTRACT

Capital structure decision is one of the most crucial decisions since the profitability of any company
is directly affected by such decision. An attempt has been made in this paper is to descriptive study
of capital structure (measured by Debt-Equity ratio) and profitability (measured by Net Profit ratio,
Return on Capital Employed and Return on Net worth and Earning per Share). A sample of ten
pharmaceutical companies have been taken and secondary data from the financial report of the
selected companies for the period of seven years from 2011-12 to 2017-18 was considered. The
result revealed that there no significant relationship between capital structure and profitability.

Key words: Capital structure, Profitability, Debt-Equity Ratio, Net Profit Ratio, Return on Capital
Employed, Return on net Worth, Earning per Share.

1
Research Scholar, P G department of Business Studies, Sardar Patel University, Vallabh Vidyanagar, Gujarat.
2
Assistant Professor, P G department of Business Studies, Sardar Patel University, Vallabh Vidyanagar, Gujarat,
*Corresponding Author
INTRODUCTION

As we know that Capital is the crucial part of any business. The amount of capital employed for
acquiring assets is called capital (capitalization). Company has to take proper care while
capitalization, so that there should not be over capitalization or under capitalization. Because both
the situation over or under capitalization will affect earning of the company. (Paramasivas &
Subramasivas, 2009)

Company of various size and nature choose different type of Capital source. If The Company is of
small and medium sized companies are generally using their internal capital, but large size business
prefers external capital. External capital is further divided in two type’s one is capital stock
(ownership capital) and Creditor-ship securities (debt capital). In capital stock, types of securities
included are equity share, preference share, no par stock and deferred stock for which dividend is
generally compensate on the basis of earning of company. In creditor-ship securities consist of
debenture stock and bonds for which compensation is paid, percentage of it is always fixed in
advance and lower then capital stock compensation. (Paramasivas & Subramasivas, 2009)

The combination of creditor-ship securities and capital stock making capitalization is called capital
structure. People sometime misunderstood between financial structure and capital structure. In
financial structure long term securities and short term securities both are included, while in capital
structure only long term securities is included. Capital structure included various types of long term
securities like equity stock, preference stock, debenture stock and bond etc. in simple word, capital
structure means is mixer of debt stock and equity stock of the company total capitalization.
Company has to make suitable combination of debt stock and equity stock after viewing various
factors like risk, liquidity etc so that increase the earning of equity shareholder. Combination
between debt stock and equity stock, where cost of finance should be minimum with thereby lead to
increase value of the firm is called optimum capital structure. (Paramasivas & Subramasivas, 2009)

Indian pharmaceutical industry is supplying various vaccines, generic demand and all other
medicine to satisfy global demand. Rank second to world largest share in the list of pharmaceuticals
and biotech workforce in different countries. Overall value of pharmaceutical sector in 2017 is US$
33 billion. Majority of Indian drug is supplied to US, in 200 different counties. Global export of
generic drug is 20 % in volume. Even government is planning for venture capital investment of
US$ 640 million to strengthen pharmaceutical infrastructure and to boost discovery. Government
wants to make India a major hub for end to end drug discovery for the ‘pharma vision 2020’.
(IBEF)

REVIEW OF LITERATURE

To getting adequate knowing and understanding for the relationship between capital structure and
its impact on profitability some of recent research paper is been studied pharmaceutical industry
and other industry also. Following are the research review relate to capital structure.

Dr. Bhavik U. Swadia (2018) research study was of analysis profitability measures and comparing
relationship between the selected 14 administrated pharmaceutical companies. Annual report and
various proposed research study is been used for research. Financial period from 2007-08 to 2016-
17 is been take i.e. ten year period is been taken. For analysis various profitability ratio and
ANOVA test is used. Outcome of the study is that company has good position in 2008 but after that
it was on declining stage and Period of 2015 was very weak. The reason stated that company has
faced this due to high COGS in compare to revenue. Impact of this in future is that shareholder will
get less dividend due to low net profit. (Swadia, 2018)

Dr. M. Muthu Gopalakrishnan & Amal Vijay A K (2017) his research paper was descriptive in
nature. Study has been done for understand the concept, analyzing and comparison of risk and
return on equity. Sample selected on the basis of listed 10 companies in National stock exchange as
per Nifty pharma index. Period of study was limited to five year from 2012to 2017, because of the
objective of study based on current scenario. For analysis and comparision collected secondary
data. Statistical tools used for analyses were mean, standard deviation, co efficient of variance,
correlation coefficient, beta and alpha. Finding and Conclusion of study was that sun pharma was
giving more return but also most risky in compare to other selected companies. (Amal & M. Mutha,
2017)

Sinha Mintibahen Bijendra, Dr Deepika Singhvi (2017) studied profitability of selected major
four pharmaceuticals companies. Period of study was of four year from 2011 to 2014. Data
collected through annual report of the companies and used different website also. For study six
profitability parameters was used like gross profit margin, operating profit margin, net profit
margin, return on capital employed, return on net worth and earnings per share were used.
Statistical tool mean, standard deviation and ANOVA test were used. Conclusion stated that before
2009 it was negative trends for the company in profitability aspect, after that profitability trends
were positive. Suggested that focus on R&D, operating profit and gross profit to get fruitful result
in future. (Sinha & Singhvi, 2017)

Shalini R, Dr. Mahua Biswas (2017) study of research paper is of factors determining the capital
Structure decisions of selected ten pharmaceutical companies as per market capitalization. Study is
descriptive in nature. Data was collected from financial statement of selected companies. Period of
study was of five year from 2012 to 2016. Used debt equity ratio with various factor like
profitability, liquidity, size, tangibility and business risk to know the outcome. Study of research
revealed that the debt equity of companies depended significantly on the factors like size of
investment and tangibility and not so significant on profitability, liquidity and business risk factors.
(R & Biswas, 2017)

V.Vijayalakshmi and M.Srividya (2014) researcher has to analysis of profitability and factor
influencing profitability. Selected ten companies on the basis of data availability and convenience
sampling method. Period of study was five year i.e. from 2010 to 2014. Secondary data were used
for research study for this data is collected from books, journals, annual reports and news-papers.
Used ratio analysis like gross profit ratio, earnings per share, return on equity, net profit ratio and
operating ratio. Statistical techniques like mean, standard deviation, co-efficient of variance,
multiple regressions and analysis of variance to know the profitability position of the companies.
Finding state that net profit ratio has significant effect on the net profit ratio. (Vijayalakshmia &
Srividyab, 2014)

Harbinger Singh and Parveen Kumar researchers (2014) have tried to evaluate the capital
structure of three leading oil refinery distributors of public sector in India. Sample selected as per
leading oil refinery is Hindustan Petroleum Corporation Limited (HPCL), Indian Oil Corporation
Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL). Using secondary data for
analysis for those Annual reports of selected corporations has taken. Covered time period of five
year from 1998-99 to 2007-2008. Researcher analysis the capital structure of selected corporation.
Statistical technique is used like mean growth rate and co- efficient of variations. For analysis
various ratio related to capital structure is done through Debt-Equity, Proprietary Ratio, Solvency
Ratio, Fixed Assets Ratio, interest covering ratio, capital gearing ratio and financial leverage.
Result of the finding was that the entire three corporations is using trading on equity in capital
structure and have increased earning for equity shareholder. Finding says that BPCL is managing
debt- equity proportion properly and also managing reserve capital more as compare to HPCL and
IOCL. Suggestion was also given that company can use more debt and also further increase the
value of equity share holder. (Singh & Kumar, 2014)

OBJECTIVE OF THE STUDY

 To express the capital structure and profitability analysis of selected pharmaceutical
companies in India.
 To find risk and return factor of investor of selected pharmaceutical companies.

RESEARCH METHODOLOGY

This Study is descriptive in nature. To express the capital structure, data of debt-equity ratio used as
independent variable and profitability ratio like net profit ratio, return on capital employed, and
return on net worth and Earning per share were taken as dependent variable. Various websites and
annual financial statements of the selected companies are used for analysis of profitability of
selected companies. Period of the study is of seven years, which start from the financial year 2011-
12 to 2017-18. Population of the study is registered pharmaceutical companies of India in
NSE/BSE. For analysis and interpretation ten companies of pharmaceutical companies has been
taken as a sample based on data availability by using convenient sampling technique. The sample
companies are Sun Pharmaceutical Industries Ltd, Dr. Reddy's Laboratories Ltd, Cipla Ltd, Divis
Laboratories Ltd, Aurobindo Pharma Ltd, Piramal Enterprises Ltd, Biocon Ltd, Lupin Ltd, Cadila
healthcare Ltd and Torrent pharmaceuticals Ltd.
RESULTS AND DISCUSSION
To comply with the core objective, ratio analysis is been used for collected through website and
used statistical tool mean and standard deviation by using MS excel.

Table 1.1: Debt- Equity Ratio

(Figures in times)
Companies /
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Mean St. Dev.
Year
Sun 0.01 0.01 0.33 0.24 0.26 0.23 0.34 0.20286 0.13829
Cipla 0 0.11 0.09 0.12 0.09 0.03 0.01 0.06429 0.04962
Dr.Reddy 0.23 0.2 0.29 0.29 0.27 0.2 0.22 0.24286 0.03988
Divis 0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.01143 0.00378
Aurobindo 0.98 0.94 0.7 0.54 0.55 0.34 0.37 0.63143 0.25485
Piramal 0.11 0.42 0.64 0.33 1.02 0.54 0.56 0.51714 0.283
Biocon 0.07 0.05 0.04 0.03 0.06 0.02 0.01 0.04 0.0216
Lupin 0.27 0.11 0.02 0 0.03 0.04 0 0.06714 0.0969
Candela 0.43 0.57 0.39 0.28 0.16 0.42 0.34 0.37 0.12884
Torrent 0.35 0.35 0.42 0.84 0.48 0.5 1.13 0.58143 0.29379
Source: - Compiled from annual reports of companies.

The above table 1.1 depicts the debt-equity ratio of selected pharmaceutical companies in India.
Almost all the selected companies show the unstable trend of debt-equity ratio, but common point is
that all the companies is using more equity than debt. May be earning of pharmaceutical industry is
more unstable or companies do not want to take risk, so most of the company prefer equity share.
Divis, Cipla, Biocon, Lupin, Sun and Dr reddy companies using least debt. Companies like
Aurobindo, Piramil, candela and Torrent using debt which indicates that the companies want to try
to use the cheaper source of finance and thereby increase in their earnings. In year 2017-2018
torrent company is using more debt. only the mean score of Aurobindo is 0.63143 , means company
using average more debt because mean is high in compare to other companies that state that
company want to increase its earning with using low bearing cost & lowest mean score 0.01143 of
divis state that company do not want to take any risk and increase its earning. standard deviation of
is 0.29379 of torrent which stated that company want to bear the more burden of financial risk. In
case of Divis this ratio is very low standard deviation 0.00378 indicating that the company wants to
retain control over the company and also does not want to bear any burden of financial risk means
believe in stability and safety from insolvency.

Table 1.2: Net Profit Ratio

(Figures in %)
Companies /
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Mean St. Dev.
Year
Sun 42.27 21.23 -99.99 -18.38 -14.09 -0.29 -6.22 -10.781 44.7156
Cipla 16.1 18.37 14.8 11.65 12.06 9.05 12.89 13.56 3.10409
Dr.Reddy 13.53 15 19.86 16.77 13.26 14.24 6.05 14.1014 4.22234
Divis 29.59 28.72 31.49 27.46 29.76 26.17 22.78 27.9957 2.86394
Aurobindo -0.99 9.14 16.48 18.73 17.74 17.76 17.59 13.7786 7.27453
Piramal 11.33 -16.5 -20.07 15.52 30.17 20.62 15.76 8.11857 19.0031
Biocon 16.42 14.22 14.97 16.11 16.01 20.06 9.85 15.3771 3.05528
Lupin 14.93 17.69 25.99 24.58 25.23 24.87 13.33 20.9457 5.43439
Candela 20.86 13.56 22.35 24.05 28.97 20.48 18.77 21.2914 4.73758
Torrent 14.99 19.75 22.65 17.93 32.04 18.59 11.34 19.6129 6.54938
Source: - Compiled from annual reports of companies.

From the above table 1.2, it is clear that proportion of net profit earned by selected companies is
different as the mean score of NPR for each company varies significantly. NPR for each company
in every year shows almost unstable direction means there is no proper increase or decrease in NPR
in series of year. Divis has the highest NPR as mean score of NPR is 27.9957% which indicate that
this company is in better position to cover with the market risk and it can also increase its earning
by using more debt in capital structure for reducing overall cost of capital of the company. While
sun pharma has negative NPR -10.781 % during the study period as it suffers from huge loss in the
year 2013-14. Company should not use debt in capital structure because of its has less net profit and
it’s recommend that company should use totally equity share so that risk factor further reduced to
make positive NPR or increase sales and decrease unnecessary expenses to cope up with the current
situation. Taking into consideration standard deviation, Sun and Piramil company has more
standard deviation 44.7156 and 19.0031 indicates that both these companies earning net profit at
extremely fluctuating every year. While standard deviation of Divis Company is lowest amongst all
selected companies, which states that company has greater stability in net earnings.

Table 1.3: Return on Capital Employed

(Figures in %)
Companies /
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Mean St. Dev.
Year
Sun 20.92 6.38 -27.91 -5.58 -4.23 0.9 -2.28 -1.6857 14.6769
Cipla 14.38 16.33 13.21 10.17 11.9 9.39 13.93 12.7586 2.44081
Dr.Reddy 12.53 15.98 18.59 14.25 10.61 13.14 6.13 13.0329 3.97561
Divis 24.23 23.12 25.04 22.87 24.55 25.03 19.79 23.5186 1.85521
Aurobindo -1.27 12.22 22.29 24.14 22.52 25.92 18.05 17.6957 9.51627
Piramal 1.12 1.51 -3.75 2.92 5.86 4.51 2.04 2.03 3.05828
Biocon 11.32 11.55 12.61 13.04 5.91 7.67 3.45 9.36429 3.70651
Lupin 19.5 24.29 31.67 25.64 23.05 27.53 11.17 23.2643 6.53243
Candela 19.15 12.82 19.33 23.81 29.1 8.23 11.63 17.7243 7.33016
Torrent 17.78 24.35 24.08 12.02 30.12 12.38 5.45 18.0257 8.65134
Source: - Compiled from annual reports of companies.

Table 1.3 shows the performance of selected companies in terms of ROCE. This ratio shows
unstable trend every year for each company. Among all the companies sun pharma and parimal are
having lowest mean, It means that companies fails to utilize total capital efficiently that means
companies is weak in earning capacity in compare to capital employed . Divis and Lupin are having
the highest return on their capital employed with a mean of 23.5186 % and 23.2643 % respectively
indicating that these companies are using their capital efficiently and economically. Standard
deviation of Divis Company has the minimum standard deviation 1.85521 indicating that this
company is consistent stability in terms of earning capacity on capital employed.

Table 1.4: Return on Equity/ Net Worth

(Figures in %)
Companies /
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Mean St. Dev.
Year
Sun 21.54 6.63 -38.13 -6.48 -4.99 -0.1 -2.5 -3.4329 18.0392
 Cipla 14.9 17 13.76 10.65 12.2 7.61 10.4 12.36 3.14364
Dr.Reddy 13.58 16.25 20.71 15.79 11.67 11.93 4.8 13.5329 4.93784
Divis 25.1 23.94 26.09 23.78 25.46 19.47 14.59 22.6329 4.15827
Aurobindo -1.7 16.87 29.21 28.29 23.69 20.23 18.15 19.2486 10.3873
Piramal 1.17 -2.19 -4.05 3.25 8.71 5.38 2.42 2.09857 4.3391
Biocon 12.19 12.49 13.65 13.98 6.14 7.94 3.53 9.98857 4.10614
Lupin 21.53 26 33.3 26.55 23.76 21.25 8.51 22.9857 7.56585
Candela 25.79 17.12 24.89 28.08 32.46 10 14.08 21.7743 8.1576
Torrent 23.85 33.09 33.29 23.03 47.01 19.17 10.57 27.1443 11.7887
Source: - Compiled from annual reports of companies.

The table 1.4 discloses the return on equity capital. Information available on the above table
shows the decreased in 2017-18 financial performance in compare to first year of study period
each company has earned satisfactory return on investment (except aurobindo). Sun pharma has
negative mean, Means Company has not good return compare to equity investment. Piramil has
minimum mean score of this ratio 2.09857 %, which states that average earning is not
satisfactory in compare to equity investment. Torrent, divis, aurobindo, lupid and candela has
higher mean then other company, which states that their average earning is good in respect of
equity employed. While cipla, bicon, divis and piramal has low standard deviation means having
more stability in return on net worth. Sun pharma and torrent company has higher standard
deviation stated that fluctuating rate is more in this company. Investor of higher standard
deviation company has to face more risk of price change.

Table 1.5: Earning Per Share

(Figures in %)
Companies /
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Mean St. Dev.
Year
Sun 16.4 5 -13.7 -6.1 -4.5 -0.1 -2.1 -0.7286 9.4852
Cipla 14 18.77 17.29 14.71 18.21 12.13 18.25 16.1943 2.571
Dr.Reddy 53.83 74.54 113.67 98.6 79.42 83.05 34.19 76.7571 26.5484
Divis 41.15 46.06 59.65 63.82 41.73 39.68 32.76 46.4071 11.2525
Aurobindo -1.46 17.04 40.24 52.01 27.85 29.16 30.94 27.9686 16.9525
Piramal 7.7 -13.4 -21.4 21.6 61.49 44.83 28.52 18.4771 29.9379
 Biocon 13.04 14.08 16.81 18.06 18.78 26.45 4.04 15.8943 6.79757
Lupin 18.02 28.19 51.88 53.41 62.92 69.63 29.76 44.83 19.5294
Candela 32.11 24.35 44.13 62.08 19.9 6.47 10.66 28.5286 19.4923
Torrent 36.79 64.58 45.05 36.83 102.99 50.48 28.48 52.1714 25.2432
Source: - Compiled from annual reports of companies.

Above table shows the Earning per Share of selected companies. Above Table disclose that there is
unstable earning per share of all the companies. The higher average earning per share of Dr. Reddy
is 76.7571 which benefit the equity investor to know that company is earning good in respect of Per
Share and the lowest mean is of Biocon. Sun pharma share holder facing highest risk because it’s
mean is negative. Cipla has lowest standard deviation means that has stability in respect of earning
per share so share holder faces low risk. In opposite piramal has highest standard deviation means
the earning is more unstable, so shareholder faces high risk in Earning per share.

CONCLUSION
This research study stated the relationship between capital structure and profitability among
selected companies. Debt to equity ratio as independent variables used to examine the capital
structure, while NPR, ROE and EPS as dependent variables used to study profitability.

Debt to equity ratio is unstable for every company. Companies are generally using equity then
debt because the profitability is also unstable. Among all the companies, Companies like
Aurobindo, Piramil, candela and Torrent using debt to some extent but it’s profitability of only
candela and torrent is only good enough to cope up the risk. Aurobindo and piramil is using debt
and there earning is low and unstable, which state that shareholder of this companies faced more
risk in compare to other companies. As far as we concerned about the profitability of the selected
companies, the entire variable is facing problem of low profitability except Dr. Reddy's
Laboratories Ltd, Divis Laboratories Ltd, Aurobindo Pharma Ltd, Lupin Ltd, Cadila healthcare
Ltd and Torrent pharmaceuticals Ltd.

The capital structure is negatively correlated with the profitability of the selected companies as
which is found through applying correlation test except company divis. It means that if debt content
is increased it will adversely affect the profitability of selected companies. The result revealed that
there no significant relationship between capital structure and profitability
SUGGESTION
Sun pharma and piramil suffers from extreme losses over the study period so they required to
stop excess use of debt and should also find others ways to improve the profitability. Divis
Company has greater scope of using more debt to increase the profitability because it’s earning is
good enough to cope of with debt risk. While directly help the shareholder to increasing the
earning of shareholder as profitability and stability aspect is good in compare to other selected
companies.

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Journal of Business Administration Research , volume 7, 27-31.

Vijayalakshmia, V., & Srividyab, M. (2014). A STUDY ON FINANCIAL PERFORMANCE OF

PHARMACEUTICAL INDUSTRY IN INDIA. Journal of Management and Science , Volume 4 (Issue 3), 36-54.

Amal, V. A., & M. Mutha, G. (2017). A Study on Risk Return Analysis of Pharmaceutical Industries in
Indian Stock Market. Imperial Journal of Interdisciplinary Research (IJIR) , Volume 3 (Issue 5), 1869-1874.
IBEF. (n.d.). Retrieved from https://www.ibef.org/industry/indian-pharmaceuticals-industry-analysis-
presentation

MONEYCONTROL. (n.d.). Retrieved from www.moneycontrol.com

Paramasivas, C., & Subramasivas, T. (2009). Financial Management. Jaipur: New Age International
Publishers.

R, S., & Biswas, M. (2017). An Empirical Study on the Capital Structure Decisions of Select
Pharmaceutical Companies in India. IOSR Journal of Business and Management (IOSR-JBM) , volume 19
(issue 5), 26-30.

Singh, H., & Kumar, P. (2014). Capital Structure Analysis of Oil Industry – An Empirical Study of HPCL,
LOCL & BPCL (INDIA). International Journal of Research in Finance & Marketing , Volume 4 (Issue 6), 18-
25.

Sinha, M. B., & Singhvi, D. (2017). Research Paper on Liquidity & Profitability Analysis of the
Pharmaceutical Companies of India. International Journal of Scientific Research and Management
(IJSRM) , Volume 5 (Issue 8), 6717-6724.

Swadia, B. U. (2018). A Comparative Study of Profitability of Selected Pharma Companies of India.

Journal of Business Administration Research , volume 7, 27-31.

Vijayalakshmia, V., & Srividyab, M. (2014). A STUDY ON FINANCIAL PERFORMANCE OF

PHARMACEUTICAL INDUSTRY IN INDIA. Journal of Management and Science , Volume 4 (Issue 3), 36-54.