FINANCIAL HEALTH OF AN ORGANIZATION

(DR. REDDY’S LABORATORIES)

COMPETITORS CHOSEN- Cipla and Sun Pharmaceuticals

A company's bottom line profit margin is the best single indicator of its financial
health and long-term viability.
There are a number of financial ratios that can be reviewed to gauge a
company's overall financial health and to make a determination of the likelihood
of the company continuing as a viable business. The general trend of financial
ratios, whether they are improving over time, is also an important consideration.
1)- Liquidity:-Liquidity is a key factor in assessing a company's basic financial
health. Liquidity is the amount of cash and easily-convertible-to-cash assets a
company owns to manage its short-term debt obligations.
The two most common metrics used to measure liquidity are the current ratio and
the quick ratio.
Of these two, the quick ratio, also sometimes referred to as the acid test, is the
more precise measure, since, in dividing current assets by current liabilities, it
excludes inventory from assets and excludes the current part of long-term debt
from liabilities.
A quick ratio lower than 1.0 is a danger signal, as it indicates current liabilities
exceed current assets.

QUICK RATIO TABLE:-

2018 2017 2016 2015 2014

Reddy 2.26 2.44 2.41 2.64 2.70
Labs
Cipla 1.64 1.54 1.74 1.30 1.50
Sun 0.98 0.79 0.76 0.55 1.03
Pharma
Industry 1.72 1.70 1.70 1.75 1.61
average

CURRENT RATIO TABLE:-

2018 2017 2016 2015 2014
 Reddy 1.68 1.83 1.74 1.81 1.96
Labs
Cipla 2.57 2.33 2.03 1.66 1.92
Sun 0.81 0.78 0.68 0.53 0.79
Pharma
Industry 1.96 1.92 1.87 1.95 1.79
Avg.

From the above Financial Ratio table:-

a)- Quick Ratio of Reddy Labs is always greater than Cipla, Sun Pharma and
overall Industry Average as well. So Reddy Labs is performing better than its
competitors here.
Whereas, the Quick Ratio of Sun Pharma is always less than 1 which is a danger
signal for Sun Pharma.
b)- With reference to Current Ratio Reddy Labs is somewhat lagging behind
Cipla and Industry Average as it has lower Current Ratio but its situation is far
better than Sun Pharma(Whose Current Ratio is always less than 1).

2)- Solvency:-Refers to a company's ability to meet its debt obligations on an

ongoing basis, not just over the short term. Solvency ratios calculate a
company's long-term debt in relation to its assets or equity.

The debt-to-equity (D/E) ratio is generally a strong indicator of a company's long-

term sustainability, because it provides a measurement of debt against
stockholders' equity, and is therefore also a measure of investor interest and
confidence in a company. A lower D/E ratio means more of a company's
operations are being financed by shareholders rather than by creditors. This is a
plus for a company since shareholders do not charge interest on the financing
they provide.

Below is the table depicting D/E ratio of companies over the period of last 5
years.
2018 2017 2016 2015 2014
Reddy 0.22 0.20 0.27 0.29 0.29
Labs
Cipla 0.01 0.03 0.09 0.12 0.09
Sun 0.34 0.23 0.26 0.24 0.33
Pharma
 Industry 0.22 0.21 0.34 0.20 0.28
Avg.

Acc. To D/E ratio the performance and financial health of Reddy Labs is
relatively poor because it has higher D/E ratio than Cipla at all times whereas
higher D/E ratio than Sun Pharma at certain times. However its performance is at
par with overall Industry average.

3)- Operating Efficiency :- A company's operating efficiency is key to its financial

success. Its operating margin is the best indicator of its operating efficiency. This
metric indicates not only a company's basic operational profit margin after
deducting the variable costs of producing and marketing the company's products
or services; it thereby provides an indication of how well the company's
management controls costs.

Below is the table showing Operating Profit (Rs. in Crores) over a period of 5
years for all 3 companies.
2018 2017 2016 2015 2014
Reddy 1,329.90 1,745.60 2,404.00 2,391.10 2,761.70
Labs
Cipla 2,195.55 1,596.26 2,053.43 1,961.31 1,989.53
Sun 123.02 113.97 -434.98 -558.62 17.07
Pharma
Industry 1,241.56 1,687.78 1,651.52 1,332.45 1,330.52
Avg.

By looking at the Net Operating Profit it is clear that Reddy Labs has greater
Operating Profit than Cipla, Industry Average and Sun Pharma as well at all
times.
At certain times Sun Pharma has negative Operating Profit which is a danger
sign for the company.

4)- Profitability :- While liquidity, basic solvency and operating efficiency are all
important factors to consider in evaluating a company, the bottom line remains a
company's bottom line: its net profitability. Companies can indeed survive for
years without being profitable, operating on the goodwill of creditors and
investors, but to survive in the long run, a company must eventually attain and
maintain profitability.
The best method for evaluating profitability is net margin, the ratio of profits to
total revenues. A larger net margin, especially as compared to industry peers,
means a greater margin of financial safety, and also indicates a company is in a
better financial position to commit capital to growth and expansion.

Below is table depicting Net profit Margin(%) for companies over a period of last
5years.

2018 2017 2016 2015 2014

Reddy 6.05 14.24 13.26 16.77 19.86
Labs
Cipla 12.89 9.05 12.06 11.65 14.80
Sun -6.24 -0.29 -14.09 -18.38 -99.99
Pharma
Industry 10.01 14.50 13.96 10.89 -6.28
Avg.

Looking at the figures of Net Profit Margin it is clear that Financial Health of
Reddy Labs is better than Cipla and Overall Industry average at most of the
times and far better than Sun Pharma at all times.
Sun Pharma has negative Net Profit Margin at all times which is a danger
signal for the company.

5)- Return on Equity(ROE):- The return-on-equity ratio (ROE) is considered a

key ratio in equity evaluation because it addresses a question of prime
importance to investors, which is what kind of return that the company is
generating in relation to its equity. A company's ROE is a valuable indicator of
both how effectively the organization is utilizing its equity capital and how
profitable the company is for equity investors.
The importance of ROE in analyzing pharmaceutical companies stems from the
basic fact that pharmaceutical companies must expend massive amounts of
capital to bring their products to market. Therefore, how efficiently they employ
the capital that equity investors provide is indeed a key indicator of the
effectiveness of the company's management and of the company's ultimate
profitability.ROE is calculated by dividing a company's net income by total
shareholders' equity. Although a higher ROE figure is generally a better ROE
figure, investors should exercise caution when a very high ROE is a result of
extremely high financial leverage.

Below is the table showing ROE(%):-

2018 2017 2016 2015 2014

Reddy 4.80 11.93 11.67 15.79 20.71
Labs
Cipla 10.40 7.61 12.20 10.65 13.76
Sun -2.50 -0.10 -4.99 -6.48 -38.18
Pharma
Industry 6.18 9.91 10.88 10.64 4.85
Avg.

With reference to ROE the performance of Reddy Labs is better than Cipla and
overall Industry average at most of the times and better than Sun Pharma at all
times.

CONCLUSION:- On the basis of above discussions it is safe to say that Reddy

Labs perform better than Cipla and Sun Pharma in almost every parameter taken
into consideration. So financial health of Reddy Labs is better than both Cipla
and Sun Pharma. Also if we compare health with overall Industry Average, we
can say that Financial performance and Health of Dr. Reddy’s Laboratories is
above average.
The same analysis has also led to the conclusion that Sun Pharma has been loss
making for its investors. However, it is still not on the verge of being bankrupt
because of the low equity multiplier and interest expenses which indicate that
although loss making, Sun Pharmacy is not very unstable yet and can recover if
they focus on increasing the Operating Profit Margin by increasing the revenue
relative to their operating expenses.

Link to Excel Sheet of Balance Sheet, P&L Account and Financial Ratios :-
Submitted By :- 1) VAIBHAV RATHORE-2017A4PS0642H
2) AMAN SHARMA-2017A4PS0531H
3) A VENKAT SAI-2017A5PS1180H
4) SYED ABDULLAH NAEEM-2017A5PS1186H
5) ATISHYA GUPTA-2017A7PS1482H