1Introduction

11Background of the study:

of annual reports of Cipla Limited and Sun
Abstracted report is based the study on
Pharmaceutical Industries Limited for the five from 2003-2004 to
2008.
years 2007

The main objective of this study was to apply the concepts learned as a part of this
course and understand the business, financial health and the reporting practices
followed by these companies. As a part of this report we have tried to analyze the
current and past performance trends for the company and predict the future
performance and stock prices of the company. To achieve this we have analyzed
Revenue Trends, Profitability, Liquidity, Debts, Stocks, Cash Flows and
provided a
summary at the end of the report.
The scope of the report is limited to our understanding of the Financial Statements
based on the current course. The report has to be seen in its
completeness along
with the excel worksheet containing the past five years financial data of the two
firms and various ratios.

Introduction Cipla is leading pharmaceutical company in India and it is one of

a

the largest exporters drugs from India with exports contributing around 50% of
of
its annual revenues. It offers a comprehensive
range of products ranging from anti-
asthma, cardiac to critical care drugs. Over the past 3 years the domestic revenue
has grown at a rate of 12% and the export revenue at 27%.

Sun Pharmaceuticals is
Mumbai based multinational company
a
employing over
8,000 people and manufacturing facilities in 19 countries. It specializes in chronic
ailment drugs and has been consistently
recent acquisitions of
strengthening market share in India. The
Caraco Pharm has helped Sun to increase its
presence.
global

Cipla and Sun Pharmaceuticals are

comparable companies in terms of revenues
and profits which makes it easier to compare the two companies and understand
the concepts of Financial Statement
Analysis.
12 Review of Literature:
Literature of Global Context

Review of Literature refers to the collection of the results of the various researches
relating to the present study. It takes into consideration the research of the previous
which
researchers are related to the present research in any way. Here are the
reviews of the previous researches related with the present study:

Bollen (1999)

Conducted a study on Ratio Variables on which he found three different

uses of ratio variables in aggregate data analysis: (1) as measures of theoretical
concepts. (2) as a meansto control an extraneous factor, and (3) as a correction for
heteroscedasticity. In the use of ratios as indices of concepts, a problem can
arise if it is regressed on other indices or variables that contain a common
component. For example, the relationship between two per capita
measures may be confounded with the common population component in
cach variable. Regarding the second use of ratios, only under exceptional
conditions will ratio variables be a suitable means of controlling an extraneous
factor. Finally. the use of ratios to coreet for heteroscedasticity is also often
misused. Only under special conditions will the common form forgers
soon with ratio variables correct for heteroscedasticity. Alternatives
to ratios for cach of these cases are discussed and evaluated.

Cooper (2000)
Conducted a study on Financial Intermediation on which he observed that
the quantitative behavior of business-cycle models in which the intermediation
process acts either as a source of fluctuations or as a propagator of real shocks. In
neither case do we find convincing evidence that the intermediation process is
an important clement of aggregate fluctuations. For an cconomy driven
by intermediation shocks, consumption is not smoother than output,
is correlated with output, variations in the capital stock
investment negatively
quite large. and interest rates are procyclical. The model economy thus fails to
are

match unconditional monents for the U.S.

economy.
Maria Zain ( 2008)
In this articles he discuss about the return on assets is an important percentage that
shows the company's ability to use its assets to generate income. He said that a
high percentage indicates that company's is doing a good utilizing the company's
assets to generate income. He notices that the following formula is one method of
calculating the return on assets percentage. Return on Assets= Net Profit/Total
Assets. The net profit figure that should be used is the amount of income after all
expenses, including taxes. He enounce that the low percentage could mean that the
company may have difficulties meeting its debt obligations. He also short explains
about the profit margin ratio - Operating Performance .He pronounces that the

profit margin ratio is expressed as a percentage that shows the relationship between
sales and profits. It is sometimes called the operating performance ratio because
it's a good indication of operating efficiencies. The following is the formula for
calculating the profit margin. Profit Margin = Net Profit/Net Sales.

James Clausen (2009)

In this article he barfly express about the liquidity ratio. He Pronounce that it is
analysis of the financial statements is used to measure company performance. It
also analyses of the income statement and balance sheet. Investors and lending
institutions will often use ratio analyses of the financial statements to determine a
11 company's profitability and liquidity. If the ratios indicate poorperformance.
investors may be reluctant to invest. Therefore, the current ratio or working capital
ratio, measures current assets against current iabilities. The current ratio measures
the company's ability to pay back its short-term debt its
obligations with current
assets. He thinks a higher ratio indicates the company is better equipped to pay off
short-term debt with current assets. Wherefore, the acid test ratio or quick ratio,
measures quick assets against current liabilities. Quick assets are considered assets
that can be quickly converted into cash. Generally they are current assets less
inventory.
Maria Zain ( 2008)

In this articles he discuss about the return on assets is an important percentage that
shows the company's ability to use its assets to generate income. He said that a
high percentage indicates that company's is doing a good utilizing the company's
assets to generate income. He notices that the following formula is one method of
calculating the return on assets percentage. Return on Assets = Net Profit/Total

Assets. The net profit figure that should be used is the amount of income after all
expenses, including taxes. He enounce that the low percentage could mean that the
company may have difficulties meeting its debt obligations. He also short explains
about the profit margin ratio -Operating Performance .He pronounces that the
profit margin ratio is expressed as a percentage that shows the relationship between
sales and profits. It is sometimes called the operating performance ratio because
it's a good indication of operating efficiencies. The following is the formula for
calculating the profit margin. Profit Margin= Net Profit/Net Sales.

James Clausen (2009)

In this article he barfly express about the liquidity ratio. He Pronounce that it is
analysis of the financial statements is uscd to measure company performance. It
also analyses of the income statement and balance sheet. Investors and lending
institutions will often use ratio analyses of the financial statements to determine a
I1 company's profitability and liquidity. If the ratios indicate poor performance,
investors may be reluctant to invest. Therefore, the current ratio or working capital
ratio, measures current assets against current liabilities. The current ratio measures
the company's ability to pay back its short-term debt obligations with its current
He higher ratio indicates the company is better cquipped to pay off
assets. thinks a
short-term debt with current assets. Wherefore, the acid test ratio or quick ratio,
measures quick assets against current liabilities. Quick assets are considered assets
that can be quickly converted into cash. Generally they are current assets less
inventory.
Gopinathan Thachappilly (2009),
In this articles he discuss about the Financial Ratio Analysis for Performance
evaluation. It analysis is typically done to make sense of the massive amount of
numbers presented in company financial statements. It helps evaluate the
performancc of a company, so that investors can decide whether to invest in that
company. Here we are looking at the different ratio categories in separate articles
on different aspects of performance such as profitability ratios, liquidity ratios,
debt ratios, performance ratios, investment evaluation ratios.

Literature on Indian Context

RammohanRao& et.al (1975)

In this study howfar the capital markets in India were competitive. Their study
examined the decisions about internal and external finance as interrelated and
consequent upon a choice of the structure of current and fixed assets. Sccondly,
they analyzed earnings pattem of different types of funds to see if the
the

competitiveness hypothesis can sustain. They coneluded that a firm's ability to

borrow was constrained by the rise associated with the proportion of debt in the

capital structure. If the ratio was high improved the firm's

then internal funds

ability to borrow. Similarly if the financial leverage (Debt or equity ratio) was
lower than the institutionally determincd leverage. The borrowing was facilitated.
But if the leverage was the institutionally determined maximum then borrowing
was inhibited.
Vasanthamani (1982)

In her study "The Financial Performance of Lakshmi Machine Works Limited".

The objective of the study was to analyze the financial performance of Lakshmi
machine work with a view to analyze the future of performance potentials. The
study covered the period from 1978-1982. The liquidity position ofthe company
showed that the company was able to meet the creditors out of its own current
assets. The quick ratio also revealed that the quick liabilities were met at of quick

assets without any difficulty.

Rajeswary (1990)

In her study entitled Financial Performance of Precot Mills Limited" has

concluded that the financial position and operating efficiency of the company was

satisfactory where as the margin or safely was not stable solvency position was not
satisfactory and the earning capacity was minimum.

Parvathi (1990)

In her "Financial Performance Analysis Hindustan Photos Films Ooty" for the year
1990-1996, concluded that the gross profit has shown as increasing trends, long
term solvency ofthe company, debt equity ratio was not satisfactory.

Sankar.T.L& et.al (1995)

In their study entitled, "Financial Performance of State Level Public Enterprises"

suffers from staggering investment,. poor prof+tability, unnecessary investment,
poor project planning and inadequate financial control.
L3Objectiveof thestudy:
The specific objectives of the study are as follows:
T o understand the concept of financial
statement analysis.
T o understand the theoritical aspect ofliquidity and profitibility.
To analyze the liquidity of the medical companies.
To analyze the profitibility of the medical companies.
T o disclose to the extent possible other information related to the financial
statements users

Assessment of Past Performance

Past Performance is a good indicator of future performance. Investors or

Creditors are interested in the trend of past sales, cost of good sold, operating
expenses, net income, cash flows and return on investment. These trends offer a
means for judging management's past performance and are possible indicators
of future performance Past perfomance is a good indicator of future
performance for Investors or creditors.

Assessment of current position

Financial statement analysis shows the current position of the firm in terms of
the types of assets owned by a business firm and the different liabilities due
against the enterprise.

Prediction of profitability and growth prospects

Financial statement analysis helps in assessing and predicting the eaming
prospects and growth rates in carning which are used by investors while
comparing investment alternatives and other users in judging earning potential
of business enterprise.

Prediction of bankruptey and failure

Financial statement analysis is an important tool in assessing and predicting

bankruptcy and probability of business failure.
 Assessment of the operational efficiency

Financial statement analysis helps to assess the operational efficiency of the

management of a company. The actual performance of the firm which are
revealed in the financial statements can be compared with some standards set
earlier and the deviation of any between standards and actual performance can
be used as the indicator of efficiency of the management.

Therefore, the main purpose of financial statement analysis is to utilize

information about the past performance of the company in order to predict how
it will fare in the future. Another important purpose of the analysis of financial
statements is to identifjy potential problem areas and troubleshoot those.

14Databaseand Methodology:
Database:
The entire study is based on secondary Database which is collected from the
Websites of the respective medical company.

Period of the study:

The study period is started from 1st April 2012 and ended on 31Smarch.It consists
of 3 of and financial year.

Sample Companies:
This study has been conducted based on following two medical companies of
Pharmaceutical Industry. These are- 1) Sun Pharmaceutical Co.

2) Cipla Pharmaccutical Co.

Methodology
The research methodology for the secondary research undertaken has been
provided as using qualitative as well as quantitative approaches.

The analysis and findings selection highlights the result of the secondary study
while a discussion and the conclusion section provides a comprehensive analysis of
the literature review for the purpose of the project. Conclusively the
recommendation for proper development in the Pharmaceutical Industry had been
provided along with the limitation of the current research can be undertaken to the
research mode comprehensive.

Here we use the annual reports of the Pharmaceutical Industry for the collection,
classification and comparison of relevant data. On this study, different chart, ratio
analysis are performed .It is to be noted that Microsoft Office 2007 is used to
complete the entire database.
15Limitations of thestudy:
The study conducted and done is analytical subject to the following limitations:

The study is mainly carried out based on the secondary data providedin
the financial statements.
This study is based on the historical data and information provided in the
annual reports therefore it may not be a future indicator.
There may be some fractional difference in the calculated ratio.
As the study was for shorts span of 8 weeks and due to lack of time other
areas could not be well focused.

Although analysis of financial statement is essential to obtain relevant information

for making several decisions and formulating coporate plans and policies, it
should be carefully performed as it suffers from a number of the following
limitations.

Mislead the user

The accuracy of financial intormation largely depends on how accurately

financial statements are prepared. If their preparation is wrong, the information
obtained from their analysis will also be wrong which may mislead the user in
making decisions.
Not useful for planning

Since financial statements are prepared by using historical financial data,

therefore, the information derived from such statements may not be effective in
corporate planning, if the previous situation does not prevail.

Qualitative aspects
Then financial statement analysis provides only quantitative information about
the company's financial affairs. However, it fails to provide qualitative information
such as management labor relation, customer's satisfaction, and management's
skills and so on which are also equally important for decision making.

Comparison not possible

The financial statements are based on historical data. Therefore comparative

analysis of financial statements of different years cannot be done as inflation
distorts the view presented by the statements of different years.

Wrong judgment
The skills used in the analysis without adequate knowledge of the subject
matter may lead to negative direction. Similarly, biased attitude of the analyst may
also lead to wrong judgment and conclusion.

1.6 Chapter Planning:

1. Introduction
2 . Conceptual Framework
3 . Data Analysis and Findings
4 . Conclusion and Recommendation
5. Bibliography