A

PROJECT REPORT
ON

RISK MANAGEMENT
AT

DR. REDDY’S LABORATORIES LTD.

Submitted In Partial Fulfillment of the Requirement for

the Award of the Degree of

“BACHELOR OF BUSINESS ADMINISTRATION”

Submitted By
Mr. MIR ABDULLAH ANNASSER
ROLL. NO: 1220-21-684-061

DEPARTMENT OF BUSINESS MANAGEMENT

HYDERABAD SCHOOL OF BUSINESS
(AFFILIATED TO OSMANIA UNIVERSITY)
HYDERABAD-500085
2021-2024
 DECLARATION

I hereby declare that the project/ dissertation entitled, “RISK

MANAGEMENT AT DR. REDDY’S LABORATORIES LTD. was carried out

and written by me in Hyderabad School of Business This work has not been

submitted for the award of any degree or diploma or certificate nor has been

submitted elsewhere for the award of any degree or Diploma.

Mr. MIR ABDULLAH ANNASSER

Roll. No: 1220-21-684-061

Place: Hyderabad
Date
 ACKNOWLEDGEMENTS

I would like to thank, ________________________, Principal and my Internal

Guide Mr. SOLOMON RAJ of “HYDERABAD SCHOOL OF BUSINESS” for
giving me such an opportunity to carry out this project, I am thankful to all the faculty
members of our college for co-operation and their encouragement during the course of
project work.

The co-operation I received from the wide cross-section of employees of Dr.

Reddy’s Lab makes it difficult to single out individuals for acknowledgement.
However, I am particularly indebted to Mr. Srinivas Reddy, Asst. Manager for
allowing me to carry out my project work in the organization, for apprising me of the
situation with necessary background and helping me to complete this project work. I
am also thankful to the staff.

I am also thankful to all those who have incidentally helped me,

through their valued guidance, co-operation and unstinted support during the
course of my project.

I am thankful to my parents and all my friends who are co-operated to

complete this project

Mr. MIR ABDULLAH ANNASSER

 ABSTRACT
The word risk is derived from an early Italian word “risicae” which means “to

dare”. The story of mankind is a story of threats and opportunities, of braving the

risks and getting the rewards in the process. We may define risk emanating from a

situation as something which throws a challenge to an act or not to act with regard to

an event or happening.

In today’s fast developing Indian economy, among the various financial

institutions, the share market has become a major source of investment for every

category of investors ranging from big institutional investors to small individual

investor.

Unlike earlier days when common man used to invest his savings in less risky

and well trusted financial institutions and instruments like public and private sector

Banks, Government Bonds and policies etc., today’s investors have realized that stock

market is a crucial source of earning quicker and higher returns on their investments

as compared to the returns earned in traditional investment methods.

 LIST OF CONTENTS

S.NO CONTENTS PAGE.NO

List of Tables i

List of Graphs ii

CHAPTER - 1 INTRODUCTION 1 – 10

CHAPTER -2 REVIEW OF LITERATURE 11 – 42

CHAPTER -3 INDUSTRY & COMPANY PROFILE 43– 62

CHAPTER - 4 DATA ANALYSIS AND INTERPRETATION 63 - 74

CHAPTER - 5 FINDINGS, SUGGESTION & CONCLUSION 75 – 78

SUMMARY 79

BIBLIOGRAPHY 80
 LIS T OF TABLES
S. NO TABLES PG. NO

1 Forex Exposure to Interest Rate (Millions) 64

2 CALCULATION OF STANDARD DEVIATION OF DR. 67

REDDY LABORATORY 2023

3 CALCULATION OF STANDARD DEVIATION OF Dr. 68

Reddy’s Lab 2023

4 Market Value 69

5 Advance Basis points Resettlement Frequency 71

 LIST OF GRAPHS

S.No Graphs Pg. NO

1 Forex Exposure to Interest Rate (Millions) 64

2 CALCULATION OF STANDARD DEVIATION OF DR. 67

REDDY LABORATORY 2023

3 CALCULATION OF STANDARD DEVIATION OF Dr. 68

Reddy’s Lab 2023

4 Market Value 69

5 Advance Basis points Resettlement Frequency 71

 CHAPTER - 1
INTRODUCTION

1
 INTRODUCTION

The word risk is derived from an early Italian word “risicae” which means “to

dare”. The story of mankind is a story of threats and opportunities, of braving the risks

and getting the rewards in the process. We may define risk emanating from a situation as

something which throws a challenge to an act or not to act with regard to an event or

happening. These challenges (or risks) under the different walks of life may take various

forms. A soldier may the risk of life in a battle and a traffic police may run the risk of

being hit by an automobile on the road. Thus, the concept of risk is synonymous with the

uncertainties in a proposition and the degree of risk may be computed in terms of

probability of associated risks. It is possible to educe them to a manageable level but

these cannot be wiped out altogether. In short, we cannot think of a zero- risk situation,

whether in our work environment or in our personal lives.

Risk taking is a deliberate action in the process of financial decision- making.

The action results from an optimal choice made by the decision maker, which, in turns,

emanates from a systematic analysis of the various alternatives available. Risk taking is a

calculated decision and phases like outcome “fate” o “come what may”, etc., do not find a

place in the process of risk assessment.

Particularly the risks associated with credit decisions taken by a banker, inter-

relationship between the various credit related risks, qualification of such risks,

theoretical framework of risk and the extent of their applicability in actual business

decisions. We will also discuss about the principles and guidelines laid down in this

context, both by the BIS (Bank for INTRNATIONAL settlement, Switzerland) and RBI

(Reserve Bank of India). The various steps in construction of risk assessment models will

2
also be discussed which would enable us to prescribe benchmarks for the purpose of

decision making in dispensing credit.

Any activity involves risk, touching all spheres of life, both personal and business,

Risk is pervasive condition of human existence. The term risk has a variety of meaning in

business and everyday life. Traveling in a car, crossing the road, investing in financial

instruments, launching a new product all involves risk. At its most gnarl level, risk is used

to describe any situation where there is uncertainty about what outcome will occur.

Although our instinctive understanding of concept of risk is clear enough, terms that have

a simple meaning in everyday usage sometimes have a specialized connotation when used

in particular field.

DEFINATION

There is no universal accepted definition of risk. The term risk is variously defined as

a) The chance of loss,

b) The possibility of loss,

c) Uncertainty,

d) The dispersion of actual from expected results or

e) The probability of any outcome different from the on expected.

The Basel committee has defined risk as “the probability of the unexpected happening-the

probability of suffering a loss”.

Prof. John Geiger has defined risk as “an expression of the danger that the

effective future outcome will deviate from the expected in a negative way”.

3
 Vaughan & Vaughan defined risk as “A condition in which there is a possibility of

an adverse deviation from desired outcome that is expected or hoped for”.

The four letters comprising the word R I S K define its features.

R = Rare (unexpected).

I = incident (outcome).

S = selection (identification).

K = knocking (measuring, monitoring, controlling).

RISK, therefore, needs to b looked at from four fundamental aspects:

 Identification

 Measurement

 Monitoring

 Control (including risk audit)

RISK VS UNCERTAINITY

Uncertainty must be taken in a sense radically distinct from the familiar notion of

Risk, from which it has never been properly separated, The term “risk,” as loosely used in

everyday speech and in economic discussion, really covers two things which, functionally

at least, in their causal; relations to be phenomena of economic organization, are

categorically different. … The essential fact is that “risk” means in some cases a quantity

susceptible of measurement, while at other times it is something distinctly not of this

character; and there are far-reaching and crucial differences in the bearings of

phenomenon depending on which of which of the two is really present and operating. …

4
It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is

so far different from an immeasurable one that it is not in effect an uncertainty at all. We

… accordingly restrict the term “uncertainty” to cases of the non-quantities type.

TYPES OF RISKS

The risk profile of an organization may be reviewed from the following angles:

A. BUSINESS RISK:

I. capital risk.

ii. Credit risk.

iii. Market risk.

iv. Liquidity risk

V. business strategy and environment risk.

vi. Operational risk.

vii. Group risk.

B. CONTROL RISK:

i. Internal controls.

ii. Organization.

iii. Management (including corporate governance).

iv. Compliance.

Both these types of risk, however, are linked to the three omnibus risk categories listed

below:

1. Credit risks.

2. Market risks.

3. Organizational risks.

5
NEAD OF THE STUDY:

Risk management is a scientific approach applied to the problem of risk. Although the

term risk management is a recent phenomenon, the actual practice of risk management is

as old as civilization itself. Risk management allows financial institutions to bring their

risk leels to manageable proportions while not severely reducing their income. Factors

like increasing competition, innovative products, technological revolution, and changing

external operating environment makes it necessary that proper risk management systems

b implemented, Risk management is thus a functional necessity and adds to the strength

and efficiency of an organization on an ongoing basis.

6
OBJECTIVES OF THE STUDY

 To study the methodology of risk analysis adopted by the company

 To understand the various risks involved in setting up an industrial project

 To study various measures for controlling the risk.

 To carry on the business of Distributors, Dealers, Wholesalers, Retailers,

Commission Agents,

 Manufacturers, Representatives for all types of products.

 To carry on the business of professionals for all types of services.

 To carry on the business of design, engineering and execution and implementation

7
SCOPE OF THE STUDY

1) The Study covers the basic meaning, concept, structure and the organization of the

Risk..

2) The theoretical part of the study include the following concepts:-

 Characteristics of Risk Management.

 Advantages/ Disadvantages of Risk Management.

3) The tools used for graphical representation of data include Pie charts, Bar diagrams,

and other accessories.

METHODOLOGY

 The format of the study was fixed after referring various books and reports from

libraries and internet.

 It helped in identifying the approach needed for project work, research methods

and report making.

 Sources of these literatures are mentioned in references.

8
DATA COLLECTION

For the preparation of any project report the collection of relevant data is very

much essential. There are basically two broad methods for collecting data, which are

followed in any report. These methods are:

 Primary data collection from the organization resources and financial position
of the company.
 The sources of secondary data are: Printed or published financial statements
of the corporation, Annual reports of the company and internet, Journal books
etc.

9
LIMITATIONS OF THE STUDY

 The study is conducted for the purpose of fulfillment of the conditions stipulated

by the University for Completion of course, so the study may not fulfill all the

requirements of a detailed investigation.

 As I am learner, I may not be able to provide a proper findings and suggestions.

 Time was a major constraint for knowing the entire process in depth..

10
 CHAPTER – II
REVIEW OF LITERATURE

11
 REVIEW OF LITERATURE

RISK MANAGEMENT:

Risk management is a scientific approach applied to the problem of risk.

Although the term risk management is a recent phenomenon, the actual practice of risk

management is as old as civilization itself. Risk management allows financial institutions

to bring their risk leels to manageable proportions while not severely reducing their

income. Factors like increasing competition, innovative products, technological

revolution, and changing external operating environment makes it necessary that proper

risk management systems b implemented, Risk management is thus a functional necessity

and adds to the strength and efficiency of an organization on an ongoing basis.

Risk Management Techniques:

Risk management is a structured approach to managing uncertainty through, risk

assessment, developing strategies to manage it, and mitigation of risk using managerial
resources.

The strategies include transferring the risk to another party, avoiding the risk,
reducing the negative effect of the risk, and accepting some or all of the consequences of
a particular risk.

Some traditional risk managements are focused on risks stemming from physical

or legal causes (e.g. natural disasters or fires, accidents, death and lawsuits). Financial

risk management, on the other hand, focuses on risks that can be managed using traded

financial instruments. Objective of risk management is to reduce different risks related to

a preselected domain to the level accepted by society. On the other hand it involves all

means available for humans, or in particular, for a risk management entity (person, staff)

12
 REASEARCH METHODOLOGY

Research methodology is a detailed study of the subject which uses a set of methods to
perform the research methodology is a framework of the methods and procedures carried
on for acquiring information needed. It is a blue print according to which research is
conducted
The data is of two types:

1) PRIMARY DATA
2) SECONDARY DATA

PRIMARY DATA:

Primary data has been collected from the people of the organization which is also
called first hand data. The data collected from primary source includes project guides,
approaching the financial department heads, the self help groups, the branch manager
and few employees of the company

 Officers of accounts sections.

 Executives and staff of financial and accounts department.
 Meeting with concerned people.
 Personal observation.

SECONDARY DATA:

The secondary data was collected from published and unpublished manuals, records,
broachers, files etc., of the organization. The secondary information was collected
from the company manuals and office records pertaining to production, financial
position and welfare Activities of the Company

13
Steps in the risk management process

Establish the context

Establishing the context involves

1. Identification of risk in a selected domain of interest

2. Planning the remainder of the process.

3. Mapping out the following:

o the social scope of risk management

o the identity and objectives of stakeholders

o The basis upon which risks will be evaluated, constraints.

4. Defining a framework for the activity and an agenda for identification.

5. Developing an analysis of risks involved in the process.

6. Mitigation of risks using available technological, human and organizational

resources.

Identification

After establishing the context, the next step in the process of managing risk is to

identify potential risks. Risks are about events that, when triggered, cause problems.

Hence, risk identification can start with the source of problems, or with the problem itself.

 Source analysis Risk sources may be internal or external to the system that is the

target of risk management. Examples of risk sources are: stakeholders of a project,

employees of a company or the weather over an airport.

 Problem analysis Risks are related to identify threats. For example: the threat of

losing money, the threat of abuse of privacy information or the threat of accidents

and casualties. The threats may exist with various entities, most important with

shareholders, customers and legislative bodies such as the government.

14
  Resources and consider the threats they are exposed to and the consequences of

each. Alternatively one can start with the threats and examine which resources

they would affect, or one can begin with the consequences and determine which

combination of threats and resources would be involved to bring them about.

Assessment

Once risks have been identified, they must then be assessed as to their

potential severity of loss and to the probability of occurrence. These quantities can be

either simple to measure, in the case of the value of a lost building, or impossible to

know for sure in the case of the probability of an unlikely event occurring. Therefore,

in the assessment process it is critical to make the best educated guesses possible in

order to properly prioritize the implementation of the risk management plan.

The fundamental difficulty in risk assessment is determining the rate of

occurrence since statistical information is not available on all kinds of past incidents.

Furthermore, evaluating the severity of the consequences (impact) is often quite

difficult for immaterial assets. Asset valuation is another question that needs to be

addressed. Thus, best educated opinions and available statistics are the primary

sources of information. Nevertheless, risk assessment should produce such

information for the management of the organization.

That the primary risks are easy to understand and that the risk management

decisions may be prioritized. Thus, there have been several theories and attempts to

quantify risks.

Numerous different risk formulae exist, but perhaps the most widely accepted

formula for risk quantification is:

15
Rate of occurrence multiplied by the impact of the event equals risk

Later research has shown that the financial benefits of risk management are less

dependent on the formula used but are more dependent on the frequency and how risk

assessment is performed.

In business it is imperative to be able to present the findings of risk

assessments in financial terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for

presenting risks in financial terms. The Courtney formula was accepted as the official risk

analysis method for the US governmental agencies. The formula proposes calculation of

ALE (annualized loss expectancy) and compares the expected loss value to the security

control implementation costs (cost-benefit analysis).

The Effect of Risk

As mentioned earlier risk results in gains or losses. If we invest in an equality

share we may gain or lose when we sell it at a later date. If a fire accident occurs in a

warehouse it will result in losses only. We are very much concerned with negative impact

of risk when we attempt to manage it. ‘Loss’ is a state wherein someone is deprived of

something he/she had. When we attempt to assess the risk, it is important to know from

whose point of view the risk is being assessed. It can be perceived from the point of view

of the insurer or the insured from the point of view of an insurance agency risk may be

perceived fro the purpose of assessing the degree of vulnerability of a particular object to

a particular event.

16
Potential risk treatments

Once risks have been identified and assessed, all techniques to manage the risk

fall into one or more of these four major categories: (Dorfman, 1997)

 Avoidance (elimination)

 Reduction (mitigation)

 Retention

 Transfer ( buying insurance)

Risk avoidance:

Includes not performing an activity that could carry risk. An example would be

not buying a property or business in order to not take on the liability that comes with it.

Another would be not flying in order to not take the risk that the airplane were to be

hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means

losing out on the potential gain that accepting (retaining) the risk may have allowed. Not

entering a business to avoid the risk of loss also avoids the possibility of earning profits.

Risk Reduction.

Involves methods that reduce the severity of the loss or the risk of the loss from

occurring. Examples include sprinklers designed to put out a fire to reduce the risk of loss

by fire. This method may cause a greater loss by water damage and therefore may not be

suitable. Halon fire suppression systems may mitigate that risk, but the cost may be

prohibitive as a strategy.

Modern software development methodologies reduce risk by developing and

delivering software incrementally. Early methodologies suffered from the fact that they

only delivered software in the final phase of development; any problems encountered in

17
earlier phases meant costly rework and often jeopardized the whole project. By

developing in iterations, software projects can limit effort wasted to a single iteration.

Outsourcing could be an example of risk reduction if the outsource can

demonstrate higher capability at managing or reducing risks. In this case companies

outsource only some of their departmental needs. For example, a company may outsource

only its software development, the manufacturing of hard goods, or customer support

needs to another company, while handling the business management itself. This way, the

company can concentrate more on business development without having to worry as

much about the manufacturing process, managing the development team, or finding a

physical location for a call center.

Risk retention:

Involves accepting the loss when it occurs. True self insurance falls in this

category. Risk retention is a viable strategy for small risks where the cost of insuring

against the risk would be greater over time than the total losses sustained. All risks that

are not avoided or transferred are retained by default. This includes risks that are so large

or catastrophic that they either cannot be insured against or the premiums would be

infeasible. War is an example since most property and risks are not insured against war,

so the loss attributed by war is retained by the insured. Also any amounts of potential loss

(risk) over the amount insured are retained risk. This may also be acceptable if the chance

of a very large loss is small or if the cost to insure for greater coverage amounts is so

great it would hinder the goals of the organization too much.

18
Risk transfer:

Means causing another party to accept the risk, typically by contract or by

hedging. Insurance is one type of risk transfer that uses contracts. Other times it may

involve contract language that transfers a risk to another party without the payment of an

insurance premium. Liability among construction or other contractors is very often

transferred this way. On the other hand, taking offsetting positions in derivatives is

typically how firms use hedging to financially manage risk.

Some ways of managing risk fall into multiple categories. Risk retention pools

are technically retaining the risk for the group, but spreading it over the whole group

involves transfer among individual members of the group.

This is different from traditional insurance, in that no premium is exchanged

between members of the group up front, but instead losses are assessed to all members of

the group.

RISK MANAGEMENT ESSENTIALS

After reading this chapter, you will be conversant with

 The nature of risk management

 The evolution of risk management

 Risk in personal life

 Corporate/organizational risks

 The process of risk management

19
Nature of Risk Management

Risk management aims to at controlling the risk exposure of a firm. It is a rational

approach towards controlling the risk to which an organization or an individual is

exposed to; risk management function can be grouped with other management functions

such as financial management, human resources management, etc. An over view of

different risks will help us to understand the nature of risk management organizations and

individuals are exposed to a wide arrays of risk in their day-to-day operations, such as

1 Fire risk

2 Risk of theft

3 Loss of customers

4 Delay in delivery of raw materials

5 Break down of machinery

6 Accidents

7 Bad debts

8 Changes in industrial policy whenever the government changes

9 Changes in financial markets

10 Changes in taxation etc.

The perspective of risks management varies from one individual. Organizations

have their own views on risk. Many scholars and practitioners

Agree that risk management is an evolving science while a distinct minority feels

that it is going to disappear in the years to come. In between there are many views on the

nature of risk management.

20
 The traditional view of risk management, believes that risk management is an

interdisciplinary science that manages that pure risk of an organization. According to this

view risk management is not changing radically but moving in increments, there fore it is

an evolving science. This view recommends insurance purchase as a risk management

solution.

1 Hardware

2 Software failure

3 Organization failure

4 Human failure

Development of Risk Management

Risk management as discussed earlier is Avery old method through which the

organization aims to cover the perils to which the organization is exposed. The most

popular method advocated by traditional view was buying insurance. In 1929, the

corporate insurance buyers met and started discussing various problems of mutual

interest. Though the meeting was not a formal one, it was a precursor to orient corporate

thinking and deal with risk in a more systematic way. In 1931, the American management

association established an insurance division. The primary objective of the division was

to provide a platform for discussing about risk management and publish news and views

of the members. This helped in creating awareness among the various risk managers

about the existence of a systematic wing for managing the risk. National insurance buyers

association was started in America, which was later renamed as risk insurance

management society (RIMS).

21
Though risk management penetrated deep in the world business as a form of insurance, it

had yet to carve a niche in the world of personal insurance, as the individual risk

management awareness arrived at a later stage of the growth of the risk management. It is

difficult to say whether the growth in risk management can be attributed to the growth in

business practices. But it can be said that the development of present day risk

management activities stem from the development which took place during early 1950’s.

Risk management practices were in vogue prior to this period, but they were not

universally popular. In other ways the different countries were having different sets of

underlying principles, philosophy and strategies to manage the risk management.

1 Maturity of the risk management.

2 Ability and knowledge of risk manager.

3 Types of organization.

During the earlier period, management was developed as an independent

function of management, as most of the organization perceived it as an offshoot of

financial management. This may be because of the conversion and measurement of risk,

which in turn resulted in underwriting of insurance policies in financial terms, as was the

case of the hierarchy of the risk manager in the organization. Previously, risk managers

were either working under the finance department of purchase department

1 Reliability movement of the 1950’s

2 System safety movement of the 1960’s and the 1970’s

22
 He illustrated how the concepts of safety management were well adopted in risk

management. He implied this way of risk management to be more inclined towards the

financial side of risk management.

The practice of risk management in Indians public sector is ever three decades old.

The reasons for late recognition of the importance of risk management are many. In India

government organization are immune to different types of legal liability and the effect of

any other exposures can be passed on to the government. Thus, the risk management

principles were not much popular in government organizations. But as the completive

forces of the market forced the government to shed the primitive practices and rules, they

have become more conscious and started to imbibe risk management practice. There are

various constraints in the implementation of risk management function. Some of them

are.

A. Size of the organization

B. Decentralization of authority

C. Democratization of decision making

D. Multiple objectives

E. Administration complexities, etc.

Corporate Risk Management

Private corporate sector adopted active risk management for a variety of reasons.

The risk management program of a corporate entity aims at logical way to solve problems

it perceives. These problems if not managed properly, can result in heavy losses. The loss

may be in term of money, material, opportunities or human life.

23
1. The risk manager of a company develops plans for protecting against any

unfavorable events. He undertakes the risk management process, whish starts from

information, supervising the initiation and progress plans of loss control measures,

which are critical for the organization. He also undertakes negotiation for the

terms and conditions to cover the losses and takes adequate steps for amicably

setting them against the insurers. There are few activities involving risks, which

still remain with in the organization even when no insurance has been undertaken.

What are the various activities or circumstances, which can cause loss to the

organization?

2. What are the alternatives available to the organization to protect it self against

these activities and circumstances?

24
 TYPES OF RISK

BUSINESS RISKS

By definition, business risks includes all risk factors, whether it affects a

business directly (loss affecting capital etc.) or indirectly (continued loss affecting

business strategy). Business risk can be divided into following:

i. Capital risk:

The size of the owner’s stake (like capital) in the organization determines

the strength of its operation. The composition of its capital- Tier-I (paid-up capital +

reserves) and Tier-II (bonds, hybrid instruments etc.)-depends on its resource

mobilization capacity. If an organization can access capital from only limited sources like

directors (their friends and relatives) rather than from the public, then this may act as a

constraint on capital. In contemporary financial management, capital has a number of

components. These include:

 Accounting capital: funds belonging to the promoters/owners.

 Regulatory capital: the minimum amount of capital necessary to take care of asset

value as per regulatory requirements

 Economic capital: the amount of amounts of funds set aside to absorb any violent

unexpected loss.

 According to the Basel committee, capital base is one of the three pillars of risk

assessment (the other two being supervisory role and market discipline).

25
ii. Credit risk:

While we will discuss comprehensively on this category of risk in subsequent

chapters, it may be sufficient at this stage to indicate its components:

 Credit growth in the organization and composition of the credit folio in terms of

sectors, centers and size of borrowing activities

 So as to assess the extent of credit concentration.

 Credit quality in terms of standard, sub-standards, doubtful and loss-making

assets.

 Extent of the provisions made towards poor quality credits.

 Volume of off-balance-sheet exposures having a bearing on the credit portfolio.

iii. Market risk:

The components of this risk type are:

 Composition of the investment portfolio.

 Quality of the investment portfolio (i.e., investment in rated and unrated

instruments).

 Interest rate volatility and sensibility.

 Where in a business the foreign exchange aspect is also vital (i.e., banking/export

oriented units).

 Equity/commodity risk (i.e., hedged/unhedged component).

26
iv. Earnings risk:

This covers a host of items such as:

 Budget and profit planning function in the organization.

 Analysis of income/expenses (with a focus on interest and non-interest income in

case of banks/financial institutions).

 Earnings quality and stability.

v. Liquidity risk:

Covers areas such as:

 Composition (wholesale/retail deposits in the case of banks with geographical and

classification of depositors etc.).

 Liquidity profile (mismatch between term and non-term liabilities, behavioral

maturity profile, diversification of funding sources etc.)

vi. Business strategy and environment risk:

Covers the following areas:

 External environment and macro-economic factors.

 Strategy with regards to market share, geographical spread, compatibility of

strategy with in-house experience and expertise.

 Business profile analysis using SWOT (strength, weaknesses, Opportunities and

threats), strength of competitors, scope and diversification, extent of customer

loyalty etc.

27
  Strategy business initiatives on the institution and streamlining of business

development and proactive measures taken.

 Experience and skills of key personnel in the organization and success in

planning.

 Adequacy and compatibility of IT system and business needs.

vii. Operational risk:

This really is an omnibus type of risk as it covers the entire gamut of activities in an

organization. The main components of operational risk are:

 People risk: the capabilities, competence and motives of the people in the

organization.

 Technology risk: system failure, system security, back-up and disaster recovery

plans, IT- related frauds etc.

 Legal risk: documentation for transactions, security, compliance with customer

confidentiality etc.

 Reputation risk: perception of customers and stakeholders of the organization,

regulatory perception process, strength for transaction delivery etc.

 Operating environment: abrupt non-macro economic changes in the

organization.

28
viii. Group risk factors:

These include

 Capital concentration of the parent/group, gearing of capital, return on capital,

investment, relationship with subsidiaries, commonality of interest.

 Operating and financial performance of the subsidiaries, shares of business and

competition faced by subsidiaries.

 Contagious problems overlooked by the parent organization.

 Risks arising from connected lending and intra-group exposures, risks from joint

ventures, etc.

 Compliance by subsidiaries with regulatory guidelines in the area of operation.

CONTROL RISKS

In the entire risk measurement process, ‘control’ of activities finds a prominent

place. A control mechanism is a must for any organization’s well-being. Control risks can

be divided into:

I. internal control risk:

 Lack of a clear line of responsibility and authority. In-house lack of control may

lead to housekeeping and other problems, which may affect the organization’s

well-being.

 Poor system for monitoring and reporting suspicious transactions that have a

noticeable impact on the organization.

 No regular surveillance of the control mechanism by the top management.

29
ii. Organizational risk:

 Vague and overlapping organizational structure with unclear legal implications.

 Absence of a structured assessment mechanism to leverage external and internal

relationship.

 Absence of a cordial industrial relationship.

 Lack of an adequate support system to evaluate major customer relationships.

iii. Management (including corporate governance) risk:

 Composition, cohesiveness, competence and leadership attributes of the board of

directors. The match between the board and the organization’s risk philosophy and

risk appetite.

 Non-assessment of the effectiveness of control functions of senior management.

 Absence of a clear succession planning mechanism.

 Undefined responsibility and accountability.

 Whether it follow contemporary corporate governance practices, especially with

regards to strategy formulation and problem-solving.

iv. Risk from the compliance angle:

 Necessary emphasis not accorded to compliance with guidelines laid down by the

regulatory authorities.

 Deviations not reported to the competent authorities when they arise.

 Non-adherence to a monitorable action plan (MAP), if any, prescribed by a

competent authority.

30
 It is evident that all these risks are interlinked. For example, the credit risk of a

bank may emerge from operational risk, where the default is the result of fraudulent

activity by the bank’s staff/others or lack of care on their part. Ultimately it is reflected in

the organization’s earnings (for example, losses due to credit risk, market risk and

operational risk) and capital.

As omnibus categories, credit risk, market risk and operational risk cover all

items of business risk and control risk. This is precisely why, internationally, risk analysis

is done on these three types only

RISK MANAGEMENT TECHNIQUES

It is aptly said that:

“Risks do not disappear, they give users a choice; which to retain and which to

shed”. There is no escape from the presence of risk, and humanity must accordingly seek

ways of dealing with it. Some risk-generally of a fundamental nature-are met through the

collective efforts of society and government. Police and fire departments are good

examples of the collectively financial approaches to dealing with risk. The existence of

risk is a source of discomfort to most people, and the uncertainty accompanying it causes

anxiety and worry. Since risk is distasteful and unpleasant, people’s rational nature leads

them to attempt to do something about it. Basically, people deal with risk in five ways.

They avoid, retain, transfer, share and reduce it.

Avoidance:

Risk is avoided when the individual refuses to accept the risk even for an instant.

This is accomplished by merely not engaging in the action that gives rise to risk. If you

want to avoid the risks associated with the ownership of property, do not purchase the

property, but lease or rent it instead. The avoidance of risk is a method of dealing with

31
risk, which is a negative rather than a positive technique. Personal advancement of the

individual and progress in the economy both require risk taking. If risk avoidance were

utilized extensively, both the individual and society would suffer. For this reason,

avoidance is an unsatisfactory approach to dealing with risks.

Retention:

Risk retention is perhaps the most common method of dealing with risk. An

individual faces an almost unlimited array of risks; in most cases nothing is done about

them. When an individual does not take positive action to avoid, reduce, and transfer the

risk, the possibility of loss involved in that risk is retained. As a general rule, risks that

should be retained are those that lead to relatively small losses.

Transfer:

Risk may be transferred from one individual to another who is more willing to bear

the risk. An example is the process of hedging, where an individual guards against the

risk of price changes in one asset by buying or selling another asset whose price changes

in an offsetting direction. For example, futures markets have been created to allow

farmers to protect themselves against changes in the price of their crop between planting

and harvesting. A farmer sells a futures contract, which is actually a promise to deliver at

a fixed price in the future. If the value of the farmer’s crop declines, the value of the

farmer’s future position goes up to offset the loss. Insurance is also a means of shifting

or transferring risk. In consideration of a specific payment (the premium) by one party,

the second party contracts to indemnify the first party unto a certain limit for the specified

loss that may or may not occur.

32
Sharing:

Risk is shared when there is some type of arrangement to share losses. Risks are

shared in a number of ways in our society. Under the corporation form of business, the

investments of a large number of persons are pooled. A large number of investors may

pool their capital, each bearing only a portion of the risk that the enterprise may fail.

Insurance is another device designed to deal with risk through sharing, (Sharing is a form

of transfer, in which the risk of the individual is transferred to a group. In addition, it

may be viewed as a form of retention. In which the risks of a number of individuals are

retained collectively).

Reduction:

Risk may be reduced in two ways i.e., through loss prevention and control. There

is almost no source of loss where some efforts are not made to avert the loss. Safety

programs and loss prevention measures, such as Medicare, fire departments, security

guards, burglar alarms are examples of attempts to deal with risk by preventing the loss or

reducing the chance that it will occur.

33
 RISK MANAGEMENT PROCESS

Risk management activities occur before, during, and after losses. Most planning

is done before losses occur. Losses involving natural disasters and other emergencies also

require action while losses are happening. After the loss, the risk manager must file

insurance claims and analyze loss patterns.

 Establishing risk management objectives, tolerances and limits for all of the

enterprise's significant risks

 Assessing risks within the context of established tolerances

 Developing cost-effective risk management strategies and processes consistent

with the overall goals and objectives

 Implementing risk management processes

 Monitoring and reporting upon the performance of risk management processes

 Improving risk management processes continuously

 Ensuring adequate communication and information for decision making

34
SOURCES OF RISK

Source of risk can b classified in several ways. Source of risk that arises from the

ownership of property: physical (e.g., fire), social (riot), and economic (inflation).

However, since the risk at hand is the identification of all types of risk, possible sources

of risk must b constructed broadly. For instance, the following sources of risk represent

on listing:

 Physical environment

 Social environment

 Political environment

 Legal environment

 Operational environment

 Economic environment

 Cognitive environment

PHYSICAL ENVIRONMENT:

The physical environment is fundamental source of risk. Earthquakes, drought, or

excessive rainfall can all lads to loss. The ability to fully understand our environment and

the effects we have on its as well as those it has on us is a control aspect of this source of

risk. The physical environment may b the source of risk. The physical environment may

both source of opportunity as well, for example, real stat as an investment, agribusiness,

and with as a contributing factor to tourism.

35
SOCIAL ENVIRONMENT:

Changing morals and values, human behavior, social structures, and institutions

are a second source of risk. Many American business executives become frustrated when

thy move into the international domain. For example, differing social values and norms in

Japan have proven to be a particular source of uncertainly for American and European

business managers. Within the underscores the important of this source of risk. Changing

culture values also create opportunities, as when new attitudes regarding women in the

workforce open a door to a significant talent pool.

POLITICAL ENVIRONMENT:

Within a single country, the political environment cans b an important source of

risk. A new president can move the nation into a policy direction that might have

dramatic effects on particular organizations (cuts in aid to local governments, new

stringent regulation on toxic waste disposal). In the international realm, the political

environment is even more complex. Not all nations are democratic in their form of

government, and politics towards business. Foreign assts might b confiscated by a host

government o tax policies might change dramatically. The political environment also can

promote positive opportunities though fiscal and monetary policy, enforcement of laws.

LEGAL ENVIRONMENT:

Within the United States today, a gat deal of uncertainty and risk arises from the

legal system. Not only are standards of conduct upheld and punishments enforced, but as

the system itself evolves new standards arise may that not b fully anticipated. In the

international domain, complexity increases because legal standards can vary from country

to country. The legal environment also produces positive outcomes in the sense that rights

are protected and that the legal system provides a stabilizing influences on society.

36
OPRATIONAL ENVIRONEMNT:

Processes and procedures of an organization generate risk and uncertainty. A

formal procedure for promoting, hiring, or firing employees may generate a legal liability.

The manufacturing process may put employees at risk of physical harm. Activities of an

organization may result in ham to the environment. International business may suffer

from risk or uncertainty due to unreliable transportation systems. The operational

environment also provides gains, as it is the ultimate source of the goods and service by

which an organization succeeds or fails.

ECONOMIC ENVIRONMENT:

Although the economic environment often flows directly from the political realm,

the dramatic expansion of the global market place has created an environment that is

greater than any single government. Although a markets is beyond the reach of a single

nation. Inflation, recession and depression are now elements of interdependent economic

systems. On a local level, interest rates and credit policies can impose significant risk on

an organization.

COGNITIVE ENVIRONMENT:

An important source of risk for organization is the difference between perception

and reality. The cognitive environment is a challenging source of risk to identify and

analyze. The analyst must contemplate such questions as “How do we understand the

effect of uncertainty on the organization?” and “How do we know whether perceived risk

is real?” An evaluation of the cognitive environment partly addresses the distinction

between risk and uncertainty.

37
WHAT IS VAR?

Value-at-risk (VaR) is a quintile based method of risk assessment of a portfolio.

Value-at risk is widely used by banks, securities firms, commodity merchants, energy

merchants, and other trading organizations. Such firms could track their portfolios' market

risk by using historical volatility as a risk metric. They might do so by calculating the

historical volatility of their portfolio's market value over a rolling 100 trading days.

However, the problem with doing this is that it would provide a retrospective indication

of risk. The historical volatility would illustrate how risky the portfolio had been over the

previous 100 days. It would say nothing about how much market risk the portfolio was

taking today. For institutions to manage risk, they must know about risks while they are

being taken. If a trader mishedges a portfolio, his employer needs to find out before a loss

is incurred. Value at-risk gives institutions the ability to do so. Unlike retrospective risk

metrics, such as historical volatility, value-at-risk is prospective. It quantifies market risk

while it is being taken. Another reason for popularity of VaR estimates is that it

summarizes in a single, easy to understand number the downside risk of an institution due

to financial market variables.

VaR can be intuitively defined as “the worst loss over a target horizon with a

given confidence level”. It can be defined either as an absolute number or as a percentage

of the portfolio value .Crucial for the determination of the extreme future market value,

and hence for the VaR, is the distribution function of the return on market value. The

portfolio value as of today is a known parameter. However, its future value in a given

time horizon is unknown and is a random variable. It will have a probability distribution

based on historical data or expected value of different market variables like interest rate,

Forex, etc. One such distribution is as shown in Exhibit 3, where the present portfolio

value is shown to be P0. With VaR, we summarize the portfolio’s market risk by

38
reporting some parameter of this distribution. For Ex, if the above distribution is for daily

portfolio value, then the VaR value in the above figure depicts the 95% quintile of the

portfolio’s daily loss. By this we mean that, the maximum loss in a single period can’t

exceed this value with a confidence level of 95% i.e. the expected loss would not be more

than this value in 19 out of 20 days. Or in other words, the portfolio is expected to lose

more than this value in 1 out of 20 days.

Exhibit 3: The distribution function of the return on market value usually a

normal or lognormal distribution is assumed for the market return. However, a normal

distribution is claimed to underestimate the probability in the tail and hence the VaR, as

VaR deals with extreme market situations. Popular alternatives include GARCH-type of

models to allow for time-varying volatility and the Student-t distribution, since it allows

for more probability mass in the tail than the normal distribution. Equally important for

VaR estimation is uncertainty in parameter values. Parameter uncertainty leads to

uncertainty in the VaR estimates. And this uncertainty increases with models that try to

incorporate complex tail behaviors. Hence there is a trade off between more complex tail

behavior and uncertainty in the VaR estimate.

There are different methods for VaR calculation. One thing to keep in mind is that

the choice of methodology used to estimate VaR gives rise to very different results of the

VaR and hence it is more important to identify which method is best suited for a given

portfolio and the intended use. The different methods are:

1. Variance-Covariance method

2. Historical simulation

3. Constant maturity model

4. Monte Carlo simulation

39
VaR

Variance-Covariance Method

In this method, the portfolio return is assumed to have normal probability

distribution. The advantage of this assumption is that the model can be defined in its

entirety in terms of only 2 parameters – Mean and Standard deviation of the portfolio

return. In this way, this method is parametric in nature. The expected value of the

portfolio is calculated as: Where 0E (1P) is the expected portfolio value in period 1 based

on information in period 0.B is a column vector giving the weightage of different

variables in the portfolio.is the mean vector of the variables in the portfolio. Similarly,

standard deviation of the portfolio is defined as: Where: is the standard deviation for the

portfolio. Is the covariance matrix of the portfolio, 1|0 indicating that the parameter is for

period 1, and conditional on information available in period 0? B` is the transpose of

vector b. One advantage of normal assumption is that quintiles of a normal distribution

occur a fixed number (z) of standard deviations from the distribution’s mean which can

be determined from standard normal distribution table. Since the computations are so

modest, implementation of Variance-Covariance method runs in real time.

However, it has the disadvantages associated with the normal distribution

function. It ignores the distribution with fat tails and since VaR is more of a measure of

tail distribution, normal assumption can lead to problem of overestimation or

underestimation of VaR, thereby defeating the purpose of VaR estimation.

40
Historical Simulation

This method is the simplest and most transparent method of calculation. This

involves evaluating the current portfolio across a set of historical changes in the

underlying variables to yield a distribution of changes in portfolio value, and computing

VaR. The benefits of the method are its simplicity to implement, and the fact that it does

not assume a normal distribution of asset returns. However, it requires a large database of

historical values to be effective. Moreover, it assumes that the historical values are a good

estimate for future values, which may not be always true.

Constant Maturity Model

In the Variance-Covariance method, the interaction between different variables

underlying the portfolio has to be taken into account. This leads to multivariate models

that include many parameters that are all estimated with uncertainty. This suggests that

VaR-estimates for portfolios of securities are more uncertain. To avoid multivariate

models, constant maturity value of the portfolio is determined at all times in history. The

resulting time series of constant maturity values may be modeled in a univariate time

series framework, which can be used to determine the VaR estimate for the constant

maturity value of the portfolio. There is difference in the actual value and constant

maturity value of a portfolio, however, over short forecasting horizons, this difference is

negligible. An advantage of this approach is that it focuses on the portfolio return directly

and not on Individual variable. Moreover, we can restrict ourselves to univariate models,

which have the advantage of less parameter uncertainty than multivariate models, as the

number of parameters to be estimated is less.

41
Monte Carlo Simulation

It is conceptually simple, but is generally computationally more intensive than

the methods described above. In this method, some market model is used to generate

random scenario of market variables for the pre-decided number of iterations. For each

set, portfolio is revaluated and profit (loss) is calculated under the simulated scenario.

These profits/losses are sorted in an order to give the simulated distribution and then this

distribution is used to determine VaR at a particular confidence level. It is possible to

compute an error term associated with the VaR estimate thus obtained and this error will

reduce as the number of simulations increases. Monte Carlo Simulation is generally used

to compute VaR for portfolios containing securities with non-linear returns. However, for

a portfolio without these complex instruments, variance-covariance method is perfectly

suitable and should be used. One thing should be kept in mind that Monte Carlo method

is subjected to model risk if the model used is not very suitable.

To determine which method is best suited for a given portfolio, the validity of the VaR

Estimate should be carried out. This is generally done by back-testing. This is done

through comparison of predicted and actual loss levels. This testing can also help in

checking the assumptions, parameters and accuracy of the model. Another important

aspect of VaR estimation is determination of time horizon and confidence level the

popular values for time horizon are 1 day and 10 days. And for confidence level are 95%

and 99%. We recommend the use of 1 day VaR with a confidence level of 99%. Time

horizon of 1 day will help in monitoring daily mark-to-market changes in portfolio value

and 99% confidence level would reduce the frequency of loss exceeding the VaR

estimate.

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 CHAPTER – III
INDUSTRY PROFILE
AND
COMPANY PROFILE

43
 INDUSTRY PROFILE

INTRODUCTION TO BULK DRUG INDUSTRY:

Since the achievement of independence, India pharmaceutical industry registered

a substantial progress and has become one of the countries leading industries. India is
now providing large quantities of varied bulk drugs and pharmaceutical products. Of late
especially during 80’s India acquired a status of one of the major exports of drugs and
pharmaceutical in the international market.

Prior to the launching of second five-year plan, the manufacture of pharmaceuticals was
limited largely to processing of bulk-imported drugs in to tablets, capsules and other
formalities. Later the Indian manufacturers were encouraged to make up the manufacture
of basic drugs wherever it was economically possible and technically feasible, resulting in
the growth of bulk drug industry and leading to self-sufficiency in the production of these
raw materials called as bulk drugs. The number of bulk drugs and pharmaceutical
chemicals manufactured in the country by the Indian change in the pattern of production,
the industry has now emerged as an exporter of basic chemicals, intermediaries and
finished production. Thus bulk drugs are poised to become the new start in the export
firmament.
Pharmaceuticals are medicinally effective chemicals, which are converted to dosage
forms suitable for patients to imbibe. In it 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:

 Allopath or modern medicine has gained global popularity.

 Ayurveda, an ancient Indian science, mainly uses herbal remedies.
 Unani having Chinese Origin is prevalent in South East Asia.
 Homeopathy, founded by a German Physician, was fairly Popular in the early 19 th
century.

44
INDUSTRY SCENARIO:

World-over, the Pharmaceuticals industry is focused on Allopath, the most modern

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

The exports from the Indian pharmaceutical industry to the well regulated market in
United States of America is increasing rapidly, by recording the highest growth in the
current financial year when compared to the recent past.

The Indian pharmacy exports to US have already recorded a favorable momentum right
from the year 2002, increasing from USD million 489.08 in April 02-March 03 to USD
million 680.50 in April 2006 - March 2008.

From being an import dependent industry in the past 1950’s Indian pharmaceutical
industry has achieved self-sufficiency and gained global recognition as a producer of low
cost high quality bulk drug and formulations. Leading Indian companies have developed
infrastructure in over 60 countries including developed markets like USA and EUROPE.
In the last few years several pharmaceutical companies have demonstrated that they
posses the ability to engage in commercially viable research and development activities
and become significant players in the international market.

The pharmaceutical industry comprises of 20,053 manufacturing unit and provides

employment to approximately 33 lakhs people. The total production in the country in
1999-2000 was 19,737 crores. The total capital investments in pharmaceutical industry
were Rs. 2,500 crores with R&D expenditure being Rs. 320 Crores. The country’s exports
stood at Rs. 6,631 crores in 1999-2000, imports were Rs. 3,441 a net surplus of Rs 3,190
crores.
The leading 250 pharmaceutical companies control 70 percent of the market. Over 60
percent of India’s bulk drugs production is exported to and the balance is sold locally to
other formulators. With more than 85 percent of formulation production in the country is
sold in the domestic market, India is largely self-sufficient in the case of formulations,
even though some life savings, new generations, under patent formulations continues to
be imported especially by MNC’s

45
 GROWTHOF THE INDIAN PHARMACEUTICAL
INDUSTRY

YEARS 2007-08 2008-09 2009-10 2023-11 2023-12

Capital Investment 140 500 1840 2150 2500

Formulation 150 1200 12068 13878 15960
Production
Bulk Drugs 18 240 2623 3148 3777
Import 8.2 112.54 2868 3128 3441
Export 3.05 46.38 5353 5959 6631
R& Expenditure 3 14.75 220 260 320

India is one among the top five manufacturers of the bulk drug in the world and is among
the top 20 pharmaceutical exporter in the world. The industry manufacturers almost the
entire range of therapeutic products and is capable of producing raw materials for
manufacturing a wide range of bulk drugs from the basic stage.

The government has taken measures to give impetus to domestic production drugs and formulations, creating an environment
conductive for channeling new investments into pharmaceutical sector. However the industry and experts feel that time has come for
the government to announce new policy initiatives, particularly relating to the research and development and pricing regime, in order
to propel the industry into a new growth orbit, as well as, to face the challenges of the WTO-led trading system and a TRIPS-driven
product patent environment.

BULK DRUGS:

Bulk drugs are medicinally effective chemicals. They are derived from 4 type
intermediate (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
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

46
 Under patent
 Generic of off patent.

A patent provides exclusivity of manufacturing/licensing to the discoverer i.e. patent

holder for a stipulated time period.

INDIAN SCENARIO:
DRAWBACKS:
In the 50 year independence, the Indian pharmaceutical industry has evolved
significantly. Initially, the MNC’s had a near monopoly. They imported and marketed
formulations in India, mainly low cost generics for the masses and also few specialties,
life saving, high priced products. With the government increasing pressure against
imports of finished products, the MNC’s set up formulation units and continued
importing the bulk drugs. In the 60’s the Indian Government laid the foundation of the
domestics’ pharmaceutical industry by promoting Hindustan Antibiotics Ltd., (HAL) and
Indian drugs. However, MNC’s maintained a lead due to backing of their global R&D.
High cost for basic research deterred local players (in the private sector).
PRESENT SCENARIO:

Over 20,000 registered pharmaceutical manufactures exist in the country. The market
share of MNC’s has fallen from 75% in 1971 to around 35% in the Indian pharmaceutical
market, while the share of Indian companies has increased from 20% in 1971 to nearly
65%. Pusses have almost lost completely.
The sector has undergone several policy as well as attitudinal changes over the past two
yeas. It was one of the major beneficiaries from the budget proposals. Some of the
positive steps taken were
 Pharmaceutical industry as knowledge based industry. The government has plans
to increase the investment in research and development.
 Rationalization of excise duty and reduction in interest rates in export financing.
 Additional deductions under income tax laws for R&D expense.
 Foreign direct investments permit unto 74% through automatic route.

47
 Setting up 2 high level committees to review the drug policy for strengthening
R&D capabilities, reducing the price control regime.
Besides the Indian parliament has enacted the required changes in the
Indian patent act 1790 (IPR) regarding mailbox arrangement and Exclusive Marketing
Right (EMR). For while the main pharmacy companies have recorded a measure of 1.4%
increase in sales and 7.4% fall in profits, the Indian pharmacy companies have recorded a
21% growth in sales companies has decreased from 1.8% if sales to 1.6% in case of MNC
pharmacy companies has increased 3.8% to 4.4%.
So while the MNC companies did not make many new launches (make a hue
& cry about increasing competition from the generics, delay in patent regime, unfavorable
price cuts). But the Indian companies took everything in their stride and went out all
cylinders firing-launching new products, entering the generics market, reorganizing the
marketing
structure, focusing on new growth segments like Cardiac, Diabetic, and
Psychiatry among a host of other initiatives.
Indian pharmaceutical exports, among the top three contributors to the
world pharmacy trade, are poised to grow 25% this year to touch $1.5 billion, according
to CII estimates.

The country is potential to rank among top three tin the world as suppliers
of the generic drugs by 2023, of the government paves way for creating a conductive
business environment by framing new policies for the sector, said Ranbaxy chief
executive officer D S Barr

48
SWOT ANALYSIS FOR THE INDIAN PHARMA
INDUSTRY
STRENGTHS:
 Cost competitiveness.
 Well-developed Industry with strong manufacturing base.
 Well Established Network of Laboratories and R&D Infrastructure.
 Access to pool of highly trained scientists, both in India and abroad.
 Strong marketing and distribution network.
 Rich Bio-Diversity.
 Competencies in chemistry and process developments

WEAKNESS:

 Low investments in innovative R&D.

 Lack of resources to compete with other MNCs for New Drug Discovery
 Research and to commercialize molecules on the worldwide basis
 Lack of strong linkages between industry and academia.
 Lack of culture of innovation in the Industry.
 Low medical expenditure and healthcare spend in the country.
 Inadequate regulatory standards.
 Production of spurious and low quality Drugs tarnishes the image of the Industry
at home
 And abroad.

OPPURTUNITIES:

 Significant export potential.

 Licensing deals with MNCs for NECs and NDDs.
 Marketing alliances to sell MNC products in domestic market.
 Contract manufacturing arrangements with MNCs.
 Potential for developing India as a centre for international clinical trails.
 Niche player in global pharmaceutical R&D.

49
THREATS:

 Product patent regime poses a serious challenge to domestic industry unless it

invests in Research and Development.
 R&D efforts of Indian Pharmaceutical companies hampered by lack of enabling
Regulatory requirement.
 Drug price control order puts unrealistic ceilings on product prices and
profitability and prevents Pharmaceutical companies from generating “inevitable”
surplus.
 Export effort hampered by procedural hurdles in India as well as non-tariff
barriers imposed abroad.
 Lowering of tariff protection.

50
 COMPANY PROFILE

Dr. Reddy’s Laboratories Ltd. Founded in 1984 by Dr. K. Anji Reddy, has become

India’s third biggest pharmaceutical company. Reddy had worked in the publicly-owned

Indian Drugs and Pharmaceuticals Ltd. Reddy's manufactures and markets a wide range

of pharmaceuticals in India and overseas. The company more than 190 medications ready

for patients to take, 60 active pharmaceutical ingredients, for drug manufacture,

diagnostic kits, critical care and biotechnology products.

Reddy’s began as a supplier to Indian drug manufacturers, but it soon started

exporting to other less-regulated markets – that had the advantage of not spend time and

money on a manufacturing plant that that would gain approval from a drug licensing body

such as the US’s Food and Drug Administration. Much of Reddy’s early success came in

those unregulated markets, where process patents – not product patents – are recognized.

With that money in the bank, the company could reverse-engineer patented drugs from

more developed countries and sells them royalty-free in India and Russia. By the early

1990s, the expanded scale and profitability from these unregulated markets enabled the

company to begin focusing on getting approval from drug regulators for their

formulations and bulk drug manufacturing plants in more-developed economies. This

allowed their movement into regulated markets such as the US and Europe.

51
 By 2023, Reddy’s had six FDA-plants producing active pharmaceutical

ingredients in India and seven FDA-inspected and ISO 9001 (quality) and ISO 14001

(environmental management) certified plants making patient-ready medications – five of

them in India and two in the UK.

By 2023 Dr. Reddy’s Q3 FY09 Revenue at Rs. 18,401 million,EBITDA at Rs. 3,453

million, PAT at Rs. 1,924 million

By 2023 Dr. Reddy’s Q3 FY10 Financial Results: Revenues at Rs. 17,296 million;

EBITDA at Rs. 3,666 million, Profits after Tax adjusted for impairment at Rs. 2,307

million.

ABOUT DR.REDDY’S

Established in 1984, Dr. Reddy's Laboratories (NYSE: RDY) is an emerging

global pharmaceutical company with proven research capabilities. The Company is

vertically integrated with a presence across the pharmaceutical value chain. It produces

finished dosage forms, active pharmaceutical ingredients and biotechnology products and

markets them globally, with focus on India, US, Europe and Russia. The Company

conducts research in the areas of diabetes, cardiovascular, anti-infectives, inflammation

and cancer.

KEY MILESTONES

1984

Dr Anji Reddy establishes Dr. Reddy's Laboratories with an initial capital outlay of Rs.25

lakhs

52
1986
 Dr. Reddy’s goes public

 Dr. Reddy’s listed on Bombay Stock Exchange (BSE)

 Dr. Reddy’s enters international markets with exports of Methyldopa

1987
 Obtains its first USFDA approval for Ibuprofen API

 Starts its formulations operations

1988

Acquires Benzex Laboratories Pvt. Limited to expand its Bulk Actives

business.

1990

Dr. Reddy’s, for the first time in India, exports Norfloxacin and Ciprofloxacin to Europe

and Far East.

1991

First formulation exports to Russia commence.

1993

Dr. Reddy's Research Foundation established. The company drug discovery programme

starts.

1994
 Makes a GDR issue of USD 48 million

 Foundation stone laid for a finished dosages facility to cater to the highly

regulated markets such as the US.

1995

53
Sets up of a Joint Venture in Russia.

1997

 Licenses anti-diabetic molecule, DRF 2593 (Balaglitazone), to Novo Nordisk.

Becomes the first Indian pharmaceutical company to out-license an original

molecule.

 First ANDA filed with the United States Food and Drug Administration for

Ranitidine

1998

Licenses anti-diabetic molecule, DRF 2725 (Ragaglitazar), to Novo Nordisk

1999

Acquisition of American Remedies Limited, a pharmaceutical company based in

India.

2000
 Dr. Reddy's Laboratories becomes India's third largest pharmaceutical company

with the merger of Cheminor Drugs Limited, a group company

 Reddy US Therapeutics, a wholly-owned subsidiary, is established at Atlanta, US

to conduct target based drug discovery

2001
 Becomes the first Asia Pacific pharmaceutical company, outside Japan, to list on

the New York Stock Exchange. Listed with the symbol ‘RDY’ on April 11, 2001.

 Out-licenses DRF 4158 to Novartis for up to US $55 million upfront payment

 Launches its first generic product, Ranitidine, in the US market

54
  Becomes the first Indian pharmaceutical company to obtain an 180-day exclusive

marketing rights for a generic drug in the US market with the launch of Fluoxetine

40 mg capsules on August 3, 2001

2002

Conducts its first overseas acquisition – BMS Laboratories Limited and Meridian

Healthcare in UK3

2003
 Announces a 15-year exclusive product development and marketing agreement for

OTC drugs with Leiner Health Products in the US

 Launches Ibuprofen, first generic product to be marketed under the “Dr. Reddy’s”

label in the US

2004

Acquires Trigenesis gives access to drug delivery technology platforms

2006

 Acquires Roche's API Business at the state-of-the-art manufacturing site in

Mexico with a total investment of USD 59 million.

 announces the formation of Perlecan Pharma: India’s First Integrated Drug

Development Company.

 Announces India's first major co-development and commercialization deal for

its molecule Balaglitazone (DRF 2593), with Rheoscience.

 announces a unique partnership for the commercialization of ANDAs with

ICICI Venture.

2023

55
  Revenues touch USD 1 Billion in December 2023.

 Dr. Reddy's obtains its second 180-day marketing exclusivity for a generic drug

in the US market with the launch of Ondenesetron Hydrochloride Tablets.

 becomes an Authorized Generic Partner for Merck’s Proscar® & Zocor® in the

US market during 180 day exclusivity period.

 Acquires betapharm- the fourth-largest generics company in Germany for a

total enterprise value of € 480 million.

2023

Becomes No.1 pharmaceutical company in India in turnover and profitability.

2023

Announces strategic alliance with GlaxoSmithKline plc to develop and market

select products across emerging markets outside India.

CORPORATE GOVERNANCE

56
Dr. Reddy's long-standing commitment to high standards of corporate governance and

ethical business practices is a fundamental shared value of its Board of Directors,

management and employees. The Company's philosophy of corporate governance stems

from its belief that timely disclosures, transparent accounting policies, and a strong and

independent Board go a long way in preserving shareholder trust while maximizing long-

term shareholder value.

The company has identified and articulated its core purpose, mission and values in

keeping with its desire for achieving corporate excellence. Dr. Reddy's believes in

creating an environment where the parameters of conduct and behavior of the company

and its management is constantly aligned with the business environment.

The mainstays of Dr. Reddy's Corporate Governance systems are an independent Board

of Directors following international practices, a committed management team, rigorous

internal control systems and the transparent dissemination of information to stakeholders.

Committees of the Board

Committees appointed by the Board focus on specific areas and take informed decisions

within the framework of delegated authority, and make specific recommendations to the

board on matters in their areas or purview. All decisions and recommendations of the

committees are placed before the Board for information or for approval.

Dr. Reddy's has seven Board-level Committees, namely

57
  The Audit Committee

 The Compensation Committee

 The Governance Committee

 The Shareholders' Grievance Committee

 The Investment Committee

 The Management Committee

The members of the Committees of Board are as under:

Audit Committee Management Committee

Dr. Omkar Goswami (Chairman) Satish Reddy (Chairman)
Kalpana Morparia G V Prasad
Ravi Bhoothalingam P N Devarajan

Compensation Committee Investment Committee

Ravi Bhoothalingam (Chairman) G V Prasad (Chairman)
Kalpana Morparia Satish Reddy
P N Devarajan P N Devarajan
Dr. JP Moreau

Governance Committee Shareholders' Grievance Committee

Anupam Puri (Chairman) P N Devarajan (Chairman)
Prof. Krishna G Palepu G V Prasad
Dr. Omkar Goswami Satish Reddy

AWARDS AND ACCOLADE

58
  The Appreciation Certificate of the District Collector for being the Best Clean

Production Industry for the year 2023 was awarded to API Unit V.

 The CII Southern Region Leadership Excellence Award was awarded to

Dr. Reddy's for the year 2023.

 The CII National Award for Excellence in Water Management for the year

2005 was awarded to both API Units II and VI.

 The FTO III Unit of Dr. Reddy's achieved the ISO 14001:2004 standard on

June 9, 2005.

 The Genentech Environmental Excellence Silver Award for the year

2004-05 was awarded to the API Global Business Unit.

KEY PERSONS

1. Mr.Dr.K.ANJI REDDY – CHAIRMAN

2. Mr.G.V.PRASAD – VICE CHAIRMAN & C.E.O

3. Mr.SATISH REDDY – M.D & C.O.O

4. Mr.Dr.OMKAR GOUSWAMI

5. Mr.RAVI BHOOTHALINGAM

6. Mr Dr.KRISHNA PALEPU

7. Ms.KALPANA MORPARIA

8. Mr.J.P.MORE

OTHER OBJECTS:

59
1. To carry on the business of Distributors, Dealers, Wholesalers, Retailers,

Commission Agents,

2. Manufacturers, Representatives for all types of products.

3. To carry on the business of professionals for all types of services.

4. To carry on the business of design, engineering and execution and implementation

of various. Types of projects on contract or turnkey basis and to acquire the

designing or technical know how.

5. To cultivate, grow, produce or deal in any vegetable products and to carry on the

business of Farmers, dairy man, milk contractors, dairy farmers, millers, surveyors

and vendors of milk cream, Cheese, butter and poultry and provision of all kinds,

growers of and dealers in corn, lay and Straw, seeds men and nursery men and to

buy, sell and trade in any goods usually traded and of The above business or other

business associated with the farming interest which may be

Advantageously carried on by the company.

6. To carry on the business of manufacturers, fabricators, erectors, dealers of in all

types of Chemical equipment, pumps, valves, storage tanks etc. required by the

chemical and Pharmaceutical industry.

7. To purchase plant, machinery, tools and implements from time to time and he

selling or disposing of the same.

8. To transact or carry on all kinds of agency business and in particular, in relation to

the investment of money, the sale of property and collection and receipt of money,

or otherwise of any assets, funds and business under any agreement.

9. To carry on and undertake the business of investing its funds in equity and

preference shares, stocks, bonds, debentures (convertible and non-convertible) of

new projects and securities of all kinds and every description of well established

60
 and sound companies, to subscribe to capital issues of joint stock companies,

ventures, industries, units, trading concerns whether old or new as the company

my think fit and to assist them by granting financial accommodation by way of

loans/advances to industrial concerns and to assist industrial enterprises in

creation , expansion and modernization upon terms whatsoever and to act as

finance brokers, merchants and commission agents and to deal in Govt. Securities

including Govt. bonds, loans, National savings Certificates, post office saving

schemes, units of investments etc., include units of Unit Trust of India.

10. To promote industrial finance, deposit or lend money, securities and properties to

or with any company, body corporate, firm person or association whether falling

under the same management otherwise, in accordance with and to the extent

permissible under the provisionscontained in Section 370&372 of the, Companies

Act, 1956, with or without security and on such Terms as may be determined from

time to time. However, the company shall not carry on the business of Banking as

defined under the Banking Regulation Act. 1949; and to carry on and undertake

the business of finance, investment and trading, hire purchase, leasing and to

finance lease operations of all kinds, purchasing, selling, hiring or letting on hire

of all kinds of plant and machinery and equipment that the Company may think

fit and to assist in financing operations of all and every kind of description of hire

purchase or deferred payment or similar transactions and to subsidies finance or

assist in subsidizing or financing the sale and maintenance of any goods, articles

or commodities of all and every kind of description upon any terms whatsoever

and to purchase or otherwise deal in all forms of immovable and movable

property, including lands and buildings, plant and machinery, equipment, ships,

aircraft, automobiles computers and all consumer, commercial and industrial

61
 items and to lease or otherwise deal with them in any manner whatsoever

including release there of regardless of whether the property purchased and leased

be now and /or used.

11. To provide a package of investment/merchant banking services by acting as

manages to public issue securities, by underwriting securities, act as Issue House

and to carry on the business of registrars to investment schemes, Money managers

to secure and extend market support by conducting surveys, collecting data,

information and reports and to act as general traders and Agents, to carry on the

agency business and warehousing indenting and dealership of business.

IV. The liability of the members of the company is limited.

V. a. The authorized share capital of the company is Rs.50,00,00,000/- (Rs. Fifty Crores

Only)divided into 10,00,00,000 equity shares of Rs.5/- (Rs. Five only) each.

b. The company has power from time to issue shares, Hybrids, Derivatives, Options,

Quasiequity Instruments, with differential rights, or to increase, consolidate, sub-divide,

exchange,reduce and also to purchase any of its shares whether or not redeemable and to

make payments out of its capital in respect of such purchase or otherwise alter its share

capital as equity or non voting equity shares or preference shares and to attach to any

classes of such shares preferences, rights, privileges or priorities in payment of dividends

or distribution of assets or otherwise, over any other shares and to subject the same to any

restriction, limitation or condition and to vary the regulation of the company, as for

apportioning the right to participate in profits in any manner subject to the provision of

the Act and consent of the appropriate authorities if required, being obtained before doing

so. We the several persons whose names, addresses and description are subscribed hereto

are desirous of being formed into a company in pursuance of the Memorandum.

62
 CHAPTER – IV
DATA ANALYSIS
AND
INTERPRETATION

63
 DATA ANALYSIS AND INTERPRETATION

ILLUSTRATION

Forex Exposure to Interest Rate (Millions)

Receivables 100

Payables 10

Loan 400

PCFC 154.5

Adv (Falcon) 39

Adv (Betapharma) 26

In this section, the actual portfolio for the company taken as on 17th of May, 2023 is

taken and then this portfolio is evaluated using market data since Apr ’99 to determine

VaR estimates with time horizon ranging from 1 day to 1 month and a confidence level of

95% and 99%. Valuation of Assets and Liabilities

64
Below shows the exposure of the Company to various risk elements because of its

Operation as well as treasury activities.

Exhibit 4:

Risk elements because of the company operation and treasury activities. Net Receivables

Because of the predominantly export oriented business of the company, its Receivables in

USD is greater than its Payables in USD and hence the difference is net receivables2. As

explained earlier, because of a possible adverse forex market movement, the Company

stands the risk of incurring a loss. Loan On 16th of February, 2023, the Company made

the historic acquisition of Betapharma, 4th largest generic pharma company of Germany,

for a huge sum of EUR 480,000,000. This acquisition has strategic importance because

this will help the Company to get a strong 2 For the sake of simplicity; it is assumed that

all the receivables and payables are only in USD. Although there are sales and purchases

in other currencies as well, these are minor compared to USD transaction and hence this

assumption is justified. 14 footholds in European market. However, for the acquisition,

the Company had the take a massive long term loan of EUR 400,000,000 that is linked to

the volatile 6 M EUR Libor rate. This loan is to be repaid within 5 years such that the

average duration does not exceed 4 years. Because of this linkage and since the

repayment of loan is to be made in EUR, the company is subjected to both interest rate

and Forex risk. The terms of the loan are stated in Exhibit 5 below:

Bank Amount (EUR) Resettlement Freq Interest Rate Duration

Citibank 400,000,000 3 months 6 M EUR Libor rate + 150 basis points 5 Years

65
Exhibit 5:

Terms of the loan of EUR 400,000,000 for Betapharma acquisition since the

interest rate is reset every 3 months, the market value of the loan amount is same as the

book value on the date of reset. Hence, the valuation of the loan on any date is done as

follows:

Where:

P = Book value of the loan

CP = Interest rate (Reset every 3 months, 6 M EUR Libor rate + 150 basis points)

DR = Discount rate (6 M EUR spot Libor rate + 150 basis points)

D = Number of days from valuation date to next resettlement

Z = Number of days between resettlements

B = Interest basis (Taken 365 days)

The Market value obtained is in EUR and to convert it to INR, it has to be multiplied with

the EUR/INR exchange rate on the valuation date.

PCFC

Packing Credit Foreign Currency (PCFC) are short term loans taken by the Company for

Meeting its working capital requirement. Exhibit 6 below shows the terms and details of

the various PCFC loans taken by the Company.

66
 DR. REDDY LABORATORY AND WIPRO LIMITED

CALCULATION OF STANDARD DEVIATION OF DR. REDDY LABORATORY

(A)

DATE RETURNS AVG RETURN DEVIATIONS SQ DEVIATIONS

(R) (‾R‾) (R-‾R‾) (R-‾R‾)²
Apr-23 -1.67 1.6415 -3.3115 10.966
May-23 -1.1985 1.6415 -2.84 8.065
Jun-23 0.267 1.6415 -1.3745 1.889
Jul-23 -1.6977 1.6415 -3.3392 11.15
Aug-23 0.573 1.6415 -1.0685 1.142
Sep-23 0.6269 1.6415 -1.0146 1.029
Oct-23 0.5825 1.6415 -1.059 1.121
Nov-23 1.8351 1.6415 0.1936 0.037
Dec-23 2.4196 1.6415 0.7781 0.605
Jan-24 -1.2685 1.6415 -2.91 8.468
Feb-24 16.7283 1.6415 15.0868 227.612
Mar-24 1.1263 1.6415 -0.5152 0.265
∑R = 19.6985 ∑(R-‾R‾) = -1.374 ∑(R-‾R‾)² = 272.349

67
 CALCULATION OF STANDARD DEVIATION OF Dr. Reddy’s Lab

DATE RETURNS AVG RETURN DEVIATIONS SQ DEVIATIONS

(R) (‾R‾) (R-‾R‾) (R-‾R‾)²
Apr-23 1.1681 0.5194 0.6487 0.421
May-23 0.1474 0.5194 -0.372 0.138
Jun-23 0.2805 0.5194 -0.2389 0.057
Jul-23 1.1902 0.5194 0.6708 0.45
Aug-23 0.6994 0.5194 0.18 0.032
Sep-23 -1.4454 0.5194 -1.9648 3.86
Oct-23 -0.5588 0.5194 -1.0782 1.163
Nov-23 1.0197 0.5194 0.5003 0.25
Dec-23 -2.2592 0.5194 -2.7786 7.721
Jan-24 2.1135 0.5194 1.5941 2.541
Feb-24 -1.3431 0.5194 -1.8625 3.469
Mar-24 5.2204 0.5194 4.701 22.099
R = 6.2327 (R-‾R‾) = -0.0001  (R-‾R‾)² = 42.201

68
P*(1+CP/4) (Z–D)*CP

(1+DR/4) D/Z B Market Value =15

Basis points
Bank Amount Resettlement Freq
StanC 50,00,000 173.6
StanC 1,00,00,000 60
StanC 2,00,00,000 50
StanC 1,00,00,000 51
HSBC 1,00,00,000 68
HSBC 45,00,000 60
Bank Am 1,50,00,000 59
SBI 2,50,00,000 51
CITI 2,00,00,000 -10.3
CITI 1,00,00,000 75
CITI 2,00,00,000 82
CITI 50,00,000 40

69
Bank Amount (USD) Start Date End Date Basis points Resettlement Freq

StanC 5,000,000 5/6/2023 5/31/2023173.60 1 Month

StanC 10,000,000 12/29/2023 6/27/2023 60.00 1 Month

StanC 20,000,000 2/16/2023 8/15/2023 50.00 1 Month

StanC 10,000,000 3/17/2023 9/13/2023 51.00 1 Month

HSBC 10,000,000 2/16/2023 8/17/2023 68.00 1 Month

HSBC 4,500,000 3/21/2023 6/19/2023 60.00 1 Month

Bank Am 15,000,000 3/3/2023 6/2/2023 59.00 1 Month

SBI 25,000,000 4/28/2023 5/28/2023 51.00 1 Month

CITI 20,000,000 4/3/2023 9/3/2023 -10.30 1 Month

CITI 10,000,000 3/17/2023 9/13/2023 75.00 1 Month

CITI 20,000,000 2/16/2023 8/15/2023 82.00 1 Month

CITI 5,000,000 3/17/2023 9/13/2023 40.00 1 Month

Exhibit 6:

Terms and details of the PCFC loan taken by the Company Interest rate is reset

every 1 month and it is linked to the 6 M USD Libor rate plus the basis point as indicated

against each of the PCFC. The valuation of a PCFC loan is done as follows:

Where all the symbols have the same meaning as described above the market value

obtained is in USD and to obtain the corresponding INR value, the USD value is to be

multiplied with the spot USD/INR exchange rate. Because of the dependence of INR

value on interest rate and exchange rate, the value of a PCFC is subjected to both interest

rate and forex risk.

Advances

The Company has given advances to its subsidiaries for their operation. The

details of the advances are shown in Exhibit 7 below3.

70
3 Advances have been given to subsidiaries other than Falcon and Betapharma as well.

However, they are not considered here for 2 reasons:

1. They are insignificant compared to advances to Falcon and Betapharma

2. The notional currency for them is INR; hence there is no forex risk for those

subsidiaries

P*(1+CP/12) (Z–D)*CP

(1+DR/12) D/Z B Market Value =16

Subsidiary Amount Basis points Resettlement Freq

Falcon 3,90,00,000 150

Betapharma 2,60,00,000 175

Interpretation:-

Subsidiary Amount Start Date Basis points Resettlement Freq

Falcon USD 39,000,000 1/1/2023 150.00 3 Months. Betapharma EUR 26,000,000

2/16/2023 175.00 3 Months.

71
Exhibit 7:

Details of the advances to Falcon and Betapharma the market value of the advances is

calculated in the same way as that for the loan above. It is copied below for convenience.

The symbols have same meaning described earlier. The value obtained will be in

respective currencies and hence need to be multiplied with appropriate spot exchange rate

to determine the value in INR. Because of the dependence on both interest rate and

exchange rate, advances are subjected to both interest rate and Forex risk.

Calculation

The calculations shown below are the snapshot of VaR estimate for the portfolio

of Dr.Reddy’s as on a particular day. Hence the estimates shown below should not be

taken to be conclusive. It would change with the changes in the portfolio. Moreover, these

calculations are done for determining the method that gives a better estimate of VaR.

Variance-Covariance method is not taken for the calculation purpose because of the

complexity involved in assigning weightage to each of the market variable manually.

Parameters Method Overall Risk Interest Rate Forex Risk

Historical Simulation Rs. 20.7 Crores Rs. 0.11 Crores Rs. 20.6 Crores

Constant Maturity Rs. 24.2 Crores Rs. 0.14 Crores Rs. 24.0 Crores TH – 1 day

and CL – 95%

Monte Carlo Simulation Rs. 16.0 Crores NA NA

Historical Simulation Rs. 38.6 Crores Rs. 0.23 Crores Rs. 38.4 Crores

Constant Maturity Rs. 34.1 Crores Rs. 0.197 Crores Rs. 33.9 Crores TH – 1 day

And CL – 99%

Monte Carlo Simulation Rs. 24.7 Crores NA NA

Historical Simulation Rs. 98.5 Crores Rs. 0.68 Crores Rs. 97.8 Crores TH – 1 Month

72
And CL – 95% Constant Maturity Rs. 91.5 Crores Rs. 0.73 Crores Rs. 90.7 Crores

Historical Simulation Rs. 111.3 Crores Rs. 1.16 Crores Rs. 110.1 Crores TH – 1 Month

and CL – 99% Constant Maturity Rs. 127.2 Crores Rs. 1.03 Crores Rs. 126.2 Crores

P*(1+CP/4) (Z–D)*CP

(1+DR/4) D/Z B Market Value =17

Back-testing of various models has not been considered in the absence of more

sophisticated techniques. Hence, another criterion for comparison can be the conservative

nature of the estimate. We can see that Historical Simulation Method gives the most

conservative estimate for a time horizon of 1 day and 99% confidence level. Hence it can

be used for the VaR estimation in case a conservative estimate is desired. However,

Variance-Covariance method can also be looked at before making any decision.

The calculations are shown in the attached files:

E:\Summers\FinalPresentation\VaREstimation\HistoricalReturnDaily.xls

E:\Summers\FinalPresentation\VaREstimation\HistoricalReturnMonthly.xls

HOW TO USE VAR?

Because of the variability in the market condition, businesses run the risk of losing

because of possible adverse market movement. However, with the advent of derivative

products and various other hedging mechanisms, it is possible for treasury department to

hedge the cash flows such that irrespective of the market movement, the company has a

risk-free cash flow. But it has a downside to it. While the Company stands to lose from

adverse market movement, at the same time it can gain substantially if the market moves

favorably for the Company’s portfolio. So, if treasury hedges the entire portfolio, the

Company will miss out the opportunity to gain from any such movement. One alternative

73
to this is that instead of hedging the entire portfolio, treasury hedges a portion of it so that

in case of adverse market movement, the Company would incur a loss; however the loss

is within the comfort level of management, or in other words, the Company can absorb

the loss without any hiccup. And needless to say, the Company stands to gain from

favorable market movement. And that is where VaR estimate comes into picture. VaR

estimate gives an idea of what is the maximum loss that the Company can incur in a given

time horizon with a specified confidence level. By monitoring VaR on a day-to-day basis,

treasury would assess whether the Company can sustain the level of loss indicated by

VaR or not. As long as the possible loss is within the target level, treasury would be free

to operate in a way they deem fit for the Company. However, as soon as the estimate

exceeds the target level, the onus will be on treasury to hedge the portfolio so as to bring

the VaR value within the range.

Hence the following steps are involved in using VaR:

1. Determine the target level for the maximum loss that the Company can absorb over a

given time horizon after discussion with the management. This can be either an absolute

value or as a percentage of the portfolio value.

2. Determine the time horizon and confidence level for VaR estimation.

3. Track the VaR estimate over the determined time horizon and confidence level daily.19

4. If the VaR estimate is within the target level, treasury is autonomous to operate in a

Way they deem fit for the Company.

5. However, if the estimate exceeds the level, treasury is mandated to hedge the

Portfolio risk so as to maintain the VaR estimate within the target level.

74
 CHAPTER – V
FINDINGS, SUGGESTIONS
AND
CONCLUSION

75
 FINDINGS

 Risk is sometimes referred to as the possibility of loss or injury. This is termed as

peril. A hazard is a condition that serves to increase the occurrence of perils.

There are different types of hazards such as physical hazards, moral hazards and

moral hazards.

 There are two types of losses: direct losses and indirect losses. Direct losses refer

to the loss of an object that is exposed to risk, such as property. Indirect losses

refer to the losses arising from direct losses.

 There are four levels of uncertainty based on our ability to forecast the outcome

and the probability of that outcome. They are certainty, objective uncertainty,

subjective uncertainty and complete uncertainty. In the first case the outcomes are

certain, in the second case the outcomes can be identified with known

probabilities.

 Risks are of different types. Pure risk refers to the risks that always result in

losses. Speculative risk refers to a risk to a risk from which a possibility of a gain

of loss exists.

 Dynamic risk arises out of changes in the environment which may be political,

economic or social, whereas static risk is unaffected by changes in the

environment.

 Depending upon human attitude towards risk – whether he is risk averse or a risk

lover – the strategy to manage risk varies. Risk can be avoided or prevented by

risk avoidance, loss control, loss prevention, loss reduction and risk transfer.

Insurance is one methods of transferring risk to a third party by paying a premium

for the same.

76
 SUGGESTIONS

WHAT TO DO ABOUT THE RISK?

 The recourse available to banks could be-

 If the risk is at the prospective stage, try to avoid it.

 If the risk is likely to occur, and it is unavoidable, accept the risk and retain it in

an economically justifiable basis.

 Try to execute some effective actions as to reduce or eliminate the loss likely to be

incurred due to happening of the particular risky incident.

 Sound risks measurement procedures and information systems, if put in place in

the right perspective, will help in taking timely decisions for avoidance of risk.

 Monitor various categories of risks on continuous basis and report to appropriate

authority that risk can be overcome in future.

 Company should adapt new policies to cover the risk advantages in the old policy.

 So it is better for the company to have mutual fund in finance sector.

 Liquidate the risk by transfer without recourses to other party.

 Put in place the comprehensive internal control audit systems with a view to

controlling risks.

 Risk management is not a destination, but a journey. It is not a on a time exercise

but a lifetime exercise, which need to be undertaken repeatedly. Over the time,

with identification of new risks, there is need to identify new risk management.

Dr. Reddy’s has grown quite significantly in the recent past, both organically and

inorganically. The recent acquisition of Pharmaceutical Products was the largest for any

Indian company. However, with these growths, the risk profile of the Company has also

grown tremendously.

77
 CONCLUSIONS:

 As risk emanates from different activity, the focus of risk management should be

on making other managers realize the implication of their actions on the

organizations risk level and learn to manage it

 Risk management widely perceived as an attempt to manage firm’s risk levels

using various available sources out of which insurance is the most commonly used

one

 It s imperative that risk manager must have a holistic approach. Ignorance of risk

management is still the main reason given by many corporate entities for not

practicing it.

 Risk identification is the basic task of risk management of any organization. The

risks to which a company is exposed to should be identified by exploring the

organization risks from various environment in which the organization

functioning

 Risk identification includes the study of hazards, which are the conditions that

influence the causes of occurrence of losses. An organization should find out the

hazards carefully in order to prevent the losses

 Risk evaluation is the final phase of risk identification job. In order to evaluate it

properly, past facts and figures about losses are to be collected properly; these

historical data will help to find out the chances of losses and it level of severity

78
 SUMMARY

Risk management is the identification, assessment, and prioritization of risks

(defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or

negative) followed by coordinated and economical application of resources to minimize,

monitor, and control the probability and/or impact of unfortunate events [1] or to maximize

the realization of opportunities. Risks can come from uncertainty in financial markets,

threats from project failures (at any phase in design, development, production, or

sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and

disasters as well as deliberate attack from an adversary, or events of uncertain or

unpredictable root-cause. Several risk management standards have been developed

including the Project Management Institute, the National Institute of Standards and

Technology.

The principles and tools for quality risk management are increasingly being

applied to different aspects of pharmaceutical quality systems. These aspects include

development, manufacturing, distribution, inspection, and submission/review processes

throughout the lifecycle of drug substances, drug products, biological and

biotechnological products (including the use of raw materials, solvents, excipients,

packaging and labeling materials in drug products, biological and biotechnological

products). Risk management is also applied to the assessment of microbiological

contamination in relation to pharmaceutical products and clean room manufacturing

environments.

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BIBLIOGRAPHY

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 BIBLIOGRAPHY:

BOOKS:

1. Risk Management review by Sri Prasanna Chandhra.

2. Financial Management review by M.Y.Khan.

3. Credit Risk review by S.K. Bagchi.

4. Company profile of Reddys Lab.

Websites:

www.reddyslab.com

www.riskglossary.com

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