Summer Training, Report

On

STUDY OF CAPITAL STRUCTURE

Submitted to:
 Table of contents
Acknowledgement 02
Certificate 03
Preface 04
Abstract 07

INTRO TO RANBAXY LABORATORIES LTD

Company Profile 08-10

Vision 10-11
Operating Joint Ventures and Subsidies 12-15
Objectives 16-18
Various divisions of Ranbaxy 19-20
Intro of Ranbaxy Plant in India and various depts. 12-23
Product Review 24-26

INTRO TO CAPITAL STRUCTURE THEORY AND ANALYSIS

Introduction 27-28
Literature of review on Capital Structure 29
Methodology 30
Theory and Analysis 31-38
Optimal Capital Structure for Ranbaxy 39-58
Capital expenditure: an overview 59-80
Latest balance sheet and capital structure of Ranbaxy 81-82
Recommendations and Suggestions for Industry 82-90
Conclusion 91-92
Biblography 93

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 ABSTRACT

A project work is a mandatory requirement for the Business

Management Programme. This type of study aims at exposing the
young prospective executive to the actual business world.

This project gives me knowledge about the capital structure and

theory analysis.Financing decisions involve raising funds for the firm.
It is concerned with formulation and designing of capital structure or
leverage. The most crucial decision of any company is involved in the
formulation of its appropriate capital structure. The best design or
structure of the capital of a company helps the management to achieve
its ultimate objectives of minimising overall cost of capital,
maximising profitability and also maximising the value of the firm.
organization. It is very effective way to judge a company’s cash flow
prospects, as cash is like blood life for any company.

The report initially begins with the company profile, followed by the
detailed analysis of company, like businesses of the company,
products offered by the company, financials of the company, etc

The report involves a lot of research to understand what exactly

capital structure of the company should be.thats , why companies
require appropriate capital structure. The purpose is to develop an
action plan that creates such a capital structure that will upgrades
and standardize the quality of business analysis.

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 INTRODUCTION TO RANBAXY

COMPANY PROFILE
“A company empowered by one mission –to place itself on the world
map. An enterprise propelled by one force-that synergizes its energies to
charter unexplored markets. Organizations fuelled by one dream-to transform
competition into opportunity.”

Ranbaxy Laboratories Ltd. was incorporated in June 1961, in the name of M/S
LEPITIT RANBAXY LABORATORIES LTD and it commenced its business
in MARCH 1962, in technical and financial collaboration with an international
company named LEPTIT SPA, MILAN, ITALY.

Ranbaxy Laboratories Pvt. Ltd. merged with “Leptit Ranbaxy Laboratories Pvt.
Ltd.” in 1962 Ranbaxy and company also merged with this company in 1966.
The collaboration arrangement with M/S LEPTIT was terminated in 1966; after
which Indian nationals acquired the entire share capital of the company.

Therefore the word Leptit was removed from the name of the company. The
name is known as RANBAXY LABORATORIES LIMITED. In 1973 the
company issued shares to the general public and became a full fledged PUBLIC
LIMITED COMPANY.

Today, Ranbaxy has emerged as a Leading

Pharmaceutical Company on the Indian
firmament, with the second largest market
share and enjoys an enviable reputation for its
high standard of ethics and quality around its
core strength of anti-infective, it has produced
new brands in emerging therapeutic areas like cardiovascular, central nervous
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system and nutritional. supporting this expansion, the company has invested in
world class manufacturing infrastructure that leverages India’s comparative cost
advantage and skilled manpower, while delivering international quality.

The company’s drive for Internationalism is guided by the well planned brand
strategy that covers some of the world emerging markets like China, cis, Central
Europe and Latin America . Its position today is in league of the Top Ten
Pharmaceutical companies of three world an decent ranking as the eleventh
largest company in the international generics space is the resounding
endorsement of its strategic mind.

It is clear that for a long time, the dominant share of revenues of the company
would continue to come from the ever expanding global generics market. Hence
the intent of Ranbaxy mission is to achieve a sustained growth rate through the
continuous pursuit of innovation phase one trials for pervasion, a compound for
treating prosthetic males have been completed. Phase 1 trials with clafrinast, an
asthma compound is an important step towards research based value creation.

This company also had success with Ciplofloxacine, an ingenious form, created
through the novel drug delivery systems research. As the demand of the bulk
drugs inside the country and abroad was increasingly rapidly a new, plant was
set up at Toansa near Ropar in 1987. This was a higher capacity plant designed
to cater to the present and future needs, initially antibiotics like Ampicillin,
Trihydrate and Doxycycline were manufactured.

Later, on the other drugs like Cephalexin monohydrate and Ranitidine were also
prepared. The plant at Toansa was designed to meet the stringent standards set
by the Food and Drug Administration (FDA) of U.S.A. This plant has been
approved by FDA and this will open up American and other newer markets for
Ranbaxy’s products
At present Ranbaxy have four plants for the manufacture of bulk drugs two at
Mohali, one at Dewas (M.P) AND Another at Toansa near ROPAR. At present,
Ranbaxy is the second most Indian company engaged in the manufacturing of
Pharmaceuticals, Bulk Drugs and Fine Chemicals.

RANBAXY’s vast range of highly pure laboratory reagent and chemicals enjoy
a place of pride in the market. IT trends, has rebuilt As a step towards
leveraging information for value creation using its information backbone around
an ERP application, along the focus on reengineering several business processes
around the internet and has putting place business solutions that challenge
existing ways of doing Business. The undying spirit of the company’s human
assets and their intensive competitive and entrepreneurial energy has played a

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great part in transforming the company into a multicultural and multiracial team.
Today, Ranbaxy is the largest exporter accounting for 12% of the industry
exports pharmaceutical substance and dosages forms to over 50 countries with
the internationals sales comprising of 45% of the total turnover.

VISION: GARUDA

During the year 2002, the company has evolved a 10-year vision till 2012, for
sustaining significant growth consistent with its mission to be an international
research based Pharmaceutical Company, under the rubric ‘Vision Garuda’,
with increasing emphasis on Novel Drug Delivery Systems Research (DDR).

In licensing and out licensing, relationship with other important pharmaceutical

entities, expansion of manufacturing facilities both in India and strategic
overseas locations, revamping of organizational structures to cater to the wider
and more dispersed span of operations, and streamlining and standardizing the
business processes through out the global organization, are other areas that
receive focus and attention of management on priority.

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Mission

“To become a Research based

International pharmaceutical company”

Vision-2012

Achieve significant business in

Proprietary prescription products
By 2012
With a strong presence in developed markets

Aspirations-2012

Aspire to be a$5 billion company

Become a Top 5 global generics player
Significant income from Proprietary products

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 OPERATING JOINT VENTURES
AND SUBSIDIARIES
BRAZIL : Ranbaxy S.P. Medicamentos Ltd.

CHINA : Ranbaxy (Guangzhou China) Ltd.

EGYPT : Ranbaxy Egypt Ltd.

GERMANY : Basics Gmb H.

HONG KONG : Ranbaxy (Hong Kong) Ltd.

INDIA : Rexcel pharmaceuticals Ltd.,

Solus pharmaceuticals Ltd.,

Vidyut Travel Services ltd.

IRELAND : Ranbaxy Ireland Ltd.

MALAYSIA : Ranbaxy (Malaysia) Sdn. Bhd.

NETHERLANDS : Ranbaxy Pharmaceuticals B.V.

NIGERIA : Ranbaxy Nigeria Ltd.

PANAMA : Ranbaxy Panama SA.

POLAND : Ranbaxy Poland Sp. Zo.

SOUTH AFRICA : Ranbaxy (SA) (Pty.) Ltd.

THAILAND : Unichem pharmaceuticals LTD.,

Unichem Distributors Ltd. Part,

Ranbaxy Unichem CO.Ltd.

U.K : Ranbaxy (UK) Ltd

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USA : Ranbaxy pharmaceuticals Inc.

Ohm Laboratories Inc.,

Ranbaxy Schein Pharma, LLC

VIETNAM : Ranbaxy Vietnam Company Ltd.

ALLIED BUSINESSES
Ranbaxy Animal Health

The Animal Health division saw an encouraging growth despite the prevailing
poor market conditions. The division grew at twice the growth rate recorded in
the industry. On the basis of having a vast dome satiated animal population, the
livestock, poultry business and pets business are among the fastest growing
sectors in India. A vast infrastructure of veterinary colleges, agricultural
institutes, technologists and researchers are helping farmers to source healthy,
cost effective products. In conjunction with the present scenario, the AHC
division of Ranbaxy Laboratories Limited has introduced several latest
generation products.

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Ranbaxy Fine Chemicals Limited (RFCL)

The division ranked 4th in the

industry and captured 11% market
share. RANKEM is established as a
powerful brand, RFCL's brand for
its range of Reagents is now
synonymous with excellence in
reagents and fine chemicals in the
country. The focus of business
remains on developing extensive
customer relations; enhancing service levels and enriching the product mix with
the help of a qualified and competent marketing and sales team

Diagnostics

The diagnostics division has aggressively focused on market expansion

activities based on strategy of reliability, quality products and efficient service.
Introduction of products in ‘Point of Care’ markets has expanded market
presence and over the next 1 – 2 years this segment will see considerable
expansion in line with world trends.

The Dade Behring segment has increased its installation base by 60% in leading
hospitals and laboratories. Plans are afoot for the introduction of more
parameters for the ‘Point of Care’ market and the launch of Special Chemistries,
a range of drug assays, plus an entry into automated microbiology in both the
Base and Dade Behring business areas.

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The company has also witnessed significant milestones in the area of Novel
Drug Delivery Systems (NDDS). The company has entered into strategic
business arrangements with companies such as Bayer AG, Glaxo-Wellcome,
Eli-Lilly etc. for production and co-marketing operations. Many innovative
developments have been taking place in recent times. The company’s research
team is capable of developing one NDDS product every 12 to 18 months. Also,
two new products: Roletra-D and Altiva-D, will soon be launched in India.

In order to expand and promote global growth, the company opened several new
markets during the year, notably in Brazil, where 25 filings were undertaken in
a span of 2-3 months.

The company has planned to build and protect intellectual property with the
help of IPC, which addresses all matters pertaining to patents. CQA supervises
the implementation of standard operating procedures (SOP) and ensures
compliance to corporate quality assurance policy in all technological operations
of the organization. The company is committed to invest 6% of the sales in R
and D by 2003, of which 7% of the expenditure will be earmarked for research
on New Drug Discovery and Novel Drug Delivery Systems. There will be
continuous emphasis on augmenting R and D performance and productivity
with advanced scientific and technological tools.

VALUES OF RANBAXY LABORATORIES LIMITED

1. Achieving customer satisfaction is fundamental to their business.

2. Practice dignity and equity in relationships and provide opportunities for
people to realize their full potential.
3. Ensure profitable growth and enhance wealth of shareholders.
4. Foster mutually beneficial relationships with all their business partners.
5. Manage their operations with concern for safety and environment.
6. Be a responsible corporate citizen.

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OBJECTIVES OF RANBAXY LABORATORIES LTD.

1. To be a leader in the Pharmaceutical industry.

2. To be a profitable company with a steady growth in earnings.
3. To set an example as a socially responsible company.
4. To diversify in health care related areas.
5. To strive for excellence and continuous improvement in all spheres.
6. To improve the quality of life of people by providing better services and
quality products.

Environment, Health and Safety [EHS]

Caring for the Environment is a core corporate value and as a part of this
commitment. The Company enunciated its EHS policy in 1993.
The Company’s EHS policy provides for the creation of a safe and healthy
workplace and a clean environment for employees and the community. It aims
at higher international standards in plant design, equipment selection,
maintenance and operations. The policy seeks to manufacture products safely
and in an environmentally responsible manner.
The implementation of the EHS Policy is ensured by institutionalizing a robust
EHS Management system, adequately supported by well defined organizational
structure.
As a part of EHS processes at the corporate level, besides laying down
guidelines on systems, policy and training, the corporate EHS office monitors
compliance, maintains and disseminates information on laws and regulations.
EHS performance review meetings are held on regular basis to monitor the
progress against agreed EHS improvement plans. Close cooperation between all
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units and individuals is the key to maintaining high standards of environment
protection and safety in all the plants.
The key processes at location level comprise of regular safety surveillance,
inspections & audits, Permit to work system for operational / maintenance
safety, Fire prevention & protection activities, operation of the ETP/Incinerator,
disposal activities related to hazardous wastes, regular monitoring of the
environment internally and also through approved laboratories. Monthly reports
address EHS initiatives, compliance & various records under the statutory
requirement, training of employees including contract employees on EHS
awareness, interaction with the residential associations/nearby community etc.,
celebration of National safety day, fire day, Environment day etc. for EHS
awareness among employees.
The manufacturing facilities for bulk drugs and dosage forms comply with the
stringent requirements of Good Manufacturing Practices (GMP) and Good
Laboratory Practices (GLP) and are approved by International health and
regulatory Agencies like FDA - USA, MCA – UK, WHO etc. These practices
and approvals ensure that an effective framework is always in place, not only
for manufacture of high quality products, but also for effective use of resources
and reduction of wastes as well as high safety & hygiene standards.
Ranbaxy has made significant improvements in process safety of the existing
manufacturing facilities by providing extensive instrumented safety protection
systems. The intended safety features are incorporated in the basic design of the
new projects.
Investments have been made on process improvements as well as effluent
treatment plant up-gradation using the latest membrane based technology, multi-
effect thermal evaporation system and state-of-the-art Incinerator. These
investments have helped to reduce discharges of contaminants into the
environment. With the facilities installed at Toansa for recycling of the treated
effluent, the site has achieved the status of “zero discharge site”.
The Company also engages with the concerned authorities and industry in
devising responsible laws, regulations and standards and thus making safety,
occupational health & environmental information and expertise available to its
employees and the community at large. Ranbaxy has made EHS concerns and
practices a necessary factor in appraising its employee performance.
The Company also accords a very high priority to hygiene monitoring at work
place and health assessment of all employees at site. The plant and processes are
continuously upgraded to improve hygiene and health standards. Necessary
training is imparted to the employees to enhance their awareness towards health
related matters.

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Safety knowledge of the employees is constantly updated through various
external and in-house training programs, including special training programs by
overseas experts & consultants.
Moving up the value chain, the company identified Consumer Healthcare as its
new business area in the year 2001. Ranbaxy Global Consumer Healthcare
(RGCH) was launched in October 2002 with a portfolio of 4 switch brands:
Revital, Pepfiz, Gesdyp & Garlic Pearls. Since these brands were already
popular amongst consumers and represented the leading common ailment
categories like VMS (Vitamins & Minerals Supplement), this portfolio was
carefully created for the introduction of RGCH to the Indian market.
Subsequently in 2004, RGCH launched its first herbal range of products through
New Age Herbals (NAH) with products offering remedy in categories of Cough
& Cold (Olesan Oil & Cough Syrups) and Appetite Stimulant (Eat Ease).

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 VARIOUS DIVISIONS OF RANBAXY
LABORATORIES LTD.

.
1. Chemical Division
2. Diagnostic Division
3. Stan care Division
4. Curradia Division
5. International Division
6. Pharmaceutical Division
7. Technical Division
8. Corporate Division
9. Animal Health Care Division

DIVISIONS IN VARIOUS GEOGRAPHICAL AREAS

1. India and Middle East

2. Europe, CIS and Africa
3. Asia Pacific and Latin America
4. North America

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JOINT VENTURE OF THE COMPANY.

2000 Ranbaxy files IND Application for Asthma Molecule- RBx4638, after
successful completion of pre-clinical studies.Ranbaxy
acquires Bayer’s Generics business (trading under the
Name of Basics) in Germany.
Ranbaxy forays into Brazil, the largest pharmaceutical
market in South America and achieves global sales of
U.S. $ 2.5 million in this market.

2001 Ranbaxy took a significant step forward in Vietnam by initiating the

Setting up of a new manufacturing facility with an
investment of U.S. $ 10 million.
Ranbaxy achieved a turnover of U.S. $ 502 million for
the year 2002 and moved closer to achieving a target
of 1 billion dollar by 2004.

2002 Receives approval from FDA to market Midazolam Hydrochloride Syrup

2 Mg base/ ml. Ranbaxy receives and approval from
FDA to manufacture and market Cefpodoxime
Proxetil for Oral Suspension, Lisinopril +
Hydrochlorothiazide Tablets Us, Terazosin
Hydrochloride Capsules and Amoxcillin Oral
suspension USP.Heralding the company’s entry into
the Indian OTC market.

2003 Ranbaxy received the economic times award for corporate excellence-
for the company for year.ranbaxy signed an agreement
toacquire RPG(aventis) SA along with its fully owned
subsidiary,OPIH SARL,in france

Ranbaxy launched its first range of herbal projects.

2005 Acquisition of additional stake in Ranbaxy
Farmaceutica Ltda., Brazil Ranbaxy announced the
acquisition of Be-Tabs Pharmaceuticals (Pty) Limited
2008 Acquired by the Japanese giant, the $9.62 billion Daiichi Sankyo, ranked
No. 3 in Japan

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BRIEF INTRO OF RANBAXY PLANTS IN INDIA

In the chemical division, various bulk drugs are manufactured. The chemical
division had three units in Punjab. One is located at Toansa, two are located at
Mohali and one unit is located at Dewas near Indore in Madhya Pradesh, where
Ciprofloxacine is manufactured. In the plant of the chemical division, various
drugs like Antibiotics, Anti-malarial, Antibacterial and Anti-ulcer are
manufactured. One of the older plants of Ranbaxy was closed after the accident
in June 2003.the second one is still working

The 1991, the Toansa plant started functioning in 1992 and the Dewas plant
started functioning in 1999. Various plant heads independently manage all these
plants.
In each unit, separate facilities with respect to the manufacture of drugs, along
with their manufacturing areas have been provided. This is required to reduce
the chances of any cross contamination under the drug laws and to comply with
good manufacturing practices.
At Mohali plant, separate blocks have been provided for the preparation of each
drug .The Toansa, Mohali and Dewas plants are planned in such a way that their
system, facilities, manufacturing practices and standards meet the requirements
of FDA. Mohali Plant also mainly in the manufacturing of Active
Pharmaceutical Ingredients (API). The Plant is divided into two plant areas A8
and A9

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THE VARIOUS DEPARTMENTS

Human Resource Department

The basic function of the human resource department in the modern corporate
world is knowledge management. The HR department strives to maintain
cohesiveness among employees. It also ensures interdepartmental cooperation in
achieving targets. The appraisal system is also taken care by this department.
The HR department delves deep into the employee’s psyche to analyze the
positives and negatives of each employee, so that a proper system of delegation
and / or empowerment can be evolved.

Finance Department

The finance department takes care of the regular financial needs of the company
it ensures proper allocation of funds and takes care of the working capital
requirements. It verifies capital raised by different departments and sends them
for approval to the higher authorities.

Stores Department

The function of this department is to provide adequate and proper storage and
preservation of various items to meet the demand of various other departments
by proper issues and maintaining accounts of consumption. It also keeps a track
of stock accumulation and abnormal consumption.

Erection and Fabrication Department

As the name suggests, this department identifies new projects and helps in
erecting them. This department also undertakes major modifications of
equipment.

ERP Department

ERP department helps to integrate the entire enterprise starting from the
supplier to the customer, covering financial and human resources. This will
enable the enterprise to increase productivity by reducing costs. It also ensures a
single solution to the information needs of the whole organization.

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Production Department

As a part of their on going commitment to produce hi-tech quality drugs and

pharmaceuticals that take care of the specific needs of markets around the
world, Ranbaxy Laboratories Limited has increased the investment in the
production department. It is the most important department of the company and
has the following objectives:

1. Improving volume of production.

2. Reducing rejection rate.
3. Maintaining rework rate.

Engineering Department

This department undertakes building, construction and maintenance.

Maintaining service facilities such as water, gas, heating, ventilation, air
conditioning, painting and plumbing are some of the other areas dealt by this
department. This department also helps in maintaining electrical equipments
such as generators, transformers, telephone system and electrical installation.

Purchase Department

The purchase department provides material to the factory without which the
wheels of machines cannot move. The various functions performed by this
department include: Securing good vendor performance, including prompt
deliveries of supplies of acceptable qualities.
1. To develop satisfactory sources of supply and maintaining good
relationships with the suppliers.
2. To pay reasonably low prices.

Quality Control/Quality Assurance Department

The purpose of QC & QA departments is to ensure that the desired quality

standard is achieved. It also ensures that the processing or fabrication of
material conforms to the specific characteristics selected, to assure that the
resulting product will in fact perform its intended function.

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PRODUCT REVIEW

Ranbaxy’s therapeutic width covers five of the top six categories including
Anti-infective, Gastrointestinal, Nutritionals, Cardiovascular, Central Nervous
System, Respiratory, Dermatological and others. While anti-infective contribute
56% of the total sales, Ranbaxy’s other brands like Simvotin and Storvas in the
cardiovascular segment, Serlift in CNS and Revital and Riconia in Nutritionals,
are on their way to success in multiple markets.
During Jan - Dec 2000, amongst the top products of Ranbaxy, Sporidex
(Cephalexin) was the Number 1 brand, closely followed by Cifran
(Ciprofloxacin).

Anti - Infectives

Anti- infective has been the main driver of Ranbaxy’s sales. The important
brands in this category are Cifran (Ciprofloxacin), Sporidex (Ciphalexin),
Enhancin (Amoxyclav), Crixan (Clarithromycin), Vercef (Cefaclor), Oframax
(Ceftriaxone), Cepodem (Cefpodoxime Proxetil), Zanocin (Ofloxacin), Ceroxim
(Cefuroxime Axetil), and Loxof (Levofloxacin).

Cifran (Ciprofloxacin) is the key brand in the anti- infective portfolio, with
estimated sales of US $ 32 Mn, currently being marketed in 15 countries.
Development of Ciprofloxacin once a day has been an important landmark
achieved by Ranbaxy. The product has been licensed to Bayer. Cifran continues
to be a dominant player in the quinolones market in India, China and Russia.

Sporidex is another leading brand in Ranbaxy’s product portfolio with

worldwide annual sales of US $ 35 Mn. It is available in eight different dosage
forms including capsules, dry powder for suspension, redimix, dispersible
tablets, paediatric drops, soft gelatin capsules, sachet and advanced formulation
for twice-daily administration. It is currently marketed in 15 countries. In India,
Sporidex is the leading brand with a market share of 36% of the Cephalexin
segment.

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Keflor is available in seven different dosage forms and is the third-largest
selling brand for Ranbaxy worldwide. The dosage forms list includes capsules,
dry syrup, modified release tablets, dispersible tablets, drops and redimix.

Enhancin is expected to be the leading product in Ranbaxy’s product portfolio

with estimated sales of US $ 45 Mn by the year 2005. The product will be rolled
out to about 20 important markets during this period.

Zanocin, with approximate sales of US $ 10 Mn, is the seventh-largest

contributor to Ranbaxy’s total sales.

Cepodem is currently available in three different countries outside India, and

will be rolled out to 13 different countries in the near future.

Cardiovasculars

Cardiovascular is projected to be the second-best category for Ranbaxy. Statins

have been the key drivers for this segment. The sale of Simvastatin has grown
substantially in the past few years, a trend that is likely to continue in the future.
In India, Simvotin (Simvastatin) is the market leader in the cholesterol reducer
segment. Another leading brand in this category is Storvas (Atorvastatin).
Storvas has been one of the fastest-ever to enter the top-300 brands list of the
Indian pharma industry. Other global cardiovascular brands are Covance
(Losartan) and Caslot (Carvedilol).

Central Nervous System

The Central Nervous Segment is one of the important focus areas identified by
Ranbaxy, with Serlift being the key brand. In India, Serlift is number 1 amongst
Sertraline brands. New product introductions will be drivers of growth in this
category.

Gastrointestinal

Currently, gastrointestinal drugs are the second-largest category for Ranbaxy.

The key brands in this category include Histac and Romesac. The current annual
sales of Ranitidine are estimated to be around US $ 16 Mn and the product is
marketed in more than 20 countries.

Rheumatologicals

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The first generation Cox-2 inhibitors principally drive worldwide growth in
rheumatology. This category is estimated to grow exponentially for Ranbaxy,
with brands like Celecoxib. This year, Rofibax (Rofecoxib) introduced in India,
has established itself as a leader in the Cox-2 inhibitor category and has
overtaken all Celecoxib brands. It has been identified as a key Global brand for
the future.

Nutritonals

Nutritionals have been a major contributor to Ranbaxy’s sales. Two of the

important products in this category are Revital and Riconia. With annual sales
estimated at about US $ 10 Mn, Revital contributes a significant share of total
sales. It is a leading brand in India and has done exceedingly well in some parts
of the world as an OTC product.

Dermatologicals

The dermatology category is mainly driven by India region and is likely to show
a good growth pattern in the future. Some of the key brands doing well in this
segment are Mobizox, Silverex, Moisturex, etc.

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INTRODUCTION
TO
CAPITAL
STRUCTURE
THEORY AND
ANALYSIS

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This is a Report on the ‘Capital Structure and Capital
Expenditure of Ranbaxy Laboratories Ltd.’. The
purpose and scope of the project can be listed as:
• Understanding the organizational structure and functioning of
Ranbaxy Laboratories Ltd.
• Analysing and comparing the financial health of the firms in the
Indian Pharma Industry.
• Identifying and analysing the capital structure of Ranbaxy.
• Conducting a Review of the Capital Expenditure done at Ranbaxy
Laboratories Ltd.
• Identifying loopholes in the functioning and in the area of study
and recommending the suggestions for the same.

Following are the limitations of the study:

• Balance sheets of only 3 years have been studied but the company is
in operation for so many years.
• Only specific tools (i.e. ratio analysis) have been used for data
analysis, while so many other tools are also there.
• Organizational rules & regulations.

• Availability of data. Financial figures for 2008 of Ranbaxy were not

available.
• Limitations of the financial tools used.

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Litreture of review on Capital Structure
CAPITAL STRUCTURE IS A MIX OF DEBT AND
EQUITY CAPITAL MAINTAINED BY A FIRM. CAPITAL
STRUCTURE IS ALSO REFERRED AS FINANCIAL STRUCTURE OF
A FIRM. THE CAPITAL STRUCTURE OF A FIRM IS VERY
IMPORTANT SINCE IT RELATED TO THE ABILITY OF THE FIRM
TO MEET THE NEEDS OF ITS STAKEHOLDERS. MODIGLIANI
AND MILLER (1958) WERE THE FIRST ONES TO LANDMARK
THE TOPIC OF CAPITAL STRUCTURE AND THEY ARGUED THAT
CAPITAL STRUCTURE WAS IRRELEVANT IN DETERMINING THE
FIRM’S VALUE AND ITS FUTURE PERFORMANCE. ON THE
OTHER HAND, LUBATKIN AND CHATTERJEE (1994) AS
WELL AS MANY OTHER STUDIES HAVE PROVED THAT THERE
EXISTS A RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND
FIRM VALUE. MODIGLIANI AND MILLER (1963)
SHOWED THAT THEIR MODEL IS NO MORE EFFECTIVE IF
TAX WAS TAKEN INTO CONSIDERATION SINCE TAX
SUBSIDIES ON DEBT INTEREST PAYMENTS WILL CAUSE A
RISE IN FIRM VALUE WHEN EQUITY IS TRADED FOR DEBT.
IN MORE RECENT LITERATURES, AUTHORS HAVE
SHOWED THAT THEY ARE LESS INTERESTED ON HOW
CAPITAL STRUCTURE AFFECTS THE FIRM VALUE. INSTEAD
OF THE FIRM. MODIGLIANI AND MILLER (1963) ARGUED
THAT THE CAPITAL STRUCTURE OF A FIRM SHOULD
COMPOSE ENTIRELY OF DEBT DUE TO TAX DEDUCTIONS
ON INTEREST PAYMENTS. HOWEVER, BRIGHAM AND
GAPENSKI (1996) SAID THAT, IN THEORY, THE
MODIGLIANI-MILLER (MM) MODEL IS VALID. BUT, IN
PRACTICE, BANKRUPTCY COSTS EXIST AND THESE COSTS
ARE DIRECTLY PROPORTIONAL TO THE DEBT LEVEL OF THE
FIRM. HENCE, AN INCREASE IN DEBT LEVEL CAUSES AN
INCREASE IN BANKRUPTCY COSTS. THEREFORE, THEY
ARGUE THAT THAT AN OPTIMAL CAPITAL STRUCTURE CAN
ONLY BE ATTAINED IF THE TAX SHELTERING BENEFITS
PROVIDED AN INCREASE IN DEBT LEVEL IS EQUAL TO THE
BANKRUPTCY COSTS. IN THIS CASE, MANAGERS OF THE
FIRMS SHOULD BE ABLE TO IDENTIFY WHEN THIS
OPTIMAL CAPITAL STRUCTURE IS ATTAINED AND TRY TO
MAINTAIN IT AT THE SAME LEVEL. THIS IS THE ONLY
WAY THAT THE FINANCING COSTS AND THE WEIGHTED
AVERAGE COST OF CAPITAL (WACC) ARE MINIMISED
THEREBY INCREASING FIRM VALUE AND CORPORATE
PERFORMANCE.

BOODHOO Roshan
ASc Finance, BBA (Hons) Finance, BSc (Hons) Banking &
International Finance
(Email: [email protected] ; Tel:
+230-7891888)
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 Methodology
The methodology adopted for the study was as follows:
• Familiarization, examination and evaluation of the procedures relating
to capital structure and capital expenditure.
• Collection of relevant data form company records and cross checking
of this data.
• Calculations of financial ratios, parameter and norms, as also their
financial implications.
Broadly the data were collected for the report on the project work has been
through the primary and secondary sources.

The primary data is collected by various approaches so as to give a precise,

accurate, realistic and relevant data. The main goal in the mind while
gathering primary data was investigation and observation. The ends were
thus achieved by a direct approach and personal observation from the
officials of the company. The other staff members and the employees were
interviewed for the sake of maintaining reasonable standard of accuracy.

The secondary data as it has always been important for the completion of
any report provides a reliable, suitable equate and specific knowledge. The
annual reports, the fixed asset register and the Capex register provided the
knowledge and information regarding the relevant subjects.

The valuable cooperation and continued support extended by all associated

personnels, head of the department, division and staff members contributed
a lot to fulfil the requirement in the collection of data in order to present a
complete report on the project work.

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 Capital Structure: Theory and
Analysis
Capital Structure
Financing decisions involve raising funds for the firm. It is concerned
with formulation and designing of capital structure or leverage. The
most crucial decision of any company is involved in the formulation
of its appropriate capital structure. The best design or structure of the
capital of a company helps the management to achieve its ultimate
objectives of minimising overall cost of capital, maximising
profitability and also maximising the value of the firm.
The capital structure decision of a firm is concerned with the
determination of debt equity composition. Capital structure ordinarily
implies the proportion of debt and equity in the total capital of a
company. The term capital may be defined as the long – term funds of
the firm. Capital is the aggregation of the items appearing on the left
hand side of the balance sheet minus current liabilities.
In other words capital may be expressed as follows:
Capital = Total Assets – Current Liabilities.
Further, capital of a company may broadly be categorised into equity
and debt. The total capital structure of a firm is represented in the
following figure:

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 Total Capital

Equity Capital Debt Capital

Equity Share Capital Term Loans

Preference Share Capital Debentures
Share Premium Deferred Payments Liabilities
Retained Earnings Other Long term Debt

Established companies generally have track record of their profit

earning capacity, which helps them to create their creditworthiness.
The lenders feel safe to invest their funds in such companies. Thus,
there is ample scope for this type of companies to collect debt. But a
company cannot freely i.e. without having any limit. The company
must have to chalk out a plan to collect a debt in such a way that the
acceptance of debt becomes beneficial for the company in terms of
increase in EPS, profitability and value of the firm.
If the cost of capital is greater than the return, it will have an adverse
effect on company’s profitability, value of the firm and its EPS.
Similarly, if company is unable to repay the debt within the scheduled
period it will affect the goodwill of the company in the credit market
and consequently may create problems in future for collecting further
debt. Other factors remaining constant, the company should select its
appropriate capital structure with due consideration.

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Capital structure involves a choice between risk and expected return.
The optimal capital structure strikes the balance between these risks
and returns and thus examines the price of the stock.

Significant variations with regard to capital structure can easily be

noticed among industries and firms within the same industry. So it is
difficult to generate the model capital structure for all business
undertakings. The following is an attempt to consolidate the literature
on various methods to suggested by researchers in arriving at optimal
capital structure.
Notations used:

• V = value of firm

• FCF = free cash flow

• WACC = weighted average cost of capital

• rs and rd are costs of stock and debt

• re and wd are percentages of the firm that are financed with

stock and debt.

Operating and Financial Leverages

The term leverage refers to the ability of a firm in employing long –
term funds having a fixed cost, to enhance returns to the owners. In
other words leverage is the employment of fixed assets or funds for
which a firm has to meet fixed costs or fixed rate of interest obligation
irrespective of the level of activities attained or the level of operating
profit earned.
Higher the leverage, higher the profits and vice – versa. But a higher
leverage obviously implies higher outside borrowings and hence
riskier if the business activity of the firm suddenly takes a dip. But a
low leverage does not necessarily indicate prudent financial
management, as the firm might be incurring an opportunity cost for
not having borrowed funds at a fixed cost to earn higher profits.

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Operating Leverage
Operating leverage is concerned with the operation of any firm. The
cost structure of any firm gives rise to operating leverage because of
the existence of fixed nature of costs. This leverage relates to the sales
and profit variations.

Operating Contribution
Leverage = EBIT

Contribution = Sales – Variable Costs

EBIT = Earnings Before Interest and Taxes.

Disadvantages of Operating Leverages

− The reliability of operating ratios rests to a large extent on the
correctness of the fixed costs identified with a product. Faulty
apportionment would distort the usefulness of the ratio.
− The published accounts does not give details of the fixed cost
incurred and the contribution from each product and for an
outsider it is difficult to calculate the firm’s operating leverage.

Firm’s cost structure and nature of the firm’s business affects

operating leverage. A degree change in sales volume results in
more than proportionate change (+/-) in operating (or loss) can be
observed by use of operating leverage.

Financial Leverage

This ratio indicates the effects on earnings by rise of fixed cost funds.
It refers to use the use of debt in the capital structure. Financial
leverage arises when a firm deploys debt funds with fixed charge. The
ratio is calculated with the following:

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 • Earnings before interest and tax / Earnings after interest –
The higher the ratio, the lower the cushion for paying interest on
borrowings. A low ratio indicates a low interest outflow and
consequently lower borrowings. A high ratio is risky and
constitutes a strain on profits. This ratio is considered along with
the operating ratio, gives a fairly and accurate idea about the
firm’s earnings, its fixed costs and the interest expenses on long
term borrowings.
• Earnings per Share – Higher financial leverage leads to higher
EBIT resulting in higher EPS, if other things remain constant.
Financial leverage affects the variability and expected level of
EPS. The more debt the firm employs the higher its financial
leverage. Financial leverage generally raises expected EPS, but
it also increases the riskiness of securities as the debt / asset ratio
rises.

Financial EBIT
Leverage = EBT

EBIT – Earnings Before Interest and Tax

EBT – Earnings Before Taxes.
Consider Two Hypothetical Firms

Firm U Firm L

No debt 10,000 of 12% debt

20,000 in assets 20,000 in assets

40% tax rate 40% tax rate

Both firms have same operating leverage, business risk, and EBIT of
3,000. They differ only with respect to use of debt.

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Impact of Leverage on Returns

Firm U Firm L (Fig.

in Rs’000)
EBIT 3,000 3,000
Interest 0 1,200
EBT 3,000 1,800
Taxes (40%) 1, 200 720
NI 1,800 1,080
ROE 9.0% 10.8%

More EBIT goes to investors in Firm L.

Total dollars paid to investors:

• U: NI = Rs.1,800.

• L: NI + Int = Rs.1,080 + Rs.1,200 = Rs.2,280.

• Taxes paid:

• U: Rs.1,200; L: Rs.720.

Now consider the fact that EBIT is not known with certainty.
Determining the impact of uncertainty on stockholder
profitability and risk for Firm U and Firm L
Firm U: Unleveraged

Economy (Fig.
in Rs’000)

Bad Avg. Good

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Prob. 0.25 0.50 0.25

EBIT 2,000 3,000 4,000

Interest 0 0 0
EBT 2,000 3,000 4,000
Taxes (40%) 800 1,200 1,600
NI 1,200 1,800 2,400

Firm L: Leveraged

Economy
(Fig. in Rs’000)

Bad Avg. Good

Prob.* 0.25 0.50 0.25

EBIT* 2,000 3,000 4,000
Interest 1,200 1,200 1,200
EBT 800 1,800 2,800
Taxes (40%) 320 720 1,120
NI 480 1,080 1,680
*Same as for Firm U.

Firm U Bad Avg. Good

BEP 10.0% 15.0% 20.0%
ROIC 6.0% 9.0% 12.0%
ROE 6.0% 9.0% 12.0%
TIE n.a. n.a. n.a.

Firm L Bad Avg. Good

BEP 10.0% 15.0% 20.0%
ROIC 6.0% 9.0% 12.0%
ROE 4.8% 10.8% 16.8%
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TIE 1.7x 2.5x 3.3x

U L

Profitability Measures:
E(BEP) 15.0% 15.0%
E(ROIC) 9.0% 9.0%
E(ROE) 9.0% 10.8%

Risk Measures:
sROIC 2.12% 2.12%
sROE 2.12% 4.24%

Conclusions
• Basic earning power (EBIT/TA) and ROIC (NOPAT/Capital
= EBIT(1-T)/TA) are unaffected by financial leverage.

• L has higher expected ROE: tax savings and smaller equity

base.

• L has much wider ROE swings because of fixed interest

charges. Higher expected return is accompanied by higher
risk.

In a stand-alone risk sense, Firm L’s stockholders see much more risk
than Firm U’s.

U and L: sROIC = 2.12%.

U: sROE = 2.12%.

L: sROE = 4.24%.

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 • L’s financial risk is sROE - sROIC = 4.24% - 2.12% =
2.12%. (U’s is zero.)

• For leverage to be positive (increase expected ROE), BEP

must be > rd.

• If rd > BEP, the cost of leveraging will be higher than the

inherent profitability of the assets, so the use of financial
leverage will depress net income and ROE.

In the example, E(BEP) = 15% while interest rate = 12%, so

leveraging “works.”

Choosing the Optimal Capital Structure for Ranbaxy

Laboratories Ltd.
Based on the ratio analysis done above it can be concluded that
Ranbaxy is an unleveared firm with very less debt component in its
capital structure. The company is in a position to increase its debt
component by resorting to external debt financing. However it should
be kept in mind that, there could be two opposite effects if debt is
increased in the capita structure. The first effect may be an overall
reduction in the cost of capital as the proportion of debt increases in
the capital structure due to low cost of debt. On the other hand,
because of fixed contractual obligation the financial risk of the
company increases. Thus, it is said that the optimum capital structure
implies a ratio of debt and equity at which weighted average cost of
capital would be least and the market value of the firm would be
highest.
Keeping the above thought in mind I have tried to compute what
would be the optimal capital structure for Ranbaxy
Laboratories Ltd., based on the following information as per the
Annual Report 2005:

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EBIT being 37,273,800;
Assuming that the firms expects zero growth
225,557,810 shares outstanding; rs = 12%;
T = 35%; b = 1.0; rRF = 6%;
RPM = 6%.

Estimates of Cost of Debt

Percent financed
with debt, wd rd

0% -
20% 8.0%
30% 8.5%
40% 10.0%
50% 12.0%

If company recapitalizes, debt would be issued to repurchase stock.

The Cost of Equity at Different Levels of Debt: Hamada’s Equation

• MM theory implies that beta changes with leverage.
• bU is the beta of a firm when it has no debt (the unlevered
beta)
• bL = bU [1 + (1 - T)(D/S)]

The Cost of Equity for wd = 20%

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Use Hamada’s equation to find beta:
bL = bU [1 + (1 - T)(D/S)]
= 1.0 [1 + (1-0.35) (20% / 80%) ]
= 1.16
Use CAPM to find the cost of equity:
rs = rRF + bL (RPM)
= 6% + 1.16 (6%) = 12.98%

Cost of Equity vs. Leverage

wd D/S bL rs
0% 0.00 1.00 12.00%
20% 0.25 1.16 12.98%
30% 0.43 1.28 13.67%
40% 0.67 1.43 14.60%
50% 1.00 1.65 15.90%

The WACC for wd = 20%

WACC = wd (1-T) rd + we rs
WACC = 0.2 (1 – 0.35) (8%) + 0.8 (12.98%)
WACC = 11.42%
Repeat this for all capital structures under consideration.

WACC vs. Leverage

wd rd rs WACC

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 0% 0.0% 12.00% 12.00%
20% 8.0% 12.98% 11.42%
30% 8.5% 13.67% 11.23%
40% 10.0% 14.60% 11.36%
50% 12.0% 15.90% 11.85%
Corporate Value for wd = 20%
V = FCF / (WACC-g)
g=0, so investment in capital is zero; so FCF = NOPAT = EBIT (1-T).
NOPAT = (Rs.37,273,800)(1-0.35) = Rs.24,227,970

V = Rs.24,227,970/ 0.1142 = Rs.212,153,852.89

Corporate Value vs. Leverage

wd WACC Corp. Value
0% 12.00% Rs.201,899,750.00
20% 11.42% Rs.212,153,852.89
30% 11.23% Rs.215,791,315.97
40% 11.36% Rs.213,274,383.80
50% 11.85% Rs.204,455,443.04

Debt and Equity for wd = 20%

The value of debt is:
= wd V = 0.2 (Rs.212,153,852.89) = Rs.42,430,770.58.
S=V–D
S = Rs.212,153,852.89 – Rs.42,430,770.58 = Rs.169,723,082.31

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Debt and Stock Value vs. Leverage
wd Debt, D Stock Value, S

0% 0 Rs.201,899,750.00
20% Rs.42, 430,770.58 Rs.169,723,082.31
30% Rs.64, 737,394.79 Rs.151,053,921.18
40% Rs.85, 309,753.52 Rs.127,964,630.28
50% Rs.102, 227,721.52 Rs.102,227,721.52

Wealth of Shareholders

Value of the equity declines as more debt is issued, because debt is

used to repurchase stock.
But total wealth of shareholders is value of stock after the recap plus
the cash received in repurchase, and this total goes up (It is equal to
Corporate Value on earlier slide).

Stock Price for wd = 20%

The firm issues debt, which changes its WACC, which changes value.
The firm then uses debt proceeds to repurchase stock.

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Stock price changes after debt is issued, but does not change during
actual repurchase (or arbitrage is possible).

The stock price after debt is issued but before stock is

repurchased reflects shareholder wealth:
S, value of stock

Cash paid in repurchase.

D0 and n0 are debt and outstanding shares before recap.
D - D0 is equal to cash that will be used to repurchase stock.
S + (D - D0) is wealth of shareholders’ after the debt is issued but
immediately before the repurchase.

P = S + (D – D0)
n0
P = Rs.169,723,082.31+ (Rs. 42,430,770.58– 0)
225,557,810
P = Rs.94.06 per share.

# Repurchased = (D - D0) / P
# Rep. = (Rs.42,430,770.58 – 0) / Rs.94.06
= 45,116.
# Remaining = n = S / P
n = Rs.169,723,082.31 / Rs.94.06
= 1,804,462.

Price per Share vs. Leverage

# shares # shares
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 wd P Repurch.
Remaining

0% Rs.89.51 0 2,255,578
20% Rs.94.06 451,116 1,804,462
30% Rs.95.67 676,673 1,578,905
40% Rs.94.55 902,231 1,353,347
50% Rs.90.64 1,127,789 1,127,789

Optimal Capital Structure

wd = 30% gives:
• Highest corporate value
• Lowest WACC
• Highest stock price per share
But wd = 40% is close. Optimal range is pretty flat.

Modigliani and Miller Theory (Modern View)

The traditional view of capital structure explained in weighted

average cost of capital is rejected by the proponents Modigliani and
Miller (MM) (1958). According to them, under competitive
conditions and perfect markets, the choice between equity financing
and borrowing does not affects a firm’s market value because the
individual investor can alter investment to any mix of debt and equity
the investor desires.

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Assumptions of MM Theory
The MM Theory is based on the following assumptions:
• Perfect capital markets exist where individuals and companies
can borrow unlimited amounts at the same rate of interest.
• There are no taxes or transaction costs.
• The firm’s investment schedule and cash flows are assumed
constant and perpetual.
• Firms exist with the same business or systematic risk at different
levels of gearing.
• The stock markets are perfectly competitive.
• Investors are rational and except other investors to behave
rationally.

MM Theory: No Taxation
The debt is less expensive than equity. An increase in debt will
increase the required rate of return on equity. With the increase in the
levels of debt, there will be higher level of interest payments affecting
the cash flow of the company. Then equity shareholders will demand
for more returns. The increase in cost of equity is just enough to offset
the benefit of low cost debt, and consequently average cost of capital
is constant for all levels of leverage as shown in Figure 1.

r Cost of
Equity
Cost of Capital

Average cost of
Capital
Cost of
Debt

Level of leverage

Figure 1: MM view of Capital Structure

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In MM theory the following notations will be used:
Vu = Market value of ungeared company i.e. company
with 100% equity financing.
Vg = Market value of a geared company i.e. capital
structure of the company includes both debt and
equity capital.
D = Market value of debt in a geared company.
Ve = Market value of equity in a geared company.
Vg = Ve + D
Ku = Cost of equity in an ungeared company.
Kg = Cost of equity in a geared company.
Kd = Cost of Debt.

M M Theory: Proposition I

The market value of any firm is independent of its capital structure,

changing the gearing ratio cannot have any effect on the company’s
annual cash flow. The assets in which the company has invested
and not how those assets are financed determine the market value.
Thus, the market value of a firm is unaffected by its financing
decisions, its capital structure, or its debt-equity ratio.
In simple words, M & M theory views the value of the company as
a whole pie. The size of the pie does not depend on how it is sliced
i.e. the firm’s capital structure but rather the size of the pie pan i.e.
the firm’s present value based on its future cash flows and its asset
base.
The value of the geared company is as follows:
Vg = Vu
Vg = Profit before interest
WACC
Vg = Vu = Earnings in ungeared company
Ku
WACC is independent of the debt / equity ratio and equal to the cost
of capital which the firm would have with no gearing in its capital
structure.

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 Proof by example -
Consider holding 1% of stock in an all-equity firm
with value VU.
Then your wealth is 0.01VU.
Also, you receive a cash flow of 0.01CFt every
period.
Alternatively, consider holding 1% equity and 1%
debt in levered version of the same firm with value
Vg=E+D.
Your wealth then is [0.01E+0.01D] = 0.01Vg.
Cash Flows each period? [0.01(Int)+0.01(CFt-
Int)]=0.01CFt.
As the inherent risk of the firm is the same, then the
discounted value of the cash flows must be the same,
i.e., Vg= VU.
WACC Prop. I

M&M

Traditional

B
E

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 MM Theory: Proposition I

M M Theory: Proposition II

The rate of return required by shareholders increases linearly as the

debt / equity ratio is increased i.e. the cost of equity rises exactly
in line with any increase in gearing to precisely offset any
benefits conferred by the use of apparently cheap debt.
MM went on arguing that the expected return on the equity of a geared
company is equal to the return on a pure equity stream plus a risk
premium dependent on the level of capital structure.
The premium for financial risk can be calculated as debt / equity ratio
multiplied by the difference between the cost of equity for ungeared
company and risk – free cost of debt.

The cost of equity depends on the following three variables:

1. The required rate of return on the firm (Ku).
2. The required rate of return on the firm’s debt (Kd).
3. The firm’s debt/equity ratio (D/E)

D
Kg = Ku +
Vg
(Ku − Kd )

MM proposition II can be summed up in following points:

• Equity holders require a premium over what everyone is paid if
the firm has debt.
• The premium DOES depend upon the firm’s financing mix.
The wealth of equity holders, however, is unaffected.
• Any increase in leverage raises both the risk of equity and its
required return.
Stockholders are indifferent to capital structure and to change in
leverage.

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 RE Prop. II
M&M
Slope = RA �RD

Traditional
RA
B
E

MM Theory: Proposition II
M M Theory: Proposition III

MM theory’s third proposition asserts that the cut-off rate for new
investment will in all cases be average cost of capital and will be un
affected by the type of security used to finance the investments.

M M Theory: Arbitrage
The cost of equity will rise by an amount just sufficient to offset any
possible saving or loss. The lenders determine the supply of debt. The
optimal level is simply the maximum amount of debt which lenders
are prepared to subscribe in any given circumstances e.g. level of
inflation, rate of economic growth, level of profits etc. the investors
will exercise their own leverage by mixing their own portfolio with
debt and equity. The investors call this the arbitrage process. Under
these conditions of investment the average cost of capital is constant.
If two different firms with same level of business risk but different
levels of gearing sold for different values, then shareholders would
move from over valued firm to the under value firm and adjust their
level of borrowing through the market to maintain financial risk at the
same level. The shareholders would increase their income through this
method while maintaining their net investment and risk at the same
level. This process of arbitrage would drive the price of the two firms
to a common equilibrium total value.

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The word ‘arbitrage’ is a technical term referring to a situation where
two identical commodities are selling in the same market for different
prices, then the market will reach equilibrium by the dealers start at
the lower price and sell at the higher price, thereby making profit. The
increase in demand will force up the price of the lower priced goods
and increase in supply will force down the price of the high priced
commodities.
The arbitrage in MM theory shows that the investors will move
quickly to take advantage and will make profit in an equilibrium
capital market, then this would represent an arbitrage opportunity.

MM Theory: Corporate Taxation

In above discussion, MM theory has ignored the tax relief on debt

interest. MM has further modified their theory by considering tax
relief available to a geared company when the debt component exists
in the capital structure. The tax burden on the company will lessen to
the extent of relief available on interest payable on the debt, which
makes the cost of debt cheaper, which reduces the weighted average
capital of the lower where capital structure of a company has debt
component.
Consider a firm with no debt (i.e. all equity or unlevered) with a value
of Vu.
Suppose firm changes capital structure by issuing debt and retiring
some equity. The firm will realize gain since interest payments on
debt are tax-deductible, so tax liability will decline!
For perpetual debt:
Yearly Tax Savings (Tax Shield)
= Interest × TC = r ×D × TC
= RD × B × TC
Tax shield will be realized each year forever. Since it goes to
bondholders, it should be discounted at RD, thus
PV of tax shield = (RD × B × TC)/ RD
= B × TC
Value of firm with debt VL (i.e. “levered firm”) will be : VL = Vu +
B × TC
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Value increases by PV of tax shield.
Tax advantage of debt increases as TC increases.
In M&M world (TC = 0), VL = V

Slope = TC
VL

PV of Tax Shield

VU M&M Value

B
MM Theory: Corporate Taxation

Under the assumption of tax relief being available on debt interest, the
total market value of the company is increasing function of the level
of gearing.
MM theory cost of equity formula for a geared company:

Kg = Ku + (1 – T) (Ku – Kd)

MM theory assumes that the value of the geared company will always
be greater than an ungeared company with similar business risk but
only by the amount of debt – associated tax saving of the geared
company. Value of geared company:
Vg = Vu + DT
When corporation taxation is introduced, the tax deductibility of debt
interest creates value for shareholders via the tax shield, but this is a
wealth transfer from taxpayers. The value of a geared company equals
the value of an equivalent ungeared company’s shareholders is less
than that in the all equity company, reflecting the tax benefits. A
further effect of corporate taxation is to lower WACC, which falls
continuously as gearing increases.
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MM Theory: Personal Taxation

MM theory considered only corporate taxes. It was left to a

subsequent analysis by Miller (1977) to include the effects of personal
as well as corporate taxes. He argued that the existence of tax relief on
debt interest but not on equity dividends would make debt capital
more attractive than equity capital to companies. The market for debt
capital under the laws of supply and demand, companies would have
to offer a higher return on debt in order to attract greater supply of
debt. When the company offers after personal tax return on debt at
least as equal to the after personal tax return on equity, the equity
supply will switch over to supply debt to the company. It is assumed
that, from the angle of the company, it will be indifferent between
raising debt or equity as the effective cost of each will be the same
and there is no advantage to gearing.

Financial Distress and Capital Structure

The assumption is that when firm has very high level of borrowing
they are more likely to run into the cost of final distress and cost of
bankruptcy. When the leverage of the firm is extremely high then it is
very likely that at some stage it will not be able to make annual
interest payments and loan repayments. Dividends for shareholders
can be bypassed but failure to pay interest on loans often gives the
lender the right to claim on the firms operating assets thereby
preventing the firm’s continuity of activity.
The following illustrative list of activities which may cause increase
in cost of the firm.
• Successive borrowings beyond the company’s target debt –
equity ratio.
• Borrowing higher levels of interest
• Skip off or cut in dividend which may cause the fall of market
rate of shares.
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 • Loss of trade credit from suppliers
• Distress sale of highly profitable instruments.
• Abandonment of promising new projects.
• Reduced credit period resulting in loss of business.
• Corporate image may be tarnished.
• Demand for withdrawal of loans made to the firm previously.
• Reduction in stock levels result in reduction in sales etc.

Bankruptcy Costs

The cost of bankruptcy may be of two types:

• Direct costs
— Those directly associated with bankruptcy, both legal and
administrative.
• Indirect costs
— Costs associated with a firm experiencing financial distress
(creditors, bankers, customers, employers, etc.)
Bankruptcy costs = direct costs + indirect costs

An increase in debt is associated with increased tax savings but also

an increased probability of running into cost of financial distress and
bankruptcy. The value of the leveraged firm is it’s capitalised after tax
operational cash flow plus the present value of the tax savings
incorporating the anticipated cost of financial distress and bankruptcy.

V = X + DT – BC
R
Where,
V = Value of leverage firm
X = Anticipated net operational cash flows
R = Capitalisation Rate
D = Market Value of Debt
T = Corporate tax rate
BC = Anticipated costs of bankrupting

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 Cost of Debt
V PV of Bankruptcy Cost

PV of Tax Shield

VU

Cost of Equity

Optimum Capital
Structure
B

Figure: Optimum Capital Structure and Costs of Financial

Distress

The existence of tax benefit for modest amounts of debt, and the need
to avoid the costs of financial distress, suggest that there is an optimal
capital structure as illustrated in figure which shows that there is an
optimal capital structure at the point where the market value of the
firm is maximized, that is where (DT – BC) is maximized.

Debt Financing and Agency Costs

Agency theory models a situation in which a principal (a superior)
delegates decision making authority to an agent (the subordinate) who
receives reward in return for performing some activity on behalf of
the principal. The outcome of the agents effects the principals welfare
in some way, for example sales revenue, output or contribution
margin. The principal attempts to combine a reward system with an
information system, in order to motivate the agent to choose the
action, which maximizes the principal’s welfare.
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In respect of debt finance, the suppliers of debt are much concerned,
about their investment in the company, about their investment in the
company, about the risk involved in financing debt to the company. In
order to minimize the risks in debt finance, the suppliers of loan will
impose restrictive conditions in loan agreements that constraint
management’s freedom of action and it is known as agency costs. The
more money the suppliers of debt lend to the company – then the
more constraints they are likely to impose on the managements in
order to secure their investments. Therefore, agency costs are more in
highly geared firms.

Difficult to identify and estimate, but exist

V = VU + BTC – PVBC– PV of agency costs
PVBC + PVAC eventually dominate over PV of tax shield.
PV of agency costs , as B generally.

PVBC + PVAC
V

PV of Tax Shield

VU

Debt Financing and Agency Cost

Signaling Theory

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In a pioneering study published in 1961, Gordon Donaldson examined
how companies actually establish their capital structure. The findings
of his study are summarised below:
1. Firms prefer to rely on internal accruals, i.e. on retained earnings
and depreciated cash flow.
2. Expected future investments oppurtunities and expected future
cash flow influence target dividend payout ratio. Firms set the
target pay out ratio at such a level that capital expenditures,
under normal circumstances, are covered by internal accruals.
3. Dividends tend to be sticky in the short run. Dividends are raised
only when the firm is confident that the higher dividend can be
maintained; dividends are not lowered unless things are very
bad.
4. If a firm’s internal accruals exceed its capital expenditure
requirements, it will invest in marketable securities, retire debt,
raise dividends, resort to acquisitions, or buyback its shares.
5. If a firm’s internal accruals are less than its non-postponable
capital expenditure, it will first draw down its marketable
securities portfolio and then seek external finance.
Noting the inconsistencies in the trade – off theory, Myers proposed a
new theory, called the signalling, or asymmetric information, theory
of capital structure. The main points of the theory are:
♦ Managers often have better information.
♦ Sell stock if stock is overvalued.
♦ Sell bonds if stock is undervalued.
♦ Investors understand this, so view new stock sales as a
negative signal.

Corporate Finance Practices

The capital structure decision is a difficult decision that involves a

complex trade – off among several considerations like income, risk,
flexibility, etc. given the over – riding objective of maximising the
market value of a firm, the following guidelines should be kept in
mind while hammering out the capital structure of the firm.

• Avail of the Tax Advantage of Debt.

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 Interest on debt finance is a tax – deductible expense. Hence
finance scholars and practitioners agree that debt financing gives
rise to tax shelter which enhances the value of the firm.
• Preserve Flexibility
Flexibility implies that the firm maintains reserve borrowing
power to enable it to raise debt capital to respond to unforeseen
changes in business and political environment. Hence the firm
must maintain some unused debt capacity as an insurance
against adverse future developments.

• Ensure that the Total Risk Exposure is Reasonable

The affairs of the firm should be managed in such a way that the
total risk borne by the equity shareholders is not unduly high.

• Subordinate Financial Policy to Corporate Strategy

Financial policy and corporate strategy are often not integrated
well. This may be because financial

• Mitigate Potential Agency Costs.

Due to separate ownership and control in modern corporations,
agency problems arise. Shareholders scattered and dispersed as
they are not able to organise themselves effectively. Hence, very
little monitoring takes place in the security markets.
Since agency costs are borne buy shareholders and the
management, the financing strategy of a firm should seek to
minimise these cost by employing external agents who
specialise in low cost – monitoring.

• Issue innovative Securities

Thanks to SEBI guidelines introduced in 1992, issues have
considerable freedom in designing financial instruments. There
is greater scope for employing innovative securities to the
advantage of the firm. The important securities innovations have
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 been as follows: floating rate bonds (or notes), collateralised
mortgage obligations, dual currency bonds, extendible notes,
medium term notes.
• Widen the Range of Financing Sources
In as dynamically evolving financial environment, traditional
sources of financing may diminish in importance. They may not
be adequate or optimal. Hence, it behoves on a firm to employ
new modes of finance like commercial paper, factoring, Euro
issues, and securitisation.

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 Capital expenditure: an
overview

Factors Of Capex

Organizations engaged in manufacturing and marketing of

goods or services require assets in their operations. An asset
can be thought of as any expenditure, which creates or aids in
creation of a revenue-generating base. Companies incur various
expenditure to carry on standard flow of work, expenditure
intended to yield returns over a period of time, and usually
exceeding one year is regarded as capital expenditure. Various
factors are considered before Board of Directors approves any
expenditure. All that factors can further be divided into:

Operational Factors
I. To meet future requirements based on market forecast.
II. To maintain coordination with the vision of the
company as Ranbaxy vision Garuda states to be top five generic
players in the world by 2012 and achieve sales of 5 billion. To
achieve this target company has to incur heavy expenditure on
acquisition of fixed assets.
III. To increase market penetration.
IV. To maintain, renew, expand, upgrade existing physical
assets that helps to facilitate and enhance revenue-generating
capacity.
V. To create, acquire and develop revenue generating
activities/ capacities that is imperative for an organization’s
healthy growth and existence.

Financial Factors
In deciding which assets to create, acquire or develop, the
benefits to be gained from the expenditure have to be weighed
against the costs that will be incurred. While costs can always
be expressed in financial terms, the benefits may or may not be
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 similarly quantifiable. Nevertheless, an attempt must be made
to express the benefits expected, in a manner that facilitates
comparison with costs and helps formulate a rational basis for
the decision making process. Following are the financial tools
that are taken into account for approving capital expenditure.

Discounted Cash Flow (DCF)

This is one of the techniques for financial evaluation of
Capex’s. DCF techniques are based on the concept of time
value of money and provide a methodology of taking into
account the timing of cash proceeds and outlays over the life of
the investment. The procedure underscores the need to state
cash flow streams arising in different time periods thus
differing in value and, hence comparable only in terms of a
common denominator viz. present values.

I. Discounted Payback Period (DPP)

DPP is the number of years it takes for the present value of
inflows to equal the initial investment. Apart from giving due
importance to time value of money it serves as a reasonable
tool of risk approximation. It favors projects, which generate
substantial cash inflows in initial years, and discriminates
against those that bring in substantial inflows in later years
(risk tending to increase with tenure). Thereby implying that an
early resolution of uncertainty enables the decision maker to
take prompt corrective action by modifying/ changing other
investment decisions.
However, by the same logic it cannot be used as a principal tool
for analysis because it ignores any substantial cash flows
arising after the pay back period.

II. Internal Rate of Return (IRR)

IRR is the discount rate that equates the present value of the
expected future cash inflows to the present value of the
expected future cash outflows. It is the post tax return from
investment and hence the excess of IRR over the cost of capital
indicates a surplus after paying for the capital employed. IRR
presupposes an equivalent rate of return on the cash flows
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 generated during the life of the asset i.e., it assumes re-
investment of intermediate cash flows at the rate of return equal
to the project's IRR.
Internal rates of return are most often used as useful additions
to NPV computations. This has in turn justified the use of IRR
as a good substitute to NPV. IRRs have the merit of indicating
whether a project is worthwhile, in
that - an IRR above the cost of capital represents a positive
NPV project, an IRR equal to the cost of capital is a zero NPV
project and an IRR less than the cost of capital is associated
with a negative NPV project.
Inspite of its merits, it needs to be understood that IRRs helps
only to identify projects that maximizes the ratio of rupee-value
to rupee-capital in percentage terms. What NPV will help in
determining is the projects that maximizes the rupee-spread
between value and capital.

III. Net Present Value (NPV)

NPV is equal to the present value of cash inflows minus the
present values of cash outflows. A positive NPV is a
prerequisite for the 'acceptance' of the project.
The primary tool of appraisal would be the NPV method. Its
superiority over other methods arises out of its principal merit
of incorporating all benefits and costs occurring over the life of
the asset

IV. Profitability Index (PI)

The Profitability Index essentially measures the Present value
of benefits times the initial investment. Under unconstrained
conditions, the profitability index will accept and reject the
same projects as the NPV criterion.
It is possible that a project may have no critical risks. Or the
financial are extremely favorable (high NPV, high IRR, high
PI, low DPP etc.) and the occurrence of consequent risks may
not compromise the success of the project. It is also possible
that there is a conscious corporate decision to accept certain
risks. In such cases, no measures are required. These risks, in
any case, must be explicitly stated in the Quantitative
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 assessment of Risk Capital investments are essentially
committed in expectation rather than in certainty, which
implies that investments are subject to risk contribute to
removing the shortcomings of an unstructured workings.

INTRODUCTION
The term 'Capital expenditure' refers to expenditure intended
to yield returns over a period of time, usually exceeding one
year. This basically implies that any expenditure, which results
in the creation of a new asset or substantially increases the
capacity/benefits of an existing asset and is of a "long term"
nature, should be classified as Capital expenditure.

Since, the expression 'Capital expenditure' is not exhaustively

defined, the facts of a particular case would decide whether
expenditure is capital or revenue. Generally speaking, the
expenditure should be tested on the following criteria to
facilitate classification between capital and revenue.

Expenditure would be deemed to be capital, if incurred

for

 Initiation of business

 Extension of business: Entry into new markets &

products (including R&D and regulatory expenses).

 Modification of asset/ equipment resulting in

increased benefits from the existing asset

 Bringing into existence a new asset.

 Conversely, expenditure would be deemed to be

revenue, if incurred for

 Routine repairs and maintenance of existing plant.

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 Replacement of any part of the existing plant with
capacities remaining unchanged

 Shifting of plants

 Making alterations or renovations on rented

premises

 Assets having life of less than one year

Classification Of Capital Investments

Since the analysis for appraisal of the proposed capital

expenditure will largely depend upon the kind of investment, it
is necessary to classify capital investments into the following
categories:

1) Cost Reduction, Modernisation and Rationalisation.

Expenditure to replace serviceable, but obsolete
equipment. This may become necessary because of the expiry
of normal life or change in technology. The purpose of this
expenditure is to improve productivity, increase efficiency or
reduce cost of labour, material or other items such as power.

2) Expansion of Existing Products/ Capacity

Expenditures to increase plant capacity for existing
products/equipment or enhance multi-purpose flexibility.

3) Expansion into New Products/New Product Packs

Expenditure necessary to produce new products/new product
pack. This also includes expenditure on existing facilities to
handle new products which may result in incremental
realizations / value additions.

4) New market development and Market Entry

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 This would include expenditure made for entering and
developing new markets. Such proposals would require the
business case to be accompanied with detailed financial
analysis.

5) Replacement: Maintenance of Business

Expenditure necessary to replace worn-out or damaged
equipment. They are not likely to increase capacity or alter
production significantly. Capital spares are included here.

6) Quality, Good Manufacturing Practices, Safety, Health and

Environment.
Expenditures necessary to upgrade quality, compliance of
GMPs, government regulations, labour agreements, insurance
policy terms, and environmental safety requirements. Financial
evaluation/benefits from such expenditure may to the extent
quantifiable, be provided.

7) Research & Development

Expenditure on R&D projects/ equipment/ facilities. Financial
evaluation/benefits from such expenditure may to the extent
quantifiable, be provided.

8) Information Technology
Expenditure on procurement of IT infrastructure (Hardware)
and/or application software. Financial evaluation/benefits from
such expenditure may to the extent quantifiable, be provided.

9) Others
This includes office buildings, vehicles, furniture, office
equipment, InfoTech related equipment and utilities, and all
such assets, which provide infrastructures support. This also
includes any capital expenditure not explicitly covered in the
above classifications.

Capital Expenditure proposals are not applicable

for

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 1] Employee entitlements
Capital expenditure necessary to meet the commitments in
respect of provision of assets to the employees in terms of
personnel policies. Financial evaluation of such expenditure is
not required. Assets purchased by employees against their
hard/soft furnishing entitlements do not fall within the scope of
this manual and hence, will not be included here as they are per
policy.

2] Amounts less than Rs.10, 000/ $1,000

Segregation of Capex and Revenue Expenditure

Broadly, the following shall be considered as Revenue:

 All repairs to equipment in the normal course of business.
 All annual maintenance contracts (AMC) to keep the said
equipment/assets in working condition.
 All expenditures, which do not result in an
enduring/permanent benefit to the assets.
 Modification to the existing assets, which does not result in
enduring benefit, are to be treated as Revenue after taking
ratification of Technical Head of Plant.
 Piping and insulation of the nature of minor repair or
replacement.
 Re-arrangement of assets or minor structural changes for
regulatory batches.
 All accessories / dies & punches which are procured
subsequent to purchase of assets
In case of certain expenditure the treatment of which is in
doubt, the decision in this respect shall be exercised by the
Plant Account Manager in consultation with the User/Technical
Head.

Date Of Capitalisation
Date of Capitalisation would be the date when the assets is
certified by the concerned Engineering / E&F Department as
ready to use or GRN date in case of assets which do not need
commissioning (that is computers, furniture, fixtures etc.).
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 Authority for fixing date of capitalisation would be with E&F
department.
Lead-time between certification and Commencement of
commercial production will not normally exceeds 30 days
In case of lead-time exceeding 30 days to take specific
approvals from the Plant Head.

Capitalization of Expenditure other than basic cost of assets

All expenditure directly related to the assets capitalized
including freight, Entry tax, Octroi, custom duty, and any such
amount, which does not form part of the original invoice, is to
be capitalized along with the relevant assets.
All installation cost, service charges and labour cost, trial run
cost (net of realizable value of the product), technician fee and
any other expenditure directly attributable to the installation.
Cenvat /CVD credits will be netted off from the cost of assets.
As per accounting standard we have to capitalise the assets net
of Modvat.
E&F department operational cost will be directly identified
with the projects or allocated to the projects on equitable basis.
For all this expenditure it is important to book at the stage of
initiation at SAP locations through the same capital internal
order number, which has been uniquely given to the Capex
proposal at the time of initiation of the particular asset.
Regarding Cenvat/ CVD credits netting off, special care is
required to be taken towards year ends to ensure meeting
technical requirements as per the Accounting Standards and
ensure maximum depreciation (including higher depreciation
allowed is accounted for on capitalization, as applicable &
there is no Cenvat (cash flow) loss.

Capex Numbering
The numbering scheme is as under

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 Entity/Division/Cost Center No./ Year/ Serial No. of
CEP raised by that RCC/ Running Serial No. of Capex of the
Division/ Plant, to be given by the Accounts department. In
case of Head Office, H.O will appear against division's name.

At the beginning of the year capital budget prepared by every cost

center (RCC) for the particular year in every business area. This
budget prepared every department and submitted to the division.
Then division decided and finalized the budget and given to the
management committee for the final approval. Capital budget is
three type prepared by the company.
Divisional
Info tech
Employee entitlement
The whole process works in a very systematic manner where
firstly engineers working at operational level locate the
requirement of any new machinery. After identifying need at
operational level process of capital budgeting commence.
Currently whole Capex system is followed manually. The whole
organization is divided plant wise.
Plants located at Mohali 1 &2, Toansa, Dewas are handled
division wise. Division consists of head from each department and
they control API Manufacturing plants from one division. API
manufacturing acts as a coordinator between above 4 plants. They
are responsible for communicating reports generated by each plant
head that comes under API manufacturing to higher authorities.
For each Plant responsible cost center head are assigned who looks
after operational need. Different RCC’s are prepared depending
upon the functions.
These head can be divided into following categories
 Production
 Engineering
 Personnel/security

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 Safety/ETP
 QA/QC
 Stores

For above different functions RCC’s head prepared their

requirement chart specifying
 RCC’s number
 Description (whether production, engineering,
QA/QC)
 Classification (Replacement, Upgradation)
 Kind of expenditure (capital or revenue)
 Justification
 VED
 Quantity

RCC’s number is unique for each function. Description about

the function whether it falls in production, engineering,
personnel etc.

Revenue or capital expenditure can be further divided as per

RCC’s requirements:

CAPITAL EXPENDITURE
Regulation
GMP (Goods Manufacturing Practices)
EHS (Environment Health Safety)
Replacement
Capacity
Upgradation

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 Additional

REVENUE EXPENDITURE
Operating Expenses
Stores
Repairs Building
Repairs and Maintenance
Staff Welfare
VED is a management science tool, which is used by various
department depicting vitality of particular need raised at
operational level where
V stands for VITAL
E stands for ESSENTIAL
D stands for DESIRABLE

The above requirement chart prepared by RCC head then

consolidated by Divisional Finance Accounts Department and
budgets are prepared. For each plant this chart is prepared
where requirement of various functions are shown and also
respective RCC head gives justification. Finance department
review the expenditure type whether capital or revenue again as
it could be classified wrong by RCC head. Finance department
then modifies this chart into budget based on
Plant wise requirement
Kind of function

In plant wise requirement various excel files are prepared

which is as follows
Summery statement
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 Revenue expenditure
Capital expenditure
RCC wise
Similarly depending upon the functions various budgets is
prepared. Basically here for production and engineering
requirements send by RCC head is provided in plant wise
description chart but for others such as
Personnel/security
Safety/ETP
QA/QC
Stores

In above functions division wise budgets are also made for

example

QA/QC -> Division -> PDL

QA
Contract Manufacturing

Personnel/security -> Division -> Personnel/security

Division Management
Division Accounts

Separate budgets are prepared and then sanctioned by

respective head.
Now the budgets prepared by finance department is further
send to respective departmental head. Then plant heads,
followed by Vice President & onwards as per the Capex
amount, approves these capex’s.

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 As explained earlier Finance manager maintain the budget
information, following manufacturing locations of API are
catered at Mohali Division
MOHALI
TOANSA
DEWAS

After preparation of Budgets, BOD approves Capital

Expenditure by initiating CAPEX form by Plant head that is
appropriately signed by requisite authorities. In CAPEX Form
itself amount is classified into various categories
A. Replacement/Cost Reduction
B. Expansion into New Product/New Product Packs
C. Quality, Safety, Environmental
D. Expansion of Existing Products Packs
E. Replacement: Maintenance of Business
F. Others
All kinds of expenditure are classified into above head for API
Manufacturing for approval of Capital Expenditure

Accounting Route for API Manufacturing

Capital Expenditure
When top authorities approve the Capex requirement then an
internal order number is created by Plant department. After the
creation of internal order number finance department inform
respective accounts department about the same. On receipt of
the IO, indenter will create the purchase requisition that
subsequently go to purchase department. Purchase department
will float enquires and prepare comparative charts for at least 3
vendors. After selecting the vendor, purchase department will
place a purchase order (PO) on the vendor for supply of the
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 asset. In case, as per the terms of the PO, any advance is to be
given to vendor, the same is released by accounts department,
after passing the necessary entries in the vendor account under
respective business area (BA). The purchase department while
preparing the PO would ensure to mention complete name as
“RANBAXY LABORATORIES LIMITED, API
MANUFACTURING” and address/ location of delivery of the
asset. On receipt of the goods, the
Stores department will arrange to prepare the GRN and get the
same approved by the user department. On approval of the
GRN, the stores department will send the bill to accounts for
invoice verification. The accounts department will verify the
invoice with PO and release the balance payment to vendor.

Material Cost
The purchase requisition (PR) for domestic materials i.e. Solvents,
Chemicals and other Consumables required for project completion
will be raised by scientists after obtaining approval from the
respective head, the purchase requisition (PR) will be send to
purchase department for procurement of the material. Purchase
department will float enquires and prepare comparative charts for
at least 3 vendors. The purchase department will place the PO on
the vendor for supply of the materials. In case, as per the terms of
the PO, any advance is to be given to vendor, the same will be
released by accounts department after passing the necessary entries
in the vendor account under Business Area (BA). The purchase
department while preparing the PO would ensure to mention
complete name as “RANBAXY LABORATORIES LIMITED,
API MANUFACTURING” and address/ location of delivery of
the asset. On receipt of the goods, the stores department will
arrange to prepare the GRN and do the respective head approve
the same. On approval of the GRN, the stores department will send
the bill to accounts department for invoice verification. The
accounts department verifies the invoice with PO and releases the
balance payment to vendor. The cost of material will be booked in
the API MANUFACTURING cost center under Business Area
1000.
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In case of imported material on receipt of approved PR from the
API MANUFACTURING, purchase department, Mohali will send
the PR to international purchasing department (ID Purchase) at
Devika Tower, Delhi. The ID Purchase, while preparing the PO
would ensure to mention the complete as “RANBAXY
LABORATORIES LIMITED, API MANUFACTURING” and
address/ location of delivery of the asset.
On receipt of the material, the purchase department will arrange to
prepare the GRN and do the respective head approve the same. On
approval
Of the GRN, the ID Purchase department will send the bill to
accounts department will only verify for invoice verification. The
accounts department will verify the invoice with PO .the
verification of Custom duty; Overseas fright etc. will be done by
ID accounts and will arrange to release the payment to vendor. The
cost of material will be booked in the API MANUFACTURING
cost center under Business Area 1000.
In the SAP system, a separate storage location (Storage Location
1075 plant 1030) for material required by API
MANUFACTURING should be created so that at any given point
the material purchased & consumed may be identified. Physically,
the capital assets as well as the materials purchased for API
MANUFACTURING should be stored in a separate storage
preferably within API MANUFACTURING storage location.

Revenue Expenditure
Apart from material, to carry on the API MANUFACTURING,
certain expenses will be incurred under various accounting heads.
These expenses either may be incurred directly by API
MANUFACTURING, or may be incurred by other locations. The
accounting of these expenses would be made as under:
The manpower i.e. lab technician and other supporting staff
working for the API MANUFACTURING should be identified.
All direct & indirect expenses incurred in connection with
recruitment, salaries, allowances and other benefits related the said
manpower be charged to the cost center for API
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MANUFACTURING e.g. Repairs & maintenance of building,
AMC’s housekeeping, Horticulture, Books & Periodicals,
Conference & Meeting, training, traveling lab assistant, Gifts &
presents etc, should be charged to the cost center of API
MANUFACTURING.
Utilities cost such as Electricity, Water, Power, and Stream etc,
incurred for API MANUFACTURING, based upon the actual bills
received from the supplier. In case the utilities are provided by any
of the existing manufacturing facilities, the supply should be
monitored by separate meter/sub meter etc, and charges for the
same based upon the actual units consumed should be debited to
the cost center of API MANUFACTURING.
The other supplies/facilities such as Telephone, Fax, Telex etc.,
should be directly in the name of API MANUFACTURING. In
case, any common facility is used, charges on reasonable basis
should be debited to the cost center of API MANUFACTURING,
Mohali. The supplies from common canteen should also be
charged on a reasonable basis i.e. linked to the number of
employees working in API MANUFACTURING. The charges for
Tea, coffee, snakes etc, consumed by API MANUFACTURING.
Guest would be charged on reasonable basis to the Cost Center of
API MANUFACTURING.
In case any materials/consumables are provided by any of the
manufacturing location to the API MANUFACTURING. A stock
transfer note will be raised on API MANUFACTURING.
Similarly if any services are provided by marketing facility to API
MANUFACTURING, cost there of at arms length basis will be
debited to the API MANUFACTURING.
Statutory Compliances (For Duties & Taxes):
[a] Excise:
1. The CENVAT credit shall not be available in respect of
the Inputs received from the vendors.
2. Transfer of any excisable inputs as such or intermediate
from manufacturing locations the same should be on
payment/reversal of appropriate duty, on which CENVAT is not
applicable
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[b] Sales Tax:
1. The premises stand already declared for the purpose of
sales tax registration.
2. As no direct sale activity is involved from the
premises, hence no payment on account of sales taxes.
[c] Other taxes:
As applicable on the items procured for the purpose
(Octroi, etc.)

SAP Programming Route For Approval Of Capex

SAP stands for System Application Products in Data Processing.

Before giving the route of SAP for Capex an introduction about
what actually is SAP
Ranbaxy is an ERP organization that uses the SAP software
system in their organization. Ranbaxy has adopted SAP R/3
version. System Application Product (SAP) is a product of
GERMANY that helps in data processing.
In this SAP software there are various modules, which deal with
different business activities.
Configuration of inventory under SAP system
In the SAP system various materials master codes are maintained
to identify the materials whether it is raw material, work in
progress, finished goods or semi finished goods. For this purpose a
7-digit code is maintained.

RAW MATERIAL 3******

PACKING MATERIAL 5******
WORK IN PROGRESS 8******
FINISHED GOODS 1******

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 STORE AND SPARES 4******

Material module under SAP consist of the following

 Organization structure
 Master data
 Procurement process
 Inventory management

Organization structure
Client
Company code
Business Area
Plant
Controlling area
Operating concern
Cost center

Client & Company Code

Client - Application-independent unit: Top level Physical structure

Client is a self-contained unit in SAP R/3 System with Separate

Master Records and its own set of tables
Company Code Represents an independent legal accounting unit,
wherein a Balance sheet, and P&L statement can be prepared.
Several company codes can be set up for each client, thus enabling
accounting data to be managed simultaneously for several
independent organizations.
Example: a subsidiary company, member of a corporate group

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RANBAXY organization has different client and company codes
for its companies. Such as

Ranbaxy laboratories LTD

Ranbaxy fine chemical LTD
Ranbaxy UK LTD

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Business Area
Line of Business: e.g. API Manufacturing, Pharmaceuticals.

An organizational entity that is not independent from a Legal

standpoint. Internal balance sheets and income Statements can be
created at Business Area level.
Business Area configured in RLL
• API MANUFACTURING
• API MARKETING
• FORMULATION MANUFACTURING
• FORMULATION MARKETING
• TRADING
• ALLIED BUSINESS
• PHARMA BUSINESS SUPPORT
• REASEARCH & DEVELOPMENT

Plant
A plant is an organizational unit within a company. A plant
produces goods; render services, or makes goods available for
distribution. A plant can be one of the following types of locations

Manufacturing facility e.g. MFG (Mohali)

Warehouse distribution center
Branch office

Controlling Area
This is organizational controlling unit. Transactions within
Controlling area is possible
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Operating Concern
Top-level logical unit in SAP. It is superset of all Cost Center,
Business Area and Controlling Area etc

Cost Center
Cost center is the smallest unit in Phase I. In SAP for handling
various costs, there are different types of cost centers. Examples,
Personal Cost Center, Amoxy Cost Center, Utility Cost Center.
For Financial purposes Cost Center are classified into various
heads such as administrative cost center, works cost center,
Utility / Production cost center.

SAP Route
SAP functioning in the system begins by creating internal order.
Internal order number is created by finance department by using
SAP command is

Accounting -> Investment Management -> internal order ->

Master data -> special functions -> KO02

The above path command is KO02 that creates an internal order

for which following information need to be filled

General data, Applicant, Person Responsible, Processing group,

Estimated costs, Application data, Department, Control data,
System status, User status, Assignments, Company code, Business
area, Plant, Object class

To make certain changes in internal order the command is

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Accounting -> Investment Management -> internal order ->
Budgeting -> Original Budget -> KO22

In above command is used to verify the amount and text of internal

order.

The report created by finance department can be viewed by using

command S_ALR_8701301.

It is not mandatory to fill up certain fields in the internal order at

the time of its creation with the result that the cost over-runs are
not reflected automatically by SAP systems. For example, the
system provides that where the expenditure under any internal
order exceeds 2.5% of the budgeted amount, the same is reflected
in the reports.
After creating the internal order the finance manager will mail the
CAPEX amount sanctioned by higher authorities and also the
internal order number to respective Plant Head. Indenter will
indent the required material. Indenter is the person who at
operational level requires the material In SAP next step is creation
of Purchase Requisition that can further be prepared in 2 ways
Cost Center
CAPEX-IO

For the purpose of capitalization we have to focus on CAPEX

route. Here, after getting mail from finance department Plant Head
will authorizes the indenter to raise indent that is the indenter will
create Purchase Requisition. From the department the SAP route
comes to Purchase Department that in Mohali handles the
Purchase Requisition for Mohali and Toansa. In purchase
department three documents are prepared in order to raise final
PURCHASE ORDER that is initiate to supplier.

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1 REQUEST FOR QUOTATION (RFQ) – Purchase Department
after receiving the Purchase Requisition will place order
depending upon requirements. In system, for different items
different staff person receives particular Purchase requisition that
is differentiated by unique purchasing group. For Example 505 is
the purchasing group that handled Purchase Requisition for items
related to Electrical and instruments.
For each item Purchase Department is required to send RFQ to 3
vendors. Three is the minimum limit for every item but in case
where Purchase Requisition (PR) specify the brand of particular
need to be acquired, in that case only one RFQ need to send. For
example if PR specifies one LG T.V then only one RFQ need to
send to dealers dealing in LG commodities. For CAPEX PR starts
from 3000001987. RFQ is the 10-digit number. In SAP for
creating a RFQ ME41 is the command used by purchase
department. Then a applet window comes where information
regarding

RFQ type
Language key
RFQ date
Quotation deadline
RFQ
Organizational data
Purchase organization
Purchasing group
Default data for items
Item category
Delivery date
Plant
Material Group
Storage location.

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Balance sheet
Dec ' 08 Dec ' 07 Dec ' 06 Dec ' 05 Dec ' 04
Sources of funds
Owner's fund
Equity share capital 210.19 186.54 186.34 186.22 185.89
Share application money 175.66 1.18 0.88 0.28 2.83
Preference share capital - - - - -
Reserves & surplus 3,330.92 2,350.68 2,162.79 2,190.80 2,320.79
Loan funds
Secured loans 162.07 365.07 224.29 353.49 133.37
Unsecured loans 3,563.30 3,137.96 2,954.31 676.31 2.49
Total 7,442.14 6,041.42 5,528.61 3,407.10 2,645.38
Uses of funds
Fixed assets
Gross block 2,386.75 2,261.48 2,133.57 1,799.32 1,402.79
Less : revaluation reserve - - - - -
Less : accumulated depreciation 930.07 791.96 699.54 599.35 525.21
Net block 1,456.68 1,469.52 1,434.03 1,199.97 877.58
Capital work-in-progress 428.77 327.42 301.88 432.84 264.16
Investments 3,618.03 3,237.55 2,679.95 762.78 679.07
Net current assets
Current assets, loans & advances 6,509.97 2,922.42 2,620.99 2,409.08 2,366.89
Less : current liabilities & provisions 4,571.31 1,915.49 1,508.24 1,397.56 1,542.33
Total net current assets 1,938.67 1,006.93 1,112.76 1,011.52 824.57
Miscellaneous expenses not written - - - - -
Total 7,442.14 6,041.42 5,528.61 3,407.10 2,645.38
Notes:
Book value of unquoted investments 3,372.60 3,106.69 2,659.94 762.77 679.07
Market value of quoted investments - 280.46 14.27 0.01 0.01
Contingent liabilities 252.85 201.00 159.40 202.40 307.95
Number of equity sharesoutstanding (Lacs) 4203.70 3730.71 3726.87 3724.42 1858.91

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Capital structure
From To Class Of Authorized Issued Paid Up Paid Up Paid Up
Year Year Share Capital Capital Shares (Nos) Face Value Capital
Equity
2008 2008 299.00 210.18 420369753 5 210.18
Share
Equity
2007 2007 299.00 186.54 373070829 5 186.54
Share
Equity
2006 2006 299.00 186.34 372686964 5 186.34
Share
Equity
2005 2005 299.00 186.22 372442190 5 186.22
Share
Equity
2004 2004 199.00 185.89 185890742 10 185.89
Share
Equity
2003 2003 199.00 185.54 185543625 10 185.54
Share
Equity
2002 2002 199.00 185.45 185452098 10 185.45
Share
Equity
2001 2001 150.00 115.90 115895478 10 115.90
Share
Equity
2000 2000 150.00 115.90 115895478 10 115.90
Share
Equity
1999 1999 150.00 115.90 115895250 10 115.90
Share
Equity
1997 1998 69.00 53.73 53726252 10 53.73
Share
Equity
1996 1997 69.00 49.41 49414717 10 49.41
Share
Equity
1995 1996 69.00 48.13 43132253 10 43.13
Share
Equity
1995 1996 69.00 48.13 5000000 3 1.25
Share
Equity
1994 1995 69.00 43.13 43132253 10 43.13
Share
Equity
1993 1994 69.00 35.33 35330269 10 35.33
Share
Equity
1992 1993 49.00 21.79 21793050 10 21.79
Share

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Recommendations and Suggestions for
the Indian Pharma Industry.

The achievements of the Indian pharmaceutical industry are

spectacular in recent times and are praise worthy, which has evolved
as model industry of the country in performance. But, in the 21st
century, the pharmaceutical value chain would depend on the ability
of pharmaceutical companies to make the technological shift
necessary to maintain and increase their competitive positions.
Also for the MNCs, India provides not just the possibility – but the
unique & tangible opportunity to make the desired ‘technological
shift’ – in process, and in location! The question before Pharma
Company CEOs the world over today is not: ‘Should my company go
to India?’ but ‘Can my company afford not to go to India’?”

STEPS REQUIRED TO BOOST THE COMPETITIVENESS OF

THE PHARMA INDUSTRY
• Extension of deduction of 150% of R&D expenses. This
would encourage more and more companies to invest in R&D.
• The government has earmarked 150 crores for R&D. This is just
not enough. It should be augmented to at least 2000 crores.
• To rationalize Drug Price Control Order (DPCO). The
objective of the price control was to ensure adequate availability
of quality medicines at affordable prices. The product patent
regime will make it obligatory for Indian companies to compete
in R&D if they want to survive. Similarly, WTO led global
trading system will result in import tariffs coming down. For
Indian companies to compete with cheap imports, they will have
to invest in cost effective technology and processes. Therefore,
it is imperative that the pharma industry has surplus for
investment. In this context, a liberalized price control regime
becomes more important.
• An academic –industrial relationship can be further
explored, on the lines of the US model, where the universities
are the sites of innovation and the industry commercializes the
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 product. The universities are permitted to own the Intellectual
Property Rights (IPR) and get a share of the profits. Academic
institutions will then become the engines of entrepreneurship.
This also requires setting up of greater number of centres of
academic excellence throughout India in different states, so that
people from across the country can avail of such education and
make their contributions without feeling the need to look beyond
India for achieving academic excellence.
• Income tax exemptions should be given on clinical trials and
contract research done outside the company and abroad.
This is because India is seen as emerging as a major centre for
outsourcing of clinical trials for the Pharmaceutical MNCs.

• The problem of spurious drugs has to be tackled.

 The procedure for procurement of licence should be
made more stringent, including extensive disclosure of
detailed personal, financial and business information and a
thorough background check. There is a strong need to
strengthen and streamline the Central and State Drug
Control Organizations. State drug controllers should take
measures like setting up of separate intelligence-cum-legal
machinery with police assistance. Faking should be made
non-bailable and cognizable offence and the prosecution
should be instituted by any police or Central Bureau of
Investigation officer not less than the rank of a sub-
inspector (instead of an inspector in the extant provision).
 Most of the cases relating to spurious drugs remain
undecided for years. Hence there is a strong need for
setting up separate courts for speedy trials of such
offences. The case should be tried by the court of the rank
of a Session Judge or above whereas the extant provision
provides for a trial by a metropolitan magistrate or a first
class judicial magistrate or above.
 Each state should set up accredited testing
laboratories that are well equipped and adequately staffed.
The staff should be trained well for drawing samples for
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 test and monitoring the quality of drugs and cosmetics
moving in the State. It is most important and essential to
have training programmes for technical staff of central and
state drug control laboratories and private testing
laboratories as it is based on the report of these testing
laboratories that a manufacturer releases his product or
otherwise. Legal action against the manufacturer is likely
to be taken on the basis of the test report given by a
government analyst.
• India should exploit its know-how in herbal medicines. Since
these medicines do not come under the purview of the TRIPS
regime and the research in new chemical entities involves
millions of dollars of investment, the Indian companies should
engage in R&D in herbal medicine. The companies should try to
exploit the Indian traditional knowledge in ayurveda and herbal
cures and file as many patents for herbal medicine as they can.
For this the government should set up R&D laboratories
undertaking research exclusively in the area of herbal medicines
and support the companies in their research and patent filing.
• The government should encourage setting up of USFDA-
compliant plants by providing tax holidays for a specified
period (as given in regions like Baddi), so that the Indian
companies can exploit the opportunity arising out of patented
drugs and take up marketing of generics in the developed
countries like USA.

TRENDS AND STRATEGIES

The Indian domestic pharmaceutical industry is increasingly
becoming globally competitive to counter the weaknesses and threats.
The key trends and strategies being adopted by the local
pharmaceutical industry are:
Increased R&D Focus
Driven by the imminent change to a product patent regime at home
from 2005 the leading pharmaceutical companies in India have been
increasing their R&D budgets over the years. Indian pharmaceutical

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companies are likely to double their expenditure on R&D over the
next 2 years.

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Exports Driven Growth
Indian pharmaceutical companies are on a global beat. Currently,
exports contribute more than half the total revenues for most of the
Indian pharmaceutical majors. Exports have increased in recent years
as Indian pharmaceutical companies have made deep inroads into the
regulated generic markets of the US and Europe, in addition to
unregulated markets.
MNCs Showing Growing Interest in India
The share of MNCs in the Indian pharmaceuticals market is expected
to increase with the recognition of product patents in the country from
2005, as they will be able to freely introduce top of the line, patented
products in the domestic market. Moreover, with the new price
control order expected to be passed soon, DPCO coverage will be
substantially reduced and margins of most MNCs with strong brands
will drastically improve. The Indian Government’s decision to allow
100 per cent Foreign Direct Investment into the drugs and
pharmaceutical industry is expected to aid increased investment in
R&D infrastructure by MNCs in India.

Recommendations and Suggestions for Ranbaxy

Laboratories Ltd.
This paper describes a methodology for deriving the optimum capital
structure for an unlevered equity driven firm. Using a hypothetical
model for computing optimal capital structure, the idea is to determine
the optimum level of debt which Ranbaxy can for maximisising its
market value and shareholders wealth. Various methods through
which Ranbaxy can raise debt are:
Debentures
Debentures are loans that are usually secured and are said to have
either fixed or floating charges with them.
A secured debenture is one that is specifically tied to the financing of
a particular asset such as a building or a machine. Then, just like a
mortgage for a private house, the debenture holder has a legal interest
in that asset and the company cannot dispose of it unless the

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debenture holder agrees. If the debenture is for land and/or buildings
it can be called a mortgage debenture.
Debenture holders have the right to receive their interest payments
before any dividend is payable to shareholders and, most importantly,
even if a company makes a loss, it still has to pay its interest charges.
If the business fails, the debenture holders will be preferential
creditors and will be entitled to the repayment of some or all of their
money before the shareholders receive anything.
Other Loans
The term debenture is a strictly legal term but there are other forms of
loan or loan stock. A loan is for a fixed amount with a fixed
repayment schedule and may appear on a balance sheet with a specific
name telling the reader exactly what the loan is and its main details.
Overdraft Facilities
Many companies have the need for external finance but not
necessarily on a long-term basis. A company might have small cash
flow problems from time to time but such problems don't call for the
need for a formal long-term loan. Under these circumstances, a
company will often go to its bank and arrange an overdraft. Bank
overdrafts are given on current accounts and the good point is that the
interest payable on them is calculated on a daily basis. So if the
company borrows only a small amount, it only pays a little bit of
interest.
Lines of Credit from Creditors
This source of finance really belongs under the heading of working
capital management since it refers to short term credit. By a 'line of
credit' we mean that a creditor, such as a supplier of raw materials,
will allow us to buy goods now and pay for them later. Why do we
include lines of credit as a source of finance? Well, if we manage our
creditors carefully we can use the line of credit they provide for us to
finance other parts of our business.
Grants
Grants can be an attractive aspect of a company's financing structure.
If a company has a specific issue that it wants or needs to deal with

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then it could find that there are grants available from local councils
and other bodies that will help to pay for it.
Venture Capital
Venture Capital has become a vital aspect of the source of finance
market over the last 10 to 15 years. Venture Capital can be defined as
capital contributed at an early stage in the development of a new
enterprise, which may have a significant chance of failure but also a
significant chance of providing above average returns and especially
where the provider of the capital expects to have some influence over
the direction of the enterprise. Venture Capital can be a high risk
strategy.
Factoring
Factoring allows you to raise finance based on the value of your
outstanding invoices. Factoring also gives you the opportunity to
outsource your sales ledger operations and to use more sophisticated
credit rating systems. Once you have set up a factoring arrangement
with a Factor, it works this way:
Once you make a sale, you invoice your customer and send a copy of
the invoice to the factor and most factoring arrangements require you
to factor all your sales. The factor pays you a set proportion of the
invoice value within a pre-arranged time - typically, most factors offer
you 80-85% of an invoice's value within 24 hours.
Leasing
Leasing is a contract between the leasing company, the lessor, and the
customer (the lessee). The leasing company buys and owns the asset
that the lessee requires. The customer hires the asset from the leasing
company and pays rental over a pre-determined period for the use of
the asset. There are two types of leases:
• Finance Leases
Under a finance lease the rental covers virtually all of the costs
of the asset therefore the value of the rental is equal to or greater
than 90% of the cost of the asset. The leasing company claims
writing down allowances, whilst the customer can claim both tax
relief and VAT on rentals paid.

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 • Operating Leases
The lease will not run for the full life of the asset and the lessee
will not be liable for its full value. The lessor or the original
manufacturer or supplier will assume the residual risk. This type
of lease is normally only used when the asset has a probable
resale value, for instance, aircraft or vehicles.
The most common form of operating lease is known as contract hire.
Essentially, this gains the customer the use of the asset together with
added services. A very common example of an asset on contract hire
would be a fleet of vehicles.

Indian pharmaceutical scene is fast changing. Consumer expectations

are going up leading to more difficulties for pharmaceutical marketing
professionals. Change in the character profile of the doctors with
socio-economic changes have also affected many pharmaceutical
companies. Thus Ranbaxy should also concentrate on following areas
to strengthen market position:

Do Market Audit
The company should carryout an audit of all its activities. This
activity analyses different marketing activities and suggest the bench
mark for the company. This is a self supportive study as the marketing
audit gives lot of avenues in streamlining the operations and cutting
the cost. It also helps to remove unnecessary activities, which may be
redundant for tomorrow. This gives also an insight to the future
scenario.

Sales Management Audit and Preparation of New Sales Strategy

Sales Management plays a very important role in pharmaceutical
industry. Medical Representative or Area Manager is the key person
in improving the sales. Medical Representative and Manager, if are
not happy, and not properly directed can lead to chaotic conditions.

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Training
Reorientation of the field force and manager is a must. Training plays
a very important role in motivating representatives as well as
managers. It helps them to sharpen their tools and develop confidence.
A series of refresher course should be organized in order to update
managers on the medical skills and the selling skills. The net benefits
of a training program may be summarized as under:

i. Confidence level of the medical representatives goes up. They

added lot of key customers whom they were not meeting earlier.
Increase in customer base with also regular visit to key
customers led to improvement in output.
ii. Improvement in strike rate – converting Non Prescribing
Potential Doctors to Irregular Prescribing Doctors Quicker.
This leads to improvement in the productivity.
iii. Training helps in accelerating productivity and overall growth in
the Company.
Morale of the people if kept high then anything can be achieved.
Today as per the study conducted in India, majority of the people
works at 40% of its energy level. A positive attitude with proper work
culture will not come only through lectures but there should be
adequate reward systems.

Optimization of Resources
Resources available today are becoming scarce. Therefore, for turning
around the company, optimization of resources does play a very
important role. The activities like rationalizing of tour programme,
defining the head quarters working norms, proper planning of input
plans like samples, gifts based on contribution, core doctors visit
analysis, application of ACE approach and input-output model led to
increase in profitability.

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 CONCLUSION

The successful strategy for Ranbaxy Laboratories Ltd. in a post 2010

world will include:
(a) Attain right product-mix
(b) Augment skills
(c) Use M&A options for either companies or products.
(d) Building ‘Innovation’ Engine at R&D
(e) Sustain growth momementum in USA.
(f) Attain critical mass in Europe and Latin America.
(g) Specialty products focus for “Brand” marketing.
(h) Fortifying home business – leverage India Base.
(i) Seeding the Japanese market.
(j) Networking, licensing and acquisitions.
(k) Technology, new market entry vehicles, brands/
proprietary products
(l) Global talent pool to fuel growth.

The increasing importance of biotech industry and its symbiotic

relationship to pharma will also be very relevant in Ranbaxy’s
strategy. However Ranbaxy should not close its eyes on the ever
increasing Global competition, which is a big threat for the company.
The entry of international and new domestic players would intensify
the competition significantly.
Further there is threat from other low cost countries like China and
Israel. However, on the quality front, India is better placed relative to
China. So, differentiation in the contract manufacturing side may
wane. The short-term threat for the pharma industry is the uncertainty
regarding the implementation of VAT. Though this is likely to have a
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negative impact in the short-term, the implications over the long-term
are positive for the industry.
The Indian pharmaceutical industry is at the center stage in the global
healthcare arena and Ranbaxy endeavors to be at the forefront in
delivering the India centric advantages to the advanced and
developing countries of the world.
From a small domestic company at inception, Ranbaxy has grown
formidably to be a Billion dollar institution that was envisioned by
Late Dr Parvinder Singh, Chairman and Managing Director, Ranbaxy
in early 90's.
It is with the unwavering ' dedication ' and the ' will to win ' of Team
Ranbaxy across the globe that Ranbaxy has traversed this journey so
far. The management feels that the next league is a greater challenge,
as the company has other milestones to achieve.
Whilst Ranbaxy continues to enhance the momentum of its generics
business in its key geographies, parallel to that it is also accelerating
its drug discovery program. The company is committed to provide
quality generics at affordable prices to the patients worldwide with a
view to help bring down the healthcare costs. Ranbaxy’s management
is confident that its efforts would see the Company emerge as a
leading player in the global generic space in the years to come.
As the company moves ahead towards its mission to become a
Research based International Pharmaceutical Company. The
management believes that, it is the spirit of Team Ranbaxy that would
enable Ranbaxy to reach out to Vision 2012

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 Bibliography
• WEBSITES:-
- www.ranbaxy.com
• ONLINE JOURNALS:-
- Cygnus Business Consulting & Research
Indian Pharmaceutical Industry-Oct-Dec 2008

- FICCI Report for National manufacturing Competitiveness

Council (NMCC)
• BOOKS:-
- Financial Management
(ICFAI University)
- Financial Management
(Fourth edition)
By M.Y.Khan & P.K.Jain
(Tata McGraw Hill Publishing Company Ltd.)
- Financial Management
(Sixth edition)
By Prasanna Chandra
(Tata McGraw Hill Publishing Company Ltd.)
- Financial Management
(Fourth edition)
By Ravi M Kishore

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