A PROJECT REPORT ON

“FINANCIAL ANALYSIS OF INDIAN PHARMA SECTOR”

A Project report submitted in the partial fulfilment of the requirement for the degree of MBA

Submitted by: Submitted to:

Name: Anmol Sharma
Roll No: 15044

G.H. PATEL INSTITUTE OF BUSINESS MANAGEMENT

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 CERTIFICATE

Date- Signature: -

ANMOL SHARMA

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 PREFACE

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 ACKNOWLEDGEMENT

I have taken efforts in this project. However, it would not have been possible
without the kind support and help of many individuals and organizations. I
would like to extend my sincere thanks to all of them. I am highly indebted to
for their guidance and constant supervision as well as for providing necessary
information regarding the project & also for their support in completing the
project.
I would like to express my gratitude towards my parents & member of
GHPIBM for their kind cooperation and encouragement which help us in
completion of this project.
I thanks and appreciations also go to my colleague in developing the project and
people who have willingly helped me out with their abilities.

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 CONTENTS:

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INTRODUCTION

Company Profile:

Established in 1907, Alembic pharmaceutical LTD is leading pharmaceutical

company in India. The company is vertically integrated with the ability to
develop, manufacture and market pharmaceutical products, pharmaceutical
substances and intermediates. Alembic is the market leader in the macrolides
segment of anti-infective drugs in India. Alembic pharmaceutical is Asia’s most
respected and integrated, committed to improving the quality of life and
healthcare in over 75 countries.

Alembic's manufacturing facilities are located in Vadodara and Baddi in

Himachal Pradesh. The plant at Vadodara has the largest fermentation capacity
in India. The Panelav facility houses the API and formulation manufacturing
(both US FDA approved) plants. The plant at Baddi, Himachal Pradesh
manufactures formulations for the domestic and non-regulated export market.
The company has a state of the art Research Centre at Vadodara.

History:

Alembic Pharmaceuticals Limited (the Resulting Company) was originally

incorporated on 16th June, 2010 in the name and style 'Alembic Pharma
Limited', under the Companies Act, 1956 and had received the Certificate of
Commencement of business on 1st July, 2010.

The company changed its name from Alembic Pharma Limited to Alembic
Pharmaceuticals Limited and the Registrar of Companies; Gujarat has approved
the change of name and issued a fresh certificate of incorporation consequent
upon change of name on 12th March, 2011.

2012

Alembic and Breckenridge Announce Paragraph IV ANDA Litigation with

Pfizer on Desvenlafaxine (Pristiq®).

Alembic Pharmaceuticals Limited enters into a product development and

License agreement with Accu-Break Pharmaceuticals, Inc., USA.

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Future plans:

To keep growth above the industry average rate is one of their targets. Like the
entire industry, Alembic has to deal with threats like recession, slowing demand
but this young brigade has the solutions.

At Alembic we are focusing our efforts to improve processes and be more

optimal in the way we work. Our goal is to increase the efficiency and curtail
wasteful expenditure. We are quite confident that we will pass this global
economic crisis without much problem and emerge much stronger."

Milestones:

1907 - Started manufacturing tinctures and alcohol at Vadodara.

1940 - Started manufacturing cough syrup, vitamins, tonics and sulphur drugs.

1961 - Lal bahadur Shastri inaugurates the Penicillin plant.

1967 - Bulk manufacturing of Vitamin B12.

1971 - Erythromycin manufactured for the first time in India.

1972 - Althrocin a brand of Erythromycin launched.

1997 - Althrocin becomes top selling brand in India.

1999 - Alembic starts production of synthetic organic API.

2000 - Gets ISO 14000 certification for its facilities at Vadodara.

2001 - Starts manufacturing of Cephalosporin C.

2007 - Acquisition of non-oncology business of Dabur Pharma Ltd.

2009 - Addressed chronic therapies through multiple marketing divisions.

2010 - ANDAs total filed 38. DMF total filed to 53 and get approval for 15.

2013 - Receives approval from the USFDA for its NDA, Desvenlafaxine Base
Extended Release (ER) Tablets.

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Board of Directors
Mr. Chirayu Amin - Chairman and Managing Director

Mr. K. G. Ramanathan - Independent Director

Mr. Pranav Amin - Joint Managing Director

Mr. Milin Mehta - Independent Director

Mr. Raj Kumar Baheti - Chief Financial Officer

Mr. Paresh Saraiya - Independent Director

Mr. Pranav Parikh - Independent Director

Mr. Shaunak Amin - Joint Managing Director

Dr. Archana Hingorani - Independent Director

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INDIAN PHARMA SECTOR

Introduction
The Indian pharmaceuticals market is the third largest in terms of volume and
thirteenth largest in terms of value, as per a report by Equity Master. Branded
generics dominate the pharmaceuticals market, constituting nearly 70 to 80 per
cent of the market. India is the largest provider of generic drugs globally with
the Indian generics accounting for 20 per cent of global exports in terms of
volume. Of late, consolidation has become an important characteristic of the
Indian pharmaceutical market as the industry is highly fragmented.

India enjoys an important position in the global pharmaceuticals sector. The

country also has a large pool of scientists and engineers who have the potential
to steer the industry ahead to an even higher level.

The UN-backed Medicines Patent Pool has signed six sub-licences with
Aurobindo, Cipla, Desano, Emcure, Hetero Labs and Laurus Labs, allowing
them to make generic anti-AIDS medicine TenofovirAlafenamide (TAF) for
112 developing countries.

Market Size
The Indian pharmaceutical industry is estimated to grow at 20 per cent
Compound Annual Growth Rate (CAGR) at over the next five years. The Indian
pharma industry, which is expected to grow over 15 per cent per annum
between 2015 and 2020, will outperform the global pharma industry, which is
set to grow at an annual rate of 5 per cent between the same period!. Presently
the market size of the pharmaceutical industry in India stands at US$ 20 billion.
As on March 2014, Indian pharmaceutical manufacturing facilities registered
with the US Food and Drug Administration (FDA) stood at 523, highest for any
country outside the US.

Domestic pharmaceutical market grew at a CAGR of 12 per cent year-on-year

in February 2016, broadly in line with the average of 12.9 per cent since April
2015. Indian pharmaceutical firms are eyeing acquisition opportunities in
Japan's growing generic market as the Japanese government aims to increase the
penetration of generic drugs to 60 per cent of the market by 2017 from 30 per
cent in 2014, due to ageing population and rising health costs.

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Investments
India has the largest number US FDA compliant plants. The industry is
expected to reach US$ 55 million by 2020, out of which US$ 30 million will be
for exports.

India's biotechnology industry comprising bio-pharmaceuticals, bio-services,

bio-agriculture, bio-industry and bioinformatics is expected grow at an average
growth rate of around 30 per cent a year and reach US$ 100 billion by 2025.
Biopharma, comprising vaccines, therapeutics and diagnostics, is the largest
sub-sector contributing nearly 62 per cent of the total revenues at Rs 12,600
crore (US$ 1.9 billion).

The Union Cabinet has given its nod for the amendment of the existing Foreign
Direct Investment (FDI) policy in the pharmaceutical sector in order to allow
FDI up to 100 per cent under the automatic route for manufacturing of medical
devices subject to certain conditions.

The drugs and pharmaceuticals sector attracted cumulative FDI inflows worth
US$ 13.45 billion between April 2000 and December 2015, according to data
released by the Department of Industrial Policy and Promotion (DIPP).

Some of the major investments in the Indian pharmaceutical sector are as

follows:

Pink Blue Supply Solutions Pvt. Ltd, a clinical supplies provider, has raised Rs
1.5 crore (US$ 0.22 million) in a seed round of funding from TermSheet.io, a
transaction-focused service provider for start-ups and investors.Dr Reddy's
Laboratories, one of the major pharmaceutical companies of India, has entered
into a strategic collaboration agreement with Turkey-based TR-Pharm, to
register and subsequently commercialise three biosimilar products in
Turkey.Lupin has completed the acquisition of US-based GAVIS
Pharmaceuticals in a deal worth US$ 880 million, which is expected to enhance
its product pipeline in dermatology, controlled substances and high-value
speciality products.Cipla Ltd, one of the major pharmaceutical and
biotechnology companies in India, has acquired two US-based generic drug
makers, InvaGen Pharmaceuticals Inc. and Exelan Pharmaceuticals Inc., for
US$ 550 million, which is expected to strengthen Cipla's US business.Emcure
Pharmaceuticals has acquired Canada's International Pharmaceutical Generics
Ltd and its marketing arm Marcan Pharmaceuticals in order to boost its global
expansion drive.Cipla announced the acquisition of two US-based companies,

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InvaGen Pharmaceuticals Inc. and Exelan Pharmaceuticals Inc., for US$550
million.Glaxosmithkline Pharmaceuticals has started work on its largest
greenfield tablet manufacturing facility in Vemgal in Kolar district, Karnataka,
with an estimated investment of Rs1,000 crore (US$ 146.72 million).Lupin has
acquired two US based pharmaceutical firms, Gavis Pharmaceuticals LLC and
Novel Laboratories Inc, in a deal worth at US$ 880 million.Several online
pharmacy retailers like PharmEasy, Netmeds, Orbimed, are attracting
investments from several investors, due to double digit growth in the Rs 97,000
crore ( US$ 14.8 billion) Indian pharmacy market.StelisBiopharma announced
the breakthrough construction of its customised, multi-product,
biopharmaceutical manufacturing facility at Bio-Xcell Biotechnology Park in
Nusajaya, Johor, Malaysia's park and ecosystem for industrial and healthcare
biotechnology at a total project investment amount of US$ 60 million. Strides
Arco lab entered into a licensing agreement with US-based Gilead Sciences Inc
to manufacture and distribute the latter's cost-efficient TenofovirAlafenamide
(TAF) product to treat HIV patients in developing countries. The licence to
manufacture Gilead's low-cost drug extends to 112 countries. CDC, the UK’s
development finance institution, invested US$ 48 million in Narayana
Hrudayalaya hospitals, a multi-speciality healthcare provider, with an aim to
expand affordable treatment in eastern, central and western India. Cadila
Healthcare Ltd announced the launch of a bio similar for Adalimumab - for
rheumatoid arthritis and other auto immune disorders. The drug will be
marketed under the brand name Exemptia at one-fifth of the price for the
branded version-Humira. Cadila’s bio similar is the first in class and an exact
replica of the original in terms of safety, purity and potency of the product,
claims the company. Torrent Pharmaceuticals entered into an exclusive
licensing agreement with Reliance Life Sciences for marketing three bio similar
in India — Rituximab, Adalimumab and Cetuximab. Indian Immunological Ltd
plans to set up a new vaccine manufacturing facility in Pondicherry with an
investment of Rs 300 crore (US$ 44.02 million).SRF Ltd has acquired Global
DuPont Dymel, the pharmaceutical propellant business of DuPont, for US$ 20
million. Intas Pharmaceuticals is the first global company to launch a bio
similar version of Lucentis, the world’s largest selling drug for treatment of
degenerative eye condition called Razumab.

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Government Initiatives
The Addendum 2015 of the Indian Pharmacopoeia (IP) 2014, published by the
Indian Pharmacopoeia Commission (IPC) on behalf of the Ministry of Health &
Family Welfare, is expected to play a significant role in enhancing the quality of
medicines that would in turn promote public health and accelerate the growth
and development of pharmaceutical sector.

The Government of India unveiled 'Pharma Vision 2020' aimed at making India
a global leader in end-to-end drug manufacture. Approval time for new facilities
has been reduced to boost investments. Further, the government introduced
mechanisms such as the Drug Price Control Order and the National
Pharmaceutical Pricing Authority to deal with the issue of affordability and
availability of medicines.

Some of the major initiatives taken by the government to promote the

pharmaceutical sector in India are as follows:

Indian Pharmaceutical Association (IPA), the professional association of

pharmaceutical companies in India, plans to prepare data integrity guidelines
which will help to measure and benchmark the quality of Indian companies with
global peers. The Government of India plans to incentivise bulk drug
manufacturers, including both state-run and private companies, to encourage
‘Make in India’ programme and reduce dependence on imports of active
pharmaceutical ingredients (API), nearly 85 per cent of which come from
China. The Department of Pharmaceuticals has set up an inter-ministerial co-
ordination committee, which would periodically review, coordinate and
facilitate the resolution of the issues and constraints faced by the Indian
pharmaceutical companies. The Department of Pharmaceuticals has planned to
launch a venture capital fund of Rs 1,000 crore (US$ 154 million) to support
start-ups in the research and development in the pharmaceutical and biotech
industry. Indian and global companies have expressed 175 investment intentions
worth Rs 1,000 crore (US$ 146.72million) in the pharmaceutical sector of
Gujarat. The memorandums of understanding (MoUs) would be signed during
the Vibrant Gujarat Summit. Telangana has proposed to set up India's largest
integrated pharmaceutical city spread over 11,000 acres near Hyderabad,
complete with effluent treatment plants and a township for employees, in a bid
to attract investment of Rs 30,000 crore (US$ 4.41 billion) in phases.
Hyderabad, which is known as the bulk drug capital of India, accounts for
nearly a fifth of India's exports of drugs, which stood at Rs 95,000 crore (US$
13.94 billion) in 2014-15.At the launch of Cluster Development Programme of
pharmaceutical sector, MrAnanth Kumar, Minister of Fertiliser and Chemicals,
announced that six pharmaceutical parks will be approved and established this

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year which will have sufficient infrastructure and facilities for testing and
treatment of drugs and also for imparting training to industry professionals.

Road Ahead
The Indian pharmaceutical market size is expected to grow to US$ 100 billion
by 2025, driven by increasing consumer spending, rapid urbanisation, and
raising healthcare insurance among others.

Going forward, better growth in domestic sales would also depend on the ability
of companies to align their product portfolio towards chronic therapies for
diseases such as such as cardiovascular, anti-diabetes, anti-depressants and anti-
cancers that are on the rise.

The Indian government has taken many steps to reduce costs and bring down
healthcare expenses. Speedy introduction of generic drugs into the market has
remained in focus and is expected to benefit the Indian pharmaceutical
companies. In addition, the thrust on rural health programmes, lifesaving drugs
and preventive vaccines also augurs well for the pharmaceutical companies.

Exchange Rate Used: INR 1 = US$ 0.0147 as on March 01, 2016

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Key players in Indian Pharmaceuticals Industry:

 Sun Pharmaceutical

Sun Pharma, officially known as Sun Pharmaceutical Industries Limited, was

founded in 1983 by Dilip Shanghvi. The company is headquartered in India's
financial capital Mumbai, Maharashtra. Active Pharmaceuticals Ingredients
(APIs) and formulations are known to be Sun Pharma's specialised areas. It
targets a wide spectrum of chronic and acute treatments. Its therapeutic
segments of over 3000 high quality molecules include psychiatry, anti-
infectives, neurology, cardiology, orthopaedic, diabetology, gastroenterology,
ophthalmology, nephrology, urology, dermatology, gynaecology, respiratory,
oncology, dental and nutritionals. On 15 June 2015, Sun Pharma was India's
largest pharmaceutical company with the market capitalisation valued at Rs.
2,01,706.41 crore. Its products and services may be categorised as below:

Formulations

Active Pharmaceutical Ingredients (APIs)

Over-The-Counter (OTC)

Antiretroviral (ARVs)

 Lupin

Headquartered in Mumbai, Lupin Limited is a multinational pharmaceutical

company. An associate professor at BITS-Pilani in Rajasthan, Dr. Desh Bandhu
Gupta established Lupin in 1968, which is today one of India's leading
pharmaceutical companies. In Pune, Maharashtra, Lupin has a state-of the-art
research and development unit. It is one of the fastest growing companies as far
as oncology, cardiology, gastroenterology, central nervous system, anti-
infective, anti-asthma and diabetology therapies are concerned. Lupin's market
capitalisation amounted to Rs. 77,115.19 crore on 15 June 2015. Its products
and services may be categorised as below:

Branded Formulations
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Advanced Drug Delivery Systems

Generics

Novel Drug Discovery

APIs

Biotechnology

 Dr. Reddy's Labs

Based in Hyderabad, Telangana, Dr. Reddy's Laboratories is a multinational

pharmaceutical entity. It was founded in 1984 as a manufacturer of APIs. A vast
range of pharmaceutical products are offered by Dr. Reddy's Labs. It has 60
APIs and 190 medications to treat various kinds of ailments. It is now India's
third largest pharmaceutical company in terms of market capitalisation, which
was valued at Rs. 56,638.13 crore on 15 June 2015. Its products and services
may be categorised as below:

Generic Formulations

Active Ingredients

Pharmaceutical Services

Biosimilars

Propriety Products

 Cipla

Dr. K. A. Hamied set up Cipla Limited in 1935, which is one of the biggest
biotechnology and pharmaceutical multinational companies of India today.
APIs and formulations are produced at 34 state-of the-art Cipla plants spread
across the country. Primarily, medicines for treatments of ailments like
depression, obesity, cardiovascular diseases, arthritis and diabetes are developed
by Cipla. It is India's fourth largest pharmaceutical company accounting for a
market capitalisation worth Rs. 47,025.38 crore on 15 June 2015. Its products
and services may be categorised as below:

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APIs

Formulations

Veterinary

 Aurobindo Pharma

Aurobindo Pharma was founded by K. Nityananda Reddy and P.V. Ramaprasad

Reddy with others in 1986. Headquartered in Hyderabad, Telangana, Aurobindo
Pharma Limited manufactures APIs and generic pharmaceuticals. Six prime
therapeutic areas of medication addressed by the company are anti-allergic,
gastroenterology, antiretroviral, antibiotics, central nervous system and
cardiology. With the market capitalisation valued at Rs. 37,281.76 crore on 15
June 2015, Aurobindo Pharma Limited is India's fifth largest pharmaceutical
company. Its products and services may be categorised as below:

Formulations

APIs

 Cadila Healthcare

The city of Ahmedabad in the western Indian state of Gujarat is home to the
head office of Cadila Healthcare that was founded in 1952. The company has
around 20 different manufacturing locations across the country. Cadila
Healthcare is India's sixth largest pharmaceutical company in terms of market
capitalisation that amounted to Rs. 36,159.61 crore on 15 June 2015. Its
products and services may be categorised as below:

APIs

Formulations

 GlaxoSmithKline

One of the oldest and most experienced players in the pharmaceutical industry
of India, GlaxoSmithKline Pharmaceuticals Limited was established in 1924.

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GlaxoSmithKline Pharmaceuticals is one of the world's top research-based
health management and pharmaceutical companies. Major therapeutic areas of
medication addressed by the company are anti-infectives, dermatology,
oncology, gynaecology, diabetes, cardiology and respiratory products. In
addition to that, it provides vaccines for cervical cancer, hepatitis B, hepatitis A,
rota-virus, influenza, tetanus, chickenpox, pertussis and diphtheria amongst
many. The market capitalisation of GlaxoSmithKline Pharmaceuticals Limited
stood at Rs. 27,522.55 crore on 15 June 2015.

 Glenmark Pharmaceuticals

Glenmark Pharmaceuticals is an Indian pharmaceutical company founded in

1977 and headquartered in Mumbai, Maharashtra. It specialises in developing
and marketing APIs and formulations and covers segments such as diabetology,
dermatology, ENT, internal medicine, gynaecology and paediatrics. Glenmark
Pharmaceuticals is India's eighth largest pharmaceutical entity by market
capitalisation, which was valued at Rs. 25,045.36 crore on 15 June 2015. Its
products and services may be categorised as below:

Formulations

Active Pharmaceutical Ingredients

 Divi's Laboratories

Divi's Laboratories was set up in 1990 with the sole purpose of research and
development in the life-sciences segment. The company mainly focuses on the
development of modern innovative methods of manufacturing pharmaceutical
intermediaries and other APIs. It is India's ninth largest pharmaceutical
company by market capitalisation, which amounted to Rs. 23,493.97 crore on
15 June 2015. Its products and services may be categorised as below:

Generics

Intermediates

Protected Amino Acids

Chiral Synthesis

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Carotenoids (Synthetic) and Nutraceuticals

 Torrent Pharmaceuticals

Based in Ahmedabad, Gujarat, Torrent Group's flagship unit is Torrent

Pharmaceuticals, founded in 1959. It is a major in therapeutic realms such as
central nervous system and cardiovascular, spanning over segments like
diabetology, gastroenterology and anti-infectives to name some. Torrent
Pharmaceuticals is operational in over 50 countries and has a significant
presence in India where it is rated as one of the top 10 pharmaceutical
companies operating in the country. On 15 June 2015, the market capitalisation
of Torrent Pharmaceuticals was Rs. 21,555.59 crore.

 IPCA

Ipca Laboratories was set up in 1949 by a group of businessmen and medical

professionals. In 1975, the current management took over the company. At
present, the Ipca Laboratories Ltd. is a rapidly growing pharmaceutical
company in India whose biggest thrust is on exports.

The main activities of Ipca Laboratories Company are to produce and market
pharmaceuticals and drugs. The various products of the company include
formulations, drug intermediates, and active pharmaceutical ingredients (API).
Ipca Laboratories produces more than 150 formulations that include oral
liquids, tablets, dry powders, and capsules. The various kinds of drug
intermediates that the company manufactures include Theo bromine,
Acetylthiophene, and P- Bromo Toluene. Ipca Laboratories Ltd. also produces
API and it is one of the biggest producers and exporters in the world in this
sector.

Ipca Laboratories products are manufactured at state-of-the-art facilities. The

company has production units in Athal, Dehradun, Aurangabad, Ratlam, Indore,
Kandla, and Silvassa. All manufacturing units of the Ipca Laboratories are
approved by the various authorities for drug regulation such as Therapeutic
Goods Administration (TGA) in Australia, Food and Drug Administration
(FDA) in USA, and Medicines Control Council (MCC) in South Africa.

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  Alembic

Established in 1907, Alembic pharmaceutical LTD is leading pharmaceutical

company in India. The company is vertically integrated with the ability to
develop, manufacture and market pharmaceutical Products, pharmaceutical
substances and intermediates. Alembic is the market leader in the macrolides
segment of anti-infective drugs in India. Alembic pharmaceutical is Asia’s most
respected and integrated, committed to improving the quality of life and
healthcare in over 75 countries.
Alembic's manufacturing facilities are located in Vadodara and Baddi in
Himachal Pradesh. The plant at Vadodara has the largest fermentation capacity
in India. The Panelav facility houses the API and formulation manufacturing
(both US FDA approved) plants. The plant at Baddi, Himachal Pradesh
manufactures formulations for the domestic and non-regulated export market.
The company has a state of the art Research Centre at Vadodara.

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SWOT Analysis of Pharma Sector

Strengths

Cost effective technology

Strong and well-developed manufacturing base

Clinical research and trials

Knowledge based, low- cost manpower in science & technology

Proficiency in path-breaking research

High-quality formulations and drugs

High standards of purity

Non-infringing processes of Active Pharmaceutical Ingredients (APIs)

Future growth driver

World-class process development labs

Excellent clinical trial centres

Chemical and process development competencies

Weaknesses

Low Indian share in world pharmaceutical market (about 2%)

Lack of strategic planning

Fragmented capacities

Low R&D investments

Absence of association between institutes and industry

Low healthcare expenditure

Production of duplicate drugs

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Opportunities

Incredible export potential

Increasing health consciousness

New innovative therapeutic products

Globalization

Drug delivery system management

Increased incomes

Production of generic drugs

Contract manufacturing

Clinical trials & research

Drug molecules

Threats

Small number of discoveries

Competition from MNCs

Transformation of process patent to product patent (TRIPS)

Out dated Sales and marketing methods

Non-tariff barriers imposed by developed countries

Challenges:

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Regulatory obstacles

Lack of proper infrastructure

Lack of qualified professionals

Expensive research equipment’s

Lack of academic collaboration

Underdeveloped molecular discovery program

Divide between the industry and study curriculum

FINANCIAL ANALYSIS

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Introduction:

Financial Analysis is the process of determining the operating & financial

characteristics of a firm from accounting data & financial statement. The goal of
such analysis is to determine efficiency & performance of the firm management,
as reflected in the financial records and reports. Its main aim is to measure the
firm’s liquidity, profitability and other indications that business is conducted in
a rational and orderly way.

The basic financial statement –

 Of the various reports that the companies issue to their shareholder, the
annual report is by far the most important. Two types of information
are given in this report, first there is a text that describes the firms
operating results during the past year and discusses new development
that will affect future operations. Second there are few basic financial
statements –the income statement, the balance sheet, the statement of
retained earnings and the sources and uses of funds statements.

 The financial statement taken together give an accounting picture of

the firm’s operation and financial positions.

“Financial statement analysis is largely a study of relationship among the

various financial factors in a business as disclosed by a single set of statements,
and a study of trends of these factors as shown in a series of statements”

--- John N. Myer

“The analysis and interpretation of financial statement are an attempt to

determine the significance and meaning of the financial statement data so that
the forecast may be made of the prospects for future earnings, ability to pay
interest and debt maturities (both current & long term) and profitability of a
sound dividend policy”

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--- R.D. and S. % Mc Muller

Thus, analysis of financial statement means such a treatment of the information

contained in the financial statement as to afford a full diagnosis of the
profitability and financial position of the firm concerned.

Nature of financial statement:

According to the American institute of certified public accountants

“……………… financial statement reflected a combination of recorded facts,
accounting conventions and personal judgments.

Objective of financial analysis:

The number and types of people interested in financial statements have changed
radically over a period of time. They need varied information and fortunately
such information may be classified as relating to profitability, liquidity and
solvency.

The Project “ANALYSIS AND INTERPRETATION OF FINANCIAL

STATEMENTS” is undertaken to fulfil the following objectives.

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  To estimate the earning capacity

 To gouge the financial position and financial performance of the firm

 To determine the long terms liquidity of the funds as well as solvency

 To determine the debt capacity of the firm

 To decide about the future prospective of the firm

Ratio Analysis

Financial ratio:

 A ratio may be defined as a fixed relationship in degree or number

between two numbers. In finance, ratios are used to point out
relationship that is not obvious from the row data.

Some uses of financial ratios are following:-

(1) To Compare Different Companies in Some Industry: ratio can high light
the factors association with successful and unsuccessful firms. They can reveal
strong firms and weak firms, overvalued undervalued firms.

(2) To Compare Different Industries: Every industry has its own unique set of
operating and financial characteristics. These can be identified with the help of
ratios.

(3) To Compare Performance in the Different Time Periods: Over a period

of years, a firm or an industry develop certain forms that may indicate future
success or failure. If relationship changes in firms data over different time
periods, the ratio may provide clues and trends of future problems.

Utility of Financial Analysis:

Following are the advantages of Financial Analysis:

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With the help of ratios we can determine the ability of the firms to meet its
current obligation. overall operating efficiency and performance of the firm.

Efficiency with which firms is utilizing its various assets in generating sales
Revenue.

Ratios help in inter-firm and intra-firm comparison.

They help in determining the financial strength by highlighting the liquidity.

They are useful in comparison of performance.

They are also useful in forecasting purpose.

Advantages of Ratios:

The ratio analysis is one of the most powerful tools of financial analysis. It is
use as advice to analysis and interprets the financial health of enterprise. Just
like a doctor examines his conclusion regarding the illness and before giving his
treatment, a financial analyst analyses the financial statement with various tools
of analysis before commenting upon the financial weakness of an enterprise. A
ratio is known as a symptom like “Blood pressure, the pulse rate or the
temperature of the individual‟. It is with help of ratios that the financial
statements can be analysed and decision made from such analysis.

HELPS IN DIVISION MAKING: Financial statements are prepared primarily

for decision making, but the information provided in financial statements is not
an end in itself and no meaningful conclusions can be drawn from these
statements alone. Ratio analysis helps in making decisions from the information
provided in these financial statements.

HELPS IN FINANCIAL FORCASTING AND PLANNING: Ratios analysis

is helpful in financial forecasting and planning. Planning is looking ahead and
the ratios calculated for a number of year’s work as a guide for the future.

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Meaningful conclusions can be drawn for future from these ratios. Thus, ratio
analysis helps in forecasting and planning.

HELPS IN COMMUNICATING: The financial strength and weakness of a

firm are communicated in an easier and understandable manner by the use of
ratios the information contained in a financial statement conveyed in a
meaningful manner to the one for whom it is meant. Thus, ratios help in
communicating and enhance the value of financial statements.

HELPS IN COORDINATION: Ratios even helps in coordinating, which is

utmost important in effective business management. Better communication of
efficiency and weakness of an enterprise results in better coordination in the
enterprise.

HELPS IN CONTROL: Ratio analysis even helps in making effective control

of the business. Standard ratios can be based upon Performa Financial
Statements and variance or deviations, if any, can be founded by comparing the
actual with the standards so as to take corrective action at the right time. The
weakness or otherwise, if any, come to the knowledge of the management
which helps in effective control of the business.

Classification of Ratios:

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1. LIQUIDITY RATIOS:

 Current ratio:

 Quick ratio:

2. LEVERAGE RATIOS:

 Debt equity ratio:

 Debt to Capital employed ratio

 Total asset to debt ratio:

 Interest coverage ratio:

3. TURNOVER RATIOS/ACTIVITY RATIOS:

 Capital Employed Turnover Ratio

 Stock turnover ratio

 Debtors turnover ratio

 Creditors turnover ratio

 Fixed assets turnover ratio

4. PROFITABILITY RATIOS:

 EBIT ratio

 Net profit ratio

 Return on Capital Employed

 Return on Equity

28 | P a g e
DU PONT ANALYSIS

 PAT/NW=GP/SALES*EBIT/GP*SALES/CE*EAT/EBIT*CE/NW

Growth Rate

 b*r

 1-DPS/EPS*ROE

Financial Ratios

1. LIQUIDITY RATIOS:

Liquidity refers to the ability of the firm to meet its obligations inventory the
short-run, usually one year. Liquidity ratios are generally based on the
relationship between current assets and current liabilities (the sources for
meeting short-term obligations). Example: Current ratio, Acid test ratio.

Current ratio: also known as working capital ratio, this is used to evaluate
short term financial position of the business concern. It indicates the ability of
the firm to meet its short term obligations. It compares the current assets and
current liabilities of the firm. Current assets are those which are either in the
form of cash or cash equivalent. Current Liabilities are those which are to be
discharged during the accounting period

Current ratio = Current assets

29 | P a g e
 Current liabilities

Significance: Ideal current ratio is 2:1. A very high ratio indicates availability of
idle cash and is not a good sign.

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Curren 1.302 1.3524 1.29 1.95 1.74 1.78 1.43 1.43 2.53 3.88
t Ratio 5

Interpretation

An ideal current ratio should be 2:1, which denotes that the current assets of a

Business should at least be twice of its current liabilities.

Current ratio of Cipla, Ajanta and Lupin are Excellent. In 2014-15, Lupin
Pharmaceutical has maximum current ratio.ie. 3.88. Current ratio of Alembic,
Aurobindo, Cadila, Dr. Reddy, IPCA, Torrent and Glenmark are not satisfactory
for 2014-15. So, as per the rule this companies doesn’t have good ability to
meet its current obligations. However this arbitrary standard needs not to be
blindly followed. Firms with less than 2:1 Current ratio may also be performing
well if it has good quality current assets.

30 | P a g e
 Current Ratio
4.5
4
3.5
3
2.5
2 Current Ratio
1.5
1
0.5
0
c la a dy t k ta n
bi do di pl CA en ar an pi
lem bin Ca Ci Red IP rr m Aj Lu
A ro . To en
Au Dr Gl

Quick ratio: it is very useful in measuring liquidity position of a firm. It

measures the firm’s capacity to pay off current obligations. It is used as
complimentary ratio to the current ratio.

Quick ratio = liquid assets

Current liabilities.

Significance: Liquid ratio of 1:1 is considered satisfactory. If quick assets are

equal to current liabilities, then the concern may be able to meet its short term
obligations.

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi

31 | P a g e
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Quick 0.743 0.7639 0.82 0.98 1.36 0.76 1.05 1.09 1.9 2.83
Ratio

Interpretation

Generally a quick ratio of 1:1 is considered to represent a satisfactory current

financial condition. Although a quick ratio is more penetrating test of liquidity
than current ratio, yet it should be used cautiously. A quick ratio of 1 does not
always represents sound liquidity position.

As we can see in the graph, Quick Ratio of Lupin is maximum with 2.83 while
it’s minimum of IPCA with 0.76.

Quick Ratio
3

2.5

1.5
Quick Ratio
1

0.5

0
c la a dy t k ta
bi do di pl CA en ar an pi
n
lem bin Ca Ci Red IP rr m A j Lu
A ro . To en
Au Dr Gl

2. LEVERAGE RATIOS:

32 | P a g e
Leverage ratios analyse the long term solvency that help us judge the ability of a
firm to pay the interest regularly as well as repay the principal when due to
debenture holders, long term lenders.

Debt equity ratio: shows a relationship between long term debt and
shareholder’s fund. This ratio indicates the relation between outsider’s fund and
shareholder’s fund. Also called external internal equity ratio

Debt equity ratio= debt or long term debt

Equity shareholder’s fund

Significance: A ratio of 1:1 is usually considered to be satisfactory. This ratio is

calculated to know about the organization’s repayment capacity of long term
debts.

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Debt
Equity 0.07 0.06
Ratio 0.08 0.3096 0.32 8 0.1952 0.32 1.04 0.99 6 0.03

Interpretation

An ideal debt equity ratio should be 1:1, which is considered as satisfactory.

Here, Torrent and Glenmark Companies ratio are satisfactory while other is not
satisfactory.

33 | P a g e
 Series 1
1.2

0.8

0.6
Series 1
0.4

0.2

0
c la a dy t k ta
bi do di pl CA en ar an pi
n
lem bin Ca Ci Red IP r r m Aj Lu
A ro . To en
Au Dr Gl

Debt-to-Capital Ratio:

A measurement of a company's financial leverage, calculated as the

company's debt divided by its total capital. Debt includes all short-term and
long-term obligations. Total capital includes the company's debt and
shareholders' equity, which includes common stock, preferred stock, minority
interest and net debt.

Debt-to-Capital Ratio: debt

Total Capital

34 | P a g e
Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Debt-
to-
Capita 0.24 0.07 0.06
l Ratio 0.076 0.2364 3 2 0.1633 0.24 0.51 0.498 2 0.03

Interpretation

Higher the ratio, it is problem for the company because company has to pay
interest on debt. Here, Torrent and Glenmark companies has ratio approx. 0.5
which is not good for company.

Debt to Equity Ratio

0.6

0.5

0.4

0.3
Debt to Equity Ratio
0.2

0.1

0
c la a dy t k ta
bi do di pl CA en ar an pi
n
lem bin Ca Ci Red IP rr m Aj Lu
A ro . To en
Au Dr Gl

35 | P a g e
Total asset to debt ratio: shows a relationship between total assets and the
long term debts.

Total asset to debt ratio= total assets

Long term debts

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Total
Asset
to debt 18.6 20.5
Ratio 2.169 5.1986 6.64 7 9.67 5.45 3.06 3.255 9 34.4

Interpretation

36 | P a g e
An ideal total asset to debt ratio should be 1:1, the higher the level of long term
debt, the more important it is for a company to have positive revenue and steady
cash flow. Here, Lupin pharmaceutical has maximum total asset to debt ratio
with 34.4.

Debt to Equity Ratio

0.6

0.5

0.4

0.3
Debt to Equity Ratio
0.2

0.1

0
c la a dy t k ta
bi do di pl CA en ar an pi
n
em bin Ca Ci Red IP rr m A j Lu
Al ro . To
Gl
en
Au Dr

Interest coverage ratio: also known as debt service ratio. This is calculated by
dividing net profit before charging interest and income tax by ‘fixed interest
charges’.

Interest coverage ratio= net profit before charging interest and income tax

‘Fixed interest charges’

Significance: This shows how many times the interest charges are covered by
profits available to pay interest charges. It is helpful in finding out whether the
business will earn sufficient

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi

37 | P a g e
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Intere
st
Cover
age 22.4 10.8 13.7 79.4 656.
Ratio 201.7 12.56 4 3 27.8 2 6.37 4.15 5 6

Interpretation

An interest coverage ratio (ICR) of 6 to 7 times is considered appropriate. The

minimum ICR was 4.15 of Glenmark while the maximum ICR was 656.55 of
Lupin. This indicates strong capacity of the company to pay the interest charges.

Interest Coverage Ratio

700

600

500

400
Interest Coverage Ratio
300

200

100

0
c la a y t k ta
bi do di pl dd CA en ar an pi
n
em bin Ca Ci e IP rr m j Lu
Al ro .R To en A
Au Dr Gl

38 | P a g e
3. TURNOVER RATIOS/ACTIVITY RATIOS:

Capital Employed Turnover Ratio:

The Capital Employed Turnover Ratio shows how efficiently the sales are
generated from the capital employed by the firm. This ratio helps the investors
or the creditors to determine the ability of a firm to generate revenues from the
capital employed and act as a key decision factor for lending more money to the
asking firm.

The formula to compute this ratio is:

Capital Employed Turnover Ratio = Net Sales/ Capital Employed

Where, Capital Employed = Net worth + Long-term Borrowings

Net Worth = Share Capital + All Reserves

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Capita 2.108 2.7768 1.47 0.92 1.266 1.07 3.735 1.1 1.62 1.04
l 6
Emplo
yed

39 | P a g e
Turno
ver
Ratio

Interpretation

Higher the ratio better is the utilization of capital employed and shows the
ability of the firm to generate maximum profits with the minimum amount of
capital employed. CETR of Aurobindo is maximum with 2.7768 while CETR of
Cipla is minimum with 0.9262.

Capital Employed Turnover Ratio

4
3.5
3
2.5
2 Capital Employed Turnover
Ratio
1.5
1
0.5
0
bi
c o
di
la pl
a
dd
y CA nt ar
k ta pi
n
m ind a Ci e IP r re m jan Lu
e b C .R A
Al ro To
Gl
en
Au Dr

Stock turnover ratio: This ratio indicates relationship between cost of goods
sold during the year and average stock kept during that year.

40 | P a g e
Stock turnover ratio= cost of goods sold

Average stock

Significance: This ratio indicates whether stock has been efficiently used or not.
It shows the speed with which the stock is rotated into sales or the number of
times the stock is turned into sales during the year. The higher the ratio, the
better it is, since it indicates that stock is selling quickly. In business, where the
STR is high, goods can be sold at a low margin of profit and even then, the
profitability may be quite high.

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Stock
Turno
ver 1.10 1.24 1.57
Ratio 1.867 1.52 2.08 8 1.44 6 1.33 1.52 2.3 9

Interpretation

Inventory turnover ratio measures the efficiency of inventory management.

Therefore ideally an increasing trend is expected. Stock turnover ratio is highest
for Cadila with 2.08 while STR is lowest for IPCA with 1.246. This implies the
company is converting its inventory into finished good.

41 | P a g e
 Stock Turnover Ratio
2.5

1.5

Stock Turnover Ratio

1

0.5

0
c la a dy t k ta n
bi do di pl CA en ar an pi
lem bin Ca Ci Red IP rr m Aj Lu
A ro . To en
Au Dr Gl

Debtor turnover ratio: This ratio indicates relationship between credit sales
and average debtors during the year.

Debtors turnover ratio= net credit sales

Average debtors + Average B/R

Significance: This ratio indicates the speed with which the amount is collected
from debtors. The higher the ratio, the better it is, since it indicates that the
amounts from debtors are being collected quickly. A lower DTR will indicate
the inefficient credit sales policy of the management.

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Debtor 5.587 3.4028 5.35 5.46 3.64 8.83 2.88 2.63 5.61 3.88

42 | P a g e
s
Turno
ver
Ratio 5

Interpretation

DTR of IPCA is maximum with 8.83 while the lowest is 2.63 of Glenmark,
which means that on an average, debtors are turned into cash 8.83 and 2.63
times in a year.

Debtors Turnover Ratio

10
9
8
7
6
5
Debtors Turnover Ratio
4
3
2
1
0
c la a dy t k ta n
bi do di pl CA en ar an pi
lem bin Ca Ci Red IP rr m Aj Lu
A ro . To en
Au Dr Gl

Creditor turnover ratio: This ratio indicates relationship between credit

purchases and average creditors during the year.

43 | P a g e
Creditors turnover ratio= net credit purchases

Average creditors + Average B/P

Significance: This ratio indicates the speed with which the amount is being paid
to the creditors. The higher the ratio, the better it is, since it will indicate that the
creditors are being paid more quickly which increases the credit worthiness of
the firm.

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Credit
ors
Turno
ver 0.50
Ratio 0.794 0.8348 1.28 3 1.086 0.41 0.27 0.18 0.3

Interpretation

Creditors’ turnover ratio indicates the payment pattern of the firm i.e. the
payment to the creditors. Cadila has highest CTR ratio with 1.28 which is good
for company while Glenmark has lowest with 0.18 times which is next to zero.
It is not good for company.

44 | P a g e
 Creditors Turnover Ratio
1.4

1.2

0.8
Creditors Turnover Ratio
0.6

0.4

0.2

0
c o la a dy t k ta n
bi nd di pl CA en ar pi
lem obi Ca Ci Red IP or r
n m A jan Lu
A r . T e
Au Dr Gl

Fixed assets turnover ratio: This ratio indicates relationship between costs of
goods sold and fixed assets during a year.

Fixed assets turnover ratio= cost of goods sold

Net fixed assets

Significance: This ratio reveals how efficiently the fixed assets are being
utilized. If there is increase in ratio, it indicates that there is better utilization of
fixed assets and vice versa.
Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Fixed
Asset
Turno
ver 0.86 0.56 0.79
Ratio 1.342 1.3346 0.77 4 0.628 8 0.4 0.59 7 0.6

45 | P a g e
Interpretation

Fixed Assets Turnover Ratio measures how efficiently fixed assets are used to
maximize sales. A firm’s ability to produce a large volume of sales for a given
amount of fixed assets is one of the most important aspects of its operating
performance. For Alembic Ltd. and Aurobindo Ltd. this ratio is approx. 1.4
times for the year and it shows satisfactory condition. Its value shows increase
or decrease shows how efficiently fixed assets used.

Fixed Asset Turnover Ratio

1.6
1.4
1.2
1
0.8
Fixed Asset Turnover Ratio
0.6
0.4
0.2
0
bi
c o
di
la pl
a
dd
y CA nt ar
k ta pi
n
m ind a Ci e IP r re m jan Lu
e b C .R A
Al ro To
Gl
en
Au Dr

Profitability ratios: These ratios measure the profit earning capacity of the
company.

Generally, profitability ratio is calculated in percentage (%).

46 | P a g e
Gross profit ratio: It shows relationship between gross profit and sales. It
shows margin of profit on sales.

Gross profit ratio= gross profit X 100

Net sales

Significance: It reveals profit earning capacity of business w.r.t. its sales.

Com Ale Auro Cad Cipl Dr. IPC Tor Glen Aja Lup
pany mbi bindo ila a Redd A rent mark nta in
c y
Year 201 2014- 201 201 2014- 201 201 2014- 201 201
4-15 15 4-15 4-15 15 4-15 4-15 15 4-15 4-15
Gros
s
Profit 17.79 18.00 17.0 16.6 20.18 12.5 20.50 11.87 32.3 32.99
Ratio % % 1% 4% % 0% % % 7% %

Interpretation

Increase in gross profit ratio indicates reduction in cost while decrease in gross
profit ratio will indicate increase in cost or sales at a lesser price. Here, Ajanta
and Lupin has highest GP Ratio with 32.37% and 32.99% respectively.

47 | P a g e
 Gross Profit Ratio
35.00%

30.00%

25.00%

20.00%
Gross Profit Ratio
15.00%

10.00%

5.00%

0.00%
c la a dy t k ta
bi do di pl CA en ar an pi
n
lem bin Ca Ci Red IP rr m Aj Lu
A ro . To en
Au Dr Gl

Net profit ratio: This ratio indicates relationship between net profit and net
sales

Net profit ratio= Net profit X 100

Net sales

Significance: It shows the operational efficiency of the business. Decrease in the

ratio indicates managerial inefficiency and excessive selling and distribution
expenses. Increase in it shows better performance.

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Net
Profit 14.01 13.05 13.9 11.4 15.67 8.32 16.38 7.21 21.3 24.5
Ratio % % 6% 5% % % % % 2% 8%

48 | P a g e
Interpretation

The increase in net profit ratio shows better performance of the company and
here for Ajanta and Lupin has maximum NPR with 21.32% and 24.58%
respectively.

Net Profit Ratio

30.00%

25.00%

20.00%

15.00%
Net Profit Ratio
10.00%

5.00%

0.00%
c la a y t k ta n
bi do di pl dd CA en ar an pi
em bin Ca Ci e IP rr m j Lu
A l ro .R To en A
Au Dr Gl

Return on capital employed: It reflects the overall profitability of the business.

It is calculated by comparing the profit earned and the capital employed to earn
it.

Rate on capital = Profit before interest, tax and dividends X 100

Capital employed

Significance: This ratio is a barometer of the overall performance which

measures how efficiently the capital employed in the business is being used.
Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

49 | P a g e
Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Return
on
Capita
l
Emplo 37.69 34.47 27.1 15.6 25.54 13.3 21.95 13.10 52.4 34.4
yed % % 5% 7% % 9% % % 5% 2%

Interpretation

Efficiently the capital employed in the business is being used and the higher
value shows better performance of company and here for Ajanta has highest
ROCE is 52.45% which is satisfactory performance for company.

Return on Capital Employed

60.00%

50.00%

40.00%

30.00%
Return on Capital Employed
20.00%

10.00%

0.00%
bi
c o la pl
a dy CA nt rk ta in
nd adi Ci ed IP orre nma Ajan Lup
lem obi C . R T e
A r Gl
Au Dr

50 | P a g e
Return on total shareholder’s fund: To calculate this, net profit after interest
and tax is divided by shareholder’s fund

Return on total = net profit after interest and tax

Shareholder’s fund Total shareholder’s funds

Significance: It reveals how profitably the proprietor’s funds have been utilized
by the firm

Comp Alem Aurobi Cadi Cipl Dr. IPC Torr Glenm Ajan Lupi
any bic ndo la a Reddy A ent ark ta n

Year 2014 2014- 2014 2014 2014- 2014 2014 2014- 2014 2014
-15 15 -15 -15 15 -15 -15 15 -15 -15

Return
on 32.30 30.47 27.9 11.6 23.71 11.7 30.15 15.84 36.8 26.5
Equity % % 0% 2% % 3% % % 3% 6%

Interpretation

ROE measures the profitability of equity funds invested in the firm. It is the
relationship between profit after tax and net worth. Net worth includes paid-up
share capital, share premium and reserve and surplus. This ratio is also known
as Return on Equity. ROE of Ajanta has highest with 36.83%.

51 | P a g e
 Return on Equity
40.00%
35.00%
30.00%
25.00%
20.00%
Return on Equity
15.00%
10.00%
5.00%
0.00%
c la a dy t k ta n
bi do di pl CA en ar an pi
lem bin Ca Ci Red IP or r
nm Aj Lu
A ro Dr
. T
Gl
e
Au

DU PONT ANALYSIS

Based on a special study conducted by the management advisory firm DuPont, a

strategic way of looking at the ratios has emerged. Return on Equity (ROE) is
calculated using following formula:

ROE= Profit after Tax / Equity

DuPont Analysis breaks the calculation of ROE in three different parts as

follows:
ROE = PATM × Total Assets Turnover × Equity Multiplier

Or, ROE = (Profit after Tax / Sales) × (Sales / Total Assets) × (Total Assets /
Equity)

PAT/NW=GP/SALES*EBIT/GP*SALES/CE*EAT/EBIT*CE/NW

Company Alembic Aurobindo Cadila Cipla

Year 2014-15 2014-15 2014-15 2014-15

Du Pont 17.79*1*2.13*0. 18*1.07*1.78*0 17.01*1.04*1.51* 16.64*1.10*0.94*

Analysis 78*1.08 .68*1.30 0.77*1.32 0.688*1.07

52 | P a g e
 i.e., i.e., i.e., i.e.,
31.92% 30.31% 27.15% 12.66%

Dr. Reddy IPCA Torrent Glenmark Ajanta Lupin

2014-15 2014-15 2014-15 2014-15 2014-15 2014-15

20.18*1.03*1 12.5*1.08*1. 20.5*1.18*0. 11.87*1.31*1 32.37*1.01*1 32.99*1*1.

.26*0.78*1.1 07*0.66*1.3 90*0.67*2.0 .10*0.60*1.9 .62*0.65*1.0 04*0.74*1.
9 1 3 9 6 04

i.e., i.e., i.e., i.e., i.e., i.e.,

24.31% 12.48% 29.61% 20.42% 36.49% 26.40%

Interpretation

The advantage of writing the equation in the long way is that it gets divided into
three segments which are strategically critical. The first is Profit after tax
margin which is after tax divided by sales. Every company is keen in knowing
extent to which the incremental sales results in profit. The second is Assets
turnover ratio (sales / total assets) showing efficiency with which we use our
assets. The third is Equity Multiplier (Total assets / Equity) giving us the extent
of financial leverage practiced. The product of three gives us ROE.

The three parameters that lead to ROE are better focused when we perform
DuPont analysis. Also we can identify the factors that contribute to ROE more
and what drag if down. For e.g., we can see in the table that in year 2014-15,
PAT is 36.49% of Ajanta which is highest among other companies.

The DuPont analysis becomes effective when carried out over several
companies within the same industry and across various industries.

53 | P a g e
 Du Pont Analysis
40.00%
35.00%
30.00%
25.00%
20.00%
Du Pont Analysis
15.00%
10.00%
5.00%
0.00%
c la a dy t k ta n
bi do di pl CA en ar an pi
lem bin Ca Ci Red IP or r
nm Aj Lu
A ro Dr
. T
Gl
e
Au

Growth Rate

Growth rates refer to the amount of increase that a specific variable has gained
within a specific period and context.

b*r

1-DPS/EPS*ROE

Compan Alembic Aurobindo Cadila Cipla

y

Year 2014-15 2014-15 2014-15 2014-15

Growth 0.4745*32.30 = (0.0624)*30.47 (0.758)*27.90 = (0.279)*11.62 =

Rate 15.33% =(1.90)% (21.14)% (3.24)%

54 | P a g e
 Dr. Reddy IPCA Torrent Glenmark Ajanta Lupin

2014-
2014-15 2014-15 2014-15 2014-15 2014-15 15

(2.75)
*26.56
=
(1.714)*23.71 0.1005*11.73 (1.5232)*30.1 1*15.84 0.5287*36.83 (73.04
= (40.64)% = 1.1788% 5 = (45.92)% = 15.84% = 19.47% )%

Interpretation

For investors, this typically represents the compounded annualized rate of

growth of a company's revenues, earnings, dividends and even macro concepts -
such as the economy as a whole. From the above table we can see that Ajanta
Ltd. has highest growth rate with 19.47% while Lupin Ltd has its adverse.

55 | P a g e
 Growth Rate
40.00%

20.00%

0.00%
c la a dy t k ta
bi do di pl CA en ar an pi
n Growth Rate
lem bin Ca Ci Red IP rr m Aj Lu
-20.00% A ro . To en
Au Dr Gl

-40.00%

-60.00%

-80.00%

Conclusion:

56 | P a g e