1| Page FUNDAMENTAL ANALYSIS OF PHARMA STOCKS

Fundamental Analysis

Fundamental analysis is a technique that attempts to determine a security’s value by focusing

on underlying factors that affect a company's actual business and its future prospects. On a
broader scope, you can perform fundamental analysis on industries or the economy as a
whole. The term simply refers to the analysis of the economic well-being of a financial entity
as opposed to only its price movements.
Fundamental analysis serves to answer questions, such as:
Is the company’s revenue growing?

• Is it actually making a profit?

• Is it in a strong-enough position to beat out its competitors in the future?
• Is it able to repay its debts?

Investors that analyze stocks utilizing fundamental analysis prefer to look at basic
information about a company in an effort to figure out what they think is the true or fair value
of a company’s stock. Fundamental Analysts look at a lot of news and perform research into
data such as growth of the company’s sales and profits.

SCOPE OF THE STUDY

The research carried out aims at studying the various scripts (companies) their Balance Sheet,

P&L A/c, Annual A/Cs, etc. in an in-depth manner by means of ratio analysis to find out

sustainability and profitability of a specific company. To study through various other tools like

current news about the company, trend analysis, common size statement etc. in order to get a

complete idea of fundamental analysis of pharmaceutical sector in particular.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

2| Page FUNDAMENTAL ANALYSIS OF PHARMA STOCKS

The study pertains to the financial years of 2007 to 2009.

PROBLEM DEFINITION

The study has been conducted to conclude about the fundamental position of the selected
companies according to the findings of ratio analysis, trend analysis and common size statement
analysis of securities, so that investors can easily get an idea about the fundamental analysis of
pharmaceutical companies.

OBJECTIVE OF STUDY

The main objective of project is to do fundamental analysis of a pharmaceutical of companies, to

study the present scenario of a pharmaceutical industry and analyze the information collected on
liquidity, stability and profitability of the companies. Also to conduct a Ratio Analysis for the
selected companies and make necessary comments on it so as to provide a complete idea and the
core ideology of the company and whether or not investors should invest in the selected
companies.

METHODOLOGY OF STUDY

Any study or research conducted should be done scientifically and to have a systematic appeal, a
proper methodology should be used to have the proper, logical, rational and systemic analysis of
data.

Primary Sources:-

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

3| Page FUNDAMENTAL ANALYSIS OF PHARMA STOCKS

When any authorized organization or an investigator or an enumerator collect the data for the
first time himself or with the help of an institution or an expert than the data thus collected are
called primary data. No data for the analysis is collected from the primary sources.

Secondary Sources:-

When an authorized organization or an investigator uses the data already collected by some
other authorized agency or investigator, then such data become secondary data for the user
organization or investigation. Secondary data is, by a large available at publications or periodical
of authorized agencies or institutions.

The main source of data collected for this project is the secondary source. The data has been
collected from the Websites the companies under study from their respective uploaded Annual
Reports.

SELECTION OF THE SAMPLE

• Population: The entire pharmaceutical industry is the population for the study.
• Sample: The three companies namely; Sun Pharmaceuticals, Ranbaxy Laboratories and
Dr. Reddy’s Lab have been chosen as the sample based on their market capitalization.

Company Market Capitalization

(in Crores of Rupees)

1. Sun Pharmaceuticals 22644.31
2. Ranbaxy Laboratories 8122.93

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

4| Page FUNDAMENTAL ANALYSIS OF PHARMA STOCKS

3. Dr. Reddy’s Lab 7595.34

(TABLE 1.1)

LIMITATIONS OF THE STUDY

1. The data has been collected from the secondary sources such as the websites of the company
and their uploaded Annual Reports.
2. The data which is useful for the fundamental analysis are lacking in this Project that are still
in negotiation or any kind of deal which is in-process. Thus, that is ignored by the study.
3. Due to lack of experience and knowledge of the pharmaceutical industry it can’t be said that
the projection has been made totally correct and accurate.
4. Today’s stock market is totally running on the investor’s perceptions so the conclusion
derived on the basis if fundamental analysis would not viable in long run.

INDUSTRY ANALYSIS

INDIAN PHARMACEUTICAL INDUSTRY

INTRODUCTION
The Indian Pharmaceutical Industry has come a long way from being almost non-existent in the
1970’s to being one of the largest and most advanced Pharmaceutical industries in the world.
The domestic Pharmaceutical output has increased at a CAGR of [Link] the Indian
Pharmaceutical Industry is valued at $ 8 billion (approx).Globally the industry ranks 4th in

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

5| Page FUNDAMENTAL ANALYSIS OF PHARMA STOCKS

terms of volume and 13th in terms of value. It provides employment to millions and ensures that
essential drugs are available to the vast population of India at affordable prices.
Indian Pharmaceutical Industry has attained wide ranging capabilities in the complex field of
drug manufacture and technology developed through a range of governmental incentives and the
industry has been declared a knowledge based industry. This Industry is a highly organized
sector and is extremely fragmented with severe price competitions and governmental price
control. The major players in the Industry are Ranbaxy, Dr. Reddy’s Laboratories, Cipla, Sun
Pharmaceutical Industries, Lupin Lab, Glaxo SmithKline Pharmaceutical, Cadila Healthcare,
Aventis etc.
India has the highest number of manufacturing plants approved by US FDA, which is next only
to that in the US. More than 85% of the formulations produced in the country are sold in the
domestic market. Over 60% of India's bulk drug production is exported. India holds the lion's
share of the world's contract research business as activity in the Pharmaceutical market
continues to explode, over 15 prominent contract research organizations (CROs) are now
operating in India attracted by her ability to offer efficient R&D on a low cost basis.
Thirty five per cent of business is in the field of new drug discovery and the rest 65 per cent of
business is in the clinical trials arena. India offers a huge cost advantage in the clinical trials
domain compared to Western countries. India got a major boost with the signing of Trade
Related Intellectual Property Rights (TRIPS) under the General Agreement on Tariffs and Trade
(GATT) in January 2005 with which it began recognizing global patents. The acceptance of
patent laws and the rise of contract research and manufacturing sourcing (CRAMS) have led to
the diversification of revenue streams, enabling the Indian Pharmaceutical Industry to
experience high market growth.
DETAILED ANALYSIS OF THE PHARMACEUTICAL SECTOR GROWTH
The Indian Pharmaceutical industry has grown from a mere Rs. 1,500 crore turnover in 1980 to
over Rs. 78,000 crore in 2008 with about 10 per cent of share volume of global production. High

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

6| Page FUNDAMENTAL ANALYSIS OF PHARMA STOCKS

growth has been achieved through; the creation of required infrastructure, capacity building in
complex manufacturing technologies of active production ingredients(APIs) and formulations,
entering into drug discovery through original and contract research and manufacturing (CRAM)
and clinical trials and product specific strategies of acquisition and mergers.
The domestic sector had a production turnover of Rs. 47,241 crore from about 10,000 small-
scale and 300 large and medium manufacturing units in 2008.
ROLE IN FOREIGN TRADE
Pharmaceutical exports have grown from Rs. 6,256 crore in 1998-99 to Rs. 30,759 crore in
2008. Exports of pharmaceuticals have been consistently outstripping the value of corresponding
Imports in the period 1996-97 up to 2007-08. Exports registered a growth rate of 25 per cent in
2007-08 over 2006- 07. The sector attracted FDI amounting to US$ 1,401.60 million during
2000-01 to September 2008, of which, US$ 125.30 million occurred during April- September
2008.
INVESTMENT
Investments in pharmaceutical sector are now expanding into areas of innovative R&D focused
outsourcing opportunities like clinical trials, data management services, pharmaceutical
informatics, lead discovery and optimization, Pharmaceutical co-kinetics and Pharmaceutical co-
dynamics and pre-clinical drug discovery in combinatorial chemistry, chiral chemistry, new drug
delivery Systems, bioinformatics and phyto-medicines.
The Indian drug discovery market has grown from US$ 470 million in 2005 to US$ 800 million
in 2007.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

7| Page FUNDAMENTAL ANALYSIS OF PHARMA STOCKS

R& D IN INDIAN INDUSTRY

Though spending on R&D in relation to the GDP in the case of India has increased over the
years, the difference between the spending in R&D between India and the developed world
remains considerably high. India spends approximately 0.88 per cent of its GDP on research and
development. This is low compared to countries like China which spend 1.42 per cent of its
GDP on R&D and most developed countries spend more than 2 per cent of their GDP. During
the period 2005-06, 74.1 per cent of the total R&D expenditure was met from government
sources and rest 25.9 per cent came from the private sector.
The Central Government was the highest contributor to R&D expenditure with a share of 57.5
per cent, the State Government had a share of 7.7 per cent while the industrial sector contributed
30.4 per cent, and the higher education sector 4.4 per cent. It is pertinent to note that the
industrial sector R&D contribution in developed countries is usually more than 50 per cent.
There are about 3,690 R&D institutions in the country. Under the Central Government R&D
expenditure, 86 per cent was incurred by 12 major scientific agencies. The share of Defence
Research and Development Organisation (DRDO) amongst the 12 major scientific agencies was
34.4 per cent. During 2005-06, the industrial sector R&D units spent 0.55 per cent of their sales
turnover on R&D.
In terms of sector-wise position, the drugs and pharmaceuticals sector occupied highest position
with a share of 37.4 per cent followed by transportation and defence with 14.7 per cent and 6.9
per cent respectively.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

8| Page FUNDAMENTAL ANALYSIS OF PHARMA STOCKS

PORTER’S FIVE FORCES MODEL

A five forces analysis of competition structure has been done and explained below of the
Pharmaceutical industry:
(a) INDUSTRY COMPETITION
Pharmaceutical industry is one of the most competitive industries in the country with as many as
10,000 different players fighting for the same pie. The rivalry in the industry can be gauged
from the fact that the top player in the country has only 6 %(2006) market share, and the top 5
players together have about 18 %(2006) market share. Thus, the concentration ratio for this
industry is very low. High growth prospects make it attractive for new players to enter in the
industry.
Another major factor that adds to the industry rivalry is the fact that the entry barriers to
pharmaceutical industry are very low. The fixed cost requirement is low but the need for
working capital is high. The fixed asset turnover, which is one of the gauges of fixed cost
requirements, tells us that in bigger companies this ratio is in the range of 3.5-4 times.
For smaller companies, it would be even higher. Many small players that are focused on a
particular region have a better hang of the distribution channel, making it easier to succeed,
albeit in a limited way.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

9| Page FUNDAMENTAL ANALYSIS OF PHARMA STOCKS

An important fact is that, pharmaceutical is a stable market and its growth rate generally tracks
the economic growth of the country with some multiple (1.2 times average in India). Though
volume growth has been consistent over a period of time value growth has not followed in
tandem. The product differentiation is one key factor which gives competitive advantage to the
firms in any industry.
However, in pharmaceutical industry product differentiation is not possible since India has
followed process patents till date, with loss favoring imitators. Consequently product
differentiation is not a driver, cost competitiveness is.
However, companies like Pfizer and Glaxo have created big brands over the years which act as
product differentiation tools. Earlier it was easy for Indian pharmaceutical companies to imitate
pharmaceutical products discovered by MNCs at a lower cost and make good profit.
But today the scene is different with the arrival of the patent regime which has forced Indian
companies to rethink its strategies and to invest more on R&D. Also contract research has
assumed more importance now.
(b) BARGAINING POWER OF BUYERS
The unique feature of pharmaceutical industry is that the end user of the product is different
from the influencer (read doctor). The consumer has no choice but to buy what doctor says.
However, when we look at the buyer’s power, we look at the influence they have on the prices
of the product. In pharmaceutical industry, the buyers
are scattered and they as such do not wield much power in the pricing of the products. However,
govt with its policies, plays an important role in regulating pricing through the NPPA (national
pharmaceutical pricing authority).

(c) BARGAINING POWER OF SUPPLIERS

The pharmaceutical industry depends upon several organic chemicals. The chemical industry is
again very competitive and fragmented. The chemicals used in the pharmaceutical industry are

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 10 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

largely a commodity. The suppliers have very low bargaining power and the companies in the
pharmaceutical industry can switch from their suppliers without incurring a very high cost.
However, what can happen is that the supplier can go for forward integration to become a
pharmaceutical company. Companies like Orchid Chemicals and Sashun Chemicals were
basically chemical companies who turned themselves into pharmaceutical companies.

(d) BARRIERS TO ENTRY

Pharmaceutical industry is one of the most easily accessible industries for an entrepreneur in
India. The capital requirement for the industry is very low; creating a regional distribution
network is easy, since the point of sales is restricted in this industry in India. However, creating
brand awareness and franchisee among doctors is the key for long term survival. Also, quality
regulations by the government may put some hindrance for establishing new manufacturing
operations. The new patent regime has raised the barriers to entry. But it is unlikely to
discourage new entrants, as market for generics will be as huge.

(e)THREAT OF SUBSTITUTES
This is one of the great advantages of the pharmaceutical industry. Whatever happens, demand
for pharmaceutical products continues and the industry thrives. One of the key reasons for high
competitiveness in the industry is that as an ongoing concern, pharmaceutical industry seems to
have an infinite future. However, in recent times the advances made in thee field of
biotechnology, can prove to be a threat to the synthetic pharmaceutical industry.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

11 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

SWOT ANALYSIS

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 12 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Strength, Weakness, Threat and Opportunity (SWOT) analysis has been done and explained
below for the Pharmaceutical industry:

CONCLUSION
This model gives a fair idea about the industry in which a company operates and the various
external forces that influence it. The industry seems to be operating in monopolistic market
structure. However, it must be noted that any industry is not static in nature. It’s dynamic and
over a period of time the model, which we have used to analyze the pharmaceutical industry
may itself evolve. Going forward, we foresee increasing competition in the industry but the form
of competition will be different. It will be between large players (with economies of scale) and it
may be possible that some kind of oligopoly or cartels come into play. This is owing to the fact
that the industry will move towards consolidation. The larger players in the industry will survive
with their proprietary products and strong franchisee. In the Indian context, companies like
Cipla, Ranbaxy and Glaxo are likely to be key players. Smaller fringe players, who have no
differentiating strengths, are likely to either be acquired or cease to exist. The barriers to entry
will increase going forward. The change in the patent regime has made sure that new proprietary

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 13 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

products come up making imitation difficult. The players with huge capacity will be able to
influence substantial power on the fringe players by their aggressive pricing thereby creating
hindrance for the smaller players. Economies of scale will play an important part too. Besides
government will have a bigger role to play.

COMPANY ANALYSIS

The Indian Pharmaceutical Industry today is in the front rank of India’s science-based
industries with wide ranging capabilities in the complex field of drug manufacture and
technology. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5
billion, growing at about 8 to 9 percent annually. It ranks very high in the third world, in terms
of technology, quality and range of medicines manufactured. From simple headache pills to

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 14 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now
made indigenously.

Playing a key role in promoting and sustaining development in the vital field of medicines,
Indian Pharma Industry boasts of quality producers and many units approved by regulatory
authorities in USA and UK. International companies associated with this sector have stimulated,
assisted and spearheaded this dynamic development in the past 53 years and helped to put India
on the pharmaceutical map of the world.

The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units.
It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies
control 70% of the market with market leader holding nearly 7% of the market share. It is an
extremely fragmented market with severe price competition and government price control.

The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs,
drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and
injectibles. There are about 250 large units and about 8000 Small Scale Units, which form the
core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These
units produce the complete range of pharmaceutical formulations, i.e., medicines ready for
consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and
used for production of pharmaceutical formulations.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 15 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the
drugs and pharmaceutical products has been done away with. Manufacturers are free to produce
any drug duly approved by the Drug Control Authority. Technologically strong and totally self-
reliant, the pharmaceutical industry in India has low costs of production, low R&D costs,
innovative scientific manpower, strength of national laboratories and an increasing balance of
trade. The Pharmaceutical Industry, with its rich scientific talents and research capabilities,
supported by Intellectual Property Protection regime is well set to take on the international
market.

(Graph 3.1)

The above graph shows the trend of the growth of the pharmaceutical sector from the year 2003
to 2009.

Three companies namely; Sun Pharmaceuticals, Dr. Reddy’s lab and Ranbaxy have been
chosen for the study from the Pharmaceutical sector.

SUNPHARMA

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 16 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Sun Pharmaceutical Industries Limited

Type Public

Founded 1983

Headquarters Mumbai, Maharashtra, India

Website [Link]/

HISTORY

Sun Pharma began in 1983 with just 5 products to treat psychiatry ailments. Sales were initially
limited to 2 states - West Bengal and Bihar. Sales were rolled out nationally in 1985. Products
that are used in cardiology were introduced in 1987, and Monotrate, one of the first products
launched at that time has since become one of our largest selling products. Important products in
Cardiology were then added; several of these were introduced for the first time in India.

Realizing the fact that research is a critical growth driver, we established our research center
SPARC in 1993 and this created a base of strong product and process development skills.

Sun Pharma was listed on the main stock exchanges in India in 1994; and the Rs. 55 crore issue
of a Rs. 10 face value equity share at a premium of Rs. 140/- was oversubscribed 55 times. The

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 17 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

minimum 25% that was required under the regulations then for listing was offered to the public,
the owner family continues to hold a majority stake in Sun Pharma. We used this money to build
a greenfield site for API manufacture, as well as for acquisitions. For the acquisitions, typically
companies or assets that could be turned around and brought on track were identified.

Our first API manufacturing plant was built in Panoli in 1995, for access to high quality actives
ahead of competition, and to tap the vast international opportunity for specialty APIs.

Another API plant, our Ahmednagar plant, was acquired from the multinational Knoll
Pharmaceuticals in 1996, and upgraded for approvals from regulated markets, with substantial
capacity addition over the years. This was the first of several sensibly priced acquisitions, each
of which would bring important parts to the long-term strategy.

By 1997, our headquarters were shifted to Mumbai, the commercial capital of the country. We
began on the first of our international acquisitions with an initial $7.5 million investment in
Caraco Pharm Labs, Detroit. By 2000, we had completed 8 acquisitions, each such move adding
new therapy areas or offering an entry to important international markets. A new research center
was set up in Mumbai for generic product development for the US market. In India, as new
therapy areas were entered into post acquisition; customer attention, product selection and
focused marketing helped us gain a foothold in areas like orthopedics, gynecology, oncology,
etc. From a ranking at 38th in 1994, by 2000 we were ranked 5th with a leadership in 8 of the 11
therapy areas that we are present in. The year 2000 was the year of turnaround at the US
subsidiary, Caraco, as it began to receive approvals after successful inspection by the USFDA.
In December 2004, a research center spread over 16 acres was inaugurated by the President of
India, with special lab space for drug discovery and innovation. The post 2005 years have
witnessed important acquisitions to strengthen our US business- the purchase of manufacturing

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 18 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

assets for controlled substances in Cranbury,NJ; that of a site to make creams and lotions in
Bryan, that of Alkaloida, a Hungary based API and dosage form manufacturer , and recently,
Chattem Ltd., a Tennessee-based controlled substance API manufacturer.

RANBAXY

Ranbaxy Laboratories Limited

Type Public

Founded 1961

Headquarters Gurgaon, Haryana, India

Employees 1100 in R&D

Website [Link]

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 19 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Ranbaxy Laboratories Limited is India's largest pharmaceutical company. Incorporated in 1961,

Ranbaxy exports its products to 125 countries with ground operations in 46 and manufacturing
facilities in seven countries. It is ranked among the top 10 generic companies worldwide. The
CEO of the company is Malvinder Mohan [Link] went public in 1973.

Ranbaxy was started by Ranjit Singh and Gurbax Singh in 1937 as a distributor for a Japanese
company Shionogi. Interestingly the name Ranbaxy is a portmanteau word from the names of its
first owners Ranjit and Gurbax. Bhai Mohan Singh bought the company in 1952 from his
cousins Ranjit Singh and Gurbax Singh. After Bhai Mohan Singh's son Parvinder Singh joined
the company in 1967, the company saw a significant transformation in its business and scale.
His sons Malvinder Mohan Singh and Shivinder Mohan Singh sold the company to the Japanese
company Daichi in June 2008.

In 1998, Ranbaxy entered the United States, the world's largest pharmaceuticals market and now
the biggest market for Ranbaxy, accounting for 28% of Ranbaxy's sales in 2005.

For the twelve months ending on 31 December 2005, the company's global sales were at US
$1,178 million with overseas markets accounting for 75% of global sales (USA: 28%, Europe:
17%, Brazil, Russia, and China: 29%). For the twelve months ending on December 31, 2006, the
company's global sales were at US $1,300 million.

Most of Ranbaxy's products are manufactured by license from foreign pharmaceutical

developers, though a significant percentage of their products are off-patent drugs that are
manufactured and distributed without licensing from the original manufacturer because the
patents on such drugs have expired.

In December 2005, Ranbaxy's shares were hit hard by a patent ruling disallowing production of
its own version of Pfizer's cholesterol-cutting drug Lipitor, which has annual sales of more than

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 20 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

$10 billion. In June 2008, Ranbaxy settled the patent dispute with Pfizer allowing them to sell
Atorvastatin Calcium, the generic version of Lipitor(R)and Atorvastatin Calcium-Amylodipine
Besylate, the generic version of Pfizer's Caduet(R) in the US starting November 30, 2011. The
settlement also resolved several other disputes in other countries.

On 23 June 2006, Ranbaxy received from the United States Food & Drug Administration a 180-
day exclusivity period to sell simvastatin (Zocor) in the U.S. as a generic drug at 80 mg strength.
Ranbaxy presently competes with the maker of brand-name Zocor, Merck & Co.; IVAX
Corporation (which was acquired by and merged into Teva Pharmaceutical Industries Ltd.),
which has 180-day exclusivity at strengths other than 80 mg; and Dr. Reddy's Laboratories, also
from India, whose authorized generic version (licensed by Merck) is exempt from exclusivity.

On 16 September 2008, the Food and Drug Administration issued two Warning Letters to
Ranbaxy Laboratories Ltd. and an Import Alert for generic drugs produced by two
manufacturing plants in India.

On 10 June 2008, Japan's Daiichi Sankyo Co. agreed to take a majority (50.1%) stake in
Ranbaxy, with a deal valued at about $4.6 billion. Ranbaxy's Malvinder Singh will remain CEO
after the transaction. Malvinder Singh also said that this was a strategical deal and not a sell out.
Daiichi-Sankyo's Acquisition of Ranbaxy.

[Link]

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 21 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Dr. Reddy’s Laboratories Ltd.

Type Public

Founded 1984

Headquarters Hyderabad, Andhra Pradesh, India

Anji Reddy, Chairman

Key people
GV Prasad, CEO

Industry Pharmaceuticals

Revenue $1.5 Billion (MAY2007)

Net income $216 Million (MAY2007)

Employees 8,225

Dr. Reddy’s Laboratories Ltd. trading as Dr. Reddy's, founded in 1984 by Dr. K. Anji Reddy,
has become India’s biggest pharmaceutical company. Dr. Anji Reddy had worked in the
publicly-owned Indian Drugs and Pharmaceuticals Ltd. Reddy's manufactures and markets a
wide range of pharmaceuticals in India and overseas. The company has more than 190
medications ready for patients to take, 60 active pharmaceutical ingredients for drug
manufacture, diagnostic kits, critical care and biotechnology products.

Dr. Reddy’s began as a supplier to Indian drug manufacturers, but it soon started exporting to
other less-regulated markets – that had the advantage of not having to spend time and money on
a manufacturing plant that that would gain approval from a drug licensing body such as the US’s

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 22 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Food and Drug Administration. Much of Reddy’s early success came in those unregulated
markets, where process patents – not product patents – are recognized. With that money in the
bank, the companies could reverse-engineer patented drugs from more developed countries and
sell them royalty-free in India and Russia. By the early 1990s, the expanded scale and
profitability from these unregulated markets enabled the company to begin focusing on getting
approval from drug regulators for their formulations and bulk drug manufacturing plants in
more-developed economies. This allowed their movement into regulated markets such as the US
and Europe.

By 2007, Dr. Reddy’s had six FDA-plants producing active pharmaceutical ingredients in India
and seven FDA-inspected and ISO 9001 (quality) and ISO 14001 (environmental management)
certified plants making patient-ready medications – five of them in India and two in the UK.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 23 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

The table below provides an insight into the various financial details of the companies chosen
for the study

Neutral SUNPHARMA RANBAXY [Link]

Price Rs1,253 Rs450 Rs558
Target Price - Rs580 Rs755
Investment Period 18 months 18 months

Stock Info
Market Cap (Rs cr) 25,250 16,807 9,377
Beta 0.46 0.65 0.48
52 Week High / Low 1280/886 490/300 760/501
Avg Daily Volume 49956 347991 104562
Face Value (Rs) 5 5 5

BSE Code 524715 500359 500124

NSE Code SUNPHARMA RANBAXY DRREDDY
Reuters Code [Link] [Link] [Link]
Bloomberg Code SUNP IN RBXY IN DRRD IN

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 24 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Shareholding Pattern (%)

Promoters 65.6 34.8 25.2
MF / Banks / Indian FIs 8.9 28.3 19.1
FII / NRIs / OCBs 19.4 17.2 44.9
Indian Public / Others 6.3 19.7 10.9
(Table 3.1)

ECONOMIC ANALYSIS
Economic analysis is important in order to understand exact condition of an economy. It can
cover a number of important economic issues that keep cropping up within a particular
economy, which is being analyzed.

Study of Indian Economy – An Overview

The Indian economy is one of the fastest growing economies in the world. The Indian economy
grew at 9 per cent in 2007-08 and 9.6 per cent in 2006-07 Growth has been supported by market
reforms, rising foreign exchange reserves, huge foreign direct investment (FDI) inflows,
development in various sectors and a flourishing capital market.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 25 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

In this growth rate industrial sector, service sector and manufacturing sector have logged in 10.9
per cent, 11 per cent and 12.3 per cent growth rate respectively in 2006-07. As far as savings and
investments are concerned both showed good growth rate as a proportion of GDP. Gross saving
rate as a proportion of gross domestic product (GDP) has 34.7 per cent in 2006-07 and gross
investment rate has 35.1 per cent in 2006-07.

To explain in depth about the Indian economy, following points are taken into consideration by
me. These factors are really very important to know about how Indian economy is being
growing and are helpful to clear the picture about the economy.

○ GDP (Gross Domestic Product)

○ Inflation

○ FDI (Foreign Direct Investment)

○ Index of Industrial Production

GDP (GROSS DOMESTIC PRODUCT)

The gross domestic product (GDP) is one of the measures of national income and input for a
country's economy. GDP is defined as the total cost of all completed goods and services
produced within the country in a particular period of time (usually a year).

• The formula to compute or measure GDP:

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

26 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

GDP = Consumption + gross investment + government spending +

(Exports – Imports)

• Consumption and investment are stands for expenditure on final goods and services.
• Consumption is further divided in two parts such as private consumption and public
or government spending.
• In gross investment depreciation of capital stock is not taken into consideration
otherwise it will be net investment and it converts the GDP into net domestic
product.
• Export minus Import is also called as net exports and this equation adjusts by
subtracting the part of expenditure not produced domestically (the imports), and
adding back in domestic area (the exports).

Contribution of Various Sectors in GDP of India for the year 2006-07:

Sector Contribution (%)

Agriculture 8.95
Industry 23.78
Service 67.28
(Table 4.1)

Growth of GDP in comparison to growth of the Pharmaceutical Sector

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 27 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Graph 4.1)

Role of Pharmaceutical Industry in India GDP Growth

• The Pharmaceutical Industry in India is one of the largest in the world
• It ranks 4th in the world, pertaining to the volume of sales
• The estimated worth of the Indian Pharmaceutical Industry is US$ 6 billion
• The growth rate of the industry is 13% per year
• Almost most 70% of the domestic demand for bulk drugs is catered by the Indian
Pharma Industry
• The Pharma Industry in India produces around 20% to 24% of the global generic drugs
• The Indian Pharmaceutical Industry is one of the biggest producers of the active
pharmaceutical ingredients (API) in the international arena
• The Indian Pharma sector leads the science-based industries in the country
• The pharmaceutical sector has the capacity and technology pertaining to complex drug
manufacturing
• Around 40% of the total pharmaceutical produce is exported
• 55% of the total exports constitute of formulations and the other 45% comprises of bulk
drugs
• The Indian Pharma Industry includes small scaled, medium scaled, large scaled players,
which totals nearly 300 different companies
• There are several other small units operating in the domestic sector

INFLATION

The Indian method for calculating inflation, the Wholesale Price Index, is different to the rest of
world. Each week, the wholesale price of a set of 435 goods is calculated by the Indian
Government. Since these are wholesale prices, the actual prices paid by consumers are far
higher.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 28 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Graph 4.2)

• According to the 2008 Economic Survey Report, India’s inflation rate was targeted by
the Reserve Bank of India (RBI) to be 4.1%. The price of basic goods such as lentils,
vegetables, fruits and poultry were expected to slow their rise.
• However, the beginning of 2008 has seen a dramatic rise in the price of rice and other
basic food stuffs.
• Inflation has climbed steadily during the year, reaching 8.75% at the end of May. There
was an alarming increase in June, when the figure jumped to 11%. This was driven in
part by a reduction in government fuel subsidies, which have lifted gasoline prices by an
average 10%.
• In July 2008, the key Indian Inflation Rate, the Wholesale Price Index, has risen above
11%, its highest rate in 13 years. This is more than 6% higher than a year earlier and
almost three times the RBI’s target of 4.1%.
• After the July month because of highest inflation rate government takes various steps to
control and reduce inflation.
• Because of these steps in august inflation is come down to around 10.45% which signals
reduction in inflation.
• In September inflation is further decrease to around 10% and after that in next month
inflation moves in single figure and in December last week inflation rate was at 6.35%.
• According to me the target of a inflation is set by the government is approximately 3% in
the year 2009 which is shown to be possible.
• Recently government has reduced the price of petrol Rs.5p/l, Diesel Rs.2p/l and Rs.25 in
LPG. These are the steps taken by government to control inflation.
• Recently government has reduced the price of petrol Rs.5p/l, Diesel Rs.2p/l and Rs.25 in
LPG. These are the steps taken by government to control inflation.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 29 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Inflation is already dropped at 5.62% as on 29th Jan 2009.

Interpretation

After studying the inflation rate in different years we can say that rate for the year 2008
is highest in last 6 to 7 years which can not considered good for the Indian economy, but if we
compare inflation rate from May 2008 to December 2008 there is a huge decrease in it and on
the basis of that we can say that inflation rate will definitely come down to 3%, which is good
for the economy.

FDI (FOREIGN DIRECT INVESTMENT)

The generous inflow of FDI is playing a significant role in the economic growth of our country.

• In 2007-08, India's FDI touched US$ 25 billion, up 56 per cent against US$ 15.7
billion in 2006-07 and it is estimated that in the year 2008-09 FDI will touch to US$
35 billion.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 30 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

• India has been rated as the fourth most attractive investment destination in the world
after China, Central Europe and Western Europe in terms of prospects of alternative
business locations.
• A large portion of the FDI has been flowing into the skill-intensive and high value-
added services industries, particularly financial services and information technology.
India is continuously attracting FDI because of its cheap labor, low costs, excellent
language and technical skills.
• Currently, FDI inflows into the Indian real estate sector are estimated to be between
US$ 5 billion and US$ 5.50 billion. Investment in the Indian realty market is set to
increase to US$ 20 billion by 2010.

(Table 4.2)

FDI Inflows in Drugs & Pharmaceuticals during April, 2007 to April, 2009 (Rs. Million, %)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 31 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

INDEX OF INDUSTRIAL PRODUCTION

The Index of Industrial Production (IIP) conveys the status of production in the industrial sector
of an economy in a given period of time, in comparison with a fixed reference point in the past.

The Department of Industrial Policy and Promotion (DIPP) has been collecting monthly
industrial production statistics for the Index of Industrial Production (IIP) as well as weekly
price quotations for the Wholesale Price Index (WPI) from the industrial units. The DIPP has
been mandated to receive such information under the Industries (Development & Regulation)
Act, 1951 as well as under the Collection of Statistics Act, 1953.

The IIP numbers, released every month in India, for instance, use 1993-94 as the base year for
comparison. The IIP figures are generally seen as an important but short-term indicator of
whether industrial activity in a country has risen or dipped, till more detailed studies or surveys
are available.

The IIP estimate for a given month is always released within six weeks from that month. The
data for the IIP estimate is supplied by 15 source agencies which include Department of
Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organization and
Central Electricity Authority, among others.

April – November
Weight 2008 2009

IIP 100% 4.1% 7.6%

Mining 10.5% 3.4% 8.4

Manufacturing 79.4% 4.3 7.7

Electricity 10.2 % 2.8 6.1

(Table 4.3)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 32 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

RATIO ANALYSIS

INTRODUCTION TO THE RATIO ANANLYSIS:-

The relationship of these two figure expressed mathematically is called a ratio. The ratio refers
to the numerical or quantities relationship between two variables or times. A ratio is calculated
by dividing one item of the relationship with the other. The ratio analysis is one of the most
useful and common methods of analyzing financial statement. Ratio enables the mass of data to
be summarized and simplified. Ratio analysis is an instrument for diagnosis of the financial
health of an enterprise.

MEANING OF RATIO:-

A ratio is only a comparison of the numerator with the denominator. The tern ratio reefers to the
numerical or quantitative relationship between two figures and obtained by dividing the former
by the latter.

Ratio analysis is an important and age old technique of financial analysis. The data given in
financial statements ratio are relative form of financial data and very useful techniques to cheek
upon the efficiency of a firm. Some ratio indicates the trend or progress or downfall of the firm.

IMPORTANCE OF RATIO:

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 33 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Ratio analysis of firm’s financial statement is of interest to a number of parties mainly.

Shareholders, creditor, financial executives etc. shareholders are interested with earning capacity
of the firm: creditors are interested in knowing the ability of firm to meet financial obligation
and financial executives are concerned with evolving analytical tools that will measures and
compare costs, efficiency liquidity and profitability with a view to making intelligent decisions.

RANBAXY

LIQUIDITY RATIOS

1. CURRENT RATIO:

2006-2007 2007-2008 2008-2009

CURRENT ASSETS 44,759.77 66,921.96 60,085.96

CURRENT LIABILITIES 21,327.31 47,438.41 41,112.36

CURRENT RATIO 2.098707 1.4107125 1.461506

(Table 5.1)

(Graph 5.1)

Interpretation:-

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 34 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Company’s current ratio was 2.09 in year 2007 which implies that current assets are 2.09 times the
current liabilities. The interpretation is the company with higher current ratio has better liquidity/short-
term solvency. Conventionally, a current ratio of 2:1 is considered satisfactory. But in here, 2007 is only
the year where company’s current ratio reached it’s highest position, it declined in 2008 and rose by 0.05
in 2009.

This shows that the company’s liquidity position dropped drastically, but is trying to cope up.

2. QUICK RATIO:

2006-2007 2007-2008 2008-2009

QUICK ASSETS 28,351.16 47,277.12 41,678.97
CURRENT LIABILITIES 21,327.31 47,438.41 41,112.36
QUICK RATIO 1.329336 0.9966358 1.013782

(Table 5.2)

(Graph 5.2)

Interpretation:-

The acid test ratio is a rigorous measure of a firm’s ability to service short term liabilities.
Generally, an acid-test ratio of 1:1 is considered satisfactory as the company can easily meet all
current claims. As the graph above clearly depicts that the company’s ability to service short
term liabilities has been considerably good. Though there was a decline in 2008, in 2009 it was
recovered.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 35 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

PROFITABILITY RATIOS

1. GROSS PROFIT RATIO

2006-2007 2007-2008 2008-2009
GROSS PROFIT 9,865.60 -5,713.30 11002.7

SALES 66,927.00 72,953.83 73,441

GROSS PROFIT RATIO 14.740837 % -7.8313914 % 14.981686 %

(Table 5.3)

(Graph 5.3)

Interpretation:-

The gross profit margin shows the gross margin on the trading. The gross profit must be
adequate to cover fixed expenses, dividends and building up of reserves. The graph above shows
that the company had earned a gross profit of 14.7 % on sales, which declined the next year
resulting into a loss of 7.83 %. But the gross profit shot up in 2009 to 14.98 %.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 36 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

2. OPERATING RATIO

2006-2007 2007-2008 2008-2009

COGS 57,061.40 78,667.13 62,438
OPERATING EXPENSES 8,906.79 10,468.81 6,591.29
SALES 66,927.00 72,953.83 73,441
operating ratio 98.5673794% 122.181303% 93.9932599%
(Table 5.4)

(Graph 5.4)

Interpretation:-

This ratio indicates the proportion of cost of sales to the total sales. It is a measurement of
what proportion of a company's revenue is left over after paying for variable costs of
production such as wages, raw materials, etc.

The above graph shows that the operating margins have been phenomenally high for all the
three years. It shot up in 2008 to 122.18 %, when the company had incurred a loss.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 37 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

3. Operating profit ratio

2006-2007 2007-2008 2008-2009

100 100 100
operating ratio 98.5673794 122.181303 93.9932599
operating profit ratio 1.43262062 -22.181303 6.0067401
(Table 5.5)

(Graph 5.5)

Interpretation:-

The ratio indicates the portion remaining out of every rupee worth of sales after all
operating costs and expenses have been met.

The above graph shows that the operating profit was low in 2007 i.e.1.43%. The company
suffered a loss in 2008 which went up to 22.18%. In 2009, it rose again to 6 %

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 38 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

4. NET PROFIT RATIO

2006-2007 2007-2008 2008-2009
NET PROFIT 7,866.49 -9,349
66,927.00 72,953.83
net profit ratio 11.75384 -12.8156
(Table 5.6)

(Graph 5.6)

Interpretation:-

Company’s net profit ratio has not been good. It earned a profit of 11.7% in 2007 and incurred a
loss of 12.81 % in 2008. It did rise in 2009, yet was to so significant, it reached 4.23%.

TURNOVER RATIOS:

1. SALES TO CAPITAL EMPLOYED

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 39 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

2006-2007 2007-2008 2008-2009

LONG TERM LIABILITIES 41,415.72 43,114.39 36,295.22
SHAREHOLDERS FUNDS 28,022.12 41,205.88 43,433.92
66,927.00 72,953.83
sales to capital employed 0.96384 0.8651992
(Table 5.7)

(Graph 5.7)

Interpretation:-

This ratio shows the efficiency of capital employed in the business by computing how many
times capital employed is turned over in a stated period.

The above graph depicts that the capital employed turnover ratio has been consistently low, yet
not negative. In 2007 it was as high as 0.96% and in 2008 it was as low as 0.86%, which
increased in 2009 to 0.92%.

2. FIXED ASSETS TURNOVER RATIO

2006-2007 2007-2008 2008-2009

SALES 66,927.00 72,953.83 73,441
FIXED ASSETS 42,045.11 44,899.67 44,905.05
sales to fixed assets 1.59179 1.6248188 1.635473

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 40 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Table 5.8)

(Graph 5.8)

Interpretation:-

This ratio shows how well the fixed assets are being used to generate sales in the business.

As the graph above shows that in 2007 the ratio was 1.57 which has been increasing through the
next two years being 1.62 and 1.63 respectively, which seems to be a good sign for the
company.

3. WORKING CAPITAL TURNOVER RATIO

2006-2007 2007-2008 2008-2009

WORKING CAPITAL 23,432.46 19,483.55 18,973.60
SALES 66,927.00 72,953.83 73,441
sales to working capital 2.856166 3.7443808 3.870694
(Table 5.9)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 41 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Graph 5.9)

Interpretation:-

This ratio shows the number of times working capital is turned over in a stated period. The
higher is the ratio lower is the investment in working capital and greater are the profits.

The above graph shows that the investment in the working capital seems to be decreasing year
by year, which is a good sign as the ratio is constantly increasing.

In 2007 the ratio was 2.87 which went up to 3.74 in 2008 and as high as 3.87 in 2009.

4. TOTAL ASSETS TURNOVER RATIO

2006-2007 2007-2008 2008-2009

SALES 66,927.00 72,953.83 73,441
TOTAL ASSETS 86,804.88 111,821.63 104,991.01

total assets turnover 0.771005 0.6524125 0.699497986

(Table 5.10)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 42 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Graph 5.10)

Interpretation:-

A high ratio is an indicator of over trading of total assets, while a low ratio reveals ideal
capacity. The traditional standard for the ratio is two times.

The total assets turnover is on the lower side, but growing.

As the above graph shows in 2007 it was 0.77, 0.65 in 2008 and 0.699 in 2009.

5. INVENTORY TURNOVER RATIO

2006-2007 2007-2008 2008-2009

SALES 66,927.00 72,953.83 73,441
STOCK / INVENTORY 16,408.60 19,643.14 18,406.99
inventory turnover ratio 3.4775301 4.0048144 3.392097241
(Table 5.11)

(Graph 5.11)

Interpretation:-

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 43 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

It denotes the speed at which the inventory will be converted into sales. Greater the turnover of
inventory more will be the efficiency of inventory management.

Surprisingly the inventory turnover ratio was the highest in 2008. And fell after that.

In 2007 it was 3.4 times, 2008 4times and in 2009 it was 3.39 times.

6. DEBTORS TURNOVER RATIO

2006-2007 2007-2008 2008-2009

SALES 66,927.00 72,953.83 73,441
DEBTORS 14,930.60 13,310.08 18,399.47
debtors turnover ratio 4.4825392 5.4810963 3.991473667
(Table 5.12)

(Graph 5.12)

Interpretation:-

It indicates the number of times on the average the receivable is turnover in each year. The
higher the ratio more is the efficiency of the management of debtors.

The debtor’s turnover ratio too has not been very good.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 44 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

It was 4.4 in 2007, 5.4 in 2008 and fell to 3.99 in 2009.

STABILITY RATIOS:

1. FIXED ASSETS TO CAPITAL EMPLOYED

2006-2007 2007-2008 2008-2009

CAPITAL EMPLOYED 69,437.84 84,320.27 79,729.14
FIXED ASSETS 42,045.11 44,899.67 44,905.05
fixed assets ratio 0.605507 0.5324896 0.56322
(Table 5.13)

(Graph 5.13)

Interpretation:-

This ratio explains whether the firm has raised adequate long term funds to meet its fixed asset
requirements. The ideal ratio is 0.67

The fixed assets ratio was nearly favorable in 2007, declined in 2008, but rose again in 2009.

It was 0.6 in 2007, 0.53 in 2008 and 0.56 in 2009.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 45 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

2. DEBT EQUITY RATIO

2006-2007 2007-2008 2008-2009

LONG TERM DEBT 41,415.72 43,114.39 36,295.22
SHAREHOLDERS FUNDS 28,022.12 41,205.88 43,433.92
debt equity ratio 1.477965 1.0463164 0.835642
(Table 5.14)

(Graph 5.14)

Interpretation:-

This ratio is determined to ascertain the soundness of long term financial policies of the
company.
The ideal ratio is 1:1.
In the year 2007 the ratio exceeded the limit marginally, but it stabilized and decreased over the
next 2 years.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 46 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

3. PROPRIETARY RATIO

2006-2007 2007-2008 2008-2009

SHAREHOLDERS FUNDS 28,022.12 41,205.88 43,433.92
TOTAL TANGIBLE ASSETS 86,804.88 111,821.63 104,991.01
proprietary ratio 0.322817 0.3684965 0.413691801
(Table 5.15)

(Graph 5.15)

Interpretation:-

This ratio shows the relationship between the shareholders funds and the total tangible assets.
The ideal ratio should be 1:3. It focuses on the general financial strength of the organization.

The graph above shows that the proprietary ratio has been good and quite stable. It has slightly
increased in 2009.

4. EARNINGS PER SHARE (EPS)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 47 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

2006 - 2007 2007 - 2008 2008 - 2009

Earning Per Share (in RS.) 16.56 - 5.69 10.21

(Table 5.16)

(Graph 5.16)

Interpretation:-

More the earning per share, more the interest of the shareholders and investors in the company.
Company had an EPS of Rs.16.56 in year 2007. It came down to a negative Rs.5.69 in 2008 and
increased in 2009 to Rs. 10.21. Though the EPS shot down due to losses in 2008, it almost
tripled in 2009, which shows a sign of growth.

DR. REDDY’S LABORATORIES

LIQUIDITY RATIOS

1. CURRENT RATIO

2006-2007 2007-2008 2008-2009

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 48 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

CURRENT ASSETS 37,492 30,342 38,798

CURRENT LIABILITIES 11,229 11,508 17,112
current ratio 3.338910719 2.636661693 2.267297803
(Table 5.17)

(Graph 5.17)

Interpretation:-

Company’s current ratio was 3.33 in year 2007 which implies that current assets are 3.33 times
the current liabilities. The interpretation is the company with higher current ratio has better
liquidity/short-term solvency. Conventionally, a current ratio of 2:1 is considered satisfactory.

In 2008 it came down to 2.63 and in 2009 it was 2.26. this shows that the company has quite a
good liquidity position.

2. QUICK RATIO

2006-2007 2007-2008 2008-2009

QUICK ASSETS 30021.06 19323.78 25547.87
CURRENT LIABILITIES 11,229 11,508 17,112

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 49 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

quick ratio 2.673528861 1.679161304 1.492987377

(Table 5.18)

(Graph 5.18)

Interpretation:-

The acid test ratio is a rigorous measure of a firm’s ability to service short term liabilities.
Generally, an acid-test ratio of 1:1 is considered satisfactory as the company can easily meet all
current claims.

As the graph above clearly depicts that the company’s ability to service short term liabilities has
been considerably good. But it should take care as the ratio s exceed the limit.

PROFITABILITY RATIOS

1. GROSS PROFIT RATIO

2006-2007 2007-2008 2008-2009

SALES 65,126 49,700 68,326
GROSS PROFIT 30,876 25,408 36,500
gross profit ratio 47.40987402 50.8 52.6
(Table 5.19)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 50 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Graph 5.19)

Interpretation:-

The gross profit margin shows the gross margin on the trading. The gross profit must be
adequate to cover fixed expenses, dividends and building up of reserves. The graph above shows
that the company had earned a gross profit of 47.4% on sales in 2007, which increased next year
resulting to 50.8 %. Increased further in 2009 to 52.6%.

2. OPERATING RATIO

2006-2007 2007-2008 2008-2009

COGS 34,250 24,292 31,826
OPERATING EXPENSES 19,651 12,620 18,363
SALES 65,126 49,700 68,326
operating ratio 82.76409393 74.26961771 73.45520007
(Table 5.20)

(Graph 5.20)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 51 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Interpretation:-

This ratio indicates the proportion of cost of sales to the total sales. It is a measurement of
what proportion of a company's revenue is left over after paying for variable costs of
production such as wages, raw materials, etc.

The above graph shows that the operating margins have been phenomenally high for all the
three years, but has a decreasing trend that can be considered good.

It was as high as 82.7 in 2007, 74.26% in 2008, further decreased to 73.4% in 2009.

3. OPERATING PROFIT RATIO

2006-2007 2007-2008 2008-2009

100 100 100
operating ratio 82.76409393 74.26961771 73.45520007
operating profit ratio 17.23590607 26.5447999 25.73038229
(Table 5.21)

(Graph 5.21)

Interpretation:-

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 52 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

The ratio indicates the portion remaining out of every rupee worth of sales after all
operating costs and expenses have been met.

The above graph shows that the operating profit was at 17.23 % in 2007, 25.7% in 2008
which went up to 26.5% in 2009.

The profit has been increasing which is a good sign, as the operating ratio has been successively
declining.

4. NET PROFIT RATIO

2006-2007 2007-2008 2008-2009

SALES 65,126 49,700 68,326
NET PROFIT 9,659 4,381 -9,172
net profit ratio 14.8311371 8.81554326 -13.42387964
(Table 5.22)

(Graph 5.22)

Interpretation:-

Company’s net profit ratio has not been good. It earned a profit of 14.8% in 2007, which
decreased to 8.8% in 2008 and incurred a loss of 13.4 % in 2009.

This indeed shows that the profits have been declining through three years.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 53 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

TURNOVER RATIOS

1. SALES TO CAPITAL EMPLOYED

2006-2007 2007-2008 2008-2009

SALES 65,126 49,700 68,326
CAPITAL EMPLOYED 64,879.20 64,652.71 55,237.00
sales to capital employed 1.003798999 0.768722575 1.236960733
(Table 5.23)

(Graph 5.23)

Interpretation:-

This ratio shows the efficiency of capital employed in the business by computing how many
times capital employed is turned over in a stated period.

The above graph depicts that the capital employed turnover ratio has been consistent, there was
a slight fall in 2008.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 54 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

2. SALES TO FIXED ASSETS

2006-2007 2007-2008 2008-2009

SALES 65,126 49,700 68,326
FIXED ASSETS 35,354 39,125 29,270
sales to fixed assets 1.842089752 1.270275884 2.334335497
(Table 5.24)

(Graph 5.24)

Interpretation:-

This ratio shows how well the fixed assets are being used to generate sales in the business.

As the graph above shows that in 2007 the ratio was 1.84 which decreased the next year being
1.27 and increased in 2009 to 2.33 respectively.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 55 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

3. SALES TO WORKING CAPITAL

2006-2007 2007-2008 2008-2009

SALES 65,126 49,700 68,326
WORKING CAPITAL 26,263.43 18,834.49 21,686.00
sales to working capital 2.479709202 2.63877599 3.150696302
(Table 5.25)

(Graph 5.25)

Interpretation:-

This ratio shows the number of times working capital is turned over in a stated period. The
higher is the ratio lower is the investment in working capital and greater are the profits.

The above graph shows that the investment in the working capital seems to be decreasing year
by year, which is a good sign as the ratio is constantly increasing.

In 2007 the ratio was 2.47 which went up to 2.63 in 2008 and as high as 3.15 in 2009.

4. TOTAL ASSETS TURNOVER

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 56 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

2006-2007 2007-2008 2008-2009

SALES 65,126 49,700 68,326
TOTAL ASSETS 72,846.58 69,467.72 68,068.00
total assets turnover 0.894011377 0.715440218 1.003790327
(Table 5.26)

(Graph 5.26)

Interpretation:-

A high ratio is an indicator of over trading of total assets, while a low ratio reveals ideal
capacity. The traditional standard for the ratio is two times.

The total assets turnover is on the lower side, but growing.

As the above graph shows in 2007 it was 0.89, 0.71 in 2008 and 1.0 in 2009.

5. INVENTORY TURNOVER RATIO

2006-2007 2007-2008 2008-2009

SALES 65,126 49,700 68,326

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 57 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

STOCK / INVENTORY 7,472 11,019 13,250

inventory turnover ratio 4.584032132 2.204597783 2.401962264
(Table 5.27)

(Graph 5.28)

Interpretation:-

It denotes the speed at which the inventory will be converted into sales. Greater the turnover of
inventory more will be the efficiency of inventory management.

Surprisingly the inventory turnover ratio was the highest in 2007. And fell after that.

In 2007 it was 4.58 times, in 2008 2.2 times and in 2009 it was 2.4 times.

6. DEBTORS TURNOVER RATIO

2006-2007 2007-2008 2008-2009

SALES 65,126 49,700 68,326
DEBTORS 7,810 6,522 14,406

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 58 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

debtors turnover ratio 8.338316939 7.620734593 4.742884909

(Table 5.28)

(Graph 5.28)

Interpretation:-

It indicates the number of times on the average the receivable is turnover in each year. The
higher the ratio more is the efficiency of the management of debtors.

The debtor’s turnover ratio too has not been very good as it is constantly declining.

It was 8.33 in 2007, 7.62 in 2008 and fell to 4.7 in 2009.

STABILITY RATIOS

1. FIXED ASSETS TO CAPITAL EMPLOYED

2006-2007 2007-2008 2008-2009

FIXED ASSETS 35,354 39,125 29,270
LONG TERM LIABILITIES 24,907 19,684 19,976
SHAREHOLDERS FUNDS 39,973 44,969 35,261
fixed assets ratio 0.544924045 0.605161906 0.529898438
(Table 5.29)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 59 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Graph 5.29)

Interpretation:-

This ratio explains whether the firm has raised adequate long term funds to meet its fixed asset
requirements. The ideal ratio is 0.67

The fixed assets ratio has been unstable through the 3 years, though very close to the ideal ratio.

2. DEBT EQUITY RATIO

2006-2007 2007-2008 2008-2009

DEBT 24,907 19,684 19,976
SHAREHOLDERS FUNDS 39,973 44,969 35,261
debt equity ratio 0.623091727 0.437722403 0.56651825
(Table 5.30)

(Graph 5.30)

Interpretation:-

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 60 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

This ratio is determined to ascertain the soundness of long term financial policies of the
company.
The ideal ratio is 1:1.
The ratio during all the three years has been lower than the ideal limit.

In 2007 it was 0.6 in 2008 it decline to 0.4 and in 2009 it came up to 0.5.

3. PROPRIETARY RATIO

2006-2007 2007-2008 2008-2009

SHAREHOLDERS FUNDS 39,973 44,969 35,261
TOTAL ASSETS 72,846.58 69,467.72 68,068.00
proprietary ratio 0.548723075 0.647334383 0.518026092
(Table 5.31)

(Graph 5.31)

Interpretation:-

This ratio shows the relationship between the shareholders funds and the total tangible assets.
The ideal ratio should be 1:3. It focuses on the general financial strength of the organization.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 61 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

The graph above shows that the proprietary ratio has been quite stable and little above the ideal
ratio . It has slightly increased in 2008.

4. EARNINGS PER SHARE (EPS)

2006 - 2007 2007 - 2008 2008 - 2009

Earning Per Share (in RS.) 70.09 28.26 - 30.69
(Table 5.32)

(Graph 5.32)

Interpretation:-

More the earning per share, more the interest of the shareholders and investors in the company.
Company had an EPS of Rs.70.09 in year 2007. It came down to Rs.28.26 in 2008 and went up
to a negative Rs. 30.69 in 2009.

The EPS has been declining successively.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 62 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

SUN PHARMA

LIQUIDITY RATIOS

1. CURRENT RATIO

2006-2007 2007-2008 2008-2009

CURRENT ASSETS 29,888.50 40,367.50 42,682.90
CURRENT LIABILITIES 3,045.50 6,373.00 7,198.10
current ratio 9.8139879 6.334144 5.929745
(Table 5.33)

(Graph 5.33)

Interpretation:-

The interpretation is the company with higher current ratio has better liquidity/short-term
solvency. Conventionally, a current ratio of 2:1 is considered satisfactory.

The current ratio of the company is too high. Too much of liquidity can have an adverse effect
on the assets of the company.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 63 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

2. QUICK RATIO

2006-2007 2007-2008 2008-2009

QUICK ASSETS 23,243.56 32,639.8 32,925.9
CURRENT LIABILITIES 3,045.50 6,373.00 7,198.10
quick ratio 7.6321786 5.121575 4.574249
(Table 5.34)

(Graph 5.34)

Interpretation:-

The acid test ratio is a rigorous measure of a firm’s ability to service short term liabilities.
Generally, an acid-test ratio of 1:1 is considered satisfactory as the company can easily meet all
current claims.

As the graph above clearly depicts that the company’s ability to service short term liabilities has
been considerably good. But it should take care as the ratio s exceed the limit by a large
variation.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 64 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

PROFITABILITY RATIO

1. GROSS PROFIT RATIO

2006-2007 2007-2008 2008-2009

GROSS PROFIT 12,605.60 23,383.90 25,194.40
SALES 22,372.80 34605.6 43,750.60
gross profit ratio 56.343417 67.57259 57.58641
(Table 5.35)

(Graph 5.35)

Interpretation:-

The gross profit margin shows the gross margin on the trading. The gross profit must be
adequate to cover fixed expenses, dividends and building up of reserves.

The graph above shows that the company had earned a gross profit of 56.34% on sales in 2007,
which increased next year resulting to 67.57%. Increased further in 2009 to 57.58%.

2. OPERATING RATIO

2006-2007 2007-2008 2008-2009

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 65 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

OPERATING EXPENSES 3,872.60 5,119.90 8,137.70

COGS 9,767.20 11,221.70 18,556.20
SALES 22,372.80 34605.6 43,750.60
operating ratio 60.965994 47.22241 61.01379
(Table 5.36)

(Graph 5.36)

Interpretation:-

This ratio indicates the proportion of cost of sales to the total sales. It is a measurement of
what proportion of a company's revenue is left over after paying for variable costs of
production such as wages, raw materials, etc.

The above graph shows that the operating margins have been high for all the three years,

It was 60.95 % in 2007, 47.2% in 2008 and 61.01% in 2009.

3. OPERATING PROFIT RATIO:

2006-2007 2007-2008 2008-2009

100 100 100
operating ratio 60.965994 47.22241 61.01379

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 66 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

operating profit ratio 39.034006 52.77759 38.98621

(Table 5.37)

(Graph 5.37)

Interpretation:-

The ratio indicates the portion remaining out of every rupee worth of sales after all
operating costs and expenses have been met.

The operating profit has been considerably good for all the three years.

In 2007 it was 39%, 52% in 2008 and fell to 38 % in 2009.

4. NET PROFIT RATIO:

2006-2007 2007-2008 2008-2009

NET PROFIT 7,842.70 14,869 18,780.10
SALES 22,372.80 34605.6 43,750.60
net profit ratio 35.05462 42.96703 42.92535
(Table 5.38)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 67 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Graph 5.38)

Interpretation:-

The company has been earning steady profits for all the three years, thus it is safe to say that the
profitability position of the company is good.

The ratio in 2007 was 35%, 42.96% in 2008 and 42.93 in 2009.

TURNOVER RATIOS

1. SALES TO CAPITAL EMPLOYED

2006-2007 2007-2008 2008-2009

SALES 22,372.80 34605.6 43,750.60
CAPITAL EMPLOYED 38,872.20 51,350.90 72,238.10
sales to capital employed 0.5755476 0.673904 0.605644
(Table 5.39)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 68 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Graph 5.39)

Interpretation:-

This ratio shows the efficiency of capital employed in the business by computing how many
times capital employed is turned over in a stated period.

The above graph depicts that the capital employed turnover ratio has been fluctuating slightly. It
was 0.57 in 2007, which rose to 0.67 in 2008 and fell to 0.605 in 2009.

2. SALES TO FIXED ASSETS

2006-2007 2007-2008 2008-2009

SALES 22,372.80 34605.6 43,750.60
FIXED ASSETS 9,514.30 10,353.60 14,625.40
sales to fixed assets 2.351492 3.342374 2.991412
(Table 5.40)

(Graph 5.40)

Interpretation:-

This ratio shows how well the fixed assets are being used to generate sales in the business.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 69 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

As the graph above shows that in 2007 the ratio was 2.35 which increased the next year being
3.34 and decreased in 2009 to 2.99.

3. SALES TO WORKING CAPITAL

2006-2007 2007-2008 2008-2009

SALES 22,372.80 34605.6 43,750.60
WORKING CAPITAL 26,843.00 33,994.50 35,484.80
sales to working capital 0.8334687 1.017976 1.232939
(Table 5.41)

(Graph 5.41)

Interpretation:-

This ratio shows the number of times working capital is turned over in a stated period. The
higher is the ratio lower is the investment in working capital and greater are the profits.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 70 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

The above graph shows that the investment in the working capital seems to be decreasing year
by year, which is a good sign as the ratio is constantly increasing.

In 2007 the ratio was 0.833 which went up to 1.01 in 2008 and as high as 1.23 in 2009.

4. TOTAL ASSETS TURNOVER RATIO

2006-2007 2007-2008 2008-2009

SALES 22,372.80 34605.6 43,750.60
TOTAL ASSETS 39,402.80 50,721.10 57,308.30
total assets turnover 0.5677972 0.682272 0.763425
(Table 5.42)

(Graph 5.42)

Interpretation:-

A high ratio is an indicator of over trading of total assets, while a low ratio reveals ideal
capacity. The traditional standard for the ratio is two times.

The total assets turnover is on the lower side, but growing.

As the above graph shows in 2007 it was 0.56, 0.68 in 2008 and 0.76 in 2009.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 71 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

5. INVENTORY TURNOVER RATIO:

2006-2007 2007-2008 2008-2009

SALES 22,372.80 34605.6 43,750.60
STOCK / INVENTORY 6,644.70 7,727.70 9,757.00
inventory turnover ratio 1.4699234 1.45214 1.901835
(Table 5.43)

(Graph 5.43)

Interpretation:-

It denotes the speed at which the inventory will be converted into sales. Greater the turnover of
inventory more will be the efficiency of inventory management.

The inventory turnover ratio has been stable and rising. There was a fall in 2008, but slight.

The ratio in 2007 was 1.46 times, 1.45 times in 2008 and 1.9 times in 2009.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 72 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

6. DEBTORS TURNOVER RATIO

2006-2007 2007-2008 2008-2009

SALES 22,372.80 34605.6 43,750.60
DEBTORS 6,788.80 14,176.70 8,810.90
debtors turnover ratio 3.2955456 2.441019 4.965509
(Table 5.44)

(Graph 5.44)

Interpretation:-

It indicates the number of times on the average the receivable is turnover in each year. The
higher the ratio more is the efficiency of the management of debtors.

The debtor’s turnover ratio too has been fluctuating.

It was 3.29in 2007, 2.44 in 2008 and fell to 4.9 in 2009.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 73 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

STABILITY RATIOS

1. FIXED ASSETS TO CAPITAL EMPLOYED

2006-2007 2007-2008 2008-2009

FIXED ASSETS 9,514.30 10,353.60 14,625.40
CAPITAL EMPLOYED 38,872.20 51,350.90 72,238.10
fixed assets ratio 0.2447585 0.201625 0.202461
(Table 5.45)

(Graph 5.45)

Interpretation:-

This ratio explains whether the firm has raised adequate long term funds to meet its fixed asset
requirements. The ideal ratio is 0.67

The fixed assets ratio has been almost stable through the 3 years, though not very close to the
ideal ratio.

2. DEBT EQUITY RATIO:

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 74 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

2006-2007 2007-2008 2008-2009

DEBT 11,144.30 1,436.30 1,788.90
SHAREHOLDERS FUNDS 27,727.90 49,914.60 70,449.20
debt equity ratio 0.4019165 0.028775 0.025393
(Table 5.46)

(Graph 5.46)

Interpretation:-

This ratio is determined to ascertain the soundness of long term financial policies of the
company.
The ideal ratio is 1:1.
The ratio during all the three years has been lower than the ideal limit.

In 2007 it was 0.4 in 2008 it declined to 0.28 and in 2009 it further declined to 0.5.

3. PROPRIETARY RATIO

2006-2007 2007-2008 2008-2009

SHAREHOLDERS FUNDS 27,727.90 49,914.60 70,449.20

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 75 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

TOTAL ASSETS 39,402.80 50,721.10 57,308.30

Proprietary ratio 0.7037038 0.984099 1.229302
(Table 5.47)

(Graph 5.47)

Interpretation:-

This ratio shows the relationship between the shareholders funds and the total tangible assets.
The ideal ratio should be 1:3. It focuses on the general financial strength of the organization.

The graph above shows that the proprietary ratio has been increasing.

In 2007 it was 0.7, in 2008 it was 0.9 and in 2009 it went up to 1.22.

4. EARNINGS PER SHARE (EPS)

2006 - 2007 2007 - 2008 2008 - 2009

Earning Per Share (in RS.) 38.9 71.8 87.8
(Table 5.48)

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 76 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

(Graph 5.48)

Interpretation:-

More the earning per share, more the interest of the shareholders and investors in the company.
Company had an EPS of Rs.38.9 in year 2007. It increased to Rs.71.8 in 2008 and went up to
Rs. 87.8 in 2009.

The EPS has been declining successively.

FINDINGS

Ranbaxy Laboratories:

Profitability position:

• The profitability position at Ranbaxy has been fluctuating. In 2008 it suffered a loss but
recovered in 2009.

Turnover position:

• The debtors turnover ratio is shows a declining trend

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 77 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

• The inventory turnover and the total assets turnover figures have also fallen in 2009.
• The fixed assets position and the working capital position of the firm though have been
quite good year on year.

Liquidity position:

• The liquidity position has been quite good and has remained stable even during the ups
and downs.

Stability structure:

• The firm has sufficient funds to meet its asset obligations

• The debt equity position is also moderate
• The EPS has been fluctuating as it fell to negative in 2008, but rose in 2009.
• The company is slowly attaining stability after it faced losses in 2008

Sun Pharmaceuticals

Profitability position:

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 78 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

• The overall profitability position has been quite good and increasing, though the
expenses incurred have been a little, yet stable.

Turnover position:

• The fixed assets position is moderate

• The working capital position has been good and shows an increasing trend
• The total assets position also has been growing
• The inventory management at the company has been quite effective as the turnover is
good and increasing
• The receivables position also has been good through the three years.

Liquidity position:

• The liquidity position at Sun has been phenomenally high, higher than the limit, which
might cause a problem in the long run. But due to its efficient management it has been
showing a downward trend nearing the ideal limits, which seems to be a good sign.

Stability structure:

• The debt equity position of the firm has been declining and the company is more
dependent on the shareholders funds
• The Net worth of the company has been quite good and shows an increasing trend
• The EPS growth has been phenomenal throughout the three years.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 79 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

Dr. Reddy’s Laboratories

Profitability position:

• The profitability position at Dr. Reddy’s has not been very satisfactory
• It suffered a loss in 2009; though the gross profit has been high and the operating
expenses have been low the net profit was negative in 2009.

Turnover position:

• Fixed and Total assets position has been quite good

• The working capital position has also been quite good and shows an increasing trend
• The inventory and debtors position have not been good and show a decreasing trend

Liquidity position:

• The liquidity position has been quite good and has remained stable even during the ups
and downs.

Stability structure:

• The net worth has been moderate throughout the three years
• The debt equity position is also moderate and stable.
• The EPS has been showing a declining trend and resulted in a negative figure in 2009,
due to loss suffered.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 80 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

SUGGESTIONS FOR INVESTORS

• Investors can invest in Sun Pharmaceutical as they depict a good financial position. Their

liquidity, profitability, turnover and the stability structure are good and overall show an

increasing trend.

• Both long term and short term investment in Sun is advisable.

• Pharmaceutical companies have lots of room to grow; so invest in theses type of industries

helps the investors in the long run.

• Buy shares of reputed companies backed by top class management.

• Do not invest in inactive shares generally it is difficult to encash them.

• Before investing we should undertake a deeps study on the net sales, net profits in relations

to equity capital employed & should attempt to forecast for the coming years.

• From the company point of view, the company should allow the investors to take part in

board of directors meeting & gives maximum dividend to the shareholders.

• Do not over pay for growth.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 81 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

• Do not invest in unlisted shares, Sun pharmaceuticals is a listed company in BSE.

• The investors should become cautious while investing for very long time.

• The investors should analyze the price movement.

• Economic performance is greatly affected to the performance of the industries of the

country, so investors should know economic performance of the country while investing.

• Before investing in any company, this is required to implement all the data & financial

results & also decision him self.

CONCLUSION

• This is the final and most important stage of the entire project. The main objective of my
project ends with this stage. This part will indicate to the investor, creditors, and
shareholders each of the company’s overall operating efficiency and performance that will
help them to make the most efficient investment decision.

• From the analysis of pharmaceutical company, I found that the financial position and the
capital structure of the Sun Pharma is stronger and comparatively higher than other
companies.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE

 82 | P a g e FUNDAMENTAL ANALYSIS OF PHARMA
STOCKS

• But after that according to me it is not advisable for the investing money in [Link]‘s lab
and Ranbaxy. On the base of overall analysis. Compare to the other four companies this
companies are not stronger and capable.

• And lastly I conclude that ratio analysis is the most important yardstick that provides
measure of comparison between different [Link] would be easier for the investor to
make the profitable decision so that they can earn much profit as possible out of their
investment.

AMITY GLOBAL BUSINESS SCHOOL, BANGALORE