1. GMITE-7 Industry : Pharma Group- 6 Venkatakrishna Adhikamsetty Anuj Magazine KrishnamurthyManjunath HavaldarNiranjan Tallapalli Ravinder Goud KattaDeepa Pavankumar GunjanSubramaniRaghavendra Vidapankal

2. 1.To determine the financial position and performance of the identified business enterprises and to interpret the financial statements ( BS and P&L) of two pharma companies. 2.Perform financial statement analysis from the management standpoint. 3.To observe and provide recommendations based on the analysis.

3. Economic Data India’s industry worth $6b 13 % annual growth rate Indian Pharma industries contribute world's forth-largest in terms of volume. According to PriceWaterhouseCoop ers (PWC) in 2010, India joined among the league of top 10 global pharmaceuticals markets in terms of sales by 2020 with value reaching US$50 billion. Pharma Industry Trend Characteristics Heavily regulated Industry (FDA – USA ) Generic Drugs in India High rate of innovation (outside India) Frequent mergers and acquisitions

4. CIPLA 1935 – Incorporated. 1939 supplied life saving drugs during WW-II. 1987-96: Innovation, introduced new drugs. 1997-2012: Expansion and Recognition. 2012 Revenue $1.27 billion 2012 Net income $204.39 million. 20000+ employees, spread over 170 countries. Dr.Reddy’s 1985 – Incorporated. 1985-90: Gained credibility and started exports to Europe and Far East. 1991-99: Expansion and Innovation. 2000-12: Grown globally. 2012 revenue $2.1 billion 2012 Net income $300 million. 15000+ employees globally over 3 business segments, Pharmaceutical Services & Active Ingredients, Global Generics and Proprietary Products.

5. CIPLA Depreciation on fixed assets-Straight-line method FINANCIAL POSITION Reserves and surplus, substantial increase of 14.6% due to unrealized forex losses - foreign currency translation Reserve (from 1.28CR to 16.47CR). Due to INR appreciation Long term borrowing, significant reduction of 88% due to repayment of term loan in 2011. Short term barrowing has drastically reduced to 98% in 2012 Current investment has increased to 321% in 2012 ( 223 CR to 940.5CR). Additional Plant and machinery purchased in 2012 could help increase the production in 2013 onwards FINANCIAL PERFORMANCE REVENUES increased by 12% while expenses at 9% EBITDA growth is recorded at 23% EBIT growth is recorded at 25% Dr Reddy’s Depreciation on fixed assets Straight-line method FINANCIAL POSITION Reserves and surplus has substantial growth of 24% Long term borrowings has significant growth of 206%. Long term loan taken by subsidiary from Citibank carrying interest rate of LIBOR plus 145 bps and is repayable in eight equal quarterly installments starting from Dec2014 and ending in Sep 2016. Short term barrowings has reduced to 13% in 2012 FINANCIAL PERFORMANCE REVENUES increased by 32% while expenses at 26% 57% of its revenue comes from international market. EBITDA growth is recorded at 51% EBIT growth is recorded at 58% Changed its policy on valuation of inventory from the first-in first- out(FIFO) method to the weighted average cost method. This probably has helped the company to match revenue and expenses

6. RatioIndicatesIndustry standard Dr Reddy (2011-2012) Cipla (2011-2012) Current RatioAbility of the firm to meet its short term debt1.5 1.14 to 1.522.62 to 3.51 Average Collection Period number of days to convert the receivables into cash. 135 days 88.39 to 82.885 to 77.94 Inventories Heldindicates improved operational efficiencies and inventory management 160 days 395.87 to 363.88291 to 290.87 Inventory T.O If company is efficiently managing and selling its inventory 6 4.53 to 4.853.32 to 3.79 Fixed Assets T.OFirms investment in the fixed assets have grown. 1.83 to 2.291.87 to.1.96 Total Assets T.Oimproved inventory and account receivable has resulted in better total asset 1 0.81 to 0.830.74 to 0.75 Debt RatioReduced business risk due to lower debt ratio 0.55 to 0.560.22 to 0.18 Debt EquityCompany’s financial risk against borrower money 2.2 to 2.271.29 to 1.22 Interest cover Assured returns and increased confidence to the lenders. 40 49 to 18 47 to 39 Return on EquityAmount earned relative to level of investment in total asset. Share holders will benefit. 16-18% 25 to 26% 14.51 to 15% Return on Investment Net income you earn based on how efficiently you generate sales with your asset base. 13 to 17%14-16% Net Profit MarginManagement is doing a good job to control the expenses 18-20% 16 to 19% 15 to 16% PE Ratioinvestors are expecting higher earnings growth in the future 18% 28 to 2526 to 29

7. No, from the market ratios, the PE ratio has fallen down, in 2011 the market was willing to pay 28 times the eps and in 2012 it came down to 25. It means the growth of the company from investors point of view is not very good. No, from long term solvency ratios, it is running high risk with debt ratios above 0.5 and debt-equity ratios above 2, this company's financial growth is more from the borrowers money, so its not completely safe to invest over the long run. As a shareholder, if these ratios are deteriorating, then their assets and equity are not sufficient to fund the total liabilities. No, from short term solvency ratios, the current ratio is recorded < 1.5 (1.14 in 2011) and when this is correlated with the average collection period (88 in 2011 to 83 in 2011), it shows that if the trade receivables are delayed over the average collection period, then the company has to liquidate its current assets against trade payables. Dr. Reddy must reduce it short term borrowings and at the same time it should be able to reduce its average collection period. NOTE: However from the annual report numbers, the company claims, it looks like it has good trust in the market which is earning good profits from the borrowed money and stock is upword. Would an investment generate attractive returns for Dr.Reddy’s ? What is the degree of risk inherent in the investment? In 2011&2012, more than 50% (Debt Ratios) of company's assets are financed through debt. D-E ratios are also high which tells us that the company is running high financial risk. Should existing investment holdings be liquidated? In 2011, the current ratio was very close to 1 (1.14), considering avg account receivables close to 3 months, it ran the CA to CL neck to neck. Any more delay in TRs would make the company to sell off its assets against TPs. In 2012 it is good.

8. Yes, from the market ratios, PE ratio is increased from 26 to 28 which shows the market is willing to pay even more over 2011. Yes, from the long term solvency ratios, debt ratios are around 0.2 and debt-equity is around 1.2, which shows that company's assets and equities would be enough to fund shareholders money in case of company bankrupt on the long run in the worst case, otherwise would return good returns. Yes, from short term solvency ratios, current ratios are around 3, which is very good for short term investors. Would an investment generate attractive returns for CIPLA ? What is the degree of risk inherent in the investment? Financial risk is low as they are financed for assets from debts only for 20%. Their D-E ratios are quite low which reflects less risk. Should existing investment holdings be liquidated? Not at all, it is running very good CRs. In fact it is wasting some investments, instead it can do some more investments and generate more returns.

9. Generally accepted accounting principles(GAAP) were adopted and practiced in both the firms Dr.Reddy’s and Cipla. Rupees depreciated by more than 14% as compared to US dollar and this has helped CIPLA and Dr.Reddy to achieve significant profit from exports. Dr. Reddy's has EPS of 76.72 in 2012 whereas Cipla has EPS of only 14.25 and this is indicated in the net income as well where Reddy has increased its net revenues by 32% YoY whereas Cipla has managed to increase it by 12% YoY. However, market sentiment does not seem to appreciate this as P/E ratio for Dr. Reddy's has come down from 26 to 22 and Cipla has come down by 25 to 22. Clearly the total liabilities is weighing them down. From the analysis we would not vote for both CIPLA and Dr Reddy's. CIPLA would need further more analyzation based on their sudden shifts in reduction of liabilities and increase of assets. Dr Reddy's is imposing financial risk on already existing business risk and hence we cannot predict the long term financial stability of the company, it depends on several external factors like economy of the country, industry competition, etc.