FINANCIAL PERFORMANCE OF INDIAN PHARMACEUTICAL INDUSTRY

Mr. U. Shaji
Ph.D. Research Scholar,
Department of Commerce, Bharathiar University, Coimbatore-641046.
Email:shadeepam@hotmail.com

Dr. G. Ganesan
Professor and Head, School of Commerce, Bharathiar University, Coimbatore-641046

ABSTRACT
With the de-licensing of pharmaceutical industry and complemented by scientific
talent and research capabilities and Intellectual Property Protection Regime, Indian
pharmaceutical industry in all set to take on new challenges in the international market.
Indian pharmaceutical industry has played a key role in promoting and sustaining
development in the vital field of medicines. Financial analysts often assess firm's
production and productivity performance, profitability performance, liquidity
performance, working capital performance, fixed assets performance, fund flow
performance and social performance. The financial performance analysis identifies the
financial strengths and weaknesses of the firm by properly establishing relationships
between the items of the balance sheet and profit and loss account. Thus, the present
paper is of crucial importance to measure the firms liquidity, profitability, and other
indicators that the business is conducted in a rational and normal way ensuring enough
returns to the shareholders to maintain at least its market value. In this context
researcher has undertaken an analysis of financial performance of pharmaceutical
companies to understand how management of finance plays a crucial role in the
growth. The present study covers two public sector drug & pharmaceutical enterprises
listed on BSE. The study has been undertaken for the period of twelve years from
1998-99 to 2009-10. In order to analyze financial performance in terms of liquidity,
solvency, profitability and financial efficiency, various accounting ratios have been
used. Statistical measures i.e., linear multiple regression analysis and test of hypothesis
t test has been used.
Keywords: De-licensing, Pharmaceutical Industry, Scientific Talent, Research,
Capabilities, Intellecutal, Property, Regime, Productivity, Fixed Assets Performace,
Market Value, Liquidity, Solvency, Financial Efficiency,

Financial Performance Of Indian Pharmaceutical Industry

1.

Introduction

The Indian pharmaceutical industry is

one of the worlds largest, ranking 4th
in terms of volume and 13th in terms
of
value
in
the
global
pharmaceutical market. In 2005,
domestic pharmaceutical sales were
US$4.5 billion, growing at CAGR
of 8.59%. The Indian pharmaceutical
industry is characterized by a multitude
of
manufacturers
(over
20,000
registered, as of 2003). These are
predominantly small manufacturers,
focusing
on
either
Active
Pharmaceutical Ingredients (APIs) or
formulations. Until the advent of
product patents in January 2005, only
process patents were applicable in
India, which effectively made it a low
cost, generic market. As a result,
manufacturing
expertise
and
efficiency were the only requirements
to participate in this industry, creating
low barriers of entry.
As a result, the leading Indian
pharmaceutical
companies
have
become some of the most efficient
manufacturing units in the world. In
fact, India has the highest number of US
FDA (Food and Drug Administration)
certified
manufacturing
facilities
outside the United States. There are an
increasing number of opportunities with
large Indian manufacturers & contract
manufacturing organizations for the
increasingly
cost-conscious
multinationals.
One of the major factors that have
increased the confidence of foreign
multinationals looking for local
opportunities in India is the adoption of
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a new product patent regime in January

2005. This will facilitate concurrent
global phase II and III clinical trials. A
new patent regime has changed the
dynamics of the Indian pharmaceuticals
industry in other respects, too. Several
leading domestic producers have begun
to conduct original research into new
chemical entities (NCEs) and novel
drug delivery systems. However, these
companies are likely to license most of
these drug candidates to Western
pharmaceutical companies, because few
Indian companies can afford the high
costs and failure rates associated with
developing an NCE. In this context,
several Indian firms have already
entered into research partnerships with
multinationals. Some pharmaceutical
MNCs like AstraZeneca have opened
their own captive research centers in
India to take advantage of the low costs
as well as availability of high quality
intellectual work force.
The present study covers two public
sector
drug
&
pharmaceutical
enterprises listed on BSE. The sample
of the companies has been selected on a
convenient basis and the necessary data
have been obtained from CMIE
database and public enterprises survey.
The researcher selects Karnataka
Antibiotics & Pharmaceuticals Ltd.
(KAPL) and Rajasthan Drugs &
Pharmaceuticals Ltd. (RDPL).
2.

Statement of the Problem

Financial performance analysis is the

process of determining the operating
and financial characteristics of a firm
from
accounting
and
financial
statements. The ability of an
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Financial Performance Of Indian Pharmaceutical Industry

organization to analyze its financial

position is essential for improving its
competitive
position
in
the
marketplace. Through a careful
analysis of its financial performance,
the
organization
can identify
opportunities to improve performance
of the department, unit or organizational
level. In this context an attempt has
been made an analysis of financial
performance
of
pharmaceutical
companies
to
understand
how
management of finance plays a crucial
role in the growth.
3.

Objectives of the study

performance
of pharmaceutical
companies
to
understand
how
management of finance plays a crucial
role in the growth.
5.

Keeping the above objectives in mind,

the following null and alternative
hypotheses have been formulated and
tested during the study period:
Hypotheses of the Study :
1.

The main objectives of the present work

are to make a study on the overall
financial performance of selected public
sector
drug
&
pharmaceutical
enterprises in India.

2.

4.

4.

Methodology

The study has been undertaken for the

period of twelve years from 1998-99 to
2009-10. In order to analyze financial
performance in terms of liquidity,
solvency, profitability and financial
efficiency, various accounting ratios
have been used. Various statistical
measures have been used i.e., Mean.,
S.D., C.V., linear multiple regression
analysis and test of hypothesis t test.
In this context an attempt has been
made an analysis of financial

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Research Hypotheses

3.

5.

6.

7.

69

When return on investment

increases, liquid ratio remains
same.
When return on investment
increases, net profit to total asset
ratio remains same.
When return on investment
increases, debt to net worth ratio
remains same.
When return on investment
increases, debt equity ratio
remains same.
When
debt
equity
ratio
increases, interest coverage ratio
remains same.
When net profit to total asset
ratio increases, debt equity ratio
remains same.
When return on investment ratio
increases, total liability to total
asset ratio remains same.

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Financial Performance Of Indian Pharmaceutical Industry

Research Model
Financial Performance
Indicators

Profitability

Liquidity

Overall
Profitability

Solvency
Financial
Performance

Net Profit

Efficiency

Return on
Investment

Financial Stability

Figure 1: Layout showing the Research model

7.

Research Variables

Hypothesis
First
Second
Third
Fourth
Fifth
Sixth
Seventh

Table 1: Data for the hypothesis

Independent Variable
Dependant Variable
Return On Investment Ratio
Return On Investment Ratio
Return On Investment Ratio
Return On Investment Ratio
Debt Equity Ratio
Net Profit To Total Asset Ratio
Return On Investment Ratio

8.
Financial
Performance
through Multiple Regressions
To
measure
the
financial
performance of selected public sector
drug & pharmaceutical enterprises in
India, it is important to study financial
performance indicators, namely, current
ratio, liquid ratio, debt-equity ratio,
interest coverage ratio, inventory
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Liquid Ratio
Net Profit To Total Asset Ratio
Debt To Net Worth Ratio
Debt Equity Ratio
Interest Coverage Ratio
Debt Equity Ratio
Total Liability To Total Asset Ratio

turnover ratio, debtors turnover ratio,

return on investment ratio, net profit to
total asset ratio, debt to total asset ratio,
debt to net worth ratio, net worth to
total asset ratio and total liabilities to
net worth. It has been analyzed in the
previous chapter. Now, to study the
joint variations of these associations,
linear regression (multiple regressions)
analysis has been adopted.
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Financial Performance Of Indian Pharmaceutical Industry

In this section an attempt has been made

to examine composite impact of
financial performance indicators on
profitability through the sophisticated
statistical techniques. Accordingly,
multiple regression techniques have
been applied to study the joint
influence of the selected ratios
indicating company's financial position
ROIR =

and performance on the profitability and

the regression coefficients have been
tested with the help of the most popular
t test. In this study, CR, LR, DER,
ICR, ITR, DTR, NPTAR, DTAR,
DNWR, NWTAR and TLTWR have
been taken as the explanatory variables
and ROIR has been used as the
dependent variable. The regression
model used in this analysis is

+ 1CR + 2 LR + 3 DER + 4 ICR + 5 ITR + 6DTR + 7NPTAR

+ 8 DTAR + 9 DNWR + 10 NWTAR + 11 TLTWR

where , 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 and 11 are the parameters of the ROIR

line.
How different financial performance
indicators adopted in the analysis have
played
role
in
attaining
the
profitability is one of the objects of the
present study?
9.
Joint Impact of Performance
Indicators on Profitability of KAPL
Multiple regression analysis of KAPL
has been tabulated in Table 8. Table 8
proves the potency of relationship
between the dependent variable, ROIR
and all the independent variables taken
together and the impact of these
independent
variables
on
the
profitability. It was observed that
increase in CR by one unit, the ROIR
increased by 34.713 units that was
statistically significant at 1 per cent
level. For one unit increase in LR, the
profitability of the company increased
by 18.264
units,
which
was
statistically significant at 1 per cent
level. However, when DER increased
by one unit, the ROIR of the company
decreased by 8.365 units though the
influence of DER on ROIR was very
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significant. For one unit increase in

ICR, the profitability of the company
decreased by 0.370 units. Again, two
important indicators of efficiency, ITR
and DTR, increased by one unit, ROIR
decreased by 3.827 units and 1.902
units
respectively
which
was
statistically at 1 per cent level. It was
observed that increase in NPTAR by
one unit, the ROIR decreased by
335.934 units that was statistically
significant at 1 per cent level. For one
unit
increase
in
DTAR,
the
profitability of the company decreased
by 203.388 units, which was
statistically significant at 1 per cent
level.
However,
when
DNWR
increased by one unit, the ROIR of the
company decreased by 4.244 units
though the influence of DNWR on
ROIR was very noteworthy. For one
unit increase in NWTAR, the
profitability of the company decreased
by 114.374 units. However, when
TLTWR increased by one unit, the
ROIR of the company decreased by
0.674 units though the influence of
TLTWR on ROIR was very significant.
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Financial Performance Of Indian Pharmaceutical Industry

Table 2: Multiple Regression Analysis of KAPL Coefficients (a)

Variables/Model
Constant
CR
LR
DER
ICR
ITR
DTR
NPTAR
DTAR
DNWR
NWTAR
TLTWR

Unstandardized
Coefficients
B
Std. Error
59.948
0.00
34.713
0.00
18.264
0.00
-8.365
0.00
-0.370
0.00
-3.827
0.00
-1.902
0.00
-335.934
0.00
-203.388
0.00
-4.244
0.00
-114.374
0.00
-0.674
0.00

Standardized Coefficients

t value

Sig.

Beta
2.604
0.844
-0.290
-1.240
-1.376
-0.539
-1.355
-2.604
-1.929
-3.336
-0.156

a. Dependent Variable: ROIR

The multiple correlation coefficient
between the dependent variable ROIR
and the independent variables CR, LR,
DER, ICR, ITR, DTR, NPTAR, DTAR,
DNWR, NWTAR and TLTWR taken
together was 1.00. It indicates that the
profitability was just about perfectly
influenced by its independent variables. It
is also evident from the value of R2 that
100 per cent of variation in ROIR was
accounted by the joint variation in all

the independent variables. Coefficient

of determination is also 100 per cent
indicates that
the regression
line
perfectly fits the data. Standard error of
estimate is perfectly associated with
regression analysis. Such a significant
variation could be justified as the impact
of many other financial performance
indicators, which have not taken into the
study, in addition to the effect of the used
in the study.

Table 3: Model Summary

Model

R Square

1.000(a)

1.000

Adjusted R
Square
1.000

Std. Error of
the Estimate
0.00

Table 4: Model Summary

Change Statistics
R Square
F Change
df1
df2
Sig. F Change
Change
1.000
0.00
11
0
0.00
a. Predictors: (Constant), TLTWR, DNWR, ICR, DTR, LR, ITR, DER,
NPTAR, NWTAR, DTAR, CR

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Financial Performance Of Indian Pharmaceutical Industry

3.3.2 Joint Impact of Performance

Indicators on Profitability of RDPL
Multiple regression analysis of RDPL
has been tabulated in Table 9. Table 9
proves the power of relationship
between the dependent variable, ROIR
and all the independent variables taken
together and the impact of these
independent
variables
on
the
profitability. It was observed that
increase in CR by one unit, the ROIR
decreased by 19.356 units that was
statistically significant at 1 per cent
level. For one unit increase in LR, the
profitability of the company decreased
by 138.589
units,
which was
statistically significant at 1 per cent
level. However, when DER increased
by one unit, the ROIR of the company
increased by 138.103 units though the
influence of DER on ROIR was very
significant. For one unit increase in ICR,
the profitability of the company
decreased by 5.983 units. Again, two

important indicators of efficiency, ITR

and DTR, increased by one unit, ROIR
increased by 6.468 units and 40.404
units respectively which was statistically
at 1 per cent level. It was observed that
increase in NPTAR by one unit, the
ROIR increased by 392.798 units that
was statistically significant at 1 per cent
level. For one unit increase in DTAR,
the profitability of the company
increased by 135.602 units, which was
statistically significant at 1 per cent
level. However, when DNWR increased
by one unit, the ROIR of the company
decreased by 215.909 units though the
influence of DNWR on ROIR was very
noteworthy. For one unit increase in
NWTAR, the profitability of the
company increased by 322.182 units.
However, when TLTWR increased by
one unit, the ROIR of the company
decreased by 32.306 units though the
influence of TLTWR on ROIR was very
significant.

Table 5: Multiple Regression Analysis of RDPL Coefficients (a)

Unstandardized
Coefficients
Variables/Model
Std.
B
Error
Constant
31.620
0.00
CR LR
-19.356
0.00
DER
-138.58
0.00
ICR ITR
9
0.00
DTR
138.103
0.00
NPTAR
-5.983
0.00
DTAR
6.468
0.00
DNWR
40.404
0.00
NWTAR
392.798
0.00
TLTWR
135.602
0.00
-215.90
0.00
9
0.00
322.182
-32.306
a. Dependent Variable:
ROIR
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Standardized Coefficients
t value

Sig.

Beta
-0.624
-3.219
8.041
-3.375
3.289
5.906
1.020
1.417
-11.600
4.215
-4.055

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Financial Performance Of Indian Pharmaceutical Industry

The multiple correlation coefficient

between the dependent variable ROIR
and the independent variables CR, LR,
DER, ICR, ITR, DTR, NPTAR, DTAR,
DNWR, NWTAR and TLTWR taken
together was 1.00. It indicates that the
profitability was just about perfectly
influenced by its independent variables.
It is also evident from the value of R2
that 100 per cent of variation in ROIR
was accounted by the joint variation
in all the independent variables.

Model
1

Coefficient of determination is also 100

per cent indicates that the regression
line perfectly fits the data. Standard
error of estimate is perfectly
associated with regression analysis.
Such a significant variation could be
justified as the impact of many other
financial performance indicators, which
have not taken into the study, in
addition to the effect of the used in the
study.

Table 6: Model Summary

Adjusted
R
R Square
R Square
1.000(a)
1.000
1.000

Std. Error of
the Estimate
0.00

Table 7: Model Summary

Change Statistics
R Square
Change
1.000

F Change

df1

df2

Sig. F Change

0.0

11

0.0

a.
Predictors: (Constant), TLTWR, NPTAR, ICR, CR, LR, DTR, DTAR, NWTAR, ITR,
DER, DTR, DNWR

4.

TESTING OF HYPOTHESES:

A hypothesis is an assumption to be
tested. The statistical testing of
hypothesis is the important technique in
statistical inference. Hypothesis tests are

widely used in business and industry for

making decisions. The following are the
hypotheses framed and tested using test
of significance at 5% level of
significance.

Hypothesis1 :
H0: When return on investment increases, liquid ratio remains same.
H1: When return on investment increases, liquid ratio also increases.

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Table 8: T-test Results of Hypothesis 1

N
LR
ROIR

LR
ROIR

Mean

9
9

Std. Deviation

SE Mean

.8667
.91705
37.9856
115.31928
Table 9: T-test Results

.30568
38.4398

DF

Sig.
(2-tailed)

Mean
Difference

2.835
.988

8
8

.022
.352

.867
37.986

The calculated value of t is more than the significant value, hence null hypotheses is not
accepted.
Hypothesis 2 :
H0:

When return on investment increases, net profit to total asset ratio remains same.

H1:

When return on investment increases, net profit to total asset ratio also increases.
Table 10: T-test Results of Hypothesis 2
N

NPTAR
ROIR

Mean
9
9

-.0489
37.9856

Std.
Deviation
.17084
115.31928

SE Mean
.05695
38.4398

Table 11: Table showing T-test Results

df

Sig. (2-tailed)

Mean Difference

NPTAR

-.859

.416

-.04889

ROIR

.988

.352

37.98556

The calculated value of t is less than the significant value, hence null hypothesis is
accepted.

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Financial Performance Of Indian Pharmaceutical Industry

Hypothesis3 :
H0: When return on investment increases, debt to net worth ratio remains same.
H1: When return on investment increases, debt to net worth ratio also increases.
Table 12: T-test Results of Hypothesis 3
N
DNWR
ROIR

Mean
9
9

Std. Deviation

-2.0211
37.9856

4.36500
115.31928

Std.Error Mean
1.45500
38.4398

Table 13: T-test Results

df

Sig.
(2-tailed)

Mean Difference

-1.389

.202

-2.02111

.988

.352

37.98556

T
DNWR
ROIR

The calculated value of t is less than the significant value, hence null hypothesis is
accepted.
Hypothesis4 :
H0: When return on investment increases, debt equity ratio remains same.
H1: When return on investment increases, debt equity ratio also increases.
Table 14: T-test of Hypothesis 4
N
DER
ROIR

Mean
9
9

-.4789
37.9856

Std.
Deviatio
n
.98316
115.31928

Std.
Error
Mean
.32772
38.4398

Table 15: T-test Results

T
DER
ROIR

-1.461
.988

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df

Sig.
(2-tailed)

Mean Difference

8
8

0.182
0.352

-.47889
37.98556

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Financial Performance Of Indian Pharmaceutical Industry

The calculated value of t is less than the significant value, hence null hypothesis is
accepted.
Hypothesis5 :
H0: When debt equity ratio increases, interest coverage ratio remains same.
H1: When debt equity ratio increases, interest coverage ratio also increases.
Table 16: T-test of Hypothesis 5
N

Mean

DER
ICR

-.4789

Std.
Deviatio
n .98316

-.4556

18.92548

SE
Mean
.32772
6.30849

Table 17: T-test Results

DER

-1.461

Sig.
(2-tailed)
.182

ICR

-.072

.944

df

Mean Difference
-.47889
-.45556

The calculated value of t is less than the significant value, hence null hypothesis is
accepted.
Hypothesis 6 :
H0: When net profit to total asset ratio increases, debt equity ratio remains same.
H1: When net profit to total asset ratio increases, debt equity ratio also increases.
Table 18: T-test Results of Hypothesis 6
N
NPTAR
DER

Mean
9
9

Std. Deviation

-.0489
-.4789

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.17084
.98316

77

Std. Error
Mean
.05695
.32772

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Financial Performance Of Indian Pharmaceutical Industry

Table 19: T-Test Results

NPTAR
DER

df

-.859
-1.461

8
8

Sig.
(2-tailed)
.416
.182

Mean
Difference
-.04889
-.47889

The calculated value of t is less than the significant value, hence null hypothesis is
accepted.
Hypothesis 7:
H0:

When return on investment ratio increases, total liability to total asset ratio
remains same.

H1:

When return on investment ratio increases, total liability to total worth ratio
also increases.
Table 20: T-test Results of Hypothesis 1

N
TLTWR
ROIR

Mean
9
9

Std. Deviation

-2.1367
37.9856

14.22696
115.31928

Std.
Error
Mean
4.74232
38.4398

Table 21: T-test Results

T

df

Sig.
(2-tailed)

Mean
Difference

TLTWR

-.451

.664

-2.13667

ROIR

.988

.352

37.98556

The calculated value of t is less than the significant value, hence null hypothesis is
accepted.
5.

associated ROIR and DER are

negatively associated, ROIR and
ICR are negatively associated a
negative association is observed
between ROIR and two efficiency
indicators ITR and DTR a negative

Conclusion and Suggestions

5.1
Findings

In KAPL, ROIR and two liquidity

indicators CR and LR are positively
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association between ROIR and

NPTAR is seen a negative
association between DTAR and
DNWR with ROIR is observed
ROIR is negatively associated with
NWTAR and
a
negative
association is clearly seen between
ROIR and
TWTAR. All the
performance
indicators
and
profitability are
just
about
correlated.
The coefficient
of
determination is almost 100 per cent.

In RDPL, ROIR and two liquidity

indicators CR and LR are negatively
associated ROIR and DER are
positively associated, ROIR and
ICR are negatively associated a
positive association is observed
between ROIR and two efficiency
indicators ITR and DTR a positive
association between ROIR and
NPTAR is seen a positive and
negative
association
between
DTAR and DNWR with ROIR is
observed ROIR
is positively
associated with NWTAR and a
negative association is clearly seen
between ROIR and TWTAR. All
the performance indicators and
profitability
are
just
about
correlated. The coefficient of
determination is almost 100 per cent.

5.2
Suggestions

For solving the problems of

debtors management in case of
RDPL, an effective professional
co-ordination
between
sales,
production and finance departments
is called for. Prompt billing, timely
reminders to defaulting customers
and immediate action should be
ensured. The investment in loans
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and advances should be minimized

to the extent possible.

To improve the financial position

of KAPL and RDPL, equity
oriented dependabilit y have to be
reduced properly.

To improve the financial stability of

both the companies under the study,
proper mixture of stake in the
business between the owners and
the creditors have to be made in
which significant pressure on future
cash flows can be avoid.

Higher
degree
of
multiple
correlations implies the presence
of explained variables (liquidity,
solvency, efficiency and financial
stability) that have lead to lower
profitabilit y over and above poor
financial position and performance,
are in action. To remove such
problems,
accurate
liquidit y
management, correct solvency or
leverage
management
and
appropriate wealth management is
highly needed.

As far as selected enterprises are

concerned, the management of the
companies should contemplate its
efforts in maximizing assets and
minimizing liabilities, so that the
company's financial position could
be improved.

Conclusions of the Study

From the study of the financial

performance
of
the
select
pharmaceutical it can be concluded that
the liquidity position was strong in

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Financial Performance Of Indian Pharmaceutical Industry

case of KAPL and RDPL thereby

reflecting the ability of the companies
to pay short-term obligations on due
dates.Long-term solvency in case of
KAPL and RDPL in all years which
shows that companies relied more on
external funds in terms of long-term
borrowings thereby providing a lower
degree
of
protection
to
the
creditors.Debtors turnover ratio of
RDPL needs to be improved as the
solvency of the firm depends upon the
sales income generated from the use of
various assets.Financial stability ratios
in the vein of debt to total asset ratio,
debt to net worth ratio, net worth to
total asset ratio and total liabilities to
total worth ratio in case of both the
selected companies have showed a
downward trend and consequently the
financial
stability
of
selected
pharmaceutical companies have been
decreasing at an intense rate.The
Indian pharmaceutical industry will
witness an increase in the market share.
The sector is poised not only to take
new challenge but to sustain the
growth momentum of the past decade.
6.

Limitations of the Study

Study exclusively depends on the
published financial data, so it is
subject to all limitations that are
inherent in the condensed published
financial statements.

The
drug
&
pharmaceutical
enterprises selected have been taken
from CMIE database. The study
covers a period of only twelve years
from 1999 to 2010. The data
collected is only for ten companies
and this might not be true
representation of the population.

Namex International Journal of Management Research

This is a major limitation of the

research.
7.

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