Capital Structure - Ranbaxy

A STUDY ON CAPITAL STRUCTURE OF RANBAXY
CHAPTER 1
INTRODUCTION OF CAPITAL STRUCTURE
This is a Report on the Capital Structure and Capital Expenditure of Ranbaxy Laboratories
Ltd.. The purpose and scope of the project can be listed as:
Understanding the organizational structure and functioning of Ranbaxy Laboratories Ltd.

Analysing and comparing the financial health of the firms in the Indian Pharma Industry.
Identifying and analysing the capital structure of Ranbaxy.
Conducting a Review of the Capital Expenditure done at Ranbaxy Laboratories Ltd.
Identifying loopholes in the functioning and in the area of study and recommending the
suggestions for the same.
Following are the limitations of the study:
Balance sheets of only 3 years have been studied but the company is in operation for so
many years.
Only specific tools (i.e. ratio analysis) have been used for data analysis, while so many
other tools are also there.

Organizational rules & regulations.
Availability of data. Financial figures for 2008 of Ranbaxy were not available.
Limitations of the financial tools used
LITRETURE OF REVIEW ON CAPITAL STRUCTURE

Capital structure is a mix of debt and equity capital maintained by a firm. Capital structure is also
referred as financial structure of a firm. the capital structure of a firm is very important since it
related to the ability of the firm to meet the needs of its stakeholders. Modigliani and miller
(1958) were the first ones to landmark the topic of capital structure and they argued that capital
structure was irrelevant in determining the firms value and its future performance. On the other
hand, Lubatkin and Chatterjee (1994) as well as many other studies have proved that there exists
a relationship between capital structure and firm value. Modigliani and miller (1963) showed that
their model is no more effective if tax was taken into consideration since tax subsidies on debt
interest payments will cause a rise in firm value when equity is traded for debt. In more recent
VIVEK COLLEGE OF COMMERCEPage 1

literatures, authors have showed that they are less interested on how capital structure affects the
firm value instead of the firm. Modigliani and miller (1963) argued that the capital structure of a
firm should compose entirely of debt due to tax deductions on interest payments. However,
Brigham and Gapenski (1996) said that, in theory, the Modigliani-miller (mm) model is valid.
But, in practice, bankruptcy costs exist and these costs are directly proportional to the debt level
of the firm. Hence, an increase in debt level causes an increase in bankruptcy costs. Therefore,
they argue that that an optimal capital structure can only be attained if the tax sheltering benefits
provided an increase in debt level is equal to the bankruptcy costs. In this case, managers of the
firms should be able to identify when this optimal capital structure is attained and try to maintain
it at the same level. This is the only way that the financing costs and the weighted average cost of
capital (WACC) are minimized thereby increasing firm value and corporate performance.
METHODOLOGY
The methodology adopted for the study was as follows:
Familiarization, examination and evaluation of the procedures relating to capital structure
and capital expenditure.

Collection of relevant data form company records and cross checking of this data.
Calculations of financial ratios, parameter and norms, as also their financial implications.
Broadly the data were collected for the report on the project work has been through the primary
and secondary sources.
The primary data is collected by various approaches so as to give a precise, accurate, realistic
and relevant data. The main goal in the mind while gathering primary data was investigation and
observation. The ends were thus achieved by a direct approach and personal observation from the
officials of the company. The other staff members and the employees were interviewed for the
sake of maintaining reasonable standard of accuracy.
The secondary data as it has always been important for the completion of any report provides a
reliable, suitable equate and specific knowledge. The annual reports, the fixed asset register and
the Capex register provided the knowledge and information regarding the relevant subjects.

The
valuable
cooperation and
continued
support extended
by all associated
personnels, head
of
the
department,
division
and
staff
members
contributed a lot
to
requirement
the collection of
in
fulfil
the
data in order to
present
complete report
on the project
work.
Capital Structure: Theory and Analysis

Capital Structure
Financing decisions involve raising funds for the firm. It is concerned with formulation and
designing of capital structure or leverage. The most crucial decision of any company is involved
in the formulation of its appropriate capital structure. The best design or structure of the capital
of a company helps the management to achieve its ultimate objectives of minimising overall cost
of capital, maximizing profitability and also maximising the value of the firm.
The capital structure decision of a firm is concerned with the determination of debt equity
composition. Capital structure ordinarily implies the proportion of debt and equity in the total
capital of a company. The term capital may be defined as the long term funds of the firm.
Capital is the aggregation of the items appearing on the left hand side of the balance sheet minus
current liabilities. In other words capital may be expressed as follows:
Capital = Total Assets Current Liabilities.
Further, capital of a company may broadly be categorised into equity and debt. The total capital
structure of a firm is represented in the following figure:
Established companies generally have track record of their profit earning capacity, which helps
them to create their creditworthiness. The lenders feel safe to invest their funds in such
companies. Thus, there is ample scope for this type of companies to collect debt. But a company
cannot freely i.e. without having any limit. The company must have to chalk out a plan to collect
a debt in such a way that the acceptance of debt becomes beneficial for the company in terms of
increase in EPS, profitability and value of the firm.
If the cost of capital is greater than the return, it will have an adverse effect on companys
profitability, value of the firm and its EPS. Similarly, if company is unable to repay the debt
within the scheduled period it will affect the goodwill of the company in the credit market and
consequently may create problems in future for collecting further debt. Other factors remaining
constant, the company should select its appropriate capital structure with due consideration.
Capital structure involves a choice between risk and expected return. The optimal capital
structure strikes the balance between these risks and returns and thus examines the price of the
stock. Significant variations with regard to capital structure can easily be noticed among
industries and firms within the same industry. So it is difficult to generate the model capital
structure for all business undertakings. The following is an attempt to consolidate the literature
on various methods to be suggested by researchers in arriving at optimal capital structure.
Notations used:
V = value of firm
FCF = free cash flow
WACC = weighted average cost of capital
rs and rd are costs of stock and debt
re and wd are percentages of the firm that are financed with stock and debt.
Operating and Financial Leverages

The term leverage refers to the ability of a firm in employing long term funds having a fixed
cost, to enhance returns to the owners. In other words leverage is the employment of fixed assets
or funds for which a firm has to meet fixed costs or fixed rate of interest obligation irrespective
of the level of activities attained or the level of operating profit earned.
Higher the leverage, higher the profits and vice versa. But a higher leverage obviously implies
higher outside borrowings and hence riskier if the business activity of the firm suddenly takes a
dip. But a low leverage does not necessarily indicate prudent financial management, as the firm
might be incurring an opportunity cost for not having borrowed funds at a fixed cost to earn
higher profits.
Operating Leverage
Operating leverage is concerned with the operation of any firm. The cost structure of any firm
gives rise to operating leverage because of the existence of fixed nature of costs. This leverage
relates to the sales and profit variations.
Operating Leverage = Contribution
EBIT
Contribution = Sales Variable Costs
EBIT = Earnings Before Interest and Taxes.
Disadvantages of Operating Leverages
The reliability of operating ratios rests to a large extent on the correctness of the fixed
costs identified with a product. Faulty apportionment would distort the usefulness of the
ratio.
The published accounts does not give details of the fixed cost incurred and the
contribution from each product and for an outsider it is difficult to calculate the firms
operating leverage.
Firms cost structure and nature of the firms business affects operating leverage. A degree
change in sales volume results in more than proportionate change (+/-) in operating (or loss) can
be observed by use of operating leverage.
Financial Leverage
This ratio indicates the effects on earnings by rise of fixed cost funds. It refers to use the use of
debt in the capital structure. Financial leverage arises when a firm deploys debt funds with fixed
charge. The ratio is calculated with the following:
Earnings before interest and tax / Earnings after interest:
The higher the ratio, the lower the cushion for paying interest on borrowings. A low ratio
indicates a low interest outflow and consequently lower borrowings. A high ratio is risky and
constitutes a strain on profits. This ratio is considered along with the operating ratio, gives a
fairly and accurate idea about the firms earnings, its fixed costs and the interest expenses on
long term borrowings.
Earnings per Share
Higher financial leverage leads to higher EBIT resulting in higher EPS, if other things remain
constant. Financial leverage affects the variability and expected level of EPS. The more debt the
firm employs the higher its financial leverage. Financial leverage generally raises expected EPS,
but it also increases the riskiness of securities as the debt / asset ratio rises.
Financial Leverage = EBIT

EBT
EBIT Earnings Before Interest and Tax
EBT Earnings Before Taxes.
Choosing the Optimal Capital Structure for Ranbaxy Laboratories Ltd

Based on the ratio analysis done above it can be concluded that Ranbaxy is an unleveared firm
with very less debt component in its capital structure. The company is in a position to increase its
debt component by resorting to external debt financing. However it should be kept in mind that,
there could be two opposite effects if debt is increased in the capital structure. The first effect
may be an overall reduction in the cost of capital as the proportion of debt increases in the capital
structure due to low cost of debt. On the other hand, because of fixed contractual obligation the
financial risk of the company increases. Thus, it is said that the optimum capital structure implies
a ratio of debt and equity at which weighted average cost of capital would be least and the
market value of the firm would be highest.
Keeping the above thought in mind I have tried to compute what would be the optimal capital
structure for Ranbaxy Laboratories Ltd., based on the following information as per the Annual
Report 2005:
EBIT being 37,273,800;
Assuming that the firms expects zero growth
225,557,810 shares outstanding; rs = 12%;
T = 35%; b = 1.0; rRF = 6%;
RPM = 6%.
Estimates of Cost of Debt

Percent financed

with debt,
wd
rd
0%
20%
8.0%
30%
8.5%
40%
10.0%
50%
12.0%
If company recapitalizes, debt would be issued to repurchase stock.

The Cost of Equity at Different Levels of Debt: Hamadas Equation
MM theory implies that beta changes with leverage.

bU is the beta of a firm when it has no debt (the unlevered beta)
bL = bU [1 + (1 - T)(D/S)]
The Cost of Equity for wd = 20%

Use Hamadas equation to find beta:
bL
= bU [1 + (1 - T)(D/S)]
= 1.0 [1 + (1-0.35) (20% / 80%) ]
= 1.16
Use CAPM to find the cost of equity:

rs
= rRF + bL (RPM)
= 6% + 1.16 (6%) = 12.98%
Cost of Equity vs. Leverage

wd
D/S
bL
rs

0%
0.00
1.00
12.00%
20%
0.25
1.16
12.98%
30%
0.43
1.28
13.67%
40%
0.67
1.43
14.60%
50%
1.00
1.65
15.90%
The WACC for wd = 20%

WACC = wd (1-T) rd + we rs
WACC = 0.2 (1 0.35) (8%) + 0.8 (12.98%)
WACC = 11.42%
Repeat this for all capital structures under consideration.
WACC vs. Leverage
wd
rd
rs
WACC
0%
0.0%
12.00%
12.00%
20%
8.0%
12.98%
11.42%
30%
8.5%
13.67%
11.23%
40%
10.0%
14.60%
11.36%
50%
12.0%
15.90%
11.85%
Corporate Value for wd = 20%

V = FCF / (WACC-g)
g=0, so investment in capital is zero; so FCF = NOPAT = EBIT (1-T).
NOPAT = (Rs.37,273,800)(1-0.35) = Rs.24,227,970
V = Rs.24,227,970/ 0.1142 = Rs.212,153,852.89
Corporate Value vs. Leverage
wd
WACC
Corp. Value

0%
12.00%
Rs.201,899,750.00
20%
11.42%
Rs.212,153,852.89
30%
11.23%
Rs.215,791,315.97
40%
11.36%
Rs.213,274,383.80
50%
11.85%
Rs.204,455,443.04
Debt and Equity for wd = 20%

The value of debt is:
= wd V = 0.2 (Rs.212,153,852.89) = Rs.42,430,770.58.
S=VD
S = Rs.212,153,852.89 Rs.42,430,770.58 = Rs.169,723,082.31
Debt and Stock Value vs. Leverage

wd
Debt, D
Stock Value, S
0%
Rs.201,899,750.00
20%
Rs.42, 430,770.58
Rs.169,723,082.31
30%
Rs.64, 737,394.79
Rs.151,053,921.18
40%
Rs.85, 309,753.52
Rs.127,964,630.28
50%
Rs.102, 227,721.52
Rs.102,227,721.52
Wealth of Shareholders
Value of the equity declines as more debt is issued, because debt is used to repurchase stock.
But total wealth of shareholders is value of stock after the recap plus the cash received in
repurchase, and this total goes up (It is equal to Corporate Value on earlier slide).
Stock Price for wd = 20%

The firm issues debt, which changes its WACC, which changes value. The firm then uses debt
proceeds to repurchase stock.
Stock price changes after debt is issued, but does not change during actual repurchase (or
arbitrage is possible).
The stock price after debt is issued but before stock is repurchased reflects shareholder
wealth:
S, value of stock
Cash paid in repurchase.
D0 and n0 are debt and outstanding shares before recap.
D - D0 is equal to cash that will be used to repurchase stock.
S + (D - D0) is wealth of shareholders after the debt is issued but immediately before the
repurchase.
P = S + (D D0)
n0
P = Rs.169,723,082.31+ (Rs. 42,430,770.58 0)
225,557,810
P = Rs.94.06 per share.
# Repurchased = (D - D0) / P
# Rep. = (Rs.42,430,770.58 0) / Rs.94.06
= 45,116.
# Remaining = n = S / P
n = Rs.169,723,082.31 / Rs.94.06
= 1,804,462.
Optimal Capital Structure

wd = 30% gives:
Highest corporate value

Lowest WACC
Highest stock price per share
But wd = 40% is close. Optimal range is pretty flat.
Modigliani and Miller Theory (Modern View)

The traditional view of capital structure explained in weighted average cost of capital is rejected
by the proponents Modigliani and Miller (MM) (1958). According to them, under competitive
conditions and perfect markets, the choice between equity financing and borrowing does not
affects a firms market value because the individual investor can alter investment to any mix of
debt and equity the investor desires.
Assumptions of MM Theory
The MM Theory is based on the following assumptions:
Perfect capital markets exist where individuals and companies can borrow unlimited
amounts at the same rate of interest.

There are no taxes or transaction costs.
The firms investment schedule and cash flows are assumed constant and perpetual.
Firms exist with the same business or systematic risk at different levels of gearing.
The stock markets are perfectly competitive.
Investors are rational and except other investors to behave rationally.
MM Theory: No Taxation
The debt is less expensive than equity. An increase in debt will increase the required rate of
return on equity. With the increase in the levels of debt, there will be higher level of interest
payments affecting the cash flow of the company. Then equity shareholders will demand for
more returns. The increase in cost of equity is just enough to offset the benefit of low cost debt,
and consequently average cost of capital is constant for all levels of leverage as shown in Figure
1.
Figure 1: MM view of Capital Structure

In MM theory the following notations will be used:
Vu = Market value of ungeared company i.e. company with 100% equity financing.
Vg = Market value of a geared company i.e. capital structure of the company includes
both debt and equity capital.

D = Market value of debt in a geared company.
Ve = Market value of equity in a geared company.
Vg = Ve + D
Ku = Cost of equity in an ungeared company.
Kg = Cost of equity in a geared company.
Kd = Cost of Debt.
M M Theory: Proposition I
The market value of any firm is independent of its capital structure, changing the gearing ratio
cannot have any effect on the companys annual cash flow. The assets in which the company has
invested and not how those assets are financed determine the market value. Thus, the market
value of a firm is unaffected by its financing decisions, its capital structure, or its debt-equity
ratio. In simple words, M & M theory views the value of the company as a whole pie. The size of
the pie does not depend on how it is sliced i.e. the firms capital structure but rather the size of
the pie pan i.e. the firms present value based on its future cash flows and its asset base.
The value of the geared company is as follows:
Vg = Vu
Vg = Profit before interest
WACC
Vg = Vu = Earnings in ungeared company

Ku
WACC is independent of the debt / equity ratio and equal to the cost of capital which the firm
would have with no gearing in its capital structure.
Proof by example
Consider holding 1% of stock in an all-equity firm with value VU.

Then your wealth is 0.01VU.
Also, you receive a cash flow of 0.01CFt every period.
Alternatively, consider holding 1% equity and 1% debt in levered version of the same
firm with value

Vg=E+D.
Your wealth then is [0.01E+0.01D] = 0.01Vg.
Cash Flows each period? [0.01(Int)+0.01(CFt- Int)]=0.01CFt.
As the inherent risk of the firm is the same, then the discounted value of the cash flows
must be the same,
MM Theory: Personal Taxation

MM theory considered only corporate taxes. It was left to a subsequent analysis by Miller (1977)
to include the effects of personal as well as corporate taxes. He argued that the existence of tax
relief on debt interest but not on equity dividends would make debt capital more attractive than
equity capital to companies. The market for debt capital under the laws of supply and demand,
companies would have to offer a higher return on debt in order to attract greater supply of debt.
When the company offers after personal tax return on debt at least as equal to the after personal

tax return on equity, the equity supply will switch over to supply debt to the company. It is
assumed that, from the angle of the company, it will be indifferent between raising debt or equity
as the effective cost of each will be the same and there is no advantage to gearing.
Financial Distress and Capital Structure
The assumption is that when firm has very high level of borrowing they are more likely to run
into the cost of final distress and cost of bankruptcy. When the leverage of the firm is extremely
high then it is very likely that at some stage it will not be able to make annual interest payments
and loan repayments. Dividends for shareholders can be bypassed but failure to pay interest on
loans often gives the lender the right to claim on the firms operating assets thereby preventing
the firms continuity of activity.
The following illustrative list of activities which may cause increase in cost of the firm.
Successive borrowings beyond the companys target debt equity ratio.

Borrowing higher levels of interest
Skip off or cut in dividend which may cause the fall of market rate of shares.
Loss of trade credit from suppliers
Distress sale of highly profitable instruments.
Abandonment of promising new projects.
Reduced credit period resulting in loss of business.
Corporate image may be tarnished.
Demand for withdrawal of loans made to the firm previously.
Reduction in stock levels result in reduction in sales etc.
Bankruptcy Costs
The cost of bankruptcy may be of two types:
Direct costs
Those directly associated with bankruptcy, both legal and administrative.
Indirect costs
Costs associated with a firm experiencing financial distress (creditors, bankers,
customers, employers, etc.)
Bankruptcy costs = direct costs + indirect costs

An increase in debt is associated with increased tax savings but also an increased probability of
running into cost of financial distress and bankruptcy. The value of the leveraged firm is its

capitalised after tax operational cash flow plus the present value of the tax savings incorporating
the anticipated cost of financial distress and bankruptcy.
V = X + DT BC
R
Where, V = Value of leverage firm
X = Anticipated net operational cash flows
R = Capitalisation Rate
D = Market Value of Debt
T = Corporate tax rate
BC = Anticipated costs of bankrupting
Optimum Capital Structure and Costs of Financial Distress
The existence of tax benefit for modest amounts of debt, and the need to avoid the costs of
financial distress, suggest that there is an optimal capital structure as illustrated in figure which
shows that there is an optimal capital structure at the point where the market value of the firm is
maximized, that is where (DT BC) is maximized.
Debt Financing and Agency Costs

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

Difficult to identify and estimate, but exist
V = VU + BTC PVBC PV of agency costs
PVBC + PVAC eventually dominate over PV of tax shield.
PV of agency costs , as B generally.
Debt Financing and Agency Cost

Signaling Theory
In a pioneering study published in 1961, Gordon Donaldson examined how companies actually
establish their capital structure. The findings of his study are summarised below:
Firms prefer to rely on internal accruals, i.e. on retained earnings and depreciated cash
flow.
Expected future investments oppurtunities and expected future cash flow influence target
dividend payout ratio. Firms set the target pay out ratio at such a level that capital
expenditures, under normal circumstances, are covered by internal accruals.

Dividends tend to be sticky in the short run. Dividends are raised only when the firm is
confident that the higher dividend can be maintained; dividends are not lowered unless
things are very bad.

If a firms internal accruals exceed its capital expenditure requirements, it will invest in
marketable securities, retire debt, raise dividends, resort to acquisitions, or buyback its
shares.
If a firms internal accruals are less than its non-postponable capital expenditure, it will
first draw down its marketable securities portfolio and then seek external finance.
Noting the inconsistencies in the trade off theory, Myers proposed a new theory, called the
signalling, or asymmetric information, theory of capital structure. The main points of the theory
are:
Managers often have better information.

Sell stock if stock is overvalued.
Sell bonds if stock is undervalued.
Investors understand this, so view new stock sales as a negative signal.
Corporate Finance Practices


The capital structure decision is a difficult decision that involves a complex trade off among
several considerations like income, risk, flexibility, etc. given the over riding objective of
maximising the market value of a firm, the following guidelines should be kept in mind while
hammering out the capital structure of the firm.
Avail of the Tax Advantage of Debt.
Interest on debt finance is a tax deductible expense. Hence finance scholars and practitioners
agree that debt financing gives rise to tax shelter which enhances the value of the firm.
Preserve Flexibility
Flexibility implies that the firm maintains reserve borrowing power to enable it to raise debt
capital to respond to unforeseen changes in business and political environment. Hence the firm
must maintain some unused debt capacity as an insurance against adverse future developments.
Ensure that the Total Risk Exposure is Reasonable
The affairs of the firm should be managed in such a way that the total risk borne by the equity
shareholders is not unduly high.
Subordinate Financial Policy to Corporate Strategy
Financial policy and corporate strategy are often not integrated well. This may be because
financial
Mitigate Potential Agency Costs.
Due to separate ownership and control in modern corporations, agency problems arise.
Shareholders scattered and dispersed as they are not able to organise themselves effectively.
Hence, very little monitoring takes place in the security markets.
Since agency costs are borne buy shareholders and the management, the financing strategy of a
firm should seek to minimise these cost by employing external agents who specialise in low cost
monitoring.
Issue innovative Securities
Thanks to SEBI guidelines introduced in 1992, issues have considerable freedom in designing
financial instruments. There is greater scope for employing innovative securities to the advantage
of the firm. The important securities innovations have been as follows: floating rate bonds (or

notes), collateralized mortgage obligations, dual currency bonds, extendible notes, medium term
notes.
Widen the Range of Financing Sources
In as dynamically evolving financial environment, traditional sources of financing may diminish
in importance. They may not be adequate or optimal. Hence, it behoves on a firm to employ new
modes of finance like commercial paper, factoring, Euro issues, and securitisation.
CHAPTER 2
CAPITAL EXPENDITURE: AN OVERVIEW
Factors Of Capex
Organizations engaged in manufacturing and marketing of goods or services require assets in
their operations. An asset can be thought of as any expenditure, which creates or aids in creation
of a revenue-generating base. Companies incur various expenditure to carry on standard flow of
work, expenditure intended to yield returns over a period of time, and usually exceeding one year
is regarded as capital expenditure. Various factors are considered before Board of Directors
approves any expenditure. All that factors can further be divided into:
Operational Factors
1. To meet future requirements based on market forecast.
2. To maintain coordination with the vision of the company as Ranbaxy vision Garuda
states to be top five generic players in the world by 2012 and achieve sales of 5
billion. To achieve this target company has to incur heavy expenditure on acquisition
of fixed assets.
3. To increase market penetration.
4. To maintain, renew, expand, upgrade existing physical assets that helps to facilitate
and enhance revenue-generating capacity.
5. To create, acquire and develop revenue generating activities/ capacities that is
imperative for an organizations healthy growth and existence.

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

This is one of the techniques for financial evaluation of Capexs. DCF techniques are based on
the concept of time value of money and provide a methodology of taking into account the timing
of cash proceeds and outlays over the life of the investment. The procedure underscores the need
to state cash flow streams arising in different time periods thus differing in value and, hence
comparable only in terms of common denominator viz. present values.
Discounted Payback Period (DPP)
DPP is the number of years it takes for the present value of inflows to equal the initial
investment. Apart from giving due importance to time value of money it serves as a reasonable
tool of risk approximation. It favors projects, which generate substantial cash inflows in initial
years, and discriminates against those that bring in substantial inflows in later years (risk tending
to increase with tenure). Thereby implying that an early resolution of uncertainty enables the

decision maker to take prompt corrective action by modifying/ changing other investment
decisions. However, by the same logic it cannot be used as a principal tool for analysis because it
ignores any substantial cash flows arising after the pay back period.
Internal Rate of Return (IRR)
IRR is the discount rate that equates the present value of the expected future cash inflows to the
present value of the expected future cash outflows. It is the post tax return from investment and
hence the excess of IRR over the cost of capital indicates a surplus after paying for the capital
employed. IRR presupposes an equivalent rate of return on the cash flows generated during the
life of the asset i.e., it assumes reinvestment of intermediate cash flows at the rate of return equal
to the project's IRR.
Internal rates of return are most often used as useful additions to NPV computations. This has in
turn justified the use of IRR as a good substitute to NPV. IRRs have the merit of indicating
whether a project is worthwhile, in that - an IRR above the cost of capital represents a positive
NPV project, an IRR equal to the cost of capital is a zero NPV project and an IRR less than the
cost of capital is associated with a negative NPV project.
Inspite of its merits, it needs to be understood that IRRs helps only to identify projects that
maximizes the ratio of rupee-value to rupee-capital in percentage terms. What NPV will help in
determining is the projects that maximizes the rupee-spread between value and capital.
Net Present Value (NPV)
NPV is equal to the present value of cash inflows minus the present values of cash outflows. A
positive NPV is a prerequisite for the 'acceptance' of the project. The primary tool of appraisal
would be the NPV method. Its superiority over other methods arises out of its principal merit of
incorporating all benefits and costs occurring over the life of the asset.
Profitability Index (PI)
The Profitability Index essentially measures the Present value of benefits times the initial
investment. Under unconstrained conditions, the profitability index will accept and reject the
same projects as the NPV criterion. It is possible that a project may have no critical risks. Or the
financial are extremely favorable (high NPV, high IRR, high PI, low DPP etc.) and the
occurrence of consequent risks may not compromise the success of the project. It is also possible

that there is a conscious corporate decision to accept certain risks. In such cases, no measures are
required. These risks, in any case, must be explicitly stated in the Quantitative committed in
expectation rather than in certainty, which implies that investments are subject to risk contribute
to removing the shortcomings of an unstructured workings.
INTRODUCTION ON CAPITAL EXPENDITURE
The term 'Capital expenditure' refers to expenditure intended to yield returns over a period of
time, usually exceeding one year. This basically implies that any expenditure, which results in
the creation of a new asset or substantially increases the capacity/benefits of an existing asset and
is of a "long term" nature, should be classified as Capital expenditure. Since, the expression
'Capital expenditure' is not exhaustively defined, the facts of a particular case would decide
whether expenditure is capital or revenue. Generally speaking, the expenditure should be tested
on the following criteria to facilitate classification between capital and revenue. Expenditure
would be deemed to be capital, if incurred for
Initiation of business
Extension of business: Entry into new markets & products (including R&D and
regulatory expenses).
Modification of asset/ equipment resulting in increased benefits from the existing asset
Bringing into existence a new asset.
Conversely, expenditure would be deemed to be revenue, if incurred for
Routine repairs and maintenance of existing plant.
Replacement of any part of the existing plant with capacities remaining unchanged
Shifting of plants
Making alterations or renovations on rented premises
Assets having life of less than one year
Classification Of Capital Investments

Since the analysis for appraisal of the proposed capital expenditure will largely depend upon the
kind of investment, it is necessary to classify capital investments into the following categories:
Cost Reduction, Modernisation and Rationalisation.
Expenditure to replace serviceable, but obsolete equipment. This may become necessary
because of the expiry of normal life or change in technology. The purpose of this expenditure
is to improve productivity, increase efficiency or reduce cost of labour, material or other
items such as power.
Expansion of Existing Products/ Capacity
Expenditures to increase plant capacity for existing products/equipment or enhance multipurpose flexibility.
Expansion into New Products/New Product Packs
Expenditure necessary to produce new products/new product pack. This also includes
expenditure on existing facilities to handle new products which may result in incremental
realizations / value additions.
New market development and Market Entry
This would include expenditure made for entering and developing new markets. Such
proposals would require the business case to be accompanied with detailed financial
analysis.
5) Replacement: Maintenance of Business
Expenditure necessary to replace worn-out or damaged equipment. They are not likely to
increase capacity or alter production significantly. Capital spares are included here.
6) Quality, Good Manufacturing Practices, Safety, Health and Environment.
Expenditures necessary to upgrade quality, compliance of GMPs, government regulations,
labour agreements, insurance policy terms, and environmental safety requirements. Financial
evaluation/benefits from such expenditure may to the extent quantifiable, be provided.
7) Research & Development
Expenditure on R&D projects/ equipment/ facilities. Financial evaluation/benefits from such
expenditure may to the extent quantifiable, be provided.
8) Information Technology
Expenditure on procurement of IT infrastructure (Hardware) and/or application software.
Financial evaluation/benefits from such expenditure may to the extent quantifiable, be
provided.
9) Others
This includes office buildings, vehicles, furniture, office equipment, InfoTech related
equipment and utilities, and all such assets, which provide infrastructures support. This also
includes any capital expenditure not explicitly covered in the above classifications.

Capital Expenditure proposals are not applicable for
Employee entitlements
Capital expenditure necessary to meet the commitments in respect of provision of assets to

the employees in terms of personnel policies. Financial evaluation of such expenditure is
not required. Assets purchased by employees against their hard/soft furnishing entitlements
do not fall within the scope of this manual and hence, will not be included here as they are
per policy.
Amounts less than Rs.10, 000/ $1,000
Segregation of Capex and Revenue Expenditure Broadly, the following shall be considered
as Revenue:
o All repairs to equipment in the normal course of business.
o All annual maintenance contracts (AMC) to keep the said equipment/assets in
working condition.
o All expenditures, which do not result in an enduring/permanent benefit to the assets.
o Modification to the existing assets, which does not result in enduring benefit, are to
be treated as Revenue after taking ratification of Technical Head of Plant.
o Piping and insulation of the nature of minor repair or replacement.
o Re-arrangement of assets or minor structural changes for regulatory batches.
o All accessories / dies & punches which are procured subsequent to purchase of assets
In case of certain expenditure the treatment of which is in doubt, the decision in this respect
shall be exercised by the Plant Account Manager in consultation with the User/Technical
Head.
Date Of Capitalisation
Date of Capitalisation would be the date when the assets is certified by the concerned
Engineering / E&F Department as ready to use or GRN date in case of assets which do not
need commissioning (that is computers, furniture, fixtures etc.).
Authority for fixing date of capitalisation would be with E&F department.
Lead-time between certification and Commencement of commercial production will not
normally exceeds 30 days In case of lead-time exceeding 30 days to take specific approvals
from the Plant Head.

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

Staff Welfare
VED is a management science tool, which is used by various department depicting vitality of
particular need raised at operational level where
V stands for VITAL
E stands for ESSENTIAL
D stands for DESIRABLE
The above requirement chart prepared by RCC head then consolidated by Divisional Finance
Accounts Department and budgets are prepared. For each plant this chart is prepared where
requirement of various functions are shown and also respective RCC head gives justification.
Finance department review the expenditure type whether capital or revenue again as it could
be classified wrong by RCC head. Finance department then modifies this chart into budget
based on: Plant wise requirement
Kind of function
In plant wise requirement various excel files are prepared which is as follows
Summery statement
Revenue expenditure
Capital expenditure
RCC wise
Similarly depending upon the functions various budgets is prepared. Basically here for
production and engineering requirements send by RCC head is provided in plant wise
description chart but for others such as
Personnel/security
Safety/ETP
QA/QC
Stores
In above functions division wise budgets are also made for example
QA/QC -> Division -> PDL
QA
Contract Manufacturing
Personnel/security -> Division -> Personnel/security
Division Management

Division Accounts
Separate budgets are prepared and then sanctioned by respective head. Now the budgets
prepared by finance department is further send to respective departmental head. Then plant
heads, followed by Vice President & onwards as per the Capex amount, approves these
capexs.
As explained earlier Finance manager maintain the budget information, following
manufacturing locations of API are catered at Mohali Division
MOHALI
TOANSA
DEWAS
After preparation of Budgets, BOD approves Capital Expenditure by initiating CAPEX form
by Plant head that is appropriately signed by requisite authorities. In CAPEX Form itself
amount is classified into various categories
A. Replacement/Cost Reduction
B. Expansion into New Product/New Product Packs
C. Quality, Safety, Environmental
D. Expansion of Existing Products Packs
E. Replacement: Maintenance of Business
F. Others
All kinds of expenditure are classified into above head for API Manufacturing for approval of
Capital Expenditure.
Accounting Route for API Manufacturing

Capital Expenditure
When top authorities approve the Capex requirement then an internal order number is created
by Plant department. After the creation of internal order number finance department inform
respective accounts department about the same. On receipt of the IO, indenter will create the
purchase requisition that subsequently go to purchase department. Purchase department will
float enquires and prepare comparative charts for at least 3 vendors. After selecting the
vendor, purchase department will place a purchase order (PO) on the vendor for supply of the

asset. In case, as per the terms of the PO, any advance is to be given to vendor, the same is
released by accounts department, after passing the necessary entries in the vendor account
under respective business area (BA). The purchase department while preparing the PO would
ensure to mention complete name as RANBAXY LABORATORIES LIMITED, API
MANUFACTURING and address/ location of delivery of the asset. On receipt of the goods,
the Stores department will arrange to prepare the GRN and get the same approved by the user
department. On approval of the GRN, the stores department will send the bill to accounts for
invoice verification. The accounts department will verify the invoice with PO and release the
balance payment to vendor.
Material Cost
The purchase requisition (PR) for domestic materials i.e. Solvents, Chemicals and other
Consumables required for project completion will be raised by scientists after obtaining
approval from the respective head, the purchase requisition (PR) will be send to purchase
department for procurement of the material. Purchase department will float enquires and
prepare comparative charts for at least 3 vendors. The purchase department will place the PO
on the vendor for supply of the materials. In case, as per the terms of the PO, any advance is
to be given to vendor, the same will be released by accounts department after passing the
necessary entries in the vendor account under Business Area (BA). The purchase department
while preparing the PO would ensure to mention complete name as RANBAXY
LABORATORIES LIMITED, API MANUFACTURING and address/ location of delivery
of the asset. On receipt of the goods, the stores department will Are range to prepare the
GRN and do the respective head approve the same. On approval of the GRN, the stores
department will send the bill to accounts department for invoice verification. The accounts
department verifies the invoice with PO and releases the balance payment to vendor. The cost
of material will be booked in the API MANUFACTURING cost center under Business Area
1000.
In case of imported material on receipt of approved PR from the API MANUFACTURING,
purchase department, Mohali will send the PR to international purchasing department (ID
Purchase) at Devika Tower, Delhi. The ID Purchase, while preparing the PO would ensure to
mention
the
complete
as
RANBAXY
LABORATORIES
LIMITED,
API

MANUFACTURING and address/ location of delivery of the asset. On receipt of the
material, the purchase department will arrange to prepare the GRN and do the respective
head approve the same. On approval Of the GRN, the ID Purchase department will send the
bill to accounts department will only verify for invoice verification. The accounts department
will verify the invoice with PO .the verification of Custom duty; Overseas fright etc. will be
done by ID accounts and will arrange to release the payment to vendor. The cost of material
will be booked in the API MANUFACTURING cost center under Business Area 1000. In the
SAP system, a separate storage location (Storage Location 1075 plant 1030) for material
required by API MANUFACTURING should be created so that at any given point the
material purchased & consumed may be identified. Physically, the capital assets as well as
the materials purchased for API MANUFACTURING should be stored in a separate storage
preferably within API MANUFACTURING storage location.
Revenue Expenditure
Apart from material, to carry on the API MANUFACTURING, certain expenses will be
incurred under various accounting heads. These expenses either may be incurred directly by
API MANUFACTURING, or may be incurred by other locations. The accounting of these
expenses would be made as under:
The manpower i.e. lab technician and other supporting staff working for the API
MANUFACTURING should be identified. All direct & indirect expenses incurred in
connection with recruitment, salaries, allowances and other benefits related the said
manpower be charged to the cost center for API AMCs housekeeping, Horticulture, Books &
Periodicals, Conference & Meeting, training, traveling lab assistant, Gifts & presents etc,
should be charged to the cost center of API MANUFACTURING.
Utilities cost such as Electricity, Water, Power, and Stream etc, incurred for API
MANUFACTURING, based upon the actual bills received from the supplier. In case the
utilities are provided by any of the existing manufacturing facilities, the supply should be
monitored by separate meter/sub meter etc, and charges for the same based upon the actual
units consumed should be debited to the cost center of API MANUFACTURING.

The other supplies/facilities such as Telephone, Fax, Telex etc., should be directly in the
name of API MANUFACTURING. In case, any common facility is used, charges on
reasonable basis should be debited to the cost center of API MANUFACTURING, Mohali.
The supplies from common canteen should also be charged on a reasonable basis i.e. linked
to the number of employees working in API MANUFACTURING. The charges for Tea,
coffee, snakes etc, consumed by API MANUFACTURING. Guest would be charged on
reasonable basis to the Cost Center of API MANUFACTURING.
In case any materials/consumables are provided by any of the manufacturing location to the
API MANUFACTURING. A stock transfer note will be raised on API MANUFACTURING.
Similarly if any services are provided by marketing facility to API MANUFACTURING,
cost thereof at arm length basis will be debited to the API MANUFACTURING.
Business Area
Line of Business: e.g. API Manufacturing, Pharmaceuticals. An organizational entity that is
not independent from a Legal standpoint. Internal balance sheets and income Statements can
be created at Business Area level. Business Area configured in RLL
API MANUFACTURING
API MARKETING
FORMULATION MANUFACTURING
FORMULATION MARKETING
TRADING
ALLIED BUSINESS
PHARMA BUSINESS SUPPORT
REASEARCH & DEVELOPMENT
Plant
A plant is an organizational unit within a company. A plant produces goods; render services,
or makes goods available for distribution. A plant can be one of the following types of
locations
Manufacturing facility e.g. MFG (Mohali)

Warehouse distribution center
Branch office

Controlling Area
This is organizational controlling unit. Transactions within Controlling area is possible
Operating Concern
Top-level logical unit in SAP. It is superset of all Cost Center, Business Area and
Controlling Area etc.
Cost Center
Cost center is the smallest unit in Phase I. In SAP for handling various costs, there are
different types of cost centers. Examples, Personal Cost Center, Amoxy Cost Center,
Utility Cost Center. For Financial purposes Cost Center are classified into various heads
such as administrative cost center, works cost center, Utility / Production cost center.
SAP Route
SAP functioning in the system begins by creating internal order. Internal order number is
created by finance department by using SAP command is
Accounting -> Investment Management -> internal order ->
Master data -> special functions -> KO02
The above path command is KO02 that creates an internal order for which following
information need to be filled
General data, Applicant, Person Responsible, Processing group, Estimated costs, Application
data, Department, Control data, System status, User status, Assignments, Company code,
Business area, Plant, Object class
To make certain changes in internal order the command is
Accounting -> Investment Management -> internal order -> Budgeting ->
Original Budget -> KO22
In above command is used to verify the amount and text of internal order.
The report created by finance department can be viewed by using command
S_ALR_8701301.
It is not mandatory to fill up certain fields in the internal order at the time of its creation with
the result that the cost over-runs are not reflected automatically by SAP systems. For
example, the system provides that where the expenditure under any internal order exceeds
2.5% of the budgeted amount, the same is reflected in the reports.

After creating the internal order the finance manager will mail the CAPEX amount
sanctioned by higher authorities and also the internal order number to respective Plant Head.
Indenter will indent the required material. Indenter is the person who at operational level
requires the material In SAP next step is creation of Purchase Requisition that can further be
prepared in 2 ways
Cost Center
CAPEX-IO
For the purpose of capitalization we have to focus on CAPEX route. Here, after getting mail
from finance department Plant Head will authorizes the indenter to raise indent that is the
indenter will create Purchase Requisition. From the department the SAP route comes to
urchase Department that in Mohali handles the Purchase Requisition for Mohali and Toansa.
In purchase department three documents are prepared in order to raise final PURCHASE
ORDER that is initiate to supplier.
1 REQUEST FOR QUOTATION (RFQ) Purchase Department after receiving the Purchase
Requisition will place order depending upon requirements. In system, for different items
different staff person receives particular Purchase requisition that is differentiated by unique
purchasing group. For Example 505 is the purchasing group that handled Purchase
Requisition for items related to Electrical and instruments.
For each item Purchase Department is required to send RFQ to 3 vendors. Three is the
minimum limit for every item but in case where Purchase Requisition (PR) specify the brand
of particular need to be acquired, in that case only one RFQ need to send. For example if PR
specifies one LG T.V then only one RFQ need to send to dealers dealing in LG commodities.
For CAPEX PR starts from 3000001987. RFQ is the 10-digit number. In SAP for creating a
RFQ ME41 is the command used by purchase department. Then a applet window comes
where information regarding
RFQ type
Language key
RFQ date
Quotation deadline
RFQ
Organizational data
Purchase organization
Purchasing group
Default data for items

Item category
Delivery date
Plant
Material Group
Storage location.

CHAPTER 3
RECOMMENDATIONS AND SUGGESTIONS FOR
THE INDIAN PHARMA INDUSTRY
The achievements of the Indian pharmaceutical industry are spectacular in recent times and
are praise worthy, which has evolved as model industry of the country in performance. But,
in the 21st century, the pharmaceutical value chain would depend on the ability of
pharmaceutical companies to make the technological shift necessary to maintain and increase
their competitive positions.
Also for the MNCs, India provides not just the possibility but the unique & tangible
opportunity to make the desired technological shift in process, and in location! The
question before Pharma Company CEOs the world over today is not: Should my company
go to India? but Can my company afford not to go to India?
STEPS REQUIRED TO BOOST THE COMPETITIVENESS OF THE PHARMA
INDUSTRY
Extension of deduction of 150% of R&D expenses. This would encourage more and
more companies to invest in R&D.

The government has earmarked 150 crores for R&D. This is just not enough. It
should be augmented to at least 2000 crores.

To rationalize Drug Price Control Order (DPCO). The objective of the price control
was to ensure adequate availability of quality medicines at affordable prices. The
product patent regime will make it obligatory for Indian companies to compete in
R&D if they want to survive. Similarly, WTO led global trading system will result in
import tariffs coming down. For Indian companies to compete with cheap imports,
they will have to invest in cost effective technology and processes. Therefore, it is
imperative that the pharma industry has surplus for investment. In this context, a
liberalized price control regime becomes more important.

An academic industrial relationship can be further explored, on the lines of the US
model, here the universities are the sites of innovation and the industry
commercializes the product. The universities are permitted to own the Intellectual

Property Rights (IPR) and get a share of the profits. Academic institutions will then
become the engines of entrepreneurship. This also requires setting up of greater
number of centres of academic excellence throughout India in different states, so that
people from across the country can avail of such education and make their
contributions without feeling the need to look beyond India for achieving academic
excellence.
Income tax exemptions should be given on clinical trials and contract research done
outside the company and abroad. This is because India is seen as emerging as a major
centre for outsourcing of clinical trials for the Pharmaceutical MNCs.
The problem of spurious drugs has to be tackled.
The procedure for procurement of licence should be made more stringent, including
extensive disclosure of detailed personal, financial and business information and a
thorough background check. There is a strong need to strengthen and streamline the
Central and State Drug Control Organizations. State drug controllers should take
measures like setting up of separate intelligence-cum-legal machinery with police
assistance. Faking should be made non-bailable and cognizable offence and the
prosecution should be instituted by any police or Central Bureau of Investigation officer
not less than the rank of a subinspector (instead of an inspector in the extant provision).
Most of the cases relating to spurious drugs remain undecided for years. Hence there is a
strong need for setting up separate courts for speedy trials of such offences. The case
should be tried by the court of the rank of a Session Judge or above whereas the extant
provision provides for a trial by a metropolitan magistrate or a first class judicial
magistrate or above.
Each state should set up accredited testing laboratories that are well equipped and
adequately staffed. The staff should be trained well for drawing samples for test and
monitoring the quality of drugs and cosmetics moving in the State. It is most important
and essential to have training programmes for technical staff of central and state drug
control laboratories and private testing laboratories as it is based on the report of these
testing laboratories that a manufacturer releases his product or otherwise. Legal action
against the manufacturer is likely to be taken on the basis of the test report given by a
government analyst.

India should exploit its know-how in herbal medicines.
Since these medicines do not come under the purview of the TRIPS regime and the research in
new chemical entities involves millions of dollars of investment, the Indian companies should
engage in R&D in herbal medicine. The companies should try to exploit the Indian traditional
knowledge in ayurveda and herbal cures and file as many patents for herbal medicine as they
can. For this the government should set up R&D laboratories undertaking research exclusively in
the area of herbal medicines and support the companies in their research and patent filing.
The government should encourage setting up of USFD
Acompliant plants by providing tax holidays for a specified period (as given in regions like
Baddi), so that the Indian companies can exploit the opportunity arising out of patented drugs
and take up marketing of generics in the developed countries like USA.
TRENDS AND STRATEGIES

The Indian domestic pharmaceutical industry is increasingly becoming globally competitive to
counter the weaknesses and threats. The key trends and strategies being adopted by the local
pharmaceutical industry are:
Increased R&D Focus
Driven by the imminent change to a product patent regime at homefrom 2005 the leading
pharmaceutical companies in India have been increasing their R&D budgets over the years.
Indian pharmaceutical companies are likely to double their expenditure on R&D over the next 2
years.
CHAPTER 4

CONCLUSION
The successful strategy for Ranbaxy Laboratories Ltd. in a post 2010 world will include:
Attain right product-mix

Augment skills
Use M&A options for either companies or products.
Building Innovation Engine at R&D
Sustain growth momementum in USA.
Attain critical mass in Europe and Latin America.
Specialty products focus for Brand marketing.
Fortifying home business leverage India Base.
Seeding the Japanese market.
Networking, licensing and acquisitions.
Technology, new market entry vehicles, brands/proprietary products
Global talent pool to fuel growth.
The increasing importance of biotech industry and its symbiotic relationship to pharma will also
be very relevant in Ranbaxys strategy. However Ranbaxy should not close its eyes on the ever
increasing Global competition, which is a big threat for the company. The entry of international
and new domestic players would intensify the competition significantly.
Further there is threat from other low cost countries like China and Israel. However, on the
quality front, India is better placed relative to China. So, differentiation in the contract
manufacturing side may wane. The short-term threat for the pharma industry is the uncertainty
regarding the implementation of VAT. Though this is likely to have a negative impact in the
short-term, the implications over the long-term are positive for the industry.
The Indian pharmaceutical industry is at the center stage in the global healthcare arena and
Ranbaxy endeavors to be at the forefront in delivering the India centric advantages to the
advanced and developing countries of the world.
From a small domestic company at inception, Ranbaxy has grown formidably to be a Billion
dollar institution that was envisioned by Late Dr Parvinder Singh, Chairman and Managing
Director, Ranbaxy in early 90's.

It is with the unwavering ' dedication ' and the ' will to win ' of Team Ranbaxy across the globe
that Ranbaxy has traversed this journey so far. The management feels that the next league is a
greater challenge, as the company has other milestones to achieve.
Whilst Ranbaxy continues to enhance the momentum of its generics business in its key
geographies, parallel to that it is also accelerating its drug discovery program. The company is
committed to provide quality generics at affordable prices to the patients worldwide with a view
to help bring down the healthcare costs. Ranbaxys management is confident that its efforts
would see the Company emerge as a leading player in the global generic space in the years to
come.
As the company moves ahead towards its mission to become a Research based International
Pharmaceutical Company. The management believes that, it is the spirit of Team Ranbaxy that
would enable Ranbaxy to reach out to Vision 2012
CHAPTER 5
BIBLIOGRAPHY
WEBSITES:- www.ranbaxy.com
ONLINE JOURNALS:- Cygnus Business Consulting & Research
Indian Pharmaceutical Industry-Oct-Dec 2008
- FICCI Report for National manufacturing Competitiveness Council (NMCC)
BOOKS:- Financial Management

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

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A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Understanding the organizational structure and functioning of Ranbaxy Laboratories Ltd.

Following are the limitations of the study:

other tools are also there.

LITRETURE OF REVIEW ON CAPITAL STRUCTURE

VIVEK COLLEGE OF COMMERCEPage 1

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Familiarization, examination and evaluation of the procedures relating to capital structure

and capital expenditure.

VIVEK COLLEGE OF COMMERCEPage 2

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Capital Structure: Theory and Analysis

VIVEK COLLEGE OF COMMERCEPage 3

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

VIVEK COLLEGE OF COMMERCEPage 4

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Operating and Financial Leverages

Disadvantages of Operating Leverages

VIVEK COLLEGE OF COMMERCEPage 5

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Financial Leverage = EBIT

VIVEK COLLEGE OF COMMERCEPage 6

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Choosing the Optimal Capital Structure for Ranbaxy Laboratories Ltd

Estimates of Cost of Debt

VIVEK COLLEGE OF COMMERCEPage 7

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

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

MM theory implies that beta changes with leverage.

The Cost of Equity for wd = 20%

Use CAPM to find the cost of equity:

Cost of Equity vs. Leverage

VIVEK COLLEGE OF COMMERCEPage 8

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

The WACC for wd = 20%

Corporate Value for wd = 20%

VIVEK COLLEGE OF COMMERCEPage 9

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Debt and Equity for wd = 20%

Debt and Stock Value vs. Leverage

Stock Price for wd = 20%

VIVEK COLLEGE OF COMMERCEPage 10

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Optimal Capital Structure

VIVEK COLLEGE OF COMMERCEPage 11

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Highest corporate value

But wd = 40% is close. Optimal range is pretty flat.

Modigliani and Miller Theory (Modern View)

amounts at the same rate of interest.

VIVEK COLLEGE OF COMMERCEPage 12

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Figure 1: MM view of Capital Structure

both debt and equity capital.

VIVEK COLLEGE OF COMMERCEPage 13

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Consider holding 1% of stock in an all-equity firm with value VU.

firm with value

MM Theory: Personal Taxation

VIVEK COLLEGE OF COMMERCEPage 14

A STUDY ON CAPITAL STRUCTURE OF RANBAXY

Successive borrowings beyond the companys target debt equity ratio.

Bankruptcy costs = direct costs + indirect costs