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Advanced Corporate Finance

Report Submission

Industry: Pharmaceuticals
Company: Glaxosmithkline India Ltd.

Submitted to: Submitted by:

Dr. Kulbir Singh Raymond Philip
Section C
201611215
Group No.: 29

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S.no Contents Pg no.
1 Pharmaceuticals industry analysis 3-4
2 Glaxosmithkline pharmaceuticals ltd-company background 4
3 Working capital management 5-8
4 Mergers and Acquisition 9
5 Derivatives 9
6 Financial distress 9-10
7 Bibliography 10

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 Pharmaceutical industry analysis
Indian pharmaceutical sector accounts for about 2.4 per cent of the global pharmaceutical
industry in value terms and 10 per cent in volume terms and is expected to expand at a
Compound Annual Growth Rate (CAGR) of 15.92 per cent to US$ 55 billion by 2020 from
US$ 20 billion in 2016.

With 71 per cent market share, generic drugs form the largest segment of the Indian
pharmaceutical sector. By 2016, India is expected to be the third-largest global generic Active
Pharmaceutical Ingredient (API) merchant market. The country accounts for the second
largest number of Abbreviated New Drug Applications (ANDAs) and is the worlds leader in
Drug Master Files (DMFs) applications with the US.

Indian drugs are exported to more than 200 countries in the world, with the US as the key
market. Generic drugs account for 20 per cent of global exports in terms of volume, making
the country the largest provider of generic medicines globally and expected to expand even
further in coming years.

The Government of India plans to set up a US$ 640 million venture capital fund to boost drug
discovery and strengthen pharmaceutical infrastructure. The Pharma Vision 2020 by the
governments Department of Pharmaceuticals aims to make India a major hub for end-to-end
drug discovery. There are several relaxations given by Government of India in excise duty
and other duty in drugs made to diagnose HIV/AIDS, malaria, cancer, etc. The policy also
focuses on increasing public expenditure in healthcare segment. Exemptions to drug
manufactured through specific research and development.

Foreign direct investment of 74% gives foreign entity to come and invest in the country. It is
lucrative for foreign entity also because Indias cost of production is significantly lower than
that of the US and almost half of that of Europe. It gives a competitive edge to India over
others. The drugs and pharmaceuticals sector attracted cumulative FDI inflows worth US$
13.85 billion between April 2000 and March 2016.

The reasons for low cost of production of generic drugs in are

1. The domestic demand for drugs in India is huge and even after offering it at lower
prices company can able to earn a decent amount of profit.
2. There is a huge pool of skilled chemist in India and overall cost of production is 35%
to 45% of that in the U.S because cost of manufacturing and installation is low.
3. Court rulings in India have generally been in favour of low cost of drugs.
4. India also follows the process of compulsory licensing which allows India companies
to use the intellectual property of patent holders at very low price.
5. The Government of India also regulates the prices of around 600 medicines which
reduces their cost.
6. The Indian companies also make huge profit by exporting bulk of drugs. It is expected
to grow around at an average rate of 12% to 14% at least until 2019.

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Major chunks of revenue in pharmaceutical industry goes to research and development wing
which is one of the crucial investments of pharmaceutical industry are risen from the year
1995 especially after the signing of TRIPs and after that it started picking up and become 3%
of total sales revenue in the year 2000.

So, overall pharmaceutical industry is making fat profit with debt being negligible in India.
Government incentive and campaign like Make in India also giving significant growth in
achieving their overall profitability.

Glaxosmithkline pharmaceuticals Ltd

Company background -

Glaxosmithkline India is the 50.7% owned subsidiary of Britain based subsidiary of major
Glaxosmithkline Plc. The company was formerly known as Glaxo before its mergers with
French pharmaceutical major Smithkline Beecham.Established in the year 1924 in India
GlaxoSmithKline Pharmaceuticals Ltd. (GSK Rx India) is one of the oldest pharmaceuticals
company and employs over 4,500 people. Globally, they are a 26.5 billion (US$ 39.14
billion), leading, research-based healthcare and pharmaceutical company. In India, they are
one of the market leaders with a turnover of Rs 2,520.2 crore (US$ 402.37 million) and a
share of 3.55 per cent.

The Company is the market leader in most of the therapeutic categories in which it operates.
GSK Pharma also offers a range of vaccines, for the prevention of hepatitis A, hepatitis B,
influenza, chickenpox, diphtheria, tetanus, rotavirus, cervical cancer, pneumonia and others.
The Company has two manufacturing units in India, located at Nashik and Thane as well as a
clinical development centre in Bangalore. The state of art plant at Nashik makes formulations
while bulk drugs and the Active Pharmaceutical Ingredients (APIs) are manufactured at
Thane.

In its latest stock exchange filing dated 31 March 2016, GSK Pharma reported a promoter
holding of 75.00 %. Large promoter holding indicates conviction and sincerity of the
promoters. We believe that a greater than 35 % promoter holding offers safety to the retail
investors.At the same time, institutional holding in the Company stood at 11.59 % (FII+DII).
Large institutional holding indicates the confidence of seasoned investors. At the same time,
it can also lead to high volatility in the stock price as institutions buy and sell larger stakes
than retail participants.

If we look into the credit and liquidity analysis which have been done in this assignment it
has found that company maintains average current ratio near to 3.19 times which shows that
company is able to meet its short term cash obligations.

Overall company is maintaing good rapport in the pharmaceutical industry and anyone can
bet it for its future.

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 Working capital management
Inventory conversion period -

Inventory 251.650 176.1 208.6 251.6 255.3

conversion period 1562 683 993 9 158
Average inventory(in 306.0
Rs Cr) 445.26 355.63 312.22 9 305.84
282.0
Inventory(in Rs Cr) 521.66 368.86 342.4 4 330.14
Cost of goods sold(in 437.8
Rs Cr) 636.97 726.73 538.57 1 431.24

Inventory conversion period

300
Inventory
200 conversion period
100
0
2016 2015 2013 2012 2011

The inventory conversion period is essentially the time period during which a company must
invest cash while it converts materials into a sale. This can be calculated by using the
formula- (Average inventory/ Cost of sales)*360.

Inventory turnover ratio is generally calculated by dividing the cost of goods sold by the
average inventory. The average inventory is calculated by adding the beginning and ending
inventories and dividing by two. If there is decline in the inventory turnover ratio that
indicates that companies stock more goods. Here, we can see that the average inventory
conversion period for given 5 years is approx. 229 days. So, we can conclude that company is
holding inventory for a significant period of time. It is because the given company comes
under pharmaceutical industry and their holding period is high because their goods are
durable and has got average expiry year of around 3 to 5 years.

Debtors conversion period

It is the average time taken by the company to convert its debt into cash. This can be calculate
by using the formula (Average debtors/credit sales or sales)*360.

It determine the companys credit function on profitability by taking account receivable

variable. This impact considers the risk associated with the credit extending. In terms of
business management, the average collection period is an extension of operating efficiency

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 Debtors conversion 14.9679 10.88 15.16 13.93 10.18
period 4954 329 255 03 858
106.14 100.6
Average debtors 113.445 98.355 5 05 66.17
Debtors 126.57 100.32 96.39 115.9 85.31
3253.4 2520.1 2599. 2338.0
Sales 2728.51 1 7 93 3

Debtors conversion period

Debtors conversion
20
period
10
0
2016 2015 2013 2012 2011

Here, we can see that debtors conversion period of the Glaxo India Ltd is the lowest in the
pharmaceutical industry. It means that the company is having good credit policy with their
debtors and at the same time of not receiving their payment on time is very less. There is a
huge risk of defaulting in payment in pharmaceutical industry because payments done by the
debtors are through third party. So, we can assume that company is having very less amount
of bad debts in their account.

Creditors conversion period

An indicator measures the average time it takes a company to settle its debts with suppliers or
creditors. Thus, among other things, it gives information about payment habits and also
whether a business is taking full advantage of trade credit available or not. This can be
calculated by using the formula (Average creditors/Credit purchases or purchases)*360.

Creditors 155.814 136.4 168.7 177.0 198.9

conversion period 2031 713 116 456 138
215.43
Average creditors 314.485 291.95 255.27 5 265.13
Creditors 323.08 305.89 278.01 232.53 198.34
Purchases 726.6 770.14 544.7 438.06 479.84

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 Creditors conversion period
300
Creditors
200 conversion period
100

0
2016 2015 2013 2012 2011

Here, Glaxo India Ltd maintains good rapport with their creditors by making their payment
timely and going with the industry standards. Their payment to creditors is relatively larger
than receiving the payment from debtors. It is because their conversion period of inventory
into cash is higher and they can make payment only they have converted their inventory into
cash.

Gross operating cycle

Operating cycle is the number of days a company takes in realizing its inventories in cash. It
equals the time taken in selling inventories plus the time taken in recovering cash from trade
receivables. It is called operating cycle because this process of producing or purchasing
inventories, selling them, recovering cash from customers, using that cash to purchase or
produce inventories and so on is repeated as long as the company is in operations. It is
calculated by (Inventory conversion period + Debtors conversion period).

Gross operating 266.618 187.0 223.8 265.6 265.5

cycle(days) 1057 516 619 203 044

Gross operating cycle(days)

300
Gross operating
200 cycle(days)
100
0
2016 2015 2013 2012 2011

The average gross operating cycle of Glaxo India Ltd is 241 days for the given 5 years. It is
up to the industry standard. It is relatively high in comparison with the other industry because
their conversion time depends on the durability of their goods which is very high compare to
most of the other industry.

Net operating cycle

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The net operating cycle, also called the cash conversion cycle, is the number of days it takes a
company to generate revenues with assets. Operating cycle is extremely important because
business is all about the running the operating cycle smoothly. If it is running smoothly,
almost everything will be smooth. If any part of the operating cycle is stuck, the whole
business gets disturbed. It is calculated by (Inventory conversion period + Debtors
conversion period Creditors deferral period.

Net operating 110.803 50.58 55.15 88.57 66.59

cycle(days) 9026 031 03 469 061

Net operating cycle(days)

150
Net operating
100 cycle(days)
50
0
2016 2015 2013 2012 2011

Here, we can see that average net operating cycle of Glaxo India Ltd is approx.75 days. It is
relatively low compare to the company counterparts. The major credit of this goes to the
credit policy of the company in converting the debt into cash in a very short period of time.
Credit deferral period is also low compare to company counterparts because they can make
their payment easily.

We can conclude that the working capital management of the company is very good and their
performance in this category is far ahead than the industry standard.

Current ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below
1 indicates that the company may not be able to meet its obligations in the short run.
However, it is not always a matter of worry if this ratio temporarily falls below 1 as many
times companies squeeze out short term cash sources to achieve a capital intensive plan with
a longer term outlook. It is calculated by Current assets/current liabilities

2565.1 2601.7 2569.4

Current assets 2146.19 8 3 2612.4 8
1105.8
Current liabilities 1053.64 6 883.07 835.75 857.98
2.036929 2.3196 2.9462 3.1258 2.9948
Current ratio 122 25 33 15 02

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 Current ratio
4 Current ratio

0
1 2 3 4 5

Its average current ratio over the last 5 financial years has been 2.6 times which indicates
that the Company has been maintaining sufficient cash to meet its short term
obligations.

Mergers and Acquisition

Date Deal Type Company Name Reason
12 Feb Sale of asset Novartis Healthcare GlaxoSmithKline Pharmaceuticals Ltd
2015 Pvt Ltd approved transfer of its cancer drugs
portfolio to an arm of Novartis AG in
India in return for acquiring vaccines
portfolio as part of a global deal between
the two-multinational pharmacy giants.

It is a kind of product extension mergers

where two business organizations that
deal in products that are related to each
other and operate in the same market.

The deal was finalised where Novartis

was to acquire GlaxoSmithKline plc's
(GSK) cancer drugs portfolio for $16
billion and sell its vaccines business in
return for $7.1 billion, apart from
forming a joint venture for the consumer
healthcare business globally
16 Dec Acquistion of Glaxosmithkline pte As the acquired company was a
2013 shares Ltd subsidiary of the holding company and
used to operate under the same brand not
much detail can be found about the
company.
It may be so that the share transfers

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 made to the promoters of the acquired
company.

Derivatives
A derivative is a security that derives its value from the value or return of another asset or
security. A physical exchange exists for many options and future contracts. Exchange traded
derivatives are standardized and backed by a clearing house.

Since, the Glaxo India Ltd does not deal in any kind of derivatives so its analysis is not
available.

Financial distress
Financial distress is a condition where a company cannot meet, or has difficulty paying off,
its financial obligations to its creditors, typically due to high fixed costs.

Poor profits indicate a company is not experiencing financial health. Struggling to break even
indicates a business cannot sustain itself from internal funds and needs to raise capital
externally. This raises the companys business risk and lowers its creditworthiness with
lenders, suppliers, investors and banks. Limiting access to funds typically results in a
company failing.

Glaxo India Ltd has a very negligible debt to equity ratio which is average of 5 years are
approx. 0.004 to equity and at the same time its interest coverage ratio is nil. Its net profit
margin is average of 5 years is 17.54% which is good according to the industry norms. Again,
while seeing the company return on long term funds is also very high which is around
41.73% which is again good indicator of company performance. Cash in hand of company is
very high with respect of debtors so it means company receivables asset is not stuck where
there is a chance that company will not recover its amount. So, there is a chance that
company can invest its cash in hand in short term investment from where it can earn a
significant amount of return.

So, by seeing the overall scenario of company we can conclude that company is not going in
any kind of financial distress in near future.

Bibliography
1. www.moneycontrol.com
2. www.glaxosmithkline.com
3. www.ibef.com
4. www.nseindia.com

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5. www.businessstandard.com
6. www.economictimes.com
7. ProwessIQ

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