Dr. Reddys Laboratories Ltd.

COMPANY PROFILE

Overview

 Dr. Reddy's Laboratories Ltd. is a multinational pharmaceutical company based in

Hyderabad, Telangana, India. The company manufactures and sells a wide range of
pharmaceutical products in India and over 25 countries through its three businesses
- Pharmaceutical Services & Active Ingredients, Global Generics, and Proprietary
Products. Its major markets include India, USA, Russia and CIS, Germany, UK,
Venezuela, S. Africa, Romania, and New Zealand.
 Founded by Dr. K Anji Reddy on February 24, 1984, the company's portfolio of
products and services include APIs, custom pharmaceutical services, generics,
biosimilars, and differentiated formulations. The company's major therapeutic areas of
focus are gastrointestinal, cardiovascular, diabetology, oncology, pain management,
and anti-infectives.
 As of 31st March 2015, Dr. Reddy's Laboratories had an intellectual capital of 1,200+
scientists. The company has 23 manufacturing facilities (17 in India and 6 in USA,
UK, and China), supported by 5 technology development centers (2 in India and 3 in
the USA, UK, and the Netherlands), 2 integrated product development facilities and 3
R&D centers.
 The company's offerings cover active pharmaceutical ingredients, branded
formulations, generic drugs, biologics, specialty products and new chemical
entities (NCE) that are sold in North America, Europe and the emerging markets of
Asia, Africa, and South America.
 About 86% of Dr. Reddy's Laboratories sales are from overseas markets. North
America is its single largest market, accounting for about 47% of its turnover.

Mission – To be India's first pharmaceutical that successfully takes its products from
discovery to commercial launch globally.
Vision –To become a discovery ruled global pharmaceutical company with a core purpose of
helping people lead healthier lives
Key Managerial Persons –
 Founder: Dr. K Anji Reddy
 Chairman: Mr. Satish Reddy
 Co-Chairman, Managing Director & CEO Mr. G V Prasad

Dr. Reddy’s Laboratories at a glance

Competitors of Dr. Reddy Laboratories –

1. Sun Pharmaceutical Industries Ltd.

2. Cipla Ltd.
3. Jubilant Life Sciences Ltd.
PROFITABILITY RATIO –
A profitability ratio is used to evaluate the company’s ability to generate income as
compared to its expenses and other cost associated with the generation of income during a
particular period.
This ratio represents the final result of the company.

1. GROSS PROFIT RATIO

Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship
between gross profit and total net sales revenue. It is a popular tool to evaluate the
operational performance of the business.
Gross Profit ratio indicates how much profit a company makes after paying off its
Cost of goods sold. It is a measure of the efficiency of a company using its raw
materials and labour during the production process

Formula: Gross profit (Net Sales – Cost of Goods Sold (COGS)) / Net sales * 100

Interpretation —
 As it can be seen the gross profit has increased from 8.92% (2018) to 13.22%
(2019), showing that the company is able to generate profits through sales
and can cover COGS.
 Must be High as it can be used to cover other expenses.
 A good sign for investors.

2. RETURN ON CAPITAL EMPLOYED (ROCE)

Return on capital employed (ROCE) is a financial ratio that measures a company's
profitability and the efficiency with which its capital is used. In other words, the
ratio measures how well a company is generating profits from its capital.
Also known as Return on Investment (ROI).

Formula: Profit Before Interest and Tax / Capital Employed * 100

Includes Equity Share Reserves Profit and Funds include Debentures and Share
Holder funds.
 Capital Employed = Non-Current Asset + Working Capital or Equity + Profits +
Reserves/Surplus – Fixed Assets – Debts/Long Term Debts

Interpretation —
 As it can be seen ROI has increased from 9.13% (2018) to 14.37% (2019),
showing that the company has efficiently utilised funds supplied to generate
profits.
 Must be High, as it will lead to high profitability and higher efficiency.
 A good sign for investors.

3. RETURN ON EQUITY (ROE)

The Return on Equity ratio essentially measures the rate of return that the owners
of common stock of a company receive on their shareholdings. Return on equity
signifies how good the company is in generating returns on the investment it
received from its shareholders.

Formula: Net Income or Profits/Shareholder’s Equity * 100

Interpretation —
 Positive increment in ROE from 7.53% (2018) to 13.90% (2019) indicates
that shareholders are gaining.
 Must be High as it indicates that investment of shareholders in the firm
generate a reasonable return.
 A good sign for investors.
 Must be higher than ROI.
 4. OPERATING PROFIT RATIO
Operating Profit Margin is a profitability or performance ratio used to calculate
the percentage of profit a company produces from its operations, prior to
subtracting taxes and interest charges.
The operating profit ratio is a key indicator for investors and creditors to see
how businesses are supporting their operations.

Formula: Operating Profit / Total Revenue (Net Sales) * 100

Interpretation —
 Positive increment in operating profit from 16.46% (2018) to 20.57%
(2019), indicates the company is making enough money from its ongoing
operations to pay for its variable costs as well as its fixed costs.
 A good sign for investors as it is generating profits.
 Must be high.

 COMPARISON OF COMPANY WITH ITS COMPETITORS

LIQUIDITY RATIOS —

It indicates the company’s ability to pay debt obligation.

 1. CURRENT RATIO (CR)
The current ratio is a liquidity ratio that measures a company's ability to pay
short-term obligations or those due within one year. It tells investors and
analysts how a company can maximize the current assets on its balance sheet
to satisfy its current debt and other payables.

Formula: Current Assets/ Current Liabilities

Chart Title
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Current Ratio

Dr. Reddy Lab Sun Pharma Cipla

Interpretation —
 As we know Ideal Ratio is 2:1.
 A current ratio below 1(in case of Sun Pharma) means that current liabilities are
more than current assets.
 Cipla is having a good current ratio i.e. 4:1 so they will be able to cover their
liabilities. Whereas rest two companies are having their current ratio less than the
ideal ratio.
 Dr. Reddy Laboratories are covering their liabilities but at a slow rate compared to
Cipla.
 2. QUICK RATIO (QR)
The quick ratio is an indicator of a company’s short-term liquidity position
and measures a company’s ability to meet its short-term obligations with its
most liquid assets. It is also known as Acid Test ratio.
It tells liquid position of firm.

Formula: Current Assets-Inventory-Prepaid Expenses/Current Liabilities

Chart Title
3

2.5

1.5

0.5

0
Quick Ratio

Dr. Reddy Lab Sun Pharma Cipla

Interpretation —
 As we know Ideal Ratio is 1:1
 Here the quick ratio is greater than 1 means that the company has enough quick
assets to pay for its current liabilities, but not in the case of Sun Pharma.
 Both Cipla and Dr. Reddy Lab have quick ratio greater than 1.
EFFICIENCY RATIOS —

It indicates how efficiently stock turn into sales.

1. INVENTORY TURNOVER RATIO

The inventory turnover ratio is an efficiency ratio that shows how effectively
inventory is managed by comparing cost of goods sold with average inventory for a
period.
Significance – How fast inventory is sold.
Formula: Cost of Goods Sold/Average Inventory
 For Manufacturers –
COGS = Opening Stock + Cost of Production – Closing Stock
Average Stock = (Opening Stock + Closing Stock)/2
 For Traders –
COGS = Opening Stock + Purchases – Closing Stock
Average Stock = (Max Stock + Min Stock)/2

Chart Title
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Inventory Turnover Ratio

Dr. Reddy Lab Sun Pharma Cipla

 Interpretation —
 The Inventory turnover ratio indicates how fast inventory is sold. High ratio
shows the high liquidity position of the firm and low ratio would signify that
inventory does not sell fast and stays on the shelf or in the warehouse for a long
time.
 Higher inventory turnover ratios are considered a positive indicator of effective
inventory management.

2. DEBTOR TURNOVER RATIO

The Debtor turnover ratio is an accounting measure used to quantify a company's

effectiveness in collecting its receivables or money owed by clients. The ratio shows
how well a company uses and manages the credit it extends to customers and how
quickly that short-term debt is collected or is paid.

Formula: Credit Sales / Average Account Receivables.

 Average Receivables = Debtors + Bill Receivables
OR
 Average Receivables = (Opening Balance + Closing Balance) / 2.

Chart Title
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Debtors Turnover Ratio

Dr. Reddy Lab Sun Pharma Cipla

 Interpretation —
 Must be High, as it indicates that the company’s collection of accounts receivable
is efficient.
 It indicates that the company have quality customers that can their debt
quickly.
 Compared to all three Cipla have highest DTR then Dr. Reddy Labs, and with lowest
is Sun Pharma.

3. FIXED ASSET TURNOVER RATIO

The fixed asset turnover ratio (FAT) is, in general, used by analysts to measure operating
performance. This efficiency ratio compares net sales (income statement) to fixed assets
(balance sheet) and measures a company's ability to generate net sales from its fixed-asset
investments, namely property, plant, and equipment (PP&E).

Formula: Net sales/Average Fixed Assets

Chart Title
2.5

1.5

0.5

0
Fixed Asset Turnover Ratio

Dr Reddy Lab Sun Pharma Cipla

Interpretation —

 The higher the fixed asset turnover ratio, the more effective the company’s
investments in fixed assets have become.
 Cipla is the most effective company as per the given data and chart. Furthermore,
a high ratio is also indicating that a company spent less money in fixed assets for
each dollar of sales revenue.

SOLVENCY RATIOS —

Solvency means ability to meet long term indebtness and solvency ratios tell about the
ability of firm to pay long term debt.

 DEBT-EQUITY RATIO
The ratio is used to evaluate a company's financial leverage. The D/E ratio is an
important metric used in corporate finance. It is a measure of the degree to which
a company is financing its operations through debt versus wholly-owned funds.

Formula: Total Debts/Total Shareholder’s Funds

Chart Title
0.3
0.25
0.2
0.15
0.1
0.05
0
Debt Equity Ratio

Dr. Reddy Lab Sun Pharma Cipla

 Interpretation –
A less than 1 ratio indicates that the portion of assets provided by stockholders is greater
than the portion of assets provided by creditors. Here, Cipla is a self-driven company as
they are not having any kind of debts whereas rest two companies are having but again it
is less than 1:1, so it is favourable to invest in all of them as per this particular ratio.

DECISION FOR MAKING INVESTMENT IN THE COMPANY

As per the analysis made from the profitability ratios, we have concluded that from the point
of view of an investor we can invest in Dr Reddys Laboratories.
The reasons for the same are as follows: -
 From profitability ratios we can ascertain company’s profitability is continuously
increasing from past few years and now it is in positive.
 Its Earning Per Share (EPS) is in positive which means that as an investor it will
lead to gain.
 From Debt Equity ratio we can see company is having less Debts and is having
efficient resources and assets to pay off its debts.
 This company also have moderate Assets Turnover Ratio and Debtor turnover
ratio this also shows that this company is more efficient than other companies. But
it may increase in coming years.
 Company is competing against the companies and performing well against the
companies which are doing in the market from past few years.
 From Debt Turnover Ratio we can analyse this company will provide more safety
to its creditors and is also having strong financial position.
CASH FLOW ANALYSIS
A cash flow statement is a statement of changes in the financial position of a firm on cash
basis.

It reveals the net effects of all business transactions of a firm during a period on cash and
explains the reasons of changes in cash position between two balance sheet dates.

It shows the various sources (i.e., inflows) and applications (i.e., outflows) of cash during
a particular period and their net impact on the cash balance.

Some of the main objectives of Cash Flow Statement are:

1. It shows the cash earning capacity of the firm.

2. It indicates different sources from which cash been collected and various purposes for
which cash has been utilised during the year.

3. It classifies cash flows during the period from operating, investing and financing activities.

4. It gives answers to various perplexing questions often encountered by management, such

as why the firm is unable to pay dividend instead of making enough profit? Why is there
huge idle cash balance in spite of loss suffered? Where have the proceeds of sale of fixed
assets gone? etc.

5. It helps the management in cash planning and control so that there are no shortage or
surplus of cash at any point of time.
INTERPRETATION OF CASH FLOW
As we can see from cash flow statement,
 Operating Activities (Inflow) – Positive
Operating activities are the daily activities of a company involved in producing and
selling its product, generating revenues, as well as general administrative and
maintenance activities. Key operating activities for company include manufacturing,
sales, advertising, and marketing activities.

 Investing Activities (Outflow) – Negative

Investing activities are the second main category of net cash activities listed on the
statement of cash flows and consist of buying and selling long-term assets and
other investments.

 Financial Activities (Outflow) – Negative

Financing activities are transactions with creditors or investors used to fund either
company operations or expansions. These transactions are the third set of
cash activities displayed on the statement of cash flows.

 For Operating Activities – The company earn profits through operating activities
like manufacturing, sales, etc.
These profits earned are used to cover Investing activities and Financing
activities.

 For Investing Activities –

The profits are used to cover investing activities like purchasing of long-term
assets.
Negative sign shows outflow of cash.

 For Financial Activities –

The profits are used to cover financing activities as well.
Here the owners withdraw funds from business, for Repayment of long term
borrowings.
 REFERENCES –
 All data used in the assignment are taken from website money control.
 Graphs used in competition section are self-made, but data is collected through
website.

LINKS-
 https://www.moneycontrol.com/india/stockpricequote/pharmaceuticals/drreddyslabor
atories/DRL
 http://www.moneycontrol.com/financials/drreddyslaboratories/balance-
sheetVI/DRL#DRL
 https://www.moneycontrol.com/financials/drreddyslaboratories/profit-
lossVI/DRL#DRL
 https://www.moneycontrol.com/financials/drreddyslaboratories/ratiosVI/DRL#DRL
 https://www.moneycontrol.com/financials/drreddyslaboratories/cash-
flowVI/DRL#DRL
COMPANY ANALYSIS (Ratio Analysis)

 COMPARISION OF COMPANY’S PROFITABILITY FROM PAST

PERFORMANCE