RESEARCH PROJECT REPORT

(MBA - 413) ON

SUBMITTED IN PARTIAL FULFILLMENT OF MASTER OF BUSINESS ADMINISTRATION PROGRAMME: 2007-2009 OF UTTAR PRADESH TECHNICAL UNIVERSITY, LUCKNOW

UNDER THE SUPERVISION OF MR. DEEPESH TIWARI MBA DEPARTMENT SRMSCET, BAREILLY

SUBMITTED BY: NAME: TANVI AGARWAL ROLL NO: 0701470051

FACULTY OF MANAGEMENT SCIENCE SHRI RAM MURTI SMARAK COLLEGE OF ENGINEERING & TECHNOLOGY

BAREILLY (U.P.)

Shri Ram Murti Smarak College of Engineering & Technology, Bareilly (U.P.)

Faculty of Management Science

Certificate

This is to certify that Ms. Tanvi Agarwal, a student of MBA-IV Semester has completed her Research Project Report titled LIQUIDITY MANAGEMENT IN PHARMACEUTICAL COMPANIES ( A CASE STUDY OF CIPLA LTD.) assigned by MBA Department and under my Supervision.

It is further certified that she has personally prepared this report that is the result of her personal survey/observation. It is of the standard expected of MBA student and hence recommended for evaluation.

Supervisor

(Mr. Deepesh Tiwari)

Above statement is endorsed.

(Prof. S.P. Gupta) Director General

PREFACE
No learning can be complete without practicing. When we study in the classroom it clears our picture about the field of the area, but it proves to be useful or thoughtful when it is applied in practical field. Now the time has changed practical knowledge for management student is must to qualify as a potential manager. It is for this reason that this project is prescribed as a part of syllabus for Masters of business administration.

Success of any organization is revealed by its financial statements. Analysis of any companys financial statements gives us an idea about the liquidity, profitability, efficiency, working and maintainability etc. of that organization.

The project report, which is presented after consist of LIQUIDITY MANAAGEMENT IN PHARMACEUTICAL COMPANIES (A CASE STUDY OF CIPLA LTD.)

ACKNOWLEDGEMENT

Behind every study there stands a myriad of people whose help and contribution make it successful. Since such a list will be a prohibitively long. I may be excused for important omissions.

This is my pleasure to thank Mr. S.P. Gupta (Director General SRMSCET) for being a source of inspiration, help and co-operation.

I express my gratitude to my lecturer Mr. Deepesh Tiwari who helped me to complete my project with his inputs in the area of Finance.

Lastly, I owe my heartily thanks to all those who extended their timely support for completion of this project.

This was a good exposure that will definitely help me in my professional career.

Tanvi Agarwal
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STUDENT DECLARATION

This project has been undertaken as a partial fulfillment of the requirement for the award of the degree of Masters of Business Administration of Uttar Pradesh Technical University, Lucknow. The project was executed after the third semester under the supervision of Mr. Deepesh Tiwari. Further I declare that this project is my original work and the analysis and finding are for academic purpose only. This project has not been presented in any seminar or submitted elsewhere for the award of any Degree or Diploma.

Tanvi Agarwal

ABSTRACT
It is often observed that whenever a financial analysis of a company is done, more emphasis is given on the profitability of the business rather than on its liquidity. Of course, this is quite obvious, as the most important financial objective of any business is to earn profit. So, the managers lay more emphasis towards profitability. But another significant variable is liquidity which means the ability of a company to honour short term financial obligations. If the company is not able to honour its short term financial obligations, it moves a step ahead towards its bankruptcy. This requires holding of large investments in current assets which include cash and near cash items such as receivables, short-term securities etc. In other words, the company must have assets which are readily convertible into money without any material loss. Such assets are termed as liquid assets. Liquidity management therefore involves the amount of investments in liquid assets to meet the short term maturing obligation of creditors and others. The environment in which a company operates is ever changing. A company having a very sound financial position today may face adverse situation tomorrow. For example, if the sales fluctuate; it has a direct impact on the liquidity and profitability of the company. This is because the situation is one on the normal day and the other on the cloudy day. To analyse the liquidity of a company requires an understanding as how a company manages in rainy days (adverse situation). As like the changes is weather are very natural, so is the change in the situation of a company.

It is found that excess-liquidity and deficient-liquidity both are adverse situations for a company. Excess-liquidity is that situation where company has more assets which can be converted into cash in short span of time. Liquidity involves costs. Cash being the most important component of liquid assets is unproductive. Spread between the borrowing and deposit rates and also between the short and long term rates are not adequately capitalized. Deficient-liquidity is the situation in which the company does not have enough liquid assets to pay off its short term financial commitments. And thus results in an acute loss of creditability of the firm. Both of these conditions are alarming as they indicate towards lack of proper liquidity management. But among these, the shortage of liquidity is most critical problem as it leads to severe implications. Liquidity management has a direct bearing on the profit earning capacity of the company. It is already established fact that there is inverse direct correlation between the liquidity and profitability. For increasing the liquidity cash and near cash items should be maintained. But cash and near cash items are either non-earning assets or very poor earning assets. Thus profitability would be adversely affected. The inverse is also true. Moreover, the maintenance of sound liquidity position may enhance the profitability, provided the established liquidity level harmonizes with the nature of business entity.

INDEX

Certificate of Guide Preface Acknowledgement Student Declaration Abstract

2 3 4 5 6-7

Chapter 1: Introduction
Company overview Theoretical background Objective of study Scope of study

9-23 24-46 47 48 49-51

Chapter 2: Literature Reviewed Chapter 2: Research methodology

Data collection Tools of analysis

52-53 54-55 56-78 79-82 83-85

Chapter 4: Analysis and Interpretation Chapter 5: Summary of Findings & conclusion Chapter 6: Limitation of Study & Suggestions

Bibliography Annexure

86-89 90

COMPANY OVERVIEW

Industry Background

The global pharmaceuticals market stands at US$500bn growing at about 9% yoy. North America is the largest market accounting for almost half the total global sales followed by Europe and Japan. USA is also the largest generics market in the world estimated at around US$17bn and growing at about 14%yoy. India currently accounts for less than 8% of the world pharmaceutical consumption and is the fifth largest producer of pharmaceutical products in the world. The Indian retail pharmaceutical market is estimated at Rs200bn with an annual growth rate of 7% in FY04. In the wake of hosts of drugs going off patent in the US, approximately US$80bn, and increasing healthcare costs in developed countries, Indian pharma companies especially the larger players can seize this opportunity and gain market share in the global generics market which is about six times the size of the domestic formulation market. Presently, Indian companies account for up to a third of the regulatory filings with the US FDA and India has the largest number of US FDA approved plants outside USA.

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Company Background

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Cipla Limited Founder

Dr. K.A. Hamied (1898-1972)

Chairman & Managing Director

Dr. Y.K. Hamied

Joint Managing Directors

Mr. M.K. Hamied Mr. Amar Lulla

Non-Executive Directors
Dr. M.K. Gurjar Mr. V.C. Kotwal Dr. H.R. Manchanda Mr. S.A.A. Pinto Mr. M.R. Raghavan Mr. Ramesh Shroff

Bankers
Bank of Baroda Canara Bank Corporation Bank Indian Overseas Bank Standard Chartered Bank The Hongkong & Shanghai Banking Corporation Limited Union Bank of India

Auditors
R.S. Bharucha & Co. R.G.N. Price & Co.

Registered Office
Mumbai Central, Mumbai 400 008

Website
www.cipla.com 12

The Chemical, Industrial & Pharmaceutical Laboratories which came to be popularly known as Cipla was founded by Dr K.A. Hamied in 1935. A Mumbai-based company currently Cipla is a leading domestic Indian pharmaceutical company with a market share of about 5.85% and crossed Rs20bn mark in revenues during FY04. The company has its manufacturing facilities in Goa, Kurkumbh, Bangalore, Patalganga and Baddi. The company has alliances with nine generic majors including Teva Pharmaceuticals USA, Watson Pharmaceuticals, Eon Labs and Akorn for over 125 projects. It has entered into a research agreement with Avestha Gengraine Technologies to work on a collaborative biopharmaceuticals development program. The company has a wholly-owned subsidiary Cipla FZE in Jebel Ali Free Zone, Dubai, UAE. Cipla had opened the door of hope to several AIDS patients by becoming the first company in the world to offer the Triple-drug AIDS Cocktail at a very low price. According to an estimate, one out of three HIV-AIDS patients in Africa takes Cipla drug for the treatment. In partnership with the medical fraternity, Cipla has spread awareness and empowered asthma patients to lead a normal life. It has the widest range of asthma medication and better delivery systems. Cipla is also dedicated to clinical and allied research in the field of Chronic Respiratory Diseases. Recently, the company has entered into agreement with a global non-profit organization for developing and manufacturing Drugs for Neglected diseases Initiative (DNDi) for a new anti-malarial combination drug.

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On the domestic front, during the year 2007 - 2008 Cipla was ranked number one in India in terms of domestic market share by ORG-IMS (MAT March 2008).

Business
Cipla has a product range covering antibiotics, anti-bacterials, anti-asthmatics, anthelmintics, anti-ulcerants, oncology, corticosteroids, nutritional supplements, face wash, contraceptive pills, weight loss, and cardiovascular drugs. It is the first player in Asia to launch a non-CFC metered dose inhaler. The company has launched many drugs and formulations which include Ciclohale, a steroid inhaler; SimplyOne, for asthma prophylaxis; Neosurf, a rescue treatment for neonatal respiratory distress syndrome; Elcepan, for epilepsy; and i-pill, the single dose emergency contraceptive. In the domestic market Cipla is a leading player in the formulations segment. Cipla manufactures and markets wide range of formulations in various conventional and advanced dosage forms such as tablets & capsules, liquids, creams, aerosole, inhalation devices, injections and sterile solutions; covering a large number of therapeutic segments the main ones being anti-asthmatics, anti-biotics, cardiovascular, anti-AIDS and antidiarrhoeals. The formulations segment is divided into prescription drugs and OTC products. The OTC product range covers therapeutic areas such as analgesics-oral, calcium preparations, cold & flu, dental care etc.

Ciplas businesses are broadly divided into the following segments: Formulations Bulk drugs & Intermediates Technology services 14

Formulations In the domestic market Cipla is a leading player in the formulations segment. Cipla manufactures and markets wide range of formulations in various conventional and advanced dosage forms such as tablets & capsules, liquids, creams, aerosole, inhalation devices, injections and sterile solutions; covering a large number of therapeutic segments the main ones being anti-asthmatics, anti-biotics, cardiovascular, anti-AIDS and antidiarrhoeals. The formulations segment is divided into prescription drugs and OTC products. The OTC product range covers therapeutic areas such as analgesics-oral, calcium preparations, cold & flu, dental care etc. The formulations segment is Ciplas main stay and contributes over 75% of the companys gross revenues.

Bulk Drugs & Intermediates The company manufactures more than 150 bulk drugs and intermediates and derives about 20% of revenues from this segment including exports of bulk drugs. Cipla has a total installed capacity of 2101 tons for bulk drug production while capacity utilization is at 47% with actual production of bulk drugs in FY04 at 981 tons.

Technology Services Cipla also offers technology for products and processes and derives revenues in the form of Royalty, technology know-how fees and licensing income under this segment. The company earned revenues of Rs544mn from technology services in FY04 as against Rs69mn in FY03.Though the scale is small the growth momentum is high in this segment.

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Manufacturing Facilities
Ciplas has manufacturing facilities for bulk drugs and formulations in Patalganga, Vikhroli, Bangalore, Kurkumbh and Goa. A number of dosage forms and APIs manufactured in the company various facilities have several regulatory approvals including the US FDA, MHRA UK, PIC Germany, MCC South Africa, TGA Australia, WHO Geneva and the Department of Health, Canada. The company is in the process of setting up a new formulation plant at Baddi in Himachal Pradesh.

Awards
The Company received two honours during the year 2007-2008 from the Forbes Magazine, Asia. Cipla was named the best Pharmaceutical Company and also the Most Profitable Company overall among those Under a Billion in the Regions Top 200 Small and Mid Size companies.

Global Presence
Exports for the financial year ended March 31, 2008 amounted to more than Rs. 21,000 million. Cipla exports raw materials, intermediates, prescription drugs, OTC products and veterinary products. Cipla also offers technology for products and processes. Technical know-how/fees received during the year 2007-08 amounted to about Rs. 1500 million. Cipla products are bought by over 170 countries located in the USA, South America, Europe, Asia, Middle East, Africa, and Australia.

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Financial Analysis
The Companys turnover at Rs. 4429 crore crossed the USD 1 billion mark for the first time. Inspite of a sluggish start in the first quarter of he year 2007 - 2008, the overall turnover (including other income) of the Company grew by 18 per cent. Although, the export figure was reduced by the appreciating rupee, total exports recorded a healthy growth of 18 per cent and domestic sales grew by 13 per cent. Notably, earnings on account of technology fees crossed Rs. 150 crore. The company is spending over 5 per cent of its total turnover on R&D activities. The Directors recommend a dividend of Rs. 2 per share on 77,72,91,357 equity shares of Rs. 2 each for the year 2007-08 amounting to Rs. 155.46 crore. The prices of input materials have risen significantly due to restriction in production by Chinese chemical manufacturers, rise in price of petroleum-based products, frequent shortages and general inflationary conditions. Because of which the Company is looking at alternative arrangements and has also increased its stock levels from 978.6 crore in 2007 to 1120.49 crore in the year ending 2008. However, the increased prices and shortages of materials will adversely affect production schedules and overall margins on all the Companys products. The net current assets of the company have increased from 1893.42 crore in year 2007 to 2496.27 crore in the year 2008. Same is the case with liquid assets which has increased to 1507.68 crore in the year 2008 in comparison to 1185.1 crore in the year 2007. But the cash and bank balances of the company has reduced to 79.28 crore in the year 2008 from 131.49 crore in the year 2007. As the cash and bank balances of the company were declined it indicates towards an analysis on the liquidity of the company, as it depicts the absolute liquidity position of the company.

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High growth in revenues

Gross sales of the company were at Rs 20,910mn in FY04 recording an impressive growth of 28% yoy. The sales growth was driven by exports of both API and formulations at Rs8,123mn, a 44% yoy growth. Total exports contributed, to about 38% of gross revenues in FY04.

Geography-wise breakup of exports

COUNTRY
AUSTRALASIIA NORTH, CENTRAL & SOUTH AMERICA MIDDLE EAST EURPOE AFRICA

PERCENTAGE
8% 37% 10% 23% 22%

The company grew at a CAGR of 25% in the period FY01 to FY04.Its presence in the regulated markets increased significantly due to buoyancy in exports. The company is now focussing on increasing its presence in the finished dosage formulations (generics) segment overseas. It has consolidated existing alliances and entered into new arangements with leading US generic companies for supply of finished dosage formulations. Similar arrangements are worked out in other overseas market.

Segment wise revenue breakup The company derived 78% of its revenues from finished dosage segment in FY04 while bulk drugs contribute 21 % to gross sales in FY04.

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New products launched

The company introduced the following formulations in FY04.

Product
Adesera Dorzox Dytor Ginette 35 Rizact Valcivir

Dosage form
tablets eye drops tablets & injection tablets tablets tablets

Purpose
Hepatitis B Glaucoma Diuretic Acne & hirsutism Acute Migraine Antiviral for herpes

Spurt in other income component

Other income in FY04 was at Rs1164mn as against Rs492 in FY03 on account of higher technology know how fees of Rs544mn as against Rs69mn in FY03. Ciplas technology is presently sold to companies in Canada, Ecuador, Germany, Ivory Coast Saudi Arabia, UK and USA. Other Income also increased on account of increase in net exchange gain and export incentives on the back of significant surge in export revenues.

Dip in operating profit margins

Though the company posted a 27% growth in sales, its operating profit margins dipped by 200bps from 20.4% in FY03 to 18.4% in FY04, on account of increase in

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raw material cost and employee cost, which were up 38% and 30% respectively in FY04. Raw material costs accounted for 47% of the total revenues and the increase in capacities and production scale lead to higher raw material costs in FY04. The second phase of manufacturing operations in Goa was commissioned in FY04.

Increase in loan funds & interest expenses

The total loan funds increased from Rs948mn in FY03 to Rs2,106 mn FY04.Increase in loan fund is due to increase in unsecured loan portfolio of Rs1,141mn.Out of the total unsecured loans a sum of Rs1,749mn is payable within the next 12 months. The interest outgo has also increased in the same proportion from Rs17mn in FY03 to Rs104mn in FY04.However, the debt equity ratio remains low at 0.17 in FY04.

Working capital management

Net working capital increased by 89% from Rs6.9bn in FY03 to Rs7.6bn in FY04.Debtor days increased to 98 days on the back of increased export sales while inventory days and creditor days fell to 113 days and 35 days respectively in FY04. However as a percentage of net sales, net working capital fell from 48% of net sales in FY03 to 41% in FY04.

Outlook
Exports of APIs and formulations witnessed good growth and this trend is likely to continue going forward on the back of the huge global generics opportunity and

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Ciplas strong strategic alliances with global pharmaceutical companies. Currently Cipla exports to over 150 companies across the globe and has an alliance with leading US generics companies such as Ivax, Watson etc. The other growth engine of the company is its technological excellence and the companys focus on new drug delivery systems (NDDS) such as inhaler products. The future strategy of the company is to forge and strengthen the existing strategic alliances with global pharma majors in order to expand its international operations, particularly in the generics segment.

Cipla maintains No.1 position in Indian Market

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Cipla Laboratories continues to be the largest pharmaceutical company in the domestic market. Cipla has topped the ORG-IMS rankings for the month of November with a market share of 5.42 per cent and sales of Rs 146.32 crore, edging out Ranbaxy which stood at second position with 5.09 per cent market share and Rs 137.49 crore sales. In October, Cipla topped with Rs 152.04 crore sales and a market share of 5.23 per cent, ahead of Ranbaxy, which garnered Rs 148.40 crore sales and 5.11 per cent market share, said sources. Cipla overtook Ranbaxy and GlaxoSmithKline India (GSK) to become the largest pharmaceutical company in the domestic market for the first time in May 2007. While GSK has maintained its number three position in November, Zydus Cadila (fourth), Alkem Laboratories (fifth) and Sun Pharma (sixth) have moved one rank up from October. Nicholas Piramal, which faced raw material shortages for its largest selling codeine based formulations, like Phensydyl, in recent months, slipped three positions to number seven in November. ORG-IMS, the largest market intelligence company in India focusing on the healthcare sector, tracks sales of Indian pharmas on a monthly basis, through over 3,000 stockists and 6,000 doctors. Indian companies are increasing their share in the domestic market mainly due to increased number of high value new introductions, though the number of new introductions has reduced recently, Ranbaxys growth has been largely driven by new introductions such as Volix, an anti-diabetes drug launched in January, Oframax-Forte and anti-asthmatic drug Synasma, which it in-licensed from Eurodrug Laboratories. Ranbaxys antibiotic Mox (amoxyllin), which was not among the top ten brands a year ago, has grown to become the fourth largest brand in the domestic market with monthly sales at Rs 9.8 crore in November. Ciplas growth was powered by positive growth in their existing portfolio, especially its respiratory products. However, GSK has lost market share

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mainly in its main portfolios such as anti- infectives, dermatologicals and pain management drugs which grew slower than the market for these products. ORG-IMS named Alkem Laboratories as the only company among the top ten for which both older products (10 per cent) and new introductions (12 per cent) have contributed significantly to value growth.

THEORITICAL BACKGROUND

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WORKING CAPITAL OR LIQUIDITY MANAGEMENT The goal of working capital management is to manage the firms current assets and liabilities in such a way that a satisfactory level of working capital is maintained. CONCEPT OF WORKING CAPITAL:
The concept of Working Capital includes Current Assets and Current Liabilities both. There are two concepts of Working Capital they are Gross and Net Working Capital. 1. Gross Working Capital: Gross Working Capital refers to the firm's investment in Current Assets. Current Assets are the assets, which can be converted into cash within an accounting year or operating cycle. It includes cash, short-term securities, debtors (account receivables or book debts), bills receivables and stock (inventory). 2. Net Working Capital: Net Working Capital refers to the difference between Current Assets and Current Liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year. It includes creditors or accounts payables, bills payables and outstanding expenses. Net Working Copulate can be positive or negative. A positive Net Working Capital will arise when Courtney Assets exceed Current Liabilities and vice versa.

Concept of Gross Working Capital

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The concept of Gross Working Capital focuses attention on two aspects of Current Assets' management. They are: A) Way of optimizing investment in Current Assets. B) Way of financing current assets. a. Optimizing investment in Current Assets: Investment in Current Assets should be just adequate i.e., neither in excess nor deficit because excess investment increases liquidity but reduces profitability as idle investment earns nothing and inadequate amount of working capital can threaten the solvency of the firm because of its inability to meet its obligation. It is taken into consideration that the Working Capital needs of the firm may be fluctuating with changing business activities which may cause excess or shortage of Working Capital frequently and prompt management can control the imbalances. b. Way of financing Current Assets: This aspect points to the need of arranging funds to finance Country Assets. It says whenever a need for working Capital arises; financing arrangement should be made quickly. The financial manager should have the knowledge of sources of the working Capital funds as wheel as investment avenues where idle funds can be temporarily invested.

Concept of Net Working Capital

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This is a qualitative concept. It indicates the liquidity position of and suggests the extent to which working Capital needs may be financed by permanent sources of funds. Current Assets should be optimally more than Courtney Liabilities. It also covers the point of right combination of long term and short-term funds for financing court Assents. For every firm a particular amount of net Working Capital in permanent. Therefore it can be financed with long-term funds. Thus both concepts, Gross and Net Working Capital, are equally important for the efficient management of Working Capital. There are no specific rules to determine a firm's Gross and Net Working Capital but it depends on the business activity of the firm. Working capital management is concerned with the problems that arise while managing the current assets the current liabilities and the interrelationship that exits between them. Thus, the WC management refers to all aspects of a administration of both current assets the current liabilities. Every business concern should not have neither redundant nor cause excess WC nor into should be short of W.C. both condition are harmful and unprofitable for any business. But out of these two the shortage of WC is more dangerous for the well being of the firms.

Need for Working Capital

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For earning profit and continue production activity, the firm has to invest enough funds in Current Assets in generating sales. Current Assets are needed because sometimes sales do not convert into cash instantaneously and it includes an operating cycle. Following are the reasons for liquidity management: It meets the requirements in bulk and to avail discounts, which enhances growth. To exploit favorable market conditions and undertake profitable projects. To pay day-to-day expenses of its operations and its credit efficiencies, reduces cost and increases the profits of the business. To utilize efficiently the fixed assets due to availability of liquid funds. The rate of return on investments also increases with the availability of adequate WC. Operating efficiency creeps in and it becomes easy to implement operating plans and achieve the firms profit targets.

Estimating Working Capital Needs

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Working Capital needs can be estimated by three different methods, which have been successfully applied in practice. They are follows: 1. Current Assets Holding Period: To estimate Working Capital requirements on the basis of average holding period of Current Assets and relating them to costs based on the company's experience in the previous years. This method is based on the operating cycle concept. 2. Ratio of Sales: To estimate Working Capital requirements as a ratio of sales on assumption that Current Assets change with sales. 3. Ratio of fixed Investment: To estimate Working Capital requirements as a percentage of fixed investment.

Managing Current Assets

Management of Current Assets is done in three parts. They are: 1) Management of cash and cash equivalents. 2) Management of inventory. 3) Management of accounts receivable and factoring. Thus, the basic goal of WC management is to manage the current assets the current liabilities of the firm in such a way that a satisfactory level of WC is maintained, i.e. it is neither inadequate nor excessive WC management policies of a firms have a great effect on its Profitability, Liquidity and Structural health of the organization.

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WC management is an integral part of overall corporate management. For proper WC management the financial manager has to perform the following basic functions: Estimating the WC requirement. Determining the optimum level of current assets. Financing of WC needs. Analysis and control of WC. WC management decision is three dimensional in nature i.e. these decisions are usually related to these there sphere or fields. Profitability, risk and liquidity. Composition and level of current assets. Composition and level of current liabilities.

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Current Assets Financing

A firm can adopt different financing policies for Current Assets Three types of financing used can be: 1. Long-term financing such as shares, debentures etc.

2. Short-term financing such as public deposits, commercial papers etc. 3. Spontaneous financing refers to the automatic sources of short-term funds arising in the normal course of a business such as trade credit (suppliers) and outstanding expenses etc.
The real choice of financing Current Assets is between the long term and short-term sources of finances. The three approaches based on the mix of long and short-term mix are: 1. Matching Approach: When the firm follows matching approach (also known as hedging approach), long term financing will be used to finance Fixed Assets and permanent Current Assets and short-term financing to finance temporary or variable Current Assets. The justification for the exact matching is that, since the purpose of financing is to pay for assets, the source of financing and the assets should be relinquished simultaneously so that financing becomes less expensive and inconvenient. However, exact matching is not possible because of the uncertainty about the expected lives of assets.

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2. Conservative Approach: The financing policy of the firm is said to be a conservative when it depends more on long-term funds for financing needs. Under a conservative plan, the firm finances its permanent assets and also a part of temporary Current Assets with long term financing. In the periods when the firm has no need for temporary Current Assets, the idle long-term funds can be invested in the tradable securities to conserve liquidity. Thus, the firm has less risk of shortage of funds. 3. Aggressive Approach: An aggressive approach is said to be followed by the firm when it uses more short term financing than warranted by the matching approach. Under an aggressive approach, the firm finances a part of its permanent current assets with short term financing. Some firms even finance a part of their fixed assets with short term financing which makes the firm more risky.

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PRINCIPLES OF WORKING CAPITAL

Principle of Risk Variation: - The goal of WC management is to establish a suitable trade between profitability and risk. Risk here refers to a firm's ability to honor its obligation as and when they become due for payments. Larger investment in current assets will lead to dependence. Short term borrowings increases liquidity, reduces risk and thereby decreases the opportunity for gain or loss On the other hand the reserve situation will increase risk and profitability And reduce liquidity thus there is direct relationship between risk and profitability and inverse relationship between liquidity and risk. Principle of Cost Capital: - The various sources of raising WC finance have different cost of capital and the degree of risk involved. Generally higher the cost lower the risk, Lower the risk higher the cost. A sound WC management should always try to achieve the balance between these two. Principle of Equity Position: - This principle is considered with planning the total investment in current assets. As per this principle the amount of WC investment in each component should be adequately justified by a firms equity position Every rupee contributed current assets should contribute to the net worth of the firm The level of current assets may be measured with the help of two ratios. They are: Current assets as a percentage of total assets. Current assets as a percentage of total sales.

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Principle of Maturity Payment: - This principle is concerned with planning the source of finance for WC. As per this principle a firm should make every effort to relate maturities of its flow of internally generated funds in other words it should plan its cash inflow in such a way that it could easily cover its cash out flows or else it will fail to meet its obligation in time.

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WORKING CAPITAL OR LIQUIDITY MANAGEMENT IN PHARMACEUTICAL COMPANIES

Working capital management refers to all management decisions and actions that ordinarily influence the size and effectiveness of the working capital. It is concerned with the most effective choice of working capital sources and the determination of the appropriate levels of the current assets and their use. It focuses attention to the managing of the current assets, current liability and their relationships that exist between them. In other words, working capital management may be defined as the management of a firms liquid assets- cash, marketable securities, accounts receivable and inventories. In the present day context of rising capital cost and scarce funds, the importance of working capital needs special emphasis. It has been widely accepted that the profitability of a business concern likely depends upon the manner in which its working capital is managed. The inefficient management of working capital not only reduces profitability but ultimately may also lead a concern to financial crisis. On the other hand, proper management of working capital leads to a material savings and ensures financial returns at the optimum level even on the minimum level of capital employed. We also know that both excessive and inadequate working capital is harmful for a firm. Excessive working capital leads to un-remunerative use of scarce funds. On the other hand inadequate working capital usually interrupts the normal operations of a business and impairs profitability. There are many instances of business failure for inadequate working capital. Further, working capital has to play a vital role to keep pace with the scientific and technological developments that are taking place in the concerned area of pharmaceutical industry. If new ideas, methods and techniques are not injected or brought into practice for want of working capital,

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the concern will certainly not be able to face competition and survive. In this context, working capital management has a special relevance and a through investigation regarding working capital practice in the pharmaceutical industry is of utmost importance. An attempt has, therefore, been made to undertake an in-depth study on, working capital practices by Bangladeshi firms in pharmaceutical industry enlisted in DSE

WORKING CAPITAL PRACTICE Four main dimensions of Working Capital Management: Cash Management, Management of Accounts Receivables, Management of Inventory and Management of Accounts Payables.

Cash Management

The most important of all the liquidity responsibilities of the financial manager is the managing of cash, both flows and balances. Cash is the benchmark of liquidity. This underscores the fact that the most important test of a financial manager is to maintain an adequate reserve of cash for all times so as to absorb the shocks of sporadic receipts and payments and meet the needs of emergency situation, otherwise paucity of cash even on a temporary phase may be cause a trouble. Our survey result indicates that almost all of the companies manage liquidity to provide a smooth production process and to reduce the cost of inefficient management. Another important result the survey is that 60% of the companies have determined optimum level of liquidity and 40% do not have any optimum level. One of the imperative aspects of Cash Management is Cash Collection Mechanism. Float is considered to be one of the

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important aspects of Collection Mechanism. Our survey result says that most of the companies that sales goods on credit collect cash through marketing agent that means the Billing & Mail float for these firms are zero. The Bank Processing Float for these firms is on an average less than 2 days.

Concentration banking: It refers to a system of centralizing corporate cash with a goal of controlling the movement of funds and minimizing idle cash balances. The survey results get that for reducing collection float of check 60% of companies use the Banks with accelerated clearing capabilities where 30% use Intra-Banks Electronic fund transfer. 5% of companies also use oral procedure.

Cash Forecasts: A firm should forecast cash to anticipate cash surplus and shortage, estimate timing of borrowing and lending of funds and have better control over funds. In survey it has been found that 80% of these firms prepare Cash Forecasting Statements. The remaining 20% of the firms follow Budgetary Method for controlling of cash. Of the 80% firms, 60% of them prepare cash forecasting Statement on Yearly Basis. 20% of the firms prepare cash forecasting statement on half yearly basis and the remaining 20% of the firms prepare cash forecasting statement on monthly yearly basis.

Hedging Strategies: Hedging is important to protect the uncertainty associated with obtaining cash balances in time. One common strategy for hedging is funding the firms expected financing needs by the establishment of a reserve credit line with a bank or group of banks. In the survey result it has been pointed out that 60% of the

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companies yet to face liquidity crisis. Almost all of these firms hedge their position by maintaining credit line with the Bank.

Models of Cash Management: There are different models that address the issue like proper management of temporary cash surplus and shortage. These models provide optimum strategies for a given time pattern of future cash flows. These Models are the Baumol Mode, the Beranek Model, the Miller-Orr Model, and the Stone Model. The survey result indicates that 80% of the firms do not experiences surplus fund, the remaining 20% firms invest excess fund for short period. Another result of the survey indicates that 90% of the companies experienced continuous cash flow. That means for these firms Miller-Orr Model or Stone Model can be applied. In few cases, firm experience periodic cash outflow and continuous cash inflow. For these firms Beranek Model can be applied.

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Receivable Management

Receivables occupy the second place, in order of investment, among the various components of working capital in manufacturing concerns. The manipulation of receivables is to push up sales and ultimately profits by allowing certain credit to the potential customers who otherwise may find it difficult to make cash purchases. Moreover, receivables are being near cash item improved the liquidity position of an enterprise. The financial significance of credit transaction is evidenced by statistics reporting that 20 to 25 percent of the typical manufacturer's total asset is receivables. As we know, the emergence of receivables in business operation cerates revenue and cost. Hence, the volume, composition and movements of receivables are required to be so designed and maintained that these ultimately helps maximization of the value of a firm which is the long standing and accepted principle of financial management.

Credit Granting Decision: One of the major aspects of Accounts Receivables is Credit Granting Decision. If the firm fails to identify the appropriate customers, it faces severe problem to sustain in the long run. There are different approaches to Credit Granting Decisions. The traditional method is 5 Cs (Capital, Character, Collateral, Capacity and Condition), which is very popular method for quick credit granting measuring creditworthiness of applicant. An alternative to this traditional approach is Judgmental Scoring approach. There are two basic versions of these systems. One is Checklist System and the other one is Weighted Scoring System. Survey results indicated that most of the companies (60%) dont sell on credit. Of the remaining 40% of the firms, 50% of them follow traditional 5C method and the others dont consider any method for granting credit.

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Terms of Sale decision: A firm should determine the appropriate terms of sale based on the buyers financial conditions and firms expected cash flow. It has been revealed from the survey result that on an average the net period in terms of sales is less than 30 days in case of 75% firms covered under survey and between 30 to 60 days in case of 25% firms. It is also found that 50% of the companies use differential terms of sales and remaining use a uniform policy. 60% of the firms frequently change terms of sales where as 40% rarely change. If there is any margin then most of the credit sales used companies change terms of sales for taking a competitive position.

Factoring: In advanced countries Factoring is gaining more and more popularity. In factoring the firm sells its receivable asset to the financial intermediary (the factor) and obtain financing. From the survey result we see that none of these firms use factoring as a means of financing. Some company has used it when there is contract base work.

Default in Accounts Receivable: The important policy implication from firms point of view is that when the buyer defaults, future cash flows to the seller are delayed, and their amount may be reduced relative to payment in non-default. Thus default to payment may lead a firm to financial crisis. Survey result shows that 50% firms have bad debts less then or within estimated figure and 50% have more. About 55% firms have bad debt less than 5%, and 45% firms have more than 5% of sales amount. All of these firms have recovery rate more than 75% of the default amount. 65% of these firms say that they dont have any separate controlling and monitoring mechanism for

39

Bad debts. Whereas the remaining firms say that the have separate controlling mechanism. These results show that the firms are more prone to financial crisis.

Controlling & Monitoring Accounts Receivables: In monitoring the collection (turnover) of accounts receivable, management wants to use a methodology that measures the relationship between the firms receivables and their sales, regardless of fluctuations in sales level. Ideally, the methodology meets at least three criteria; it should not signal a deviation form expectations in the payments behavior of the firms customers when none has occurred. It should signal a deviation when one has occurred. It should be simple to implement and to understand. Two common methods of receivables monitoring are: 1) Days Sales Outstanding Statistics (Also known as average collection period) 2) The Aging Fraction Statistics.

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Inventory Management

Inventory represents an investment and must, therefore, compete with other investment of the firm's. As a consequence, total investment in inventories must be related to some optimum investment level that contributes to the overall wealth maximization object of the shareholders. Since the proper management of inventory has a significant influence on profitability and liquidity, to a large extent, the success and failure of a business depends upon its inventory management performances.

Composition of Inventory: In most of the case, a firm maintains raw material, Working-in-process and Finished goods as inventory. Depending on the nature of Business, proportion of inventory held by the firm varies. Even the composition of inventory also varies. In our survey it has been observed that almost all firms hold a huge proportion of Inventory in Current Assets. From the data we retrieve, the proportional investment in Raw Material is highest among the inventories. The following tables are the fact that reflects the above statements. (Industry Average) The main reason behind such huge investment is that in pharmaceutical business the firms make every attempt to retain their customers. In doing so, the firms do not want to face any stock out situation. Because, in such case the doctors will not prescribe the product of the firm any more and a substitute product would replace their existing market segment. In addition to this few firms also takes part in Export Business and as a result of this they had to maintain a huge finished good as inventory.

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Procurement of Inventory: Procurement of inventory is another important aspect of Inventory Management. For Pharmaceutical industry the proportion of Import to Local procurement varies within the range of 60% to 40%, 75% to 25%, 80% to 20%.

Costing Policy of Inventory: There are costs involved in maintaining Inventory. The main two costs are: Carrying cost and Ordering Costs. Carrying costs are directly proportional to the level of inventory carried by the firm and include the opportunity cost of inventory investment, insurance on the inventory, storage costs of inventory investment, and so forth. Order costs are directly proportional to the number of orders and incurs in placing & checking an order. Costs of this sort include set-up costs on machines to produce inventory, costs of generating a purchase order for the inventory. In addition to these there are Obsolesces costs and Stock out costs.

Lead Time for Inventory: The lead-time for inventory, in four out of five cases, it was found that it takes 1 to 4 months to import raw material through ship, while in case of procurement the raw material from local market usually it takes 15 days on an average for most of the firms in our survey.

Static versus Dynamic Problem: Static Inventory Problem is defined as a situation where the goods have a one period life meaning that they cannot be carried over in the next period. The opposite is the case with Dynamic inventory situation where the firm can use the inventory for more than one period. In our survey we found that the life cycle or the expiration of the inventory for most of the companies (4/5) is more than 24 months. A few of them (1/5) are using inventory for less than 6 months.

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Replenishment Rate for Inventory: An infinite replenishment defined as a situation where the order quantity is obtained at once. In opposite, finite replenishment is defined as gradual pilling up of inventory. In this regard the survey result indicates that 60% of the companies experiences infinite replenishment, while the others (40%) experiences finite replenishment of inventory.

Order Placing for inventory: 60% of the firms place order for inventory on the basis of lead-time of inventory procurement. The remaining 30% of the firm places order for inventory considering the present stock of goods and expected time to obtain that goods. Some of these firms maintains pipeline for raw materials.

Safety Stock Determination: Although all the firms maintains the huge level of safety stock to avoid stock out situations, these firms do not follow any structured or any other policy in determining the safety stock level. Past experience of the manager and their subjective judgments are the main to parameters considered.

Stock out Situation: Since these firms maintain a large safety stock, they have yet to face any major stock out situation.

Inventory Controlling Mechanism: If the firm fails to control the flow of inventory, it will definitely incur some cost in operation process. There are different methods available for inventory controlling. Physical control and Stock verification are the two most popular methods. In our survey too it has been found that most of the firms are currently using both the physical control and stock verification method. A few firms are also using budgetary control. All the companies use First in First out or FIFO

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method for valuation inventory. The Most important findings for inventory Management is that almost 80% companies determine the level of inventory to be maintained on the basis of production target and current position of stock. 10% of the firm follows both Inventory Budgeting Method and Present Stock Position in determining the inventory level to be maintained. The remaining 10% of the firms follow EOQ model with relaxed assumptions.

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Management of Accruals and Payable

Accounts Payable: A firm can utilize this fund for financing purpose since it is termed as cost free source of fund. Proper Management of Accruals, in fact, can reduce the dependency on Bank loan. The trade credit is one of the main tools for financing working capital. There are three typical policies for the payment of invoices. The First policy of payment is made on the latest date will allow the buyer to take the cash discount offered in the sellers terms of sale. The Second way of generating additional short term financing form trade creditors is to delay payment to trade creditors beyond the discount date. The Third policy is to pay the suppliers beyond the due date. This strategy is called stretching accounts payable. Survey indicates that almost all these firms follow a consistent policy in case of payment of invoices. 50% of the firms pay invoices at sight. 45% of these firms pay on due date. The remaining 5% of the firms pay either within the discount date or just after the discount period. Thus, only a few firms follow a policy of Stretching the Accounts Payables. A review of the financial statements of these firms also reveal that 50% of these firms finance Working Capital using Trade Credit and the remaining 50% of the firms are dependent more on Short Term Bank loan. Another interesting result form our survey is that almost all of the firms use Inventory as security collateral incase of borrowing from banks. It is also found that 75% of the firms use bonded Warehouse Financing and remaining use specific lien.

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Accruals: However, firms also incur other types of liabilities for which immediate payments are not required, like the labor of executive and hourly employees, accumulate interest expense on borrowed funds etc. Any such accrual involves a delay in payment and thus it is a potential source of financing. Our survey result indicates that in case of accruals payment companies usually pay on due date. Again a review of the financial statements of these firms indicates that on an average these firms have a lower percentage (ranging from 7.5% to 9%) of accruals to the total current liability

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OBJECTIVE OF THE STUDY

The objective of study are-: To study the overall quantum of liquidity maintained by the giant Cipla Ltd. To make an item-wise analysis of the elements or components of working capital to identify the responsible elements for changes in it. To evaluate the liquidity management of the company through ratio analysis. To examine the relationship between liquidity and profitability by using correlation coefficient and also to test the significance of such a correlation coefficient. To study the liquidity position of the company under study on the basis of some important parameters of liquidity management such as inventory to current assets, debtors to current assets, cash and bank to current assets and loans and advances (including other current assets) to current assets. To offer necessary suggestions to improve the liquidity management of Cipla Ltd.

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SCOPE OF THE STUDY

First of all this report is helpful to judge the whole liquidity position and its management in pharmaceutical company (CIPLA ltd.), so it is helpful to understand each and every aspect related to liquidity, its relation to profitability etc., which is very helpful for the researcher in its forthcoming career. Secondly, this report can be considered as a source of secondary data for any further research related to it. And last but not the least; CIPLA ltd. can take advantage of the recommendations given in order to further enhance its liquidity position and its management strategies.

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49

LITERATURE REVIEWED
Oppedahl and Richard A.: The stress in this essay has been laid on two most important components of working capital called accounts receivable and marketable securities. The essay revealed that the managers had to be very cautious in accounts receivables and marketable securities decisions. Siddharth, M.R and Das G.: They have attempted to ascertain efficient or otherwise use of working capital in selected pharmaceutical firms in India. The overall analysis of the data indicated that the selected companies did very well in terms of employment of working capital. Sur, Debashish: He attempted to assess the efficiency of working capital management. The study revealed that the working capital management was inefficient during the study period. He recommended special attention to the management of inventories which constituted the highest part of current assets. Singh, P.K.: The author attempted to assess the significance of management of working capital through working capital ratios and operating cycle. The study brought out the need for efficient management of debtors, the percentage of which was highest. Parasuraman, N.R.: In this study he attempted to understand the relationship between credit period given by the companies and their actual performance in terms of sales and profitability. Having laid emphasis on Indian pharmaceutical companies, he found out that leading companies had employed greater working capital for enhancing profitability.

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Abuzar M.A. Elijelly: In this study he empirically has examined the relation between profitability and liquidity, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia. The study found significant negative relation between the firms profitability and its liquidity level, as measured by current ratio. Sushma Vishnani, Bhupesh Kr. Shah: Have concluded that if a company desires to take greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, therefore, of profitability also. Adolphusj.Toby: In this paper the author investigates the empirical relationship between liquidity and other performance measures in Nigerian manufacturing companies. The result shows statistically significant relationships between liquidity and profitability, efficiency and leverage measures. P.K. Das: The study based on different measures reveals that the overall liquidity position of the company was satisfactory

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52

RESEARCH METHODOLOGY

Research Objective

LIQUIDITY

MANAGEMENT COMPANIES (A

IN CASE

PHARMACEUTICAL

STUDY OF CIPLA LTD. Data Collection : The research will be based on secondary data for the examination of different aspects of liquidity

management of the selected company i.e. Cipla Ltd. Hence, the data and information required for the study will be collected mostly from the annual reports of the company for the period from 1999-2000 to 2008-2009. Tools of Analysis : For the purpose of analyzing the efficiency of the liquidity management of the company under study, the technique of ratio analysis, statistical techniques like mean, standard deviation, correlation, t-test could be used according to the their relevance.

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TOOLS OF ANALYSIS
Ratio Analysis Ratio analysis is a study of relationship among the various financial factors in a business. Net Profit Ratio: - This ratio establishes relationship between net profit and net sales. Net profit shows the operational efficiency of the business. Decrease in the ratio indicates managerial inefficiency and excessive selling and distribution expenses. In the same way, increase shows better performance. Return on investment: - This is one of the most important ratios for the measure of overall profitability. It indicates the relationship of net profit with capital employed in the business. Return on investment ratio measures, the operational efficiency and borrowing policy of the enterprise. It also shows how effectively the capital employed in the business is used. Debt equity ratio: - This is to judge the long term financial policy of the business. It establishes relationship between long term loans and owners funds. Working capital turnover ratio: - It reflects the efficiency in the utilization of working capital. Fixed assets turnover ratio: - It ensures whether investment in the assets have been judicious or not.

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 Inventory turnover ratio: - This ratio measures how many times the average stock is sold during the year. Receivables turnover ratio: - It indicates the efficiency with which the debts are collected during the year. It also reflects the effectiveness of the credit sales policy of the management. Current ratio: - It indicates the short term financial soundness of the company. It indicates whether the current assets are sufficient to meet the current liabilities. Liquid ratio: - liquidity is the ability of the firm to meet its current obligation as they fall due. Cash turnover ratio: - It reflects the availability of minimum cash balance to pay out the cash expenses and efficiency in disposing cash.

Correlation Croxton and Cowden say - When the relationship is of a quantitative nature, the appropriate statistical tools for discovering and measuring the relationship and expressing it in brief formula is known as correlation. Correlation analysis attempts to determine the degree of relationship between variables. -Ya Lun Chou

t-test To test whether there is significant correlation between the liquid ratios and profitability ratio.

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The null hypotheses will be: H0 Change in liquidity does not lead to any effect on the profitability of Cipla Ltd.

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DATA ANALYSIS & INTERPRETATION

FINANCING OF WORKING CAPITAL

Table 1- Financing of Working Capital Particulars Gross Working Capital Long Term Loan %age of long term loan to gross working capital 2004 1436.23 210.58 14.66% 2005 1749.04 191.20 10.93% 2006 2292.28 468.91 20.45% 2007 2834.68 123.56 4.35% 2008 3743.98 580.53 15.5%

Analysis:Through this, an attempt has been made to explain the relative importance of longterm debt in working capital. This trend speaks of low dominance of long- term loan as source of working capital in 2007, and overall it shows a fluctuating trend with regular ups and downs. With this analysis it is revealed that in year 2004 % of long term loan used to support the gross working capital was 14.66% and in year 2005 it has declined. Again in year 2006, it has almost doubled and in future again decrease is there. The whole process reveals that company is not using any

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set policy in this regard, whenever there is a need of external funds, they are raised.

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STRUCTURAL ANALYSIS OF WORKING CAPITAL

Table 2- Component of Working Capital (figures in crores) Particulars 2004 2005 2006 2007 2008

Inventory

568.94 (39.61%)

745.68 (42.63%) 587.32 (33.57%) 11.20 (0.64%) 13.61 (0.77%) 391.33 (22.37%) 1749.04 (100%) 95.37%

957 (41.7%) 875.96 (38.2%) 44.48 (1.94%) 13.35 (0.58%) 401.49 (17.51%) 2292.28 (100%) 89.88%

978.60 (34.52%) 1028.78 (36.29%) 131.49 (4.63%) 24.83 (0.87%) 670.98 (23.67%) 2834.68 (100%) 81.63%

1120.49 (29.9%) 1393.91 (37.23%) 79.28 (2.11%) 34.39 (0.92%) 1115.81 (29.80%) 3743.98 (100%) 83.64%

Sundry Debtors

498.22 (34.68%)

Cash & Bank Balances Other current assets Loans and advances Gross Working Capital Ratio of Current Assets to Total Assets

6.24 (0.43%) 7.55 (0.53%) 355.25 (24.73%) 1436.23 (100%) 93.22%

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Analysis:Component wise analysis of working capital has been done to make an attempt to trace out the factors responsible for the significant change in working capital for different years. It is evident that on an average for CIPLA Ltd., percentages of current assets to total assets were 93.22% to 83.64% in 2008. In the year 2004 major portion of gross working capital was dominated by inventory and same is the case in year 2005 & 2006. In the year 2007 and 2008 debtors contributed to a major portion of gross working capital, this shows that the company has increased its trend of providing credit to its customers. In all the years it can be analyzed that inventory is increasing, which reveals that company is more particular towards maintaining adequate inventory to support the production. One thing to be noticed is that in year 2007 company maintained 4.63% of gross working capital as cash, which is highest in all the years, this shows that company maintained more than needed cash level in this year, as before also company is operating smoothly in minimized cash balance.

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RATIO ANALYSIS

Liquidity Ratios:-

Current Ratio= Current Assets Current Liabilities

YEAR RATIO

2004 2.11:1

2005 2.25:1

2006 2.52:1

2007 3.01:1

2008 3:1

3.5 3 2.5 2 1.5 1 0.5 0 2004 2005 2006 2007 2008 Ratio

As the current ratio measures the ability of the enterprise to meet its current obligations. Normally current ratio of 2:1 is recommended. At present the company has enough liquidity as it goes on increasing from the last few years.

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Liquid Ratio= Current Assets- (stock + prepaid expenses) Current Liabilities

YEAR RATIO

2004 1.28:1

2005 1.29:1

2006 1.47:1

2007 1.97:1

2008 2.10:1

2.5 2 1.5 1 0.5 0 2004 2005 2006 2007 2008 Ratio

The liquidity position of the company is sound as its liquid ratio is more than the standard of 1:1 in all the years mentioned.

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Profitability Ratios:-

Net Profit Ratio= Net Profit * 100 Net Sales

YEAR RATIO

2004 16.04%

2005 23.09%

2006 29.04%

2007 28.27%

2008 27.30%

30 25 20 15 10 5 0 2004 2005 2006 2007 2008 Ratio

Profitability of the company is good but net profit ratio is decreasing from 2006 to 2008. Although the distinction is less but the company should pay attention towards this.

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Return on Investment= Net Profit before tax, int. & div. * 100 Capital Employed

YEAR RATIO

2004 27.40%

2005 29.49%

2006 28.94%

2007 24.04%

2008 19.33%

30 25 20 15 10 5 0 2004 2005 2006 2007 2008 Ratio

Return on Investment ratio measures, the operational efficiency and borrowing policy of the enterprise. It also shows how effectively the capital employed in the business is used. It shows the earning capacity of the net assets of the business. The ratio judges that the performance of the company is good but is slightly declined in the year 2008 which needs immediate attention.

Activity Ratios:-

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Working Capital Turnover Ratio= Net Sales Working capital

YEAR RATIO

2004 2.43

2005 2.25

2006 2.09

2007 1.81

2008 1.60

2.5 2 1.5 1 0.5 0 Ratio

2004 2005 2006 2007 2008

It reflects the liquidity position of the company is good and this ratio is neither excessive nor less which means that the company is doing well and focuses on its liquidity management as well as other operations simultaneously.

Fixed assets turnover ratio= Net sales

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Fixed assets

YEAR RATIO

2004 3.36

2005 2.95

2006 2.74

2007 2.47

2008 2.40

3.5 3 2.5 2 1.5 1 0.5 0 2004 2005 2006 2007 2008 Ratio

Higher ratio indicates better performance in the form of increase production and reduced cost. It ensures that the fixed assets have been judiciously used. This ratio is very significant for manufacturing enterprises, where fixed assets employed are more than working capital. But here as compared to 2004, in 2008 fixed assets turnover has reduced, which reflects that fixed assets are not contributing to that extent as earlier.

Inventory Turnover Ratio= Cost Of goods sold

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Average Stock

YEAR RATIO

2004 3.18

2005 3.31

2006 3.40

2007 3.55

2008 3.80

3.8 3.6 3.4 3.2 3 2.8 Ratio

2004 2005 2006 2007 2008

This ratio measures how many times the average stock is sold during the year. Higher inventory turnover ratio is beneficial to the concern. Promptness of sale indicates better performance of the business. It also shows efficiency of the concern. So Cipla is efficient enough in this aspect.

Receivables Turnover Ratio=

Net Sales_____

Average Receivables

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YEAR RATIO

2004 4.31

2005 4.01

2006 3.96

2007 3.61

2008 3.30

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Ratio

2004 2005 2006 2007 2008

This reflects a continuous decrease. This also reveals the fact that the company is inefficient in collecting its debts. This needs the immediate remedy of the company as it will harm the liquidity position of the company and leads to loaning of funds to maintain adequate working capital.

Cash Turnover Ratio= Cash operating expenses during the year_ Average cash balance during the year

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YEAR RATIO

2004 123.52

2005 144.36

2006 77.31

2007 35.72

2008 24.45

160 140 120 100 80 60 40 20 0 2004 2005 2006 2007 2008 Ratio

This analysis shows that cash position of the company is becoming better year after year. Cash operating expenses are declining or cash balance increases, it affects the cash position as well as cash turnover ratio. So here it is good.

Solvency Ratios:

Debt Equity Ratio= Long Term Loans 69

Shareholders fund

YEAR RATIO

2004 0.16:1

2005 0.12:1

2006 0.23:1

2007 0.03:1

2008 0.15:1

0.25 0.2 0.15 0.1 0.05 0 Ratio

2004 2005 2006 2007 2008

The debt equity ratio is 0.03:1 in 2007, implying that the company has not taken the advantage of leverage, i.e. that the company has not borrowed what it could have done up to 2 times more than the equity without ill-affecting the interest of equity shareholders. In general, the lower debt equity ratio, the higher the degree of protection felt by the creditors.

IMPACT OF WORKING CAPITAL ON PROFITABILITY

Table 3-Impact of working capital on profitability 70

Year

Working CR

Capital LR 1.28 1.29 1.47 1.97 2.10

Ratios WTR 2.43 2.25 2.09 1.81 1.60 ITR 3.18 3.31 3.40 3.55 3.80 RTR 4.31 4.01 3.96 3.61 3.30 PR 0.27 0.29 0.28 0.24 0.19

2004 2005 2006 2007 2008

2.1 2.25 2.52 3.01 3

Coefficient of correlation(r) t value

-0.80 -2.30

-0.91 -3.80

0.88 3.23

-0.90 -3.57

0.87 3.05

In order to judge the liquidity position and its impact on profitability, it is necessary to analyze different working capital ratios as exhibited in above table. The working capital ratio in the present study consists of Current ratio (CR), Liquid Ratio (LR), Working Capital Turnover Ratio (WTR), Inventory Turnover Ratio (ITR), Receivables Turnover Ratio (RTR) and Profitability Ratio (PR).

For this purpose of calculating the value of ratios, formulas used are as follows: 1. CR = Current Assets / Current Liabilities 2. LR = Current Assets Stock in hand / Current Liabilities 3. WTR = Net Sales / Current Assets Current Liabilities 4. ITR = Net Sales / Average Inventory 71

5. RTR = Net Sales / Average Receivables 6. PR = Operating Net Profit / Capital Employed

The next step is to calculate the Correlation Coefficient (r) between profitability ratio and other ratios. After this t-test for testing significance of an observed sample Correlation Coefficient (r) at 5% level of significance have been taken up.

The formula used in this regard is:Correlation Coefficient (r) = 1/n (Xi X) (Yi Y) / {1/n (Xi X) 2 {1/n (Yi Y) 2} And, t = r n-2 / 1- r 2, at (n-2) degree of freedom where n is the pairs of observation and X and Y are variables.

TABLE 3 (A) CALCULATION OF r AND t FROM CR AND PR CR (X) PR (Y) (Xi X) (Xi X) 2 (Yi Y) (Yi Y)2 (Xi X) (Yi Y)

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2.1 2.25 2.52 3.01 3

0.2 7 0.2 9 0.2 8 0.2 4 0.1 9

-0.48 -0.33 -0.06 0.43 0.42

0.23 0.108 0.0036 0.1849 0.1764

0.02 0.04 0.03 -0.01 -0.06

0.0004 0.0016 0.0009 0.0001 0.0036

-0.0096 -0.0132 -0.0018 -0.0043 -0.0252

(Xi X) -0.02

(Xi X) 2 0.7042

(Yi Y) 0.02

(Yi Y)2 0.0066

(Xi X) (Yi Y) -0.0541

X =12.88/5 = 2.58 Y = 1.27/5 = 0.254 r = -0.0108/0.0135 = -0.80 Therefore t = -2.30 Since the calculated value oft is less than the tabulated value (3.18) at 3 degree of freedom at 5% level of significance, therefore the relationship is insignificant, i.e. our hypothesis is true.

TABLE 3 (B) CALCULATION OF r AND t FROM LR AND PR 73

LR (X) 1.28 1.29 1.47 1.97 2.10

PR (Y) 0.2 7 0.2 9 0.2 8 0.2 4 0.1 9

(Xi X) -0.34 -0.33 -0.15 0.35 0.48

(Xi X) 2 0.12 0.11 0.02 0.12 0.23

(Yi Y) 0.02 0.04 0.03 -0.01 -0.06

(Yi Y)2 0.0004 0.0016 0.0009 0.0001 0.0036

(Xi X) (Yi Y) -0.0068 -0.0132 -0.0045 -0.0035 -0.0288

(Xi X) 0.01

(Xi X) 2 0.60

(Yi Y) 0.02

(Yi Y)2 0.0066

(Xi X) (Yi Y) -0.0568

X =8.11/5 = 1.62 Y = 1.27/5 = 0.254 r = -0.0113/0.0124 = -0.91 Therefore t = -3.80 Since the calculated value oft is less than the tabulated value (3.18) at 3 degree of freedom at 5% level of significance, therefore the relationship is insignificant, i.e. our hypothesis is true.

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TABLE 3 (C) CALCULATION OF r AND t FROM WTR AND PR WTR PR (X) 2.43 2.25 2.09 1.81 1.60 (Y) 0.27 0.29 0.28 0.24 0.19 (Xi X) 0.39 0.21 0.05 -0.23 -0.44 (Xi X) 0.02 (Xi X) 2 0.15 0.04 0.002 0.05 0.19 (Xi X) 2 0.432 (Yi Y) 0.02 0.04 0.03 -0.01 -0.06 (Yi Y) 0.02 (Yi Y)2 0.0004 0.0016 0.0009 0.0001 0.0036 (Yi Y)2 0.0066 (Xi X) (Yi Y) 0.0078 0.0084 0.0015 0.0023 0.0264 (Xi X) (Yi Y) 0.0464

X =10.18/5 = 2.036 Y = 1.27/5 = 0.254 r = 0.00928/0.0105 = 0.88 Therefore t = 3.23 Since the calculated value of t is more than the tabulated value (3.18) at 3 degree of freedom at 5% level of significance, therefore the relationship is significant, i.e. our hypothesis is false.

TABLE 3 (D)

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CALCULATION OF r AND t FROM ITR AND PR ITR (X) 3.18 3.31 3.40 3.55 3.80 PR (Y) 0.27 0.29 0.28 0.24 0.19 (Xi X) -0.27 -0.14 -0.05 0.10 0.35 (Xi X) -0.01 (Xi X) 2 0.0729 0.0196 0.0025 0.01 0.1225 (Xi X) 2 0.2275 (Yi Y) 0.02 0.04 0.03 -0.01 -0.06 (Yi Y) 0.02 (Yi Y)2 0.0004 0.0016 0.0009 0.0001 0.0036 (Yi Y)2 0.0066 (Xi X) (Yi Y) -0.0054 -0.0056 -0.0015 -0.001 -0.021 (Xi X) (Yi Y) -0.0345

X =17.24/5 = 3.45 Y = 1.27/5 = 0.254 r = -0.0169/0.0076 = -0.90 Therefore t = -3.57 Since the calculated value oft is less than the tabulated value (3.18) at 3 degree of freedom at 5% level of significance, therefore the relationship is insignificant, i.e. our hypothesis is true.

TABLE 3 (E) CALCULATION OF r AND t FROM RTR AND PR

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RTR (X) 4.31 4.01 3.96 3.61 3.30

PR (Y) 0.27 0.29 0.28 0.24 0.19

(Xi X) 0.48 0.18 0.13 -0.22 -0.53 (Xi X) -0.01

(Xi X) 2 0.23 0.03 0.02 0.05 0.28 (Xi X) 2 0.61

(Yi Y) 0.02 0.04 0.03 -0.01 -0.06 (Yi Y) 0.02

(Yi Y)2 0.0004 0.0016 0.0009 0.0001 0.0036 (Yi Y)2 0.0066

(Xi X) (Yi Y) 0.0096 0.0072 0.0039 0.0022 0.0318 (Xi X) (Yi Y) 0.0547

X =19.19/5 = 3.83 Y = 1.27/5 = 0.254 r = 0.0109/0.0125 = 0.87 Therefore t = 3.05 Since the calculated value oft is less than the tabulated value (3.18) at 3 degree of freedom at 5% level of significance, therefore the relationship is insignificant, i.e. our hypothesis is true.

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Analysis:As we know, that liquidity of any company can be properly judged by its current ratio and its liquid ratio. These two ratios are actually linked to it strongly, and these are the ratios which have the power to affect the profitability. So, from the analysis, it appears that the CR of CIPLA Ltd. Has moved between 2.1 and 3 during the period of study. On an average it stands at 2.5:1 for the entire period. As a convention, a standard of 2:1 is considered satisfactory. It can be said that the liquidity of the company as measured by CR is satisfactory. The coefficient of correlation between CR and PR is -0.80, which indicates that there is negative correlation between the two variables and it is not significant at 5% level. CR indicates that there may be sufficient funds to pay-off liabilities. According to the t-test between CR and PR, there is no significant relationship between liquidity and profitability and it is true also as liquidity and profitability have negative relationship between them. Since the CR is not a conclusive index of the real liquidity of a firm, it needs an additional analysis of the liquidity of current assets, which is done by examining LR. As per this, LR has moved between 1.28 and 2.10. On an average it stands at an average of 1.69:1 for the entire period, which as a rule of thumb or as a convention is satisfactory, but not necessarily means satisfactory liquidity position if all the debtors cannot be realized and cash is involved immediately to meet the current obligations. Usually a high LR is an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time, and on the other hand a low LR represents that the firms liquidity position is not good. The coefficient of correlation between LR and PR is -0.91, which indicates that there is negative correlation between LR and PR and it is also not significant at 5% level of significance.

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As far as the coefficient of correlation is concerned, it gives mixed results. For most of the cases it is highly significant, either in positive direction or in negative direction, but in some cases the level of satisfaction is low. The t value, for most of the variables the calculated value is less than tabulated value. But as far as working capital turnover ratio is concerned it showed a positive correlation between it and profitability.

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SUMMARY OF FINDINGS
On the basis of Ratio Analysis

Current ratio reveals that the current position of the company is good and it is in a position to meet out its liabilities efficiently. As far as liquid ratio is concerned it is also satisfactory, as 2:1 is standard and company is in that level in 2008. Profitability of the company is good as revealed by the different profitability ratios, but there is a need to maintain it. Working capital turnover ratios showed a downward trend which is needed to be rectified. Same is the case with fixed assets, as fixed assets turnover ratio is also declining. Company is efficient enough to convert its inventory into sales. There is enough cash level maintained by the company to support smooth functioning of its operations. Long term loans as compared to shareholders fund are satisfactory. This level has to be maintained. From structural analysis it is revealed that companys 85% of total assets are current assets on an average. But in that the major portion is that of inventory, which is an ill-liquid asset and has a direct impact on the liquidity of the company.

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On the basis of Working Capital Analysis

The main component of the gross working capital of the company is inventories and that too mainly of finished goods, which means that the production is being done at a higher rate and now the companys marketing department should work actively to convert the stock into sales, which does not block the funds of the company in stock. The financing of working capital depicts that the company is reducing its reliance on long term debts to finance working capital and it is a fluctuating trend in using long term loans as a source to finance gross working capital. There is negative correlation between Current Ratio & Profitability Ratio. The negative correlation exists between Liquidity Ratio & Profitability Ratio. The positive correlation is present between Working Capital Turnover Ratio and Profitability Ratio. The negative correlation is present between Inventory Turnover Ratio and Profitability Ratio. Receivables Turnover Ratio and Profitability Ratios share the positive relationship.

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CONCLUSION
You have powers, You never dreamt of, You can do things, You never thought, You could do. There are no limitations, in what you can do. Except the limitation in your own mind, As to what, You cannot do. Dont think you cannot. Think you can. Anonymous On the basis of this study it can be conclude that the present state of the company is good as it is able to meet its current obligations in time. Result of t test conclude that there is no significant relationship between working capital ratios and the profitability ratio which means that liquidity is not the only factor which affects the profitability of the company there are other factors also. The study found significant negative relation between the firms profitability and its liquidity level, as measured by current ratio. The overall analysis of the data indicated that the selected companies did very well in terms of employment of working capital. The company has the great potential to carve out a niche for itself. If the company utilizes its financial resources judiciously it has the ability to be in a better position than today.

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LIMITAIONS OF STUDY
One major limitation of this study is that time is limited, as this report is to be completed within 3 months, so more detailed analysis is not possible to be done. Another thing is the lack of resources available. Whatever data and information is available at the point of time is used to prepare this report and more journals. Magazines, related books are not used, due to non- availability of them. This report is based on secondary data available i.e. the balance sheet and profit and loss account of the company. This may not always show a true picture, there may be something hidden.

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RECOMMENDATIONS:

Dont wait for the best idea, Implement the better one, Still better and the best will follow.

Company should pay due attention to its policy related to collection of receivables, as this has a direct impact on the liquidity position and the cash requirements of the company. As we know that the fixed assets are the heart of any organization and without heart no one can survive, so company should focus more on the fixed assets turnover. One thing to be recommended is that company should follow a set policy or should set any limit in regard to financing of gross working capital from long term loans, as the study reflected the fluctuating trend. Company should have a check on inventory level regularly as we know that it is a non- liquid asset in a short time span and directly related to liquidity position.

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BIBLIOGRAPHY
Books Considered are: Block, B., Stanley & Hirt, A., Geoffrey, (1992). Foundations of financial managemen. Boston, Irwin Publications. Rustagi, R.P., (1999). Financial management, theory, concepts & problems. New Delhi, Galgotia publishing company. Myers, I., Brealey, (2000). Principles of corporate finance. New Delhi, Co: Tata McGraw Hill. VanHorne, C., James & Jr. Wachowicz, W., John, (2003). Fundamentals of financial management. New Delhi, Pentice Hall of India. Chandra, Prasanna, (2006). Financial management theory and practice. New Delhi Co: Tata McGraw Hill. Pandey, I.M., (2007). Financial Management. New Delhi, Vikas Publications. Khan & Jain, (2007). Financial Management. New Delhi, Co: Tata McGraw Hill. Bhalla, V.K., (2007). Working capital Management. New Delhi, Anmol Publication. Kothari, C.R., (2007). Research Methodology. New Delhii, Co: New age international. Gangadhar, V., (2008). Management of corporate liquidity. New Delhi, Anmol Publications ltd. Parkinson, L., Kenneth, (2008). Corporate liquidity: a guide to managing working capital. Boston, Irwin professional publication.

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 Siddiqui, S.A., Comprehensive Accountancy, 2001, Laxmi Publications PVT. LTD, New Delhi. Journals: Oppedahl & Richard (December 1990). Working capital management, Business Review,49(2), 1-4 Siddharth, M.R. & Das, G., (March 1994). Working capital turnover in Pharmaceutical companies, The management accountant, 151-153 Sur, Debashish, (November 1997). Working capital management in Colgate Palmolive- India Ltd.- A case study, The management accountant,828-833 Singh, P.K., (July 2004). Working capital management in Lupin laboratories Ltd.- A case study, The management accountant, 534-539 Parasuraman, N.R., (December 2004). Working capital practices in leading pharmaceutical companies- A view of the credit policy & profitability, The management accountant, 39(12), 998-1005 Abuzar, M.A., Elijelly, (2004). Liquidity profitability tradeoff: An empirical investigation in an emerging market, International journal of commerce and management, 14(2), 48-61 Vishnani, Sushma & Shah, Kr., Bhupesh, (2007). Impact of working capital management policies on corporate performance- An empirical study, Global business review, 8(2), 267-281 Adolphusj. Toby, (2008). Liquidity performance in Nigerian manufacturing companies, Finance India, 22(1), 117-131 Das, P.K., (2008). A study on liquidity management in Ranbaxy laboratories ltd., The journal of accounting and finance, 22(1), 135-149

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Other Publications: Annual reports of CIPLA Ltd. Various English Dailies Website Used:www.ssrn.com www.cipla.com www.sciencedirect.com www.bnet.com

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