Financial Statements Analysis GMITE-7 Industry : PharmaGroup- 6
Objectives To determine the financial position and performance of the identified business enterprises and to interpret the financial statements ( BS and P&L) of two pharma companies. Perform financial statement analysis from the management standpoint. To observe and provide recommendations based on the analysis.
Company Summary CIPLA • 1935 – Incorporated. • 1939 supplied life saving drugs during WW-II. • 1987-96: Innovation, introduced new drugs. • 1997-2012: Expansion and Recognition. • 2012 Revenue $1.27 billion • 2012 Net income $204.39 million. • 20000+ employees, spread over 170 countries. Dr.Reddy’s • 1985 – Incorporated. • 1985-90: Gained credibility and started exports to Europe and Far East. • 1991-99: Expansion and Innovation. • 2000-12: Grown globally. • 2012 revenue $2.1 billion • 2012 Net income $300 million. • 15000+ employees globally over 3 business segments, Pharmaceutical Services & Active Ingredients, Global Generics and Proprietary Products.
Summary of Balance Sheet and Profit and Loss CIPLA Depreciation on fixed assets-Straight-line method FINANCIAL POSITION Reserves and surplus, substantial increase of 14.6% due to unrealized forex losses - foreign currency translation Reserve (from 1.28CR to 16.47CR). Due to INR appreciation Long term borrowing, significant reduction of 88% due to repayment of term loan in 2011. Short term barrowing has drastically reduced to 98% in 2012 Current investment has increased to 321% in 2012 ( 223 CR to 940.5CR). Additional Plant and machinery purchased in 2012 could help increase the production in 2013 onwards FINANCIAL PERFORMANCE REVENUES increased by 12% while expenses at 9% EBITDAgrowth is recorded at 23% EBITgrowth is recorded at 25% Dr Reddy’s Depreciation on fixed assets Straight-line method FINANCIAL POSITION Reserves and surplus hassubstantial growth of 24% Long term borrowings has significant growth of 206%. Long term loan taken by subsidiary from Citibank carrying interest rate of LIBOR plus 145 bps and is repayable in eight equal quarterly installments starting from Dec2014 and ending in Sep 2016. Short term barrowings has reduced to 13% in 2012 FINANCIAL PERFORMANCE REVENUESincreased by 32% while expenses at 26% 57% of its revenue comes from international market. EBITDAgrowth is recorded at 51% EBITgrowth is recorded at 58% Changed its policy on valuation of inventory from the first-in first-out(FIFO) method to the weighted average cost method. This probably has helped the company to match revenue and expenses
Observations and Recommendations • What is the degree of risk inherent in the investment? • In 2011&2012, more than 50% (Debt Ratios) of company's assets are financed through debt. D-E ratios are also high which tells us that the company is running high financial risk. • Should existing investment holdings be liquidated? • In 2011, the current ratio was very close to 1 (1.14), considering avg account receivables close to 3 months, it ran the CA to CL neck to neck. Any more delay in TRs would make the company to sell off its assets against TPs. In 2012 it is good.
Observations and Recommendations • What is the degree of risk inherent in the investment? • Financial risk is low as they are financed for assets from debts only for 20%. Their D-E ratios are quite low which reflects less risk. • Should existing investment holdings be liquidated? • Not at all, it is running very good CRs. In fact it is wasting some investments, instead it can do some more investments and generate more returns.
Conclusion • Generally accepted accounting principles(GAAP) were adopted and practiced in both the firms Dr.Reddy’s and Cipla. • Rupees depreciated by more than 14% as compared to US dollar and this has helped CIPLA and Dr.Reddy to achieve significant profit from exports. • Dr. Reddy's has EPS of 76.72 in 2012 whereas Cipla has EPS of only 14.25 and this is indicated in the net income as well where Reddy has increased its net revenues by 32% YoY whereas Cipla has managed to increase it by 12% YoY. However, market sentiment does not seem to appreciate this as P/E ratio for Dr. Reddy's has come down from 26 to 22 and Cipla has come down by 25 to 22. Clearly the total liabilitiesis weighing them down. • From the analysis we would not vote for both CIPLA and Dr Reddy's. CIPLA would need further more analyzation based on their sudden shifts in reduction of liabilities and increase of assets. Dr Reddy's is imposing financial risk on already existing business risk and hence we cannot predict the long term financial stability of the company, it depends on several external factors like economy of the country, industry competition, etc.