Company Analysis Report On Dr.reddy’s

1

INDEX S.NO

CONTENTS

PAGE NO.

1.

Dr.Reddy’s Company History

10-12

2.

Dr.Reddy’s Statistics

13-14

3.

Dr.Reddy’s Logo

15-16

4.

Dr.Reddy’s Tie-ups & Annual

17-18

Turnover 5.

Dr.Reddy’s Organization Structure 19-22 & Managemant

6.

Dr.Reddy’s Financial Statements:

23-33

• Profit and Loss Accounts

7.

• Balance Sheets Dr.Reddy’s Ratio Analysis

34-48

8.

Conclusion

49

9.

Bibliography

50-51

2

DR.REDDY’S

COMPANY HISTORY

3

HISTORY: Dr. Reddy's Laboratories Ltd. is one of India's leading pharmaceutical companies with global ambitions. The company has departed from the Indian pharmaceutical market mainstream of copying patented drugs to pursue the development of its own--patentable-molecules. As such, the company has already achieved success with a number of promising anti-diabetic molecules. At the same time, Dr. Reddy's is pursuing a share of the lucrative, but highly competitive, U.S. generics market, including the higher-margin "branded generic" market. Dr. Reddy's operates through several strategic business units, including: Branded Finished Dosages; Generic Finished Dosages; Bulk Actives; Custom Chemicals; Biotechnology; Diagnostics; Critical Care; and Discovery Research. A leader in its domestic market, the company is also active on the international scene, which accounted for 64 percent of the company's total sales of Rs 18 billion ($392 million) in 2003. North America contributed 32 percent of sales, while Russia added 28 percent. The rest of the company's international revenues were generated through the Asian, African, and South American markets. Dr. Reddy's is led by founder and Chairman Dr. Anji Reddy and CEO (and Reddy's son-in-law) G.V. Prasad. Dr. Reddy's Laboratories was the first Asian pharmaceutical company, excluding Japan, to list on the New York Stock Exchange.

Bulk Actives to Generics in the 1980s: In 1970, the Indian government, then led by Indira Ghandi, abrogated laws respecting international pharmaceutical patents. The move, meant to reduce the cost of providing healthcare to India's large and exceedingly poor population, had the effect of supercharging the country's pharmaceutical sector. With a long history in process chemistry, and a large and highly educated pool of scientists, the sector quickly became experts at reverse-engineering, and then copying, the drugs developed by the world's large multinationals.

4

The new industry quickly became one of the world's most energetic markets--by the 1990s, there were more than 20,000 companies operating in India's pharmaceuticals industry. Indian producers were able to produce drugs and their components for a fraction of the cost of their Western counterparts, and quickly found an enormous demand throughout the developing world. Yet the highly competitive domestic market, as well as the slender margins available from the copied--many would call them pirated--drugs forced the Indian companies to develop highly cost-effective manufacturing and marketing models. Reddy remained with IDPL into the early 1970s. The change of law and the rise of new opportunities in the pharmaceutical industry, however, encouraged him to set up his own business, and in the mid-1970s, Reddy founded a company for producing and selling bulk actives--the basic ingredients of drug compounds--to pharmaceutical manufacturers. Reddy's clientele soon featured a host of national and multinational companies, such as Burroughs Welcome and others. In the early 1980s, however, Reddy sought to aim higher and establish himself as a manufacturer of finished products. In 1984, Reddy founded Dr. Reddy's Laboratories, using $40,000 of his own, backed by a bank loan for $120,000. Reddy jumped into the market of producing copies, taking advantage of the 1970 law. As he told Forbes: "We are products of that. But for that, we wouldn't be here. It was good for the people of India, and it was good for this company." The company achieved another crucial milestone in 1987 when it gained U.S. FDA approval for its ibuprofen formulation. That approval, which was coupled with the allimportant FDA certification of its factory, marked the start of the company's international formulations exports. Risking on Research in the 1990s By the early 1990s, Reddy's, like its Indian counterparts, boasted a wide range of "copied" drugs in its portfolio. International sales were also becoming an increasingly important part of the company's total revenues, a trend boosted by the company's entry 5

into the Russian market in 1991. That country later grew into one of the company's primary export markets. Reddy's shift initially met with skepticism from the Indian community. As Reddy told the Financial Times: "I made a statement in Bangalore in 1993. I said: 'Don't think that because we don't have millions of dollars we cannot invent new drugs. Don't shy away from this.' But nobody had the conviction that an Indian company could discover anything." Nonetheless, for its research and development effort, Reddy's adopted a standard practice among even the largest multinationals, that of developing "analogue" preparations of existing drugs. By slightly altering the composition of a molecule or preparation, Reddy would be able to present a new drug, which was sufficiently different chemically to achieve a separate patent. The shift into research represented only one prong of Dr. Reddy's ambitions. In its determination to become a player in the global market, the company moved to end production of illegal copies and instead shift its operations to the manufacture of--legal-generic drugs. In 1994, the company placed a rights issue of $48 million in order to construct a new facility dedicated to producing generic drugs capable of meeting the legislative requirements of Western markets. The company also opened a U.S. subsidiary in New Jersey that year. By 1995, Reddy's initial research and development efforts had already paid off, as the company filed its first patent application for a new and promising anti-diabetes formulation. The company successfully completed laboratory testing on the drug, an insulin sensitizer dubbed balaglitazone by 1997. Yet, lacking the funds to engage in its own clinical testing, the company placed the patent up for grabs, and licensed it to Novo Nordisk in 1997. This marked a first for an Indian-developed drug. The following year, Novo Nordisk acquired the license for Dr. Reddy's second insulin sensitizer, ragaglitazar. Going Global in the 21th Century

6

The year 1997 marked a new era for Dr. Reddy's. In that year, the U.S. FDA adopted new rules, designed to encourage the growth of the generic drugs market in the United States, which provided a six-month exclusivity period for the first company to gain approval to market newly available drugs in a generic form. Dr. Reddy's decided to get in on the action--as an estimated $60 billion of drugs was expected to outgrow their patents over the next ten years--and in 1997 the company filed an abbreviated new drug application (ANDA, used for registering a drug in its generic formula) for a generic version of the popular anti-ulcer medication Zantac. Buoyed by its early success, Dr. Reddy's moved to expand its operations at the turn of the century. In 1999, the company made a new acquisition, buying up American Remedies Limited, based in Chennai, boosting its formulations capacity. That year, also, the company set up a research and development subsidiary, Reddy US Therapeutics, in Atlanta, Georgia, placing part of its drug discovery effort closer to the U.S. market. In 2000, the company made another important acquisition, this time of Cheminor Drugs Limited, which enabled Dr. Reddy's to claim the number three spot among Indian pharmaceutical companies. That year, the company launched the commercial distribution of its first generics in the United States. Back home, the company's research efforts had paid off with the filing of an Investigational New Drug Application for an anti-cancer molecule developed in the company's labs. Dr. Reddy's global ambitions now took it to the New York Stock Exchange, where the company listed its stock in 2001, becoming the first Asian pharmaceutical company outside of Japan to do so. The company clearly revealed its ambitions, as Reddy told Business Week: "We want to be a truly innovative company discovering and marketing drugs the world over." That year, the company scored a new success in its research activities, licensing a second-generation anti-diabetic molecule to Novartis in a deal worth some $55 million. Meanwhile, on the generics front, the company was lifted when its application for a 40mg generic version of the popular anti-depressive Prozac was awarded a 180-day exclusivity period. That period generated some $56 million--nearly all profit--for the company.

7

The year 2002 also marked the company's first overseas acquisition, when it paid £9 million to acquire the United Kingdom's BMS Laboratories Ltd. and its marketing and distribution subsidiary Meridian Healthcare Ltd. That purchase enabled the company to expand into the U.K.--and ultimately European--generics market. At the end of 2002, Dr. Reddy's scored a new victory in the U.S. market, when it successfully defeated lawsuits lobbied by Pfizer to prevent the Indian company's marketing of its own variant of the pharmaceutical giant's Novasc. The company then began preparations to introduce its version of the drug in 2003. Yet the new compound was expected to mark a new step for the company, as it became determined to enter the higher-margin branded generics category. Dr. Reddy's backed this change in strategy with a new portfolio of drugs, including the filing of an ANDA for fexofenadine HCI (better known as Allegra, from Aventis) in April 2003. In July of that year, the company scored a new victory when it was granted tentative FDA approval to develop and market generic versions of the Bristol Myers Squibb drug Serzone. Dr. Reddy's appeared well on its way to achieving its goal of becoming a global pharmaceutical company. Principal Subsidiaries: Aurantis Farmaceutica Ltda (Brazil; 50%); Aurigene Discovery Technologies Inc. (U.S.A.); Aurigene Discovery Technologies Limited; Cheminor Drugs Limited; Compact Electric Limited; Dr. Reddy's Exports Limited (22%); Dr. Reddy's Farmaceutica Do Brazil Ltda.; Dr. Reddy's Laboratories (EU) Limited (U.K.); Dr. Reddy's Laboratories (Proprietary) (South Africa); Dr. Reddy's Laboratories (UK) Limited; Dr. Reddy's Laboratories Inc. (U.S.A.); DRL Investments Limited India; Kunshan Rotam Reddy Pharmaceutical Co. Limited (China; 51%); OOO JV Reddy Biomed Limited (Russia); Pathnet India Private Limited (49%); Reddy Antilles N.V. (Antilles); Reddy Cheminor S.A. (France); Reddy Netherlands B.V.; Reddy Pharmaceuticals Hong Kong Limited; Reddy Pharmaceuticals Singapore; Reddy US Therapeutics Inc.; Zenovus Biotech Limited. `

8

Principal Competitors: RPG Enterprises; GlaxoSmithKline Consumer Healthcare Ltd.; East India Pharmaceutical Works Ltd.; Cipla Ltd.; Concept Pharmaceuticals Ltd.; Khandelwal Laboratories Ltd.; Dabur India Ltd.

DR.REDDY’S

STATISTI CS

9

STATISTICS: Public Company Incorporated: 1984 Employees: 5,796 Sales: Rs 18.01 billion ($391.8 million) (2003) Stock Exchanges: Bombay New York Ticker Symbol: RDY NAIC: 325412 Pharmaceutical Preparation Manufacturing

Address: 7-1-27, Ameerpet Hyderabad, Andhra Pradesh 500 016 India Telephone: 91-40-373-1946 Fax: 91-40-373-1955 http://www.drreddys.com

10

DR . REDDY’S

LOGO

11

COMPANY LOGOS: New logo:

Old logo:

12

DR.REDDY’S

TIE-UPS & ANNUAL TURNOVE R 13

NATCO PHARMA, DR REDDY’S IN CANCER DRUG TIEUP: 16 April 2009, Mumbai: Drug maker Natco Pharma Ltd said on Wednesday it has entered into an agreement with Dr Reddy’s Laboratories Ltd to jointly develop and sell generic cancer products. Dr Reddy’s will pay an undisclosed amount upfront for securing the rights to sell the products and for capacities to make the drugs, Natco said in a statement to the stock exchange, adding the firms also have a profit-sharing agreement in place. The deal covers oral and injectible drugs, including paclitaxel, the generic form of Abraxis Bioscience’s breats cancer drug Abraxane. Natco will exclusively supply the drugs to Dr Reddy’s, which will sell them globally, it said. The deal could be expanded to include more products, Natco added. Natco shares ended up 8.9% at Rs71.30 in a firm Mumbai market.

RECENT TURNOVER OF THE COMPANY: Hyderabad, May 18, 2009: (IANS) City-based drug major Dr Reddy’s Laboratories Monday reported 89 percent jump in net profits to Rs.850 crore ($167 million) in 2008-09 from Rs.450 crore the year before. The total income of the company grew 39 percent to Rs.6,940 crore last fiscal from Rs.5,000 crore in 2007-08, the company said in a regulatory filing. Dr Reddy’s, which booked a forex loss of Rs.63.4 crore for the fiscal, owed its growth to the successful launch of the generic version of GlaxoSmithKline’s Imitrex in November 2008. The drug is used to treat migraines.

14

DR.REDDY’S

ORGANISAT ION STRUCTU RE & 15

MANAGEME NT

16

ORGANIZATION STRUCTURE AND MANAGEMENT: Board of Directors: Dr Reddy’s Board of Directors comprises eminent individuals from diverse fields. The Board acts with autonomy and independence in exercising strategic supervision, discharging its fiduciary responsibilities, and in ensuring that the management observes the highest standards of ethics, transparency and disclosure. Our directors are experts in the diverse fields of medicine, chemistry and medical research human resource development, business strategy, finance, and economics. They review all significant business decisions, including strategic and regulatory matters. Every member of the Board, including the non-executive directors, has full access to any information related to our company. Committees appointed by the Board focus on specific areas, take decisions within the authority delegated to them and make specific recommendations to the Board on matters in their areas or purview. Whole time directors: 1. Dr. Anji Reddy, Chairman. 2. G V Prasad, Executive Vice Chairman and Chief Executive Officer. 3. Satish Reddy, Managing Director & Chief Operating Officer.

Committees of the Board: Committees appointed by the Board focus on specific areas and take informed decisions within the framework of delegated authority, and make specific recommendations to the Board on matters in their areas or purview. All decisions and recommendations of the committees are placed before the Board for information or for approval.

17

We have six Board-level Committees, namely •

The Audit Committee

•

The Compensation Committee

•

The Governance Committee

•

The Shareholders' Grievance Committee

•

The Investment Committee

•

The Management Committee

The members of the Committees of Board are as under: Audit Committee: Dr. Omkar Goswami (Chairman) Kalpana Morparia Ravi Bhoothalingam . Management Committee: Satish Reddy (Chairman) G V Prasad Ravi Bhoothalingam Compensation Committee: Ravi Bhoothalingam (Chairman) Kalpana Morparia Dr. JP Moreau. Investment Committee : G V Prasad (Chairman) Ravi Bhoothalingam Satish Reddy.

18

Governance Committee : Anupam Puri (Chairman) Dr. Omkar Goswami. Shareholders' Grievance Committee: Ravi Bhoothalingam (Chairman) G V Prasad Satish Reddy.

Management Team: The Management Council is the top tier of our company's management structure. The management of Dr. Reddy's has developed and implemented policies, procedures and practices that attempt to translate our company's vision, mission and purpose into reality. The management also identifies, measures, monitors and controls the risks factors in the business and ensures safe, sound and efficient operation. The Management Council meets every quarter under the chairmanship of the CEO.

19

DR.REDDY’ S

FINANCIA L STATEMEN TS 20

21

FINANCIAL STATEMENTS: Businesses report information in the form of financial statements issued on a periodic basis. GAAP requires the following four financial statements: •

Balance Sheet - statement of financial position at a given point in time.

•

Income Statement - revenues minus expenses for a given time period ending at a specified date.

•

Statement of Owner's Equity - also known as Statement of Retained Earnings or Equity Statement.

•

Statement of Cash Flows - summarizes sources and uses of cash; indicates whether enough cash is available to carry on routine operations.

Balance Sheet: The balance sheet is based on the following fundamental accounting model: Assets = Liabilities + Equity Assets can be classed as either current assets or fixed assets. Current assets include cash, accounts receivable, marketable securities, notes receivable, inventory, and prepaid assets such as prepaid insurance. Fixed assets include land, buildings, and equipment. Such assets are recorded at historical cost, which often is much lower than the market value. Liabilities represent the portion of a firm's assets that are owed to creditors. Liabilities can be classed as short-term liabilities (current) and long-term (non-current) liabilities. Current liabilities include accounts payable, notes payable, interest payable, wages payable, and taxes payable. Long-term liabilities include mortgages payable and bonds payable. Equity is referred to as owner's equity in a sole proprietorship or a partnership, and stockholders' equity or shareholders' equity in a corporation. The equity owners of a

22

business are residual claimants, having a right to what remains only after the creditors have been paid.

Income Statement: The income statement presents the results of the entity's operations during a period of time, such as one year. The simplest equation to describe income is: Net Income = Revenue - Expenses Revenue refers to inflows from the delivery or manufacture of a product or from the rendering of a service. Expenses are outflows incurred to produce revenue. Income from operations can be separated from other forms of income. In this case, the income can be described by: Net Income = Revenue - Expenses + Gains - Losses where gains refer to items such as capital gains, and losses refer to capital losses, losses from natural disasters, etc.

Cash Flow Statement: The nature of accrual accounting is such that a company may be profitable but nonetheless experience a shortfall in cash. The statement of cash flows is useful in evaluating a company's ability to pay its bills. For a given period, the cash flow statement provides the following information: •

Sources of cash

•

Uses of cash

•

Change in cash balance

The information used to construct the cash flow statement comes from the beginning and ending balance sheets for the period and from the income statement for the period.

23

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.3.2005 Amount (Rs.)

Particulars Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

1,625.6 76.80 1,548.76 -8.41 29.62 1,569.97 574.04 43.21 178.66 47.43 546.35 25.48 0.00 1,415.17 163.21 154.80 12.73 142.07 92.46 5.23 44.38 0.00 44.38 -21.10 65.46 841.14 0.00 38.26 5.37 765.19 8.55 100.00 271.05

24

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.3.2006 Amount (Rs.)

Particulars Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%)

2,101.97 98.71 2,003.26 95.98 36.72 2,135.96 792.87 48.23 205.85 74.95 567.59 33.42 0.00 1,722.91 317.07 413.05 24.63 388.42 111.33 13.31 263.78 -0.01 263.77 52.64 211.12 930.04 0.00 38.35 5.38 766.95 27.53 100.00

25

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.3.2007 Amount (Rs.)

Particulars Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%)

3,872.92 89.66 3,783.26 233.95 23.23 4,040.44 1,144.82 57.83 299.04 155.63 777.06 44.76 0.00 2,479.14 1,327.35 1,561.30 51.96 1,509.34 133.50 18.16 1,357.68 -0.02 1,357.66 188.99 1,176.86 1,334.32 0.00 62.97 10.70 1,679.12 70.09 75.00

26

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.3.2008 Amount (Rs.)

Particulars Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

3,428.40 84.51 3,343.89 197.29 93.87 3,635.05 1,347.33 77.12 366.28 130.35 896.54 37.44 0.00 2,855.06 582.70 779.99 14.69 765.30 161.99 20.71 582.60 -0.06 582.54 108.88 475.22 1,507.73 0.00 63.06 10.72 1,681.73 28.26 75.00 286.12

Balance Sheet of Dr.Reddy’s Laboratoriesas on 31.3.05

27

Amount (Rs.) 38.26 38.26 0.00 0.00 2,035.82 0.00 2,074.08 3.27 269.96 273.23 2,347.31

Liabilities Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

Assets Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

1,004.22 441.68 562.54 60.13 358.46 303.81 417.64 41.09 762.54 387.70 850.64 2,000.88 0.00 451.50 183.18 634.68 1,366.20 0.00 2,347.33 189.19 271.05

Balance Sheet of Dr.Reddy’s Laboratories as on 31.3.06

28

Amount (Rs.)

Liabilities Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

38.35 38.35 0.00 0.00 2,223.79 0.00 2,262.14 145.13 778.74 923.87

3,186.01

Assets Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deferred Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

1,052.90 491.08 561.82 112.92 911.36 443.10 581.22 25.50 1,049.82 723.61 625.44 2,398.87 0.00 624.25 174.70 798.95 1,599.92 0.00

3,186.02 2,409.27 294.95

Balance Sheet of Dr.Reddy’s Laboratories as on 31.3.07

29

Amount (Rs.) 83.96 83.96 0.00 0.00 4,289.40 0.00 4,373.36 1.92 327.98 329.90

Liabilities Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

4,703.26

Assets Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

1,291.19 609.15 682.04 280.61 966.99 487.58 1,055.70 148.60 1,691.88 1,028.56 1,308.11 4,028.55 0.00 731.96 522.97 1,254.93 2,773.62 0.00

4,703.26 1,896.92 260.45

Balance Sheet of Dr.Reddy’s Laboratories as on 31.3.08

30

Amount (Rs.) 84.09 84.09 0.00 0.00 4,727.72 0.00 4,811.81 3.40 458.91 462.31 5,274.12

Liabilities Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

Assets Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets

1,750.21 762.80 987.41 245.71 2,080.71 640.93 897.71 67.19 1,605.83 1,272.02 470.15 3,348.00 0.00 786.36 601.38 1,387.74 1,960.26 0.00 5,274.09

Contingent Liabilities Book Value (Rs)

1,892.55 286.12

31

DR.REDDY’S

RATIO ANALYSI S

32

RATIO ANALYSIS: When it comes to investing, analyzing financial statement information (also known as quantitative analysis), is one of, if not the most important element in the fundamental analysis process. At the same time, the massive amount of numbers in a company's financial statements can be bewildering and intimidating to many investors. However, through financial ratio analysis, you will be able to work with these numbers in an organized fashion. Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment.

Financial ratios are calculated from one or more pieces of information from a company's financial statements. For example, the "gross margin" is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms. In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company's situation and the trends that are developing. A ratio gains utility by comparison to other data and standards. Taking our example, a gross profit margin for a company of 25% is meaningless by itself. If we know that this company's competitors have profit margins of 10%, we know that it is more profitable than its industry peers which is quite favourable. If we also know that the historical trend is upwards, for example has been increasing steadily for the last few years, this would also be a favourable sign that management is implementing effective business policies and strategies.

33

Among the dozens of financial ratios available, we've chosen 30 measurements that are the most relevant to the investing process and organized them into six main categories as per the following list: 1) Liquidity Measurement Ratios - Current Ratio - Quick Ratio - Cash Ratio - Cash Conversion Cycle

2) Profitability Indicator Ratios - Profit Margin Analysis - Effective Tax Rate - Return On Assets - Return On Equity - Return On Capital Employed

3) Debt Ratios - Overview Of Debt - Debt Ratio - Debt-Equity Ratio - Capitalization Ratio - Interest Coverage Ratio - Cash Flow To Debt Ratio

34

4) Operating Performance Ratios - Fixed-Asset Turnover - Sales/Revenue Per Employee - Operating Cycle

5) Cash Flow Indicator Ratios - Operating Cash Flow/Sales Ratio - Free Cash Flow/Operating Cash Ratio - Cash Flow Coverage Ratio - Dividend Payout Ratio

6) Investment Valuation Ratios - Per Share Data - Price/Book Value Ratio - Price/Cash Flow Ratio - Price/Earnings Ratio - Price/Earnings To Growth Ratio - Price/Sales Ratio - Dividend Yield - Enterprise Value Multiple

It

is imperative to note the importance of the proper context for ratio analysis. Like

computer programming, financial ratio is governed by the GIGO law of "Garbage In...Garbage Out!" A cross industry comparison of the leverage of stable utility

35

companies and cyclical mining companies would be worse than useless. Examining a cyclical company's profitability ratios over less than a full commodity or business cycle would fail to give an accurate long-term measure of profitability. Using historical data independent of fundamental changes in a company's situation or prospects would predict very little about future trends. For example, the historical ratios of a company that has undergone a merger or had a substantive change in its technology or market position would tell very little about the prospects for this company. Credit analysts, those interpreting the financial ratios from the prospects of a lender, focus on the "downside" risk since they gain none of the upside from an improvement in operations. They pay great attention to liquidity and leverage ratios to ascertain a company's financial risk. Equity analysts look more to the operational and profitability ratios, to determine the future profits that will accrue to the shareholder. Although financial ratio analysis is well-developed and the actual ratios are well-known, practicing financial analysts often develop their own measures for particular industries and even individual companies. Analysts will often differ drastically in their conclusions from the same ratio analysis. Let us now practically work on some of the important formulas in ratio analysis taking values from the four year statements we have in the previous papers:

1) Liquidity Measurement Ratios Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. This is done by comparing a company's most liquid assets (or, those that can be easily converted to cash), its short-term liabilities. In general, the greater the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations.

36

A) Current Ratio: The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities.

The current ratios of the consecutive four years are: Year

Value

2005 2006 2007 2008

3.15 3.00 3.21 2.41

CURRENT RATIO 3.5 3 2.5 2 VALUE

1.5 1 0.5 0

2005

2006

2007

2008

37

INTERPRETATION: The current ratio is used extensively in financial reporting. However, while easy to understand, it can be misleading in both a positive and negative sense

- i.e., a

high current

ratio is not necessarily good, and a low current ratio is not necessarily bad. Here the current ratio

is

satisfactory

in

the

years

2006,and

good

in

the

year

2008.

B) Quick Ratio: The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.

The Quick Ratios of consecutive four years are: Year 2005 2006 2007 2008

Value 2.59 2.43 2.81 1.94

38

QUICK RATIO 3 2.5 2 1.5

value

1 0.5 0 2005

2006

2007

2008

INTERPRETATION: A higher ratio means a more liquid current position.it means the liquid current position of the company is good in 2007 (2.81) and satisfactory in 2005,2006,2008. Current yr ratio is very bad when it compared to the previous year.

2. PROFITABILITY INDICATOR RATIOS: In the income statement, there are four levels of profit or profit margins - gross profit, operating profit, pretax profit and net profit. The term "margin" can apply to the absolute number for a given profit level and/or the number as a percentage of net sales/revenues. Profit margin analysis uses the percentage calculation to provide a comprehensive measure of a company's profitability on a historical basis (3-5 years) and in comparison to

peer

companies

and

industry

benchmarks.

Basically, it is the amount of profit (at the gross, operating, pretax or net income level) generated by the company as a percent of the sales generated. The objective of margin analysis is to detect consistency or positive/negative trends in a company's earnings.

39

Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company's earnings that drive

A) Gross Profit Ratio:

The Gross Profit Ratios of consecutive four years are: Year 2005 2006 2007 2008

value 4.56 10.26 31.55 12.58 GROSS PROFIT RATIO

35 30 25 20 values

15 10 5 0 2005

2006

2007

2008

INTERPRETATION:

40

This ratio ratio indicates the degree to which the selling price of good per unit or in whole may decline without resulting in losses from operations to the firm. when we observe the above ratios there is an increase in the profit margin from 2005-2007,but a vast decline in gross profit in the year 2008(12.58).

B) Net Profit Ratio:

The Net Profit Ratio of consecutive four year:

Year 2005 2006 2007 2008

Values 4.06 10.08 29.01 13.57

NET PROFIT RATIO

41

30 25 20 15

values

10 5 0 2005

2006

2007

2008

INTERPRETION: An increase in the ratio over the previous year indicates improvement in the operational efficiency of the business. The net profit ratio in 2007(29.01) is good and 2008(13.57) is comparatively good when compared to 2005 and 2006.

C) Operating Profit Ratio:

The Operating Profit Ratios for the consecutive four years are: Year Value 2005 10.53 2006 15.82 2007 35.08 2008 17.42 OPERATING PROFIT RATIO

42

40 35 30 25 20

values

15 10 5 0

2005

2006

2007

2008

INTERPRETATION: The operating profit margin is high in the firm it is considered as a good sign to the company as its operating expenses are decreased. For the current year 2008 i.e(17.42) we can say the company position is satisfactory as operating ratio is high than the gross profit margin.

D)Return On Equity: This ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors.

The returns on equity shares for the consecutive four years are:

43

Year 2005 2006 2007 2008

Value 3.15 9.33 26.90 9.87

RETURN ON EQUITY RATIO 30 25 20 15

values

10 5 0 2005

2006

2007

2008

INTERPRETATION: Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business, making it correspondingly harder to obtain credit. It is the return on the amount invested in the company in the form of equity share capital. The higher is the return will be more interest for the investor to invest in the company. Hence the current year return on equity(9.87) is satisfactory but not good when compared to the previous year

3) DEBT RATIOS: 44

The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. To a large degree, the debt-equity ratio provides another vantage point on a company's leverage position, in this case, comparing total liabilities to shareholders' equity, as opposed to total assets in the debt ratio.

The Debt Equity Ratios of the four consecutive years are: Year 2005 2006 2007 2008

Value .13 .40 .07 .09

DEBT EQUITY RATIO

45

0.4 0.35 0.3 0.25 0.2

values

0.15 0.1 0.05 0

2005

2006

2007

2008

INTERPRETATION: The ratio compares equity percentage with total debt of the company. A lower the percentage means that a company is using less leverage and has a stronger equity position. This creates a confidence in the investor to invest in the company. The current year debt equity ratio(.09) is positively good.

CONCLUSION FOR RATIO ANALYSIS: After the examination of the above ratios given above makes it clear that the overall performance of the company is much poorer in the current year as compared to previous year.

CONCLUSION: 46

I here conclude my company analysis report by giving an idea on the project report in brief. My report consists the company history, statistics, and its organization structure and management, which is the minimum information is to be noted. It also contains four year consecutive income statements and balance sheets which are required for ratio analyzing. It is really good and I am feeling great to read a public company. This helps me in knowing an organization and its position in the business world which is compulsory to a MBA student to know.

M.MADHU LATHA (08211E0020)

47

BIBLIOGRAPH Y

48

BIBLIOGRAPHY: 1. Financial Management, Dr. S N Maheshwari, Sulthan Chand & Sons.2007 2. Financial Accounting for Business Management, Ashish K. Battacharya.2007 3. Management Accounting, R P Trivedi, Pankaj Publications.2007

WEBSITES: S.no 1. 2. 3. 4. 5.

Website www.drreddys.com www.investopedia.com www.moneycontrol.com Money.rediff.com www.wikipedia.com

49