RANBAXY Analysis Of Working Capital Management

Raw Materials Storage Period (RMSP):

This is the time-period when the company starts procuring raw materials including spares parts & stores from suppliers up-to its consumption in the production process. If we take a look at the companys proceedings for the last three years, there is not much to differentiate. On an approximate basis 40 days is the time taken to carry-out the initial process of the cycle.

Work-In-Progress Storage Period (WIPSP):

This is the second phase in working capital management where the company converts the raw materials to semi-finished goods considering all the direct expenses incurred in the production process. Considering the cumulative basis, in 2008 & 2009 the company took approximately 75 days & in 2010 the company took 83 days to do that. If we only consider the WIPSP phase then the company took 34, 35 & 43 days in 2008, 2009 & 2010 respectively. This shows that there was a sudden rise in direct expenditure for the company in 2010 which is a bit of a concern as it will take more time in the production process of semi-finished goods.

Finished Goods Storage Period (FGSP):

This is the third stage in the working capital cycle where the semi-finished goods are converted to the finished goods considering all the indirect expenses incurred during this phase. Taking the cumulative basis into consideration, the company took approximately 115 days in 2008 & 2009 but 123 days in 2010. If only FGSP phase is considered then in 2008, 2009 & 2010 the company took approximately 40 days. It shows that, the company was successful in managing the indirect costs n semi-finished goods throughout. But, taking the cumulative basis into consideration in 2010 the company took a week more to produce the finished goods. This can be justified as a spill-over effect from the WIPSP.

Average Collection Period (ACP):

This is the time period that justifies the realization efficiency of the company after it sells finished goods to the debtors. The first thing we look into this is the Debtor Turnover Ratio (DTR) which was 4.5, 3.5 & 3.7 times for the company in 2008, 2009 & 2010 respectively. Considering cumulative basis, the company took 195, 218 & 221 days in 2008, 2009 & 2010 respectively to collect cash from the debtors after selling the finished goods from the starting point of production. If only ACP is considered, the company took 80, 103 & 98 days in 2008, 2009 & 2010 respectively. It shows that, the company had problems in 2009 for

realizing cash from debtors but it managed it efficiently while 2010 figure is seen. On the overall impact the company has bought down 3 days in the production process in comparison to the week loss it had till FGSP due to the excessive direct expenses incurred on the final year.

Gross Operating Cycle (GOC):

Its the total time-period starting from the point of making first payment to procure raw materials for production to the last realization of cash from the debtors in a fiscal year. The sum-total of RMSP, WIPSP, FGSP and ACP is taken to compute this. The cumulative figures of all these phases for 2008, 2009 & 2010 were 195, 218 & 221 days respectively. It is very evident that in 2009 & 2010 the company had faced problems in production, sales & generation of revenues compared to 2008. This may be due to the effect of the global economic downfall. But the time lag in 2010 was much lesser than it was in 2009 compared to 2008. This also shows a positive sign that the company is recovering well.

Average Payable Period (APP):

It is basically the creditors velocity. For computing this, first thing we consider is the Creditors Turnover Ratio (CTR) which was 3.2, 2.7 & 2 times in 2008, 2009 & 2010 respectively. The APP of the company says that, it took 111, 134 & 180 days in 2008, 2009 & 2010 respectively on an average to pay its creditors for the materials supplied. Its pretty evident that year by year the company is taking more time to pay its creditors. Form the stakeholders point this is not at all a good sign but if the creditors are allowing the company to pay on such time & extending it year by year due to the reputation of the company then its acceptable. But the company must take things seriously as its one of the main issues.

Net Operating Cycle (NOC):

Its the net time period where the payment efficiency of the company is measured after we deduct the APP from the GOC. It shows how much extra time or less time the company is taking in paying off the creditors. Form the computed figures we can infer that in 2008 & 2009 the company took approximately 84 days extra to pay-off its creditors. But one of the real positives from the companys point is that it bought down the extra payment period to 40 days in 2010 which would gain the suppliers confidence. May be as the company had problems in realizing cash from debtors, it used up the extra reserves for paying off the creditors early when can be adjusted once the cash is received from debtors.

Net Working Capital Ratio:

This measure shows how much working capital a company has used on a fiscal year in terms of the total assets or total resources it has. In this case the company has used 11%, 16% & 37% of working capital in 2008, 2009 & 2010 respectively in terms of its total assets or total resources. This also signifies that in 2010 the company had used its current assets more for business operations compared to 2008 & 2009. May be thats the reason the NOC was bought down as the creditors was paid from the instant cash generation from short term activities of the company.

Working Capital Turnover Ratio:

This ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales. In this case the computing figures come to 5, 3.7 & 1.5 times approximately in 2008, 2009 & 2010 respectively. It means that the capacity of the entity is generating sales is declining on year to year basis. This may be due to the effect of the global economic slowdown. But the efficiency of the company should be increased to give better results in future.

Working Capital Management Lupin

Raw Material Conversion Period
This is the time-period when the company starts procuring raw materials including spares parts & stores from suppliers up-to its consumption in the production process. If we look at the trend in 3 years, companys RMCP for 2008 was 45.65, in 2009 it was 83.41, in 2010 it was 86.04. As it is visible that RMCP is continuously increasing, so it is not good for the company. Raw material consumption is increasing from 2008 to 2009 to 2010.

Work-In-Progress Storage Period (WIPSP):

This is the second phase in working capital management where the company converts the raw materials to semi-finished goods considering all the direct expenses incurred in the production process. In 2008 it was 27 days, 2009 47 days and 2009 79 days. This shows that there was a sudden rise in direct expenditure for the company which is a bit of a concern as it will take more time in the production process of semi-finished goods.

Finished Goods Storage Period (FGSP):

This is the third stage in the working capital cycle where the semi-finished goods are converted to the finished goods considering all the indirect expenses incurred during this phase. FGCP in 2008 was 31.39 days, in 2009 57 days and 2010 55 days. As it can be seen there hasnt been much change from 2009 to 2010. But from 2008 to 2009 there has been an increase.

Average Collection Period (ACP):

This is the time period that justifies the realization efficiency of the company after it sells finished goods to the debtors. Considering cumulative basis, the company took 162,301,220 days in 2008, 2009 & 2010 respectively to collect cash from the debtors after selling the finished goods from the starting point of production. If only ACP is considered, the company took 90, 103 & 90 days in 2008, 2009 & 2010 respectively. It shows that, the company had problems in 2009 for realizing cash from debtors but it managed it efficiently while 2010 figure is seen. On the overall impact the company has bought down 3 days in the production process in comparison to the week loss it had till FGSP due to the excessive direct expenses incurred on the final year.

Gross Operating Cycle (GOC):

Its the total time-period starting from the point of making first payment to procure raw materials for production to the last realization of cash from the debtors in a fiscal year. The

sum-total of RMSP, WIPSP, FGSP and ACP is taken to compute this. The cumulative figures of all these phases for 2008, 2009 & 2010 were 194,199,311 days respectively. It is very evident that in 2009 & 2010 the company had faced problems in production, sales & generation of revenues compared to 2008. This may be due to the effect of the global economic downfall. But the time lag in 2010 was much lesser than it was in 2009 compared to 2008. This also shows a positive sign that the company is recovering well.

Average Payable Period (APP):

It is basically the creditors velocity. 122, 75, 235 days. The APP of the company says that, it took 122, 75, 235 days in 2008, 2009 & 2010 respectively on an average to pay its creditors for the materials supplied. Its pretty evident that from 2008 to 2009 companys APP had decreased which is a good sign for the company. But from 2009 to 2010 the company is taking more time to pay its creditors. Form the stakeholders point this is not at all a good sign but if the creditors are allowing the company to pay on such time & extending it year by year due to the reputation of the company then its acceptable. But the company must take things seriously as its one of the main issues.

Net Operating Cycle (NOC):

Its the net time period where the payment efficiency of the company is measured after we deduct the APP from the GOC. It shows how much extra time or less time the company is taking in paying off the creditors. In 2009 it was 71 days, in 2009 it was 187 days, in 2010 it was 76 days. From the computed figures we can infer that in 2008 & 2009 the company took approximately 116 days extra to pay-off its creditors. But one of the real positives from the companys point is that it bought down the payment period to 76 days in 2010 which would gain the suppliers confidence. May be as the company had problems in realizing cash from debtors, it used up the extra reserves for paying off the creditors early when can be adjusted once the cash is received from debtors.

Inter Firm Analysis

Taking the Pharmaceutical Industry of India into consideration, Working Capital Management is an integral part of their operations. This is because this industry always handles a great deal of current assets such as inventories, debtors & they do purchase raw materials on credit from suppliers. The short term resources do go hand in hand with the long term resources in this industry & without working capital management this industry cannot move an inch further. More than 50 companies operate in the bio-technology part of Indian Pharmaceutical Industry & out of that we are analysing the results of three major giants namely Ranbaxy, Cipla & Lupin. By having a broad view on the computed results we can infer how this industry is utilizing the overall working capital they generates. As we move on to inter firm analysis, first of all lets take a look at the RMCP of all the three firms for the year 2008, 2009 & 2010. Ranbaxy maintained on an average of 40 days throughout. Lupin maintained 45 days for 2008 & in 2009 it was 83 days. But finally it came down to 86 days in 2010. Cipla maintained 114 days in 2008 but on 2009 & 2010 it came down to 124 & 81 days respectively. We assume that size of the firms & amount of raw materials consumed as per requirements makes a significant difference in RMSP for each of the firm. But on the contrary Ranbaxy is more efficient than the other two entities which are visible clearly from the computation results. Now lets have a look at the WIPSP for 2008, 2009 & 2010 for the three firms. Ranbaxy took an average of 75 days in 2008 & 2009 but 83 days in 2010 to convert the raw materials into semi-finished goods. During 2008, Lupin performed the same activity in 72 days but it came down to 130 days in 2009 & 165 days in 2010. But Ranbaxy did this in 121, 143 & 136 days taking 2008, 2009 & 2010 respectively. If the size difference & production capacity is not considered, again Ranbaxy is the standout performer among the three in this activity. Another point which we can look into is the direct expenses incurred by each firm which can make a significant impact on these figures but if we do consider that, the size & production capacity do comes in between. Considering FGSP it can be seen, Ranbaxy took approximately 115 days in 2008 & 2009 but 123 days in 2010 to convert raw materials into finished goods. Lupin did the same activity in 103, 187 & 220 days take 2008, 2009 & 2010 respectively. Cipla on the other hand took 156, 180 & 171 days in 2008, 2009 & 2010 respectively. We have clear cut evidence from the results that Ranbaxy is do performing well in terms of the other two entities. In this stage the indirect expenses play a vital role for the companies. It seems Ranbaxy do have a sound managing technique in bringing out the most efficient thought of where to spend & in what amount. Moreover at this stage the piling up of inventories do hampers the companies

which can be a reason Lupin & Cipla covers an extra time period irrespective of the size of the firms & production capacity. It can also be the reason that these two companies got more affected due to the global economic slowdown compared to Ranbaxy as there was less demand in the market at that point. When average collection period is considered which signifies the total time period taken by a company from the point of procuring raw materials to the last realization of cash from the debtors, Ranbaxy took 195, 218 & 221 days in 2008, 2009 & 2010 days respectively whereas Lupin took 193, 199 & 310 days in 2008, 2009 & 2010 respectively. The time period for Cipla was 262, 315 & 298 days in 2008, 2009 & 2010 respectively. From the result we can infer very safely that Ranbaxy maintains a very effective time-period from the point of production to the point of realization of cash from the debtors when compared to Cipla & Lupin. May be Ranbaxy sells goods to debtors who has high credibility & they justifies that by taking less time to pay cash & companies like Lupin & Cipla is not up-to the mark in this aspect Even a company can take some measures in managing the account receivables. If we consider that these three companies do take steps, again Ranbaxy is far better managed compared to the other two. This cumulative result also signifies the GOC for these three companies. The Creditors velocity of Average Payable Period for Ranbaxy is 111, 134 & 180 days in 2008, 2009 & 2010 respectively. Lupins APP in 2008 was 122 days & in 2009 it came down to 78 days. But in 2010, it suddenly increased to 235 days which is not a good sign. Ciplas creditor velocity was 106 days in 2008 but it extended to 111 days in 2009 & again came down to 91 days in 2010. Comparing the three firms its clear that Ranbaxy takes less time to pay its creditors though in 2010 it took some more time compared to its previous records. This is a very important area for the companies as the suppliers do keep an eye on these results. Finally when the NOC is considered, its pretty much visible that Ranbaxys figures came down to 40 days in 2010 from an average of 84 days in 2008 & 2009. Lupins figure for 2008 was 71 days which gradually increased to 188 days in 2009 & again came down to 76 days in 2010 which justifies that the company recovered a lot. Ciplas figure shows that in 2008 it took 155 days but that stretched to 205 days on an average in 2009 & 2010. Actually this is the extra time a company takes to clear its payments to the suppliers. So it does make an impact on the companys credit worthiness. While comparing & analysing the results we can come to a conclusion that Ranbaxy has better credibility while the management of working capital comes into picture though all the companies significantly bought down the NOC in 2010. Although all companies do suffer due to the global economic downfall & there is always a difference in size & production capacity, its really safe to infer that Ranbaxy does have better working capital management in place as compared to Lupin & Cipla.