LIQUIDITY ANALYSIS OF SELECTED PHARMACEUTICAL COMPANIES IN INDIA

Transcription

1 KAAV INTERNATIONAL JOURNAL OF ECONOMICS, COMMERCE & BUSINESS MANAGEMENT A REFEREED BLIND PEER REVIEW QUARTERLY JOURNAL KIJECBM/JUL-SEP (2017)/VOL-4/ISS-3/A59 PAGE NO ISSN: IMPACT FACTOR (2017) LIQUIDITY ANALYSIS OF SELECTED PHARMACEUTICAL COMPANIES IN INDIA 1 NEETU SAINI 1 Research Scholar, I. K. Gujral Punjab Technical University (PTU) Jalandhar, India 2 DR. SANJEEV BANSAL 2 Assistant Professor, Department of Commerce I. K. Gujral Punjab Technical University (PTU), Jalandhar, India Abstract This paper focuses on the liquidity position of selected companies of pharmaceutical industry in India. An attempt has been made to understand the abilities of selected pharmaceutical companies to pay short term debt obligations, how does these differ and get affected over a sufficient period of time. The major stress has been laid down on studying liquidity ratios of selected top 30 pharmaceutical companies in India. A comparative external analysis of these companies has been done for the period of 13 years. This analysis helps these companies to identify the strategic financial moves while establishing their standard goals for the long run. The present study has made use of various financial and accounting ratios which have been tested with the help of appropriate statistical tools like averages, standard deviation and coefficient of variation. These ratios have been further examined with the help of Repeated measure ANOVA. The paper has concluded that there is significant difference between related population means of current ratios and quick ratios of the company over the years. However the liquidity position of the pharmaceutical companies is quite satisfactory over the period under study. Keyword: pharmaceutical company, Keyword2: liquidity, Keyword3: India, Keyword4: debt obligations. Introduction The history of Indian pharmaceutical industry can be traced back to Gupta dynasty. Charak Samhita and Sushruta Samhita are two known old texts of famous Ayurvedic therapy which have been survived as rich source of information and assessment on medicine, Pharmaceutics and surgery from ancient India (Samhita, C., 2001). This rich literature is not only used in India, but it has been warmly accepted around the globe for further research in this area. The dependence upon indigenous form of medicine in India was reduced and shifted toward imported form of medicines during British rule. With the effort of then famous scientists PC Ray, TK Gajjr and S Kotibhaskar, first Indian pharmaceutical organization was set up with the name of Bengal Chemicals in (Garg, N.K., 1981). However even some more establishments came into existence, even then these companies were not able to meet the growing demand 405

2 of medicines and equipments. It was after the world war II, a large number of pharmaceutical companies started their operation in India viz. Unichem, Zandu Pharmaceutical Company, Calcutta Chemicals, CIPLA, etc. where these companies were able to meet up the demand supply gap to a large extent. In the post independence period, the government of India took special initiative toward this sector. Numerous new units came into existence and a large number of new drugs were produced by these units for various purposes and medications. But all these were not sufficient and there was dire need of research and development in this direction. The overall contribution of Indian pharmaceutical industry in the global growth was negligible at that time. With the passage of time foreign direct investment and foreign institutional Investors increased and started to invest in India. Hindustan Antibiotics Ltd was the first drug manufacturing company set up in public sector of India. Its sole objective was to provide affordable drugs or medicines to the local masses. After the change in the policies and process patent in the Patent Act 1911, subsidies and infrastructural facilities given by government, recommendations of World Health Organization and the changes introduced during the post liberalization period have paved the way in emerging Indian pharmaceutical sector as a global leader in terms of volume and value. At present, the Indian pharmaceutical industry is one of the world s largest global giant industries in terms of ranking at 3 rd place in terms of volume and 13th in terms of value in the global pharmaceutical market (Bhunia 2010, 428; IBEF 2017). The statistics have shown that the Indian pharmaceuticals market has grown at a CAGR of per cent during with the market increasing from US$ 6 billion in 2005 to US$ 36.7 billion in 2016 and it has also been expected to expand the same at a CAGR of per cent to US$ 55 billion by The reason is simple that India s cost of production of drugs is significantly lower than that of the US and almost half of that of Europe. The success story is expected to continue and it has been forecast that the market size of the Indian pharmaceutical is expected to grow to US$ 100 billion by 2025, driven by increasing consumer spending on medicines, quick rate of urbanization, health awareness and raising healthcare insurance coverage. The share of Indian pharmaceutical export in the total world s consumption of generic medicines is nearly 5 percent. The US is the largest consumer of Indian pharmaceutical exported medicines followed by UK. However the use of Indian pharmaceutical generic drug is also increasing in other nations like Canada, France, Germany, Brazil and Japan (Pant 2016). The study of historical perspective of the Indian pharmaceutical sector has shown that these companies have acquired substantial market share especially during the post liberalization period. They have increased their market capitalization and consequently profitability as well. However their liquidity and solvency position are still requiring a comprehensive outlook to compete globally in the long run and avoid bankruptcy conditions in short run. A review of the existing studies has been made in this regard and gap has been tried to be identified. Literature review Bhunia (2010) has studied the financial performance of pharmaceutical companies in India. He has studied liquidity, solvency, profitability and financial efficiency of the companies to show that better management of finances leads to the growth of the firms. The author has studied the financial reports of two public sector drugs and pharmaceutical companies viz. Karnataka Antibiotics & Pharmaceuticals Ltd. (KAPL) and Rajasthan Drugs & Pharmaceuticals Ltd. (RDPL). He has undertaken the financial period of 12 years from to Various statistical measures like linear regression and t-test has been used to interpret the results. The author has concluded that the overall ability of both firms is quite satisfactory to meet short term obligations. However Debt equity management has shown more stress on finances through debt, may lead to bankruptcy in long run. Financial stability ratios have shown downward trend for both companies. Saleem and Rehman (2011) have argued that there must be relationship between liquidity and profitability of the enterprises. They have taken financial data of 26 companies from the oil and gas sector listed on Karachi stock exchange for the period 2004 to The impact of liquidity on profitability has been studied using panel data analysis with the help of ordinary least square method. The authors have concluded that ROI is greatly affected by the liquidity ratios where as ROE is not affected by the liquidity ratios. 406

3 ASA & associates LLP (2015) have published a report on pharmaceutical industry in India. They have discussed that the growth of this sector has tremendously increased in the last few decades. It has been expected that this sector will grow at 20% CAGR annually over the next five years. They have studied India is among top five emerging markets in this area where the generic drugs accounts for almost 20% of global export in terms of volume. India has almost registered units with 250 leading pharmaceutical companies. The reason is competent workforce, cost effective chemical synthesis, legal and financial framework, information & technology, globalization and free market economy. Major challenges to this sector are declining productivity of in house R & D, patent expiration, increasing regulatory concerns, global recession etc. Desai (2015) has conducted a solvency analysis of selected pharmaceutical companies in India. He has studied top four pharmaceutical brands viz. Lupin, Dr. Reddy s Lab, Cadila Health Care, & Cipla. The period of the study was five years from to They have studied the liquidity and solvency using various accounting ratio and analyzed with the help of averages, standard deviation and coefficient of variation. The author has concluded that all the firms have ability to pay their debt timely. However Dr Reddy s lab and Cadila health has high debt ratio. Debtor turnover ratio and Cipla and Cadila Health are quite better than others. Interest coverage ratio is better in case of Lupin is quite high, show their efficiency in timely meeting their interest payments. Objective of the study a) To know the liquidity position of the selected leading Indian Pharmaceutical Companies. b) To determine the overall liquidity position of Indian pharmaceutical industry. Companies under study: The present study has taken a representative sample of leading 30 pharmaceutical companies viz. 1) Sun pharma 2) Lupin 3) Cadila Health 4) Cipla 5) Dr. Reddy s Lab 6) Piramel Enterprises 7) Aurobindo Pharma Ltd. 8) Glenmark 9) Torrent 10) Glaxo Smithkline Pharma Company 11) Biocon 12) Divislab 13) Natco 14) Ajanta 15) Jubilant 16) Sanofi 17) Strides Shasun 18) Abbott 19) Pfizer 20) Wockhardt 21) Ipca Labs 22) Shilpa Medicare 23) Dishman 24) FDC 25) Granules 26) Sequent Scientific 27) Caplin Point 28) JB Chemicals 29) Unichem Lab 30) Marksans. Their Financial data from annual reports were used for further analysis. Research Methodology The study has been undertaken for the financial periods of 13 years from to The data has been collected from the annual reports of the companies. In order to analyze the liquidity position of Indian pharmaceutical industry, annual reports of 30 randomly selected leading pharmaceutical companies have been studied for the above mentioned period. Their positional statements have been used and studied thoroughly. The study has attempted to analyze the liquidity position of the company to depict their position to meet short term obligations and long term payments when they become due. Liquidity Ratio is the best measure and indicator to assess the financial health of a company. It signifies the firm s ability to pay short term and near obligations timely without much hassle. The margin of safety in current assets signifies the edge over the immediate obligations and shows how well liquid your financial position is. This margin is well known as working capital in financial terminology, is an indicator of liquidity and solvency position. In other words working capital is excess of current assets over current liabilities of a company. The proposed study has focused upon two essential tools of liquidity ratios viz. current ratio and quick ratio. Current ratio is the ratio of current assets and current liabilities of a company. If the ratio is greater than unity, it signifies company s good position to pay their short term liabilities. Whereas the quick ratio is quite stringent in nature and do eliminate inventory and prepaid expenses out of gross current assets. These two assets are less liquid and not easily convertible into cash easily as and when required to meet obligations. A quick ratio or acid ratio is the ratio of liquid assets to current liabilities. This ratio also greater than or equal to unity is considered quite satisfactory. In nutshell, these ratios can be described as below: Current Ratio = Current Assets Rule of thumb (2:1) Current Liabilities 407

4 Quick Ratio = Quick or liquid Assets rule of thumb (1:1) Current Liabilities These ratios have been taken for 30 pharmaceutical companies for the period of 2004 to These ratios are related to each other and not independent year wise. There is a need to understand the overall differences in the related means of these ratios. So here same companies are being measured more than once i.e. for 13 years on the same dependent variable. Here independent variable is time or years which is categorical and dependent variable has been taken is the liquidity ratios of these companies over the period. Repeated Measure ANOVA: A study of liquidity ratios of 30 subjects (companies) has been done for the independent variable time under 13 different years. The within subject factor has been labeled as treatment instead of time or years. A repeated measure ANOVA has been used to study related time periods for same group of companies. A repeated measure ANOVA or ANOVA is a statistical approach to study repeated measures designs. This design is also known as within subjects ANOVA or ANOVA for correlated samples which is equivalent to one way ANOVA for related groups. ANOVA is a test to detect overall differences between related means Hypothesis testing under study: 1) Null Hypothesis: Whether there is no significant difference between related population means of current ratios over the years H oc : μ 1c = μ 2c = μ 3c = = μ 13c Alternative Hypothesis: The related population means are not equal. I.e. at least two means differ significantly. H Ac : at least two means differ significantly. 2) Null Hypothesis: Whether there is no significant difference between related population means of quick ratios over the years H oq : μ 1q = μ 2q = μ 3q = = μ 13q Alternative Hypothesis: The related population means are not equal. I.e. at least two means differ significantly. H Aq : at least two means differ significantly Analysis: A repeated measure ANOVA has been conducted on the financial ratios with the level of significance at alpha 5%. A repeated measure ANOVA calculates an F-statistic in a similar way and for analysis of liquidity position of Indian pharmaceutical industry has been calculated as below: ANOVA Source of Variation SS Df MS F P-value F crit Rows (Time) E Columns Error Total Table 1: Difference between related population means of current ratios over the years This table has shown that p value is more than alpha value i.e It is also clear that F- Value is more than F- critical value. So the null hypothesis is rejected that whether there is significant difference between related population means of current ratios over the years among the companies. It has been observed from the average current ratio for last 13 years that Caplin point is worst among all and there average current ratio is However rest of 29 companies is able to maintain their average above unity. Sun pharma has highest among all and their average current ratio for last 13 year is where as Pfizer stand at number two position. Inspite of marinating good average Sun Pharma has highest standard deviation of The major reason is Sun pharma has very high current ratio in the period to It has also shown that they were not properly utilizing they had highly liquid assets 408

5 unutilized in that period. The least standard deviation in the current ratio for the period of 13 year is in case of Cadila Health with an average of ANOVA Source of Variation SS Df MS F P-value F crit Rows E Columns Error Total Table 2: Difference between related population means of quick ratios over the years This table has shown that p value is more than alpha value i.e It is also clear that F- Value is more than F- critical value. So the null hypothesis is rejected that whether there is significant difference between related population means of quick ratios over the years among the companies. It has been observed from the average quick ratio for last 13 years that Natco is worst among all and there average quick ratio is and IPCA lab is However rest of 24 companies is able to maintain their average above unity. Sun pharma has highest among all and their average quick ratio for last 13 year is where as JB Chemicals stand at number two position with an average quick ratio of Inspite of marinating good average Sun Pharma has highest standard deviation of The major reason is Sun pharma has very high quick ratio in the period to It has also shown that they were not properly utilizing they had highly liquid assets unutilized in that period. The least standard deviation in the current ratio for the period of 13 year is in case of Cadila Health with an average of Finding of the study: 1) The current ratio of all the companies under consideration is quite satisfactory. Sun Pharma and Divislab have surplus liquid assets at their disposal where as majority of the companies are able to maintain the thumb rule of 2:1 average current ratio throughout the period of 13 years. Caplin Point is the only company maintaining average current ratio below unity since This analysis shows good average liquidity position of the companies to meet their near term obligations. 2) The standard deviation in the average current ratio is highest in case of Sun Pharma. In , they have 8.43 current ratio and 7.35 in , leading to huge deviations from the averages. Whereas coefficient of variation is highest in case of Wockhardt i.e. 77%. 3) The quick ratio of the most of the companies is also satisfactory. Sun pharma is the only company having surplus liquid assets and with quick ratio of and most of the companies above unity. IPCA lab has least quick ratio showing illiquidity since ) A repeated measure ANOVA has been conducted to find differences between related population means of current ratios and quick ratios over the years for the selected pharmaceutical companies. it has been observed that these have changed and evolved significantly over the period. Conclusion of the study: Most of the Indian pharmaceutical companies have been able to maintain their liquidity position during the period of study. A few are still struggling and have liquidity at the nook and corner. These companies must manage their receivables and accounts payable well in advance so that they may not be running out of working capital and leading to poor solvency position. The present study has opened the scope of further research in this area which may prove as light house for the Indian pharmaceutical sector. 409

6 Bibliography and References: A brief report on pharmaceutical industry in India,ASA & associates LLP 2, Desai H, Solvency analysis of selected pharmaceutical companies in India, Global Journal of Research Analysis, 2015,vol. 4, no. 8, pp Field, AP, Repeated measures ANOVA, Discovering Statistics Using IBM SPSS Statistics: and Sex and Drugs and Rock N Roll, London, Sage, (4 th Edition), 2013 pp Garg, NK & Nigam SK, Interaction in chemistry and medicine between India and Europe in 18 th - 19 th century, Indian Journal of History of Science, 1981, vol. 16, no. 2, pp Khidmat, WB & Rehman, MU, Impact of liquidity & solvency on profitability chemical sector of pakistan, Ekonomika Management Inovace, 2014, vol.6, no. 3, pp Majumder, MT & Rahman, MM, Financial analysis of selected pharmaceutical companies in Bangladesh, Journal of Biology, Agriculture and Healthcare, 2011,vol. 1, no. 2, pp Pant. R, Indian pharmaceutical exports: the growth story, business standard, Saleem, Q & Rehman, RU, Impacts of liquidity ratios on profitability, Interdisciplinary Journal of Research in Business, 2011,vol. 1, no.7, pp Samhita, C, Charaka samhita, Varanasi, India: Chaukhamba Bharati Academy, 2001,vol.1, pp Indian Pharmaceutical Industry, Indian Brand Equity Foundation (IBEF), Investor Relations/ Finance marksanspharma.com/annual-reports.html en.sanofi.com/publications/publications.aspx 410

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8 Table 3: Current ratios of 30 companies over a period of 13 years with composite average, Standard deviation and Coefficient of variation Table 4: Quick ratios of 30 companies over a period of 13 years with composite average, Standard deviation and Coefficient of variation 412