A STUDY ON LIQUIDITY MANAGEMENT OF PHARMACEUTICAL COMPANIES IN INDIA

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A STUDY ON LIQUIDITY MANAGEMENT OF PHARMACEUTICAL COMPANIES IN INDIA Dr A.L KAMALAVALLI 1 S.PUSHPAVATHI 2 1 Associate Professor, Department of Commerce, N.G.M College, Pollachi.

It can be defined as an act of planning, organizing, directing and controlling the liquidity of a firm to reach a pre-determined end.

1 A STUDY ON LIQUIDITY MANAGEMENT OF PHARMACEUTICAL COMPANIES IN INDIA Dr A.L KAMALAVALLI 1 S.PUSHPAVATHI 2 1 Associate Professor, Department of Commerce, N.G.M College, Pollachi. 2 Research Scholar, Department of Commerce, N.G.M College, Pollachi. ABSTRACT: Liquidity management implies managing the firm s ability to meet its short term obligations. It can be defined as an act of planning, organizing, directing and controlling the liquidity of a firm to reach a pre-determined end. Liquidity management is necessary to strike a balance between return and the risk of being illiquid at a given point of time. In this present study a liquidity management of top 10 pharmaceutical companies for the period of 10 is analyzed through liquidity ratios, Motaal s comprehensive test and Rank correlation. The study concluded that the liquidity position of the company is volatile during the study period. However, the liquidity of the company was found better as compared to the industry average. More precisely we investigated the relationship between liquidity and profitability. The study accepted the null hypothesis and concluded that profitability of Indian Pharmaceutical companies is not highly influenced by liquidity. Introduction: The general state of liquidity in corporate sector in recent past particularly after the sharp decline in the interest rates has tended to be reasonably good in India. However, many companies both in public and private sector irrespective of their size, age or product range have been experiencing difficulties in meeting their short-term maturing liabilities. Liquidity and profitability are two important and vital aspects of corporate business life. No firm can survive without liquidity. A firm not making profit may be considered as sick but, one having no liquidity may soon meet its downfall and ultimately die. As a matter of fact, liquidity is a pre-requisite for the very survival of a business firm. Liquidity management has thus, become a basic and broad aspect of judging the performance of a corporate entity. A business can survive long periods of low earnings if it has adequate cash flow and financial strength. But the opposite is not true (Druker, 1980); therefore, for smooth running of the business, a firm should have required degree of liquidity. It should be neither excessive nor inadequate. Excessive liquidity implies accumulation of idle funds which earn no profits for the firm and inadequate liquidity results in production interruptions and hampers the firm s earning capacity. An efficient liquidity management can only do much to ensure the success of the firm while inefficiency can lead not only to loss of profits but also to the ultimate downfall of what otherwise might be considered as promising concern.the need for skilled liquidity management in corporate sector has thus become greater in recent years (sur,1999). Objectives of the Study This study has the following broad objectives: 1. To examine the liquidity position of the firms during the period under study. 2. To compare the liquidity position of the firms. 3. To measure the extent of relationship between liquidity and profitability. 104 icmrrjournal@gmail.com

2 Review of literature A brief review of the different parts of research in the field is attempted in the following paragraphs. Erkki Kytönen (2005) investigates the importance of International financial reporting (IFR) on the information asymmetry and the strategic liquidity holding decisions and concludes that firms' size, growth opportunities, opportunity costs, cash flows, efficiency of working capital management, leverage, dividend policy, and the probability of financial distress are most important in determining liquidity holdings in Finnish firms. Bardia (2006) in their study liquidity maintained by the Steel SAIL had concluded that the overall state of liquidity should be improved as to put a favorable impact on the profitability of SAIL. Singh and Pandey (2008) suggested that, for the successful working of any business organization, fixed and current assets play a vital role, and that the management of working capital is essential as it has a direct impact on profitability and liquidity. They studied the working capital components and found a significant impact of working capital management on profitability for Hindalco Industries Limited.Amalendu Bhunia (2010) in his study liquidity management of the private sector steel companies in India had pointed out that there is positive relationship exists between liquidity and profitability exists. Dutta Smriti Mahavidyalaya(2010) assessed the impact of working capital management on liquidity, profitability and non-insurable risk of ONGC and found that positive relation between liquidity and profitability,risk and profitability of the firm.talat Afza and Mian Sajid Nazir (2011) evaluated the efficiency of the working capital management of cement sector of Pakistan by using three efficiency index values and conclude that the cement firms of Pakistan did perform remarkably well during this period. Qasim Saleem and Ramiz Ur Rehman (2011) reported both Liquidity and profitability are closely related because one increases the other decreases. Vivek Sharma (2011) in his study revealed that liquidity risk and return both are very important aspects to be considered while making any decisions regarding company s finance. It affects both liquidity and profitability of the firms. Based on the above reviews the researcher has identified, that liquidity management in pharma companies has not expressed properly. Hence an attempt is made in this article to examine the liquidity management of pharmaceutical companies in India. Research Methodology We selected top ten pharmaceutical companies operating in India for the present study based on market capitalization above twenty corers. The study relates to a period of ten years, starting from to For the purpose of study only secondary data have been used. The study is based on the secondary data obtained from the CAPITAL LINE database. In the course of analysis, various accounting and statistical tools and techniques have been used. Accounting techniques includes ratio analysis, while among statistical techniques the Arithmetic Mean, Motaal s comprehensive test, test of significance ( t test), Rank order correlation have been employed. The pharmaceutical companies selected for the purpose of the study are as follows: Cipla Limited Cadila Healthcare Ltd DR.Reddy laboratories Ltd Glenmark pharmaceuticals Lupin pharmaceutical Ltd Torrent pharmaceuticals Aurobindo pharma Ltd Glaxosmithkline pharmaceutical Ltd Sun pharmaceutical Ltd IPCA laboratories ANALYSIS AND INTERPRATATION: Current Ratio (CR): This ratio shows the relationship between current assets and current liabilities of a company. It is an important measure of analyzing the firm's ability to pay off and it s 105 icmrrjournal@gmail.com

3 current obligations out of its short-term resources. The higher the CR, the higher is the amount available per rupee of current obligations and accordingly, the higher is the feeling of safety and security. The rule of thumb about the Current Ratio is 2: 1. This rule is based on the logic that in the worse situation even if the possibility of 50% shrinkage in the value of current assets, the firm will be in position to payoff its current obligations. This rule, however, cannot be treated as a general guide applicable to all types of businesses. Each firm should develop its own standard for Current Ratio from past experience. Table I shows that the Current Ratio in selected companies mean value stood at It varied between 2.71 in sun pharmacy and 1.16 in Aurobindo. Out of ten companies Cipla with 2.26, Sun Pharma with 2.74, Glaxosmith with 2.06, Dr.Reddy with 1.78 and Glenmark with 1.91are higher than the industry mean value indicating more liquidity funds than requirement. Torrent, Lupin, IPCA labs, Cadila and Aurobindo are lower than the industry men value but it is satisfactory indicating that these companies have sufficient funds to meet current obligations. Table:1 RATIOS RELATING TO LIQUIDITY MANAGEMENT OF SELECTED PHARMACEUTICAL INDUSTRY COMPANY CR QR ITR DTR CTTR CIPLA DR.REDDY LUPIN AUROBINDO SUN PHARMA CADILA GLENMARK TORRENT GLAXOSMITH IPCA LABS Mean Quick Ratio (QR): This ratio is a more rigorous measure of liquidity as compared to the current ratio. It is a refinement of Current Ratio as it excludes non liquid current assets such as inventories, prepaid expenses etc. Thus by using it, the liquidity of a company can be judged more precisely. Conventionally, a quick ratio of 1:1 is considered as satisfactory. It is evident from Table 1 that the industry mean value stood at 1.98 times. It is high in Glenmark with 3.71 times followed by Aurobindo with 2.49, Sun Pharma with 2.47 and Dr.Reddy with 2.19 and low in Cadila with Those companies whose mean value is higher than the industry average has idle funds in hands which may reduce their profitability. Other companies such as Cipla, Lupin, Torrent, Glaxosmith and IPCA labs area also maintain more than the conventional standard. Out of ten companies four is higher than industry value rest of six is lower than the industry value. So as far quick ratio is concerned that the debt paying capacity of selected companies are satisfied. They are kept their status sound enough in respect of liquidity throughout the study period. Inventory Turnover Ratio (ITR): This ratio focuses light on the inventory control policy adopted by a concern. This ratio shows the relationship between the cost of goods sold during a particular year and inventories kept by a concern during that year. Higher ITR shows higher efficiency of Inventory management and vice versa. The Table 1 discloses that the industry mean value stood at ITR of Glemark is maximum with 7.39 followed by Cadila, Dr,reddy, Lupin, torrent and sun Pharma with 5.92, 5.89, 5.31, 5.27 and Out of ten companies six companies namely Dr.Reddy, Lupin, Sun 106 icmrrjournal@gmail.com

4 Pharma, Cadila, Glemark and torrent are higher than the industry mean value. All the selected companies are maintaining slightly higher than the Industry average. It is thus, clear that in general the inventory management of selected pharmaceutical companies is satisfactory during the period under study. Debtors Turnover Ratio (DTR): Debtors turnover ratio highlights credit and collection policy pursued by a firm. The quality of debtors influences the liquidity of a firm. It tests the speed with which debtors are converted into cash. The liquidity of a firm is directly influenced by this speed. Thus, debtors velocity indicates the efficiency of receivables management in a company. A High DTR reflects the promptness of debtors collectivity i.e. smooth flow of liquidity and a low DTR indicates longer average collection period i.e. shrinkage of liquidity and also proves inefficiency in credit management. The ratio is high in Glaxosmith with 6.26 and low 3.01 in Aurobindo. The Industry mean value stood at Out of ten companies Cadila with 6.05,Torrent with 5.29,Glaxosmith with 6.26 and IPCA labs with 5.75 are higher than the industry average. Other six company s Cipla, Dr.Reddy, Lupin, Aurobindo, Sun Pharma and Glenmark are slightly lower than the industry value. Thus it indicates that the performance of credit management as well as debtor s collection is satisfactory in the selected companies. Current Assets to Total Assets Ratio (CTTR): It indicates the extent of total funds invested for the purpose of working capital and throws light on the importance of current assets of a firm. It should be worthwhile to observe that how much of that portion of total assets is occupied by the current assets, as current assets are essentially involved in forming working capital and also take an active part in increasing liquidity. Thus, this ratio should not be so large to ignore the application of the funds in fixed assets. Also care should be taken that principal investment of the firm should be in the operating items. This key ratio is important from the view point of liquidity. The higher CTTR, the higher is liquidity and vice-versa.the ratio is high in Glaxosmith with 0.64 and low in Cadila with0.35. the average industry value is 0.47.out of the companies the level of working capital investment out of total funds, the performance of Cipla, Lupin, Aurobindo, Torrent, Glaxosmith and IPCA labs are satisfactory during the study period whereas Dr.Reddy, Sun Pharma, Cadila and Glenmark are found not to be satisfactory. Table 2: Motaal's Comprehensive Test for the Selected Companies Company NWC INVENTORY LIQUID LOANS RANK RANK RANK RANK TOTAL RANKS A B C D A B C D A+B+C+D CIPLA DR.REDDY Ultimate Rank LUPIN AUROBINDO SUN PHARMA CADILA GLENMARK TORRENT GLAXOSMITH IPCA LABS icmrrjournal@gmail.com

5 Motaal's Comprehensive Test: In Table 2 an attempt has been made to evaluate the overall liquidity position of selected companies during the period under study more precisely by applying Motaal's comprehensive test. In this test, a method of ranking has been applied to reach at a more comprehensive assessment of liquidity in which four different ratios viz. net working capital to current assets ratio, inventory to current assets ratio, liquid assets to current assets ratio and loans & advances to current assets ratio have been computed and combined in a points score. A high value of net working capital to current assets ratio or liquid assets to current assets ratio shows greater liquidity and accordingly ranking has been done in that order. On the other hand, a low inventory to current assets ratio or loans & advances to current assets ratio indicates more favourable liquidity position and therefore, ranking has been done accordingly in that order. Ultimate ranking has further been done on the basis that the lower the total of individual ranks, the more favourable is the liquidity position of the concern and vice versa. Table 2 furnishes that in the selected companies the most sound liquidity position is found in Dr.reddy,Sun Pharma followed by Glenmark, Torrent, Glaxosmith, Cipla, Cadila, IPCA labs and last two positions were shared by Lupin and Aurobindo. Liquidity and profitability Analysis by using simple rank correlation: In Table 3 an effort has been made to measure the extent of relationship between liquidity and profitability of selected companies by computing Spearman's rank correlation co-efficient. For this purpose, the ratio of current assets to total assets (CTTR) has been used as the liquidity indicator and the ratio of return on capital employed (ROCE) has been taken as the profitability parameter. Table :3 Rank Correlation between Liquidity and Profatibility RANK R1-R2 D Company CTTR (R1) ROCE RANK(R2) (D) Square CIPLA DR.REDDY LUPIN AUROBINDO SUN PHARMA CADILA GLENMARK TORRENT GLAXOSMITH IPCA LABS Σd 2 = 106 Table 3 depicts that the rank correlation coefficient between CTTR and ROCE of selected companies calculated value is (table value for five percentage is ) which indicates that there is no relationship between liquidity and profitability of the companies. To find out significance of the above result we test the hypothesis as under by using t test. Testing the Significance of Correlation Co-efficient: Ho : Null hypothesis : There is no correlation between the ranked data. H1 : Alternative hypothesis : There is a correlation between the ranked data. a : 0.05 : Level of significance for testing these hypothesis.(table value1.860) 108 icmrrjournal@gmail.com

6 Since computed value of t (1.153) is less than the table value of t (1.860) hence, the null hypothesis is accepted which means there is no significant relationship between liquidity and profitability in selected companies. This relationship is not statistically significant at 5% level. Findings CONCLUSION Liquidity position of the selected pharmaceutical companies are maintain adequate quantum of current assets in relation of current liabilities as to keep a good amount of liquidity. Quick assets in relation to current liabilities are satisfactory all the companies are maintain quick assets above the norm 1:1. A high inventory turnover ratio can indicate better liquidity, but it can also indicate a shortage or inadequate inventory levels, which may lead to a loss in business.. It is clear that the inventory management of pharmaceutical industries is satisfactory. The companies like Dr.Reddy and Glenmark should tighten the debt collection efforts and should reduce the amount tied-up in debtors. But in overall ranking for the selected companies revels that out of ten companies Dr. Reddy and Sun Pharma shows very good liquidity management. There is no relationship found between liquidity and profitability in selected pharmaceutical companies. The ultimate objective of a business is to generate surplus. Inefficient management of liquidity hurts a business to earn profit. Therefore, there is no alternative of efficient liquidity management for satisfying the business goal. From the analysis so far it may be concluded that liquidity management is very much useful to ensure better productive capacity, good profitability of an enterprise. From our study it is clear that overall liquidity management reaches a business goal. It is also observed that liquidity and profitability are not closely related with each other in selected pharmaceutical companies. References: 1. Debasish Sur (2001), Liquidity Management: an overview of four companies in Indian power sector, The Management Accountant, Vol. 36, N0.o.6, pp Sur D (2001): Liquidity management: An overview of four companies in Indian power sector,the management Accountant, Vol. 36,No. 6 Kolkatta.pp Singh, P.K. (2004), Working Capital Management in Lupin Laboratories Ltd. A case study, The Management Accountant, Vol.39 (7), pp Sudipta Gosh (2008), Liquidity Management: A case study of TISCO Ltd., The Management Accountant, Vol. 43, No. 2, pp Das, P.K. (2008), A Study on Liquidity Management in Ranboxy Laboratories Ltd., The Journal of Accounting and Finance, Vol.22,(1), October March, pp icmrrjournal@gmail.com

LIQUIDITY MANAGEMENT OF SELECT CEMENT COMPANIES OF ANDHRA PRADESH - (A COMPARATIVE STUDY)

IMPACT: International Journal of Research in Business Management (IMPACT: IJRBM) ISSN (E): 2321-886X; ISSN (P): 2347-4572 Vol. 3, Issue 5, May2015, 31-42 Impact Journals LIQUIDITY MANAGEMENT OF SELECT