SRSD ASSIGNMENT

FUNDAMENTAL
AND TECHNICAL ANALYSIS
 FUNDAMENTAL ANALYSIS

I ANALYSIS OF THE GLOBAL SCENARIO

Globally, pharmaceutical industry grew at a compounded annual growth rate of 9.1 per
cent in the last 23 years to $491 billion. Mergers and acquisitions reshaped
multinationals. With a slew of brand name drugs losing patent protection in the next few
years and the pressure building for pharmaceuticals to cut price, these giants find
themselves under immense strain to find new drugs and reduce price. Bringing a new
drug into the market costs a company an average of about $800 to $900 million. Some
estimates show that patient recruitment and medical personnel account for nearly 70 per
cent of the clinical costs that are required to bring a drug to market. The less expensive
means to raise research productivity is outsourcing research to low cost havens such as
India and China. The global pharmaceutical outsourcing market stands at $10 billion.

Some of the major trends that are expected in the future include mergers and acquisitions
in the industry; new product launches by MNCs and Indian companies; in-licensing of
patented products by Indian companies to launch them in the Indian market and increase
in the number of contract research organisations.

Barriers to Entry in the Global Industry

Like many industries, any new entrant into the pharmaceutical sector will be faced with
various hurdles that have been previously erected by already established businesses and
by national and international standards and regulations. These include:
• Economies of scale - manufacturing, R&D, marketing, sales
• Distribution product differentiation - established products, brands and
relationships
• Capital requirements and financial resources
• Access to distribution channels: preferred arrangements
• Regulatory policy: patents, regulatory standards
• Switching costs - employee retraining, new equipment, technical assistance

The barriers to entry are extremely high in the pharmaceutical industry. Many of the top
firms have significant manufacturing capabilities that are hard to replicate. Also, they
have extensive patents that guarantee the protection of their products while they defend
their brands with large marketing budgets. Since any emerging pharmaceutical company
can expect a sharp retaliation from the established competitors in the pharmaceutical
industry, the overall threat of entry into the global marketplace is relatively low in
comparison to other international industries.
The largest factors that influence the success of many pharmaceutical companies are
capital requirements and financial resources, regulatory policies, and research and
development. All three of these factors can influence one another and a lapse in one area
can be disastrous for the future of the company.
Factors affecting the pharmaceutical industry:

1. Government Regulations-drug prices, FDA regulations, sales & marketing practices-

2. Loss of Patent Protection - patent expiration, biogenerics, legal attack of patent
validity, patent law reform, health crises. Patent expiration is no longer the only threat
to patent protection.
3. Industry Player Environment -outsourcing, M&A, spin-outs, future industry
structure. A churning of pharma industry players will continue as both large and small
companies fight for survival.
4. New Product Development - R&D, poor quality drug candidates, slow production of
novel drug discovery technology5. Socio-economic Trends -- greater end-user
involvement, threat of bioterrorism, epidemiology, DTC advertising & customer
confidence, employment, stock market performance, worldwide market

Social and Demographic factors:

As the population ages and the diseases increase, new medical needs emerge and the
demand for effective medicines rises accordingly. In Russia, around 15% of the
population and 40% in China are above the age of 60.

II ECONOMIC ANALYSIS

• India is one of the top emerging markets in the world. Many reasons account for
this.
• It has a huge talent pool of managerial and technical manpower and this provides
it with a competitive edge in the global market.
• The democracy promotes a transparent environment that includes a free press and
a proper legal and accounting system.
• It has a competitive and dynamic private sector that accounts for more than 75%
of India's GDP.
• Government has become more liberal and has reduced its control on foreign trade
and investment and is heading its way towards privatizing the domestic sector.
• This has shown a marked increase in FDI and FII inflows (but we are lagging
behind if we compare with China)
• Since 1990, the economy of India has witnessed a decent growth rate of 6% and
has been successful in overcoming poverty by about 10%.
• The weakness of India is the continuing public-sector budget deficit, which is
nearly 10% of GDP, lack of proper infrastructure to support the growth
momentum, inflation (which is now easing).
1) Gross Domestic product:

India’s Economy is experiencing a robust growth in the year 2006-07. The Gross
Domestic Product in the country increased at a rate of 9.2 percent p.a The GDP Growth
was mainly led by the fast rising industrial production as well as the growth in the
services sector.

The services sector is growing at a rate of around 10% and its contribution to GDP is
maximum, around 40%. This is slated to continue to be the major contributor to the GDP
in the years to come due to increase in importance of activities like trading, banking &
finance, infotainment, real estate, transportation, security, management & technical
consultancy, hotels, restaurants, storage and communications to name a few. All these
industries are showing buoyant growth

2) Inflation

The latest government data showed inflation rising to 4.41 per cent in week ended July
14, 2007. The major contributor to inflation are rising global and domestic fuel prices,
massive trade deficits in US, rising prices of foods and manufacturing products. Both the
Monetary policies as well as the Fiscal policies have helped a lot in checking the rate of
inflation in the country. This has checked the overheating of the economy. Inflation has
to be brought down to 2-3% levels for real growth.

3) Interest rates

Interest rates have been increased (CRR increased to 7%. Repo, reverse repo unchanged)
by RBI. It also withdrew a cap of 30 billion rupees on its daily money market operations
to drain cash from the system, a move that enables banks to park more funds with it. This
is to check the rise in inflation and curb credit growth. For example, this will hit the home
loan segment, especially when the real estate sector is undergoing a major boom. The
hike in CRR is likely to push up short-term lending rates and profitability of banks will
be under pressure. The hike will not have any direct impact on liquidity condition since
there are ample resources in the system. The policy supports the objective of growth and
stability. This will lead to higher arbitrage possibility and greater inflow of foreign funds
into India. Consequently, the rupee will get strengthened. This development is going to
make us uncompetitive in both manufacturing and IT services exports. In the medium
term, it will have a negative impact on employment growth. If the rupee keeps
strengthening, any enterprise planning to make India a manufacturing or services hub for
exports will have to review its strategy. Further, interest rate hike prompted by the
previous monetary policy have had an unfavourable impact on the growth rates of EMI-
driven industries such as automobiles and consumer durables. This trend will not only
continue, but would get accentuated if interest rates go up further
4) Are consumers spending?
The per capita income in 2005-06, in real terms, increased by 7.4 per cent, and the
savings rate has been estimated at 32.4 per cent. The growth in the economy has lead to
increase in purchasing power and thus increase in spending power The major components
of spending are– food, housing, apparel and services, transportation, healthcare,
entertainment, and personal insurance and pensions.

5) Money supply, Exchange rate

The money supply growth rate is much above the targeted range and the current liquidity
built up in the economy could lead to inflationary expectations in coming months.
Enormous increase in liquidity is due to increase in capital flows. The CRR hike and
increase in interest rates will strengthen the rupee making foreign investment attractive

III INDUSTRY ANALYSIS

• The Indian Pharmaceutical industry is highly fragmented with about 24,000

players (around 330 in the organised sector).
• The top ten companies make up for more than a third of the market.
• The leading 250 pharmaceutical companies control 70% of the market with
market leader holding nearly 7% of the market share
• The revenues generated by the industry - US$ 5.2 bn
• Growth at an average rate of 8% over last five years.
• India’s share is increasing at 10% a year as compared 7% annual growth for the
overall world markets
• The Indian pharma industry accounts for about 1% of the world's pharma industry
in value terms and 8% in volume terms.
• Barriers to entry: Licensing, distribution network, patents, plant approval by
regulatory authority.
• The annual per capita drug expenditure is still amongst the lowest in the world.
• India also offers excellent exports opportunities for clinical trials, R&D, custom
synthesis and technical services like Bioinformatics
• Indian pharma industry are significantly influenced by regulations. are three tiers
of regulations – on bulk drugs, on formulations and on overall profitability. This
has made the profitability of the sector susceptible to the whims and fancies of the
pricing authority.
• The new Pharmaceutical Policy 2006, which proposes to bring 354 essential drugs
under price control has not been officially passed as yet and has been stiffly
opposed by the pharmaceutical industry.
• While the average R&D spending in India as a whole is a meager 2% of sales, the
spend of the top five companies is about 5% to 10%. Despite growing at a CAGR
 of 53% over the last four years, the ratio is still way below the global average of
15% to 20% of sales
• In the longer run, domestic companies would face fresh competition from MNCs,
as they would make aggressive new launches. That said, for the latter, the going
might not be that easy, as prices of patented products would most likely be subject
to ‘negotiations’.
• With the governments in the developed markets looking to cut down healthcare
costs by facilitating a speedy introduction of generic drugs into the market,
companies like Ranbaxy and Dr.Reddy’s, will stand to benefit. However, despite
this huge promise, intense competition and consequent price erosion would
continue to remain a cause for concern.
• A key to sustained growth and profitability in the highly competitive US market is
by acquiring scale (possible through acquisitions), being present across
geographies, having a lean cost structure, a balanced product mix comprising of
niche products besides plain vanilla generics and a strong marketing and
distribution network.
• Partnerships are likely to play a crucial role in driving growth going forward
• Currently, India has the highest number of US FDA approved plants outside the
US at 75.
• Government is planning to increase public spending on health to atleast 2% to 3%
of GDP over the next five years from the current 0.8%, which can provide further
impetus to the pharma industry
• Production of spurious and low quality drugs spoils the image of the industry in
international arena
• FDI upto 74% is permitted through automatic route in the case of bulk drugs, their
intermediates and formulations (except those produced by the use of recombinant
DNA technology). 100% FDI in case of bulk drugs, their intermediates and
formulations is considered by the Government on a case-by-case basis.

The pharmaceutical industry in India meets around 70% of the country's demand for bulk
drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules,
orals and injectibles. There are about 250 large units and about 8000 Small Scale Units,
which form the core of the pharmaceutical industry in India (including 5 Central Public
Sector Units). These units produce the complete range of pharmaceutical formulations,
i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e.,
chemicals having therapeutic value and used for production of pharmaceutical
formulations.
Technologically strong and totally self-reliant, the pharmaceutical industry in India
has low costs of production, low R&D costs, innovative scientific manpower,
strength of national laboratories and an increasing balance of trade. The
Pharmaceutical Industry, with its rich scientific talents and research capabilities,
supported by Intellectual Property Protection regime is well set to take on the
international market.
Advantage India

• Competent workforce
• Cost-effective chemical synthesis
• Legal & Financial Framework
• Information & Technology
• Globalization
• Consolidation

The future of the industry will be determined by how well it markets its products to
several regions and distributes risks, its forward and backward integration capabilities, its
R&D, its consolidation through mergers and acquisitions, co-marketing and licensing
agreements.

IV COMPANY ANALYSIS

Profit And Loss Account - Dr Reddy's Lab

Rs in Cr PROJECTED
2006- 2005- 2004- % Inc/Dec % Inc/Dec % Rs in mn Rs in mnRs in
2007 2006 2005 mn
INCOME : 2005-2006 2006-2007 Inc/De 30-9-2007 2008- % 2010-
c 2009 Inc/D 2011
ec
Sales Turnover 6603.5 2476.6 1626.8 52.24% 166.64% 130% 7000 16100 125% 36225
Excise Duty 89.66 121.59 76.8 58.32% -26.26% 20% 107.592 129.11 17% 131.31
Net Sales 6513.9 2355 1550 51.94% 176.60% 6892.408 15971 36094
Other Income 116.16 120.85 73.57 64.27% -3.88% -5% 100 95 10% 104.5
Stock 51.89 42.23 29.62 42.57% 22.87%
Adjustments

Total Income 6681.9 2518.1 1653.2 52.32% 165.36% 6992.408 16066 36198

EXPENDITURE :
Raw Materials 2672.5 781.7 503.96 55.11% 241.88% 250% 3500 4550 20% 5460
Power & Fuel 81.24 53.53 43.2 23.91% 51.77% 18% 95.8632 113.12 20% 135.74
Cost
Employee Cost 625.13 336.22 177.13 89.82% 85.93% 70% 1062.721 1806.6 95% 3522.9
Other 328.58 177.93 142.22 25.11% 84.67% 90% 624.302 1186.2 25% 1482.7
Manufacturing
Expenses
Selling and 1059.6 646.33 505.2 27.94% 63.94% 65% 1748.3235 2884.7 80% 5192.5
Administration
Expenses
Miscellaneous 137.16 91.01 131.9 -31.00% 50.71% 55% 212.598 329.53 65% 543.72
Expenses
 Less: Pre- 0 0 0 0 0 0
operative Expenses
Capitalised

Total 4904.2 2086.7 1503.6 38.78% 135.02% 7243.8077 10870 16338

Expenditure

Operating Profit 1551.3 399.71 149.56 167.26% 288.11% 300% 2150 8600 150% 21500
Interest 51.96 24.62 12.74 93.25% 111.05% 125% 76 171 135% 401.85
Gross Profit 1499.4 375.09 136.82 174.15% 299.73% 2074 8429 21098
Depreciation 133.5 111.33 92.46 20.41% 19.91% 20% 145 174 22% 212.28
Profit Before Tax 1365.9 263.76 44.36 494.59% 417.84% 1929 8255 20886
Tax 173 13.83 0 1150.90% 100% 120 240 95% 468
Fringe Benefit 6.99 6.88 0 1.60% - - - - -
tax
Deferred Tax 9 31.93 -21.1 -251.33% -71.81% - - - - -
Reported Net 1176.9 211.12 65.46 222.52% 457.44% 1809 8015 20418
Profit

Projected EPS- 69.45 26.82 7.85 241.66% 158.95% 47.595 121.25

Unit Curr
No of Shares 168.4
Outstanding
Projected Share 800 1100 1400
Price
Projected P/E Ratio 23.112 11.547
Income
sales: The company saw 166% growth in sales in 2006-07. This was on account of increase in sales in the US and
Europe. It is also due to the acquisition of Betafarm in Germany.Revenue from APIs increased by 44 per cent. Thus
the growth is majorly due to the acquisition. It is one of the leading players in generic drugs that sells for half the
rates of that of branded drugs.Conservative estimates have been taken for subsequent years but still the growth will
be robust.
Other Income: Revenues from custom pharmaceuticals services and drug discovery have been falling but it will
revive in the near future as the cost will come down and hence prices

Expenditure
Raw Materials : Raw material cost is increasing at a phenomonal rate. This is because they have scaled up
their operations to met global sa well as domestic demand
Power & Fuel Cost: Power and fuel cost has not been increasing much due to therir conscious efforts to use
power and fuel saving technology. But the cost cannot be totally brought down due to the increasing global fuel
prices.
Employee Cost : Employee cost is increasing. Number of employees have increased due to acquisitions abroad
and increasing capacity in the domestic market
Other Manufacturing Expenses: Expences related to setting up R&D facilities and increasing R&D expenditure
Selling and Administration Expenses: Due to competition from MNCs and more number of players in the
generic drug market, stepping up of selling and administration costs are taking place. This cost will significantly
increase in the near future
FINANCE -BALANCE SHEET - Dr Reddy's Laboratories Ltd (Curr: Rs in Cr.)
PROJECTE
D
2006- 2005- 2004- Rs in mn Rs in Rs in mn
2007 2006 2005 mn
SOURCES OF FUNDS 30-9-2007 2008-2009 2010-
2011
Share Capital 83.96 38.35 38.26 15.00% 90 103.5 20% 124.2
Reserves Total 4289.4 2223.8 2035.8 10.00% 5000 5500 10% 6050
Total Shareholders 4373.4 2262.1 2074.1 - 5090 5603.5 - 6174.2
Funds
Secured Loans 1.92 145.13 3.27 10.00% 2.112 2.2598 10% 2.485824
Unsecured Loans 327.98 778.74 269.97 377.177 433.75 624.6051
Total Debt 329.9 923.87 273.24 379.289 436.01 627.0909

Total Liabilities 4703.3 3186 2347.3 5469.289 6039.5 6801.291

APPLICATION OF FUNDS :
Gross Block 1291.2 1052.9 1004.2 30.00% 1678.547 1846.4 15% 2123.362
Less : Accumulated 609.15 491.08 441.68 32.00% 804.078 884.49 15% 1017.159
Depreciation
Net Block 682.04 561.81 562.54 - 874.469 961.92 - 1106.203
Investments 830.21 821.79 358.46 40.00% 1162.294 1394.8 20% 1673.703
Total Current Assets 4011.4 2381 1948.2 35.00% 5153.873 5920.6 20% 7154.233
Total Current 1043.2 638.4 560.82 65.00% 1721.346 2237.7 40% 3132.85
Liabilities
Net Current Assets 2968.1 1742.6 1387.4 - 3432.527 3682.9 4021.383
Net Deferred Tax -57.74 -53.08 -21.16 5.00% - - -

Total Assets 4703.3 3186 2347.3 5469.29 6039.5 6801.29

Assumptions

Reserves : Since this component not only has the surplus from the P/L Account but elements of
redemption reserves, security premium etc. an estimate of 10% has been taken to account for all the
mandatory and other reserves.
Secured Loans and unsecured loans have come down significantly

Gross block and investments have increased. This is due to global market expansion as well as
increase in business in domestic market. There will be huge investments into increasing capacity.
Current Assets: Since its revenue is on the rise, account recievable will also increase along with
inventories etc. So a figure of 65% has been taken for these assets.
Current Liabilities: This will show a similar increase, moreover the price of raw materials is on the
rise, as a result of which creditors will also rise.There fore 28% is taken.