CHAPTER-1

INTRODUCTION
CAPITAL BUDGETING DEFINITION
Capital Budgeting decisions pertaining to fixed /long term assets which by
definition refer to assets which are in operation, and yield a return, over a period of
time, usually exceeding one year. They, therefore involve a series of outlays of cash
resources in return for anticipated flow of future benefits.
A capital expenditure is an outlay of cash for a project that is expected to produce a
cash inflow over a period of time exceeding one year. Examples of projects include
investments in property, plant, and equipment, research and development projects,
large advertising campaigns, or any other project that requires a capital expenditure
and generates a future cash flow.

Importance:
Capital budgeting also has a bearing on the competitive position of the enterprise
mainly because of the fact that they relate to fixed asset. The fixed asset represents a
true earning asset of the firm. They enable the firm to generate finished goods that can
be ultimately being sold for profits.
The Capital Expenditure decision has its effects over a long time span and inevitable
affects the companys future cost structure.
The Capital investment decision once made are not easily reversible without much
financial loss to the firm because there may be no market for second-of hand plant
and equipment and their conversion to other uses may most financially viable.
Capital investment involves cost and the majority of the firms have search capital
resources.

NEED OF THE STUDY:

Capital Budgeting means planning for capital assets. Capital Budgeting decisions
are vital to an organization as to include the decision as to:

Whether or not funds should be invested in long term projects such as settings
of an industry, purchase of plant and machinery etc.,

Analyze the proposals for expansion or creating additions capacities.

To decide the replacement of permanent assets such as building and

equipments.

To make financial analysis of various proposals regarding capital investment

so as to choose the best out of many alternative proposals.

SCOPE OF THE STUDY:

The efficient allocation of capital is the most important financial function in
the modern times. It involves decision to commit the firms, since they stand the
long- term assets such decision are of considerable importance to the firm since
they send to determine its value and size by influencing its growth, probability and
growth.
The scope of the study is limited to collecting the financial data of Dr.Reddy s
Laboratories Ltd for four years and budgeted figures of each year.

OBJECTIVES OF THE STUDY:

The study on capital budgeting in Dr.Reddy s Laboratories Ltd A case study is
based on the following objectives.

To evaluate the capital budgeting practices relating to various projects of

Dr.Reddy s Laboratories Ltd Hyderabad

To Asses the long term requirements of funds and plan for application of
internal resources and debt servicing.

To Assess the effectiveness of long term investment decisions of Dr.Reddy s

Laboratories Ltd

To offer conclusion derived from the study and give suitable suggestions for
the efficient utilization of capital expenditure decisions.

REASEARCH METHODOLOGY:
At each point of time a business firm has a number of proposals regarding
various projects in which, it can invest funds. But the funds available with the firm are
always limited and are not possible to invest trend in the entire proposal at a time.
Hence it is very essential to select from amongst the various competing proposals,
those that gives the highest benefits. The crux of capital budgeting is the allocation of
available resources to various proposals.

Primary sources:
It is also called as first hand information, the data is collected through the
observation in the organization and interview with officials.

By asking question with the accounts and other persons in the financial
department.

A part from these some information is collected through the seminars, which
were held by Dr.Reddy s Laboratories Ltd

Secondary sources:
The secondary data have been collected through the various books, magazines,
broachers and websites.

LIMITAIONS OF THE STUDY:

All the Techniques of Capital Budgeting pressure that various investment

proposals under consideration that are mutually exclusive which may not
practically be true in some particular circumstances.

The techniques of a Capital budgeting requires estimation of future cash

inflows and outflows. The future is always uncertain and the data collected for
future may not be exact obviously the result based upon wrong data cannot be
good.

Uncertainty and risk pose the biggest limitation to the techniques of Capital
Budgeting.

Time constraint was a major limiting factor. Time was insufficient to even
grasp the theoretical concepts.

CHAPTER-2
LITERATURE REVIEW
CAPITAL BUDGETING DEFINITION:
Capital Budgeting decisions pertaining to fixed /long term assets which by definition
refer to assets which are in operation, and yield a return, over a period of time, usually
exceeding one year. They, therefore involve a series of outlays of cash resources in
return for anticipated flow of future benefits.

Importance:
Capital budgeting also has a bearing on the competitive position of the
enterprise mainly because of the fact that they relate to fixed asset. The fixed asset
represents a true earning asset of the firm. They enable the firm to generate finished
goods that can be ultimately being sold for profits.
The Capital Expenditure decision has its effects over a long time span and inevitable
affects the companys future cost structure.
A capital expenditure is an outlay of cash for a project that is expected to produce a
cash inflow over a period of time exceeding one year. Examples of projects include
investments in property, plant, and equipment, research and development projects,
large advertising campaigns, or any other project that requires a capital expenditure
and generates a future cash flow.
Because capital expenditures can be very large and have a significant impact on the
financial performance of the firm, great importance is placed on project selection.
This process is called Capital Budgeting.

The Capital investment decision once made are not easily reversible without much
financial loss to the firm because there may be no market for second-of hand plant
and equipment and their conversion to other uses may most financially viable.
Capital investment involves cost and the majority of the firms have search capital
resources.

Investment Evolution Criteria:

Three steps are involved in the evaluation of an investment:

Estimation of cash flows.

Estimation of the required rate of return (the opportunity cost of capital)
Application of a decision rule of making the choice.
The first two steps, discussed in the subsequent chapters, are assumed as given.
Thus, our discussion in this chapter is confined to the third step. Specifically, we
focus on the merits and demerits of various decision rules.

Investment decision rule:

The investment decision rules may be referred to as capital budgeting techniques, or
investment criteria. A sound appraisal technique should be used to measure the
economic worth of an investment project. The essential property of a sound
technique is that it should maximize the share holders wealth. The following other
characteristics should also be possessed by a sound investment evaluation criterion.

It should consider all cash flows to determine the true profitability of the
project.

It should provide for an objective and unambiguous way of separating good

projects from bad projects.

It should help ranking of projects according to their true profitability.

It should recognize the fact that bigger cash flows are preferable to smaller
ones and early cash flows are preferable to later ones.

it should be a criterion which is applicable to any conceivable investment

project independent of others.

CONTROL AND MONITORY:

A Capital projects reporting system is required to review and
monitor the performance of investment projects after completion and
during their life. Follow up comparison of the actual performance with
original estimates to ensure better forecasting besides sharpening the
techniques for improving future forecasts.
As a result company may re-praise its projects and take necessary action.
Indian Companies use regular project reports for controlling capital expenditure
reports may be quarterly, half-yearly, monthly, bi-monthly continuous reporting..

Expenditure to date
Stage and physical completion
Approved total cost
Revised total cost

DECISION MAKING LEVEL:

For planning and control purpose three levels of Decision making have been
identified :

Operating
Administrative

 Strategic

OPERATING CAPITAL BUDGETING:

Includes routine minor expenditure, as office equipment handled
by lower level management.
ADMINISTRATIVE CAPITAL BUDGETING:
Falls in between these two levels involves medium size
investments such as business handled by middle level management.
STRATEGIC CAPITAL BUDGETING:
Involves large investment as acquisition of new business or
expansion in a new time of business, handled by top management unique
nature.
Evaluation criteria:
A number of investment criteria (or capital budgeting techniques) are in use in
practice. They may be grouped in the following two categories.
1. Discounted cash flow criteria

Net present value(NPV)

Internal rate return(IRR)

Profitability index(PI)

2. Non discounted cash flow criteria

Payback period(PB)

Discounted payback period

Accounting rate of return(ARR)

Net Present Value

The Net Present Value technique involves discounting net cash flows for a project,
then subtracting net investment from the discounted net cash flows. The result is
called the Net Present Value (NPV).
If the net present value is positive, adopting the project would add to the value of the
company. Whether the company chooses to do that will depend on their selection
strategies.
If they pick all projects that add to the value of the company they would choose all
projects with positive net present values, even if that value is just $1. On the other
hand, if they have limited resources, they will rank the projects and pick those with
the highest NPV's.

Internal Rate of Return

The internal rate of return (IRR) is a Capital budgeting metric used by firms to decide
whether they should make Investments. It is also called discounted cash flow rate of
return (DCFROR) or rate of return (ROR).
It is an indicator of the efficiency or quality of an investment, as opposed to Net
present value (NPV), which indicates value or magnitude.
The IRR is the annualized effective compounded return rate which can be earned on
the invested capital, i.e., the yield on the investment. Put another way, the internal rate
of return for an investment is the discount rate that makes the net present value of the
investment's income stream total to zero.
Another definition of IRR is the interest rate received for an investment consisting of
payments and income that occur at regular periods.

A project is a good investment proposition if its IRR is greater than the rate of return
that could be earned by alternate investments of equal risk (investing in other projects,
buying bonds, even putting the money in a bank account). Thus, the IRR should be
compared to any alternate costs of capital including an appropriate risk premium.

Profitability index
Yet another time adjusted method of evaluating the investment proposals is the
benefit-cost (B/C) ratio or profitability index. Profitability index is the ratio of the
present value of cash inflows at the required rate of return, to the initial cash out flow
of the investment.

Evaluation of PI method
Like the NPV and IRR rules, PI is a conceptually sound method of arising investment
projects. It is a variation of the NPV method and requires the same computations as
the NPV method.

Time value it recognizes the time value of money.

Value maximization it is consistent with the share holder value

maximization principle. A project with PI greater than one will have
positive NPV and if accepted it will increase share holders wealth.

Relative profitability in the PI method since the present value of cash

inflows is divided by the initial cash out flow , it is a relative measure

Payback period
The payback period is one of the most popular and widely recognized
traditional methods of evaluating investment proposals. Payback is the number of
years required to cover the original cash outlay invested in a project. If the project
generates constant annual cash inflows, the payback period can be computed by
dividing cash outlay by the annual cash inflow.

Evolution of Payback:
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Many firms use the payback period as an investment evaluation criterion and a
method of ranking projects. They compare the projects payback with pre-determined
standard pay back. The would be accepted if its payback period is less than the
maximum or standard payback period set by management as a ranking method.
It gives highest ranking to the project, which has the shortest payback period and
lowest ranking to the project with highest payback period. Thus if the firm has to
choose between two mutually exclusive projects, the project with shorter payback
period will be selected.

Evolution of payback period;

Pay back is a popular investment criterion in practice. It is considered to have certain
virtues.

Simplicity
The significant merit of payback is that it is simple to understand and easy to
calculate. The business executives consider the simplicity of method as a virtue. This
is evident from their heavy reliance on it for appraising investment proposals in
practice.

Cost effective
Payback method costs less than most of the sophisticated techniques that require a lot
of the analysts time and the use of computers.

Short-term
Effects a company can have more favorable short-run effects on earnings per share by
setting up a shorter standard payback period. It should, however, be remembered that
this may not be a wise long-term policy as the company may have to sacrifice its
future growth for current earnings.

Liquidity

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The emphasis in payback is on the early recovery of the investment. Thus, it gives an
insight into the liquidity of the project. The funds so released can be put to other uses.
In spite of its simplicity and the so, called virtues, the payback may not be a desirable
investment criterion since it suffers from a number of serious limitations

Risk shield
The risk of the project can be tackled by having a shorter standard payback period. As
it may be in a ensured guaranty against its loss. A company has to invest in many
projects where the cash inflows and life expectancies are highly uncertain.

Discounted payback period

One of the serious objections to the payback method is that it does not discount the
cash flows for calculating the payback period. We can discount cash flows and then
calculate the payback.
The discounted payback period is the no. of. Periods taken in recovering the
investment outlay on the present value basis. The discounted payback period still fails
to consider the cash flows occurring after the payback period.

Accounting rate of return

The Accounting rate of return (ARR) also known as the return on investment
(ROI) uses accounting information as revealed by financial statements, to measure the
profitability of an investment. The accounting rate of return is the ratio of the average
after tax profit divided by the average investment. The average investment would be
equal to half of the original investment if it were depreciated constantly. Alternatively,
it can be found out by dividing the total if the investments book values after
depreciation be the life of the project.

Factors Affecting Capital Budgeting:

While making capital budgeting investment decision the following factors or aspects
should be considered.

The amount of investment

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Minimum rate of return on investment (k)

Return expected from the investments. (R)

Ranking of the investment proposals and

Based on profitability the raking is evaluated I.e., expected rate of return on

investment.

Factors Influencing Capital Budgeting Decisions:

There are many factors, financial as well as non-financial, which influence
that Budget decisions. The crucial factor that influences the capital expenditure
decisions is the profitability of the proposal. There are other factors, which have to be
in considerations such as.

Urgency:
Sometimes an investment is to be made due to urgency for the survival
of the firm or to avoid heavy losses. In such circumstances, the proper
evaluation of the proposal cannot be made through profitability tests. The
examples of such urgency are breakdown of some plant and machinery, fire
accident etc.

Degree of Certainty:
Profitability directly related to risk, higher the profits, Greater is the
risk or uncertainty. Sometimes, a project with some lower profitability may be
selected due to constant flow of income.

Intangible Factors:
Some times a capital expenditure has to be made due to certain
emotional and intangible factors such as safety and welfare of workers,
prestigious project, social welfare, goodwill of the firm, etc.,

Legal Factors.

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Any investment, which is required by the provisions of the law, is

solely influenced by this factor and although the project may not be profitable
yet the investment has to be made.

Availability of Funds.
As the capital expenditure generally requires large funds, the
availability of funds is an important factor that influences the capital
budgeting decisions. A project, how so ever profitable, may not be taken for
want of funds and a project with a lesser profitability may be some times
preferred due to lesser pay-back period for want of liquidity.

Future Earnings
A project may not be profitable as compared to another today but it
may promise better future earnings. In such cases it may be preferred to
increase earnings.

Obsolescence.
There are certain projects, which have greater risk of obsolescence
than others. In case of projects with high rate of obsolescence, the

project

with a lesser payback period may be preferred other than one this may have
higher profitability but still longer pay-back period.

Research and Development Projects.

It is necessary for the long-term survival of the business to invest in
research and development project though it may not look to be profitable
investment.

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Cost Consideration.
Cost of the capital project, cost of production, opportunity cost of
capital, etc. Are other considerations involved in the capital budgeting
decisions?

RISK AND UNCERTANITY IN CAPITAL BUDGETING

All the techniques of capital budgeting require the estimation of future cash inflows
and cash outflows. The future cash inflows are estimated based on the following
factors.

Expected economic life of the project.

Salvage value of the assets at the end of economic life.

Capacity of the project.

Selling price of the product.

Production cost.

Depreciation rate.

Rate of Taxation

Future demand of product, etc.

But due to the uncertainties about the future, the estimates of demand, production,
sales, selling prices, etc. cannot be exact. For example, a product may become
obsolete much earlier than anticipated due to unexpected technological
developments.

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All these elements of uncertainty have to be take in to account in the form of forcible
risk while taking on investment decision. But some allowances for the elements of
the risk have to provide.
The following methods are suggested for accounting for risk in capital Budgeting.

1. Risk-Adjusted cut off rate or method of varying discount rate:

The simple method of accounting for risk in capital Budgeting is to increase the cutoff rate or the discount factor by certain percentage on account of risk. The projects
which are more risky and which have greater variability in expected returns should be
discounted at a higher rate as compared to the projects which are less risky and are
expected to have lesser variability in returns.
The greatest drawback of this method is that it is not possible to determine the
premium rate appropriately and more over it is the future cash flow, which is
uncertain and requires adjustment and not the discount rate

Risk Adjusted Cut off Rate

Certainty Equivalent
method

Decision Tree Analysis

Suggestions
Suggestions
Accounting risk
Accounting risk
In Capital Budgeting

Co-Efficient
of of
Co-Efficient
Variation Method
Variation
Method

In Capital Budgeting
Standard Deviation
Standard
method

Sensitivity Technique
Sensitivity Technique
Deviation Method
Profitability
Technique
Profitability
Technique

2. Certainty Equivalent Method:

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Another simple method of accounting for risk in capital budgeting is to reduce

expected cash flows by certain amounts. It can be employed by multiplying the
expected cash inflows certain cash outflows.

3. Sensitivity Technique:
Where cash inflows are very sensitive under different circumstances, more than one
forecast of the future cash inflows may be made. These inflows may be regards as
Optimistic, Most Likely, and Pessimistic.

Further cash inflows may be

discounted to find out the Net present values under these three different situations. If
the net present values under the three situations differ widely it implies that there is a
great risk in the project and the investors decision to accept or reject a project will
depend upon his risk bearing abilities.
4. Probability Technique:
A probability is the relative frequency with which an event may occur in the future.
When future estimates of cash inflows have different probabilities the expected
monetary values may be computed by multiplying cash inflow with the probability
assigned. The monetary values of the inflows may further be discounted to find out
the present vales. The project that gives higher net present value may be accepted.
5. Standard Deviation Method:
If two projects have same cost and there net present values are also the same, standard
deviations of the expected cash inflows of the two projects may be calculated to judge
the comparative risk of the projects. The project having a higher standard deviation is
set to be more risky has compared to the other.
6. Coefficient of variation Method:
Coefficient of variation is a relative measure of dispersion. If the projects have the
same cost but different net present values, relative measure, i.e., coefficient of
variation should be computed to judge the relative position of risk involved. It can be
calculated as follows.
Coefficient of Variation = Standard Deviation X100
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Mean

7. Decision Tree Analysis:

In modern business there are complex investment decisions which involve a sequence
of decisions over time. Such sequential decisions can be handled by plotting decisions
trees. A decision tree is a graphic representation of the relationship between a present
decision and future events, future decisions and their consequences. The sequences of
event are mapped out over time in a format resembling branches of a tree and hence
the analysis is known as decision tree analysis. The various steps involved in a
decision tree analysis are

Identification of the problem

Finding out the alternatives;

Exhibiting the decision tree indicating the decision points, chance events, and
other relevant date;

Specification of probabilities and monetary values for cash inflows;

Analysis of the alternatives.

Limitations of Capital Budgeting

Capital Budgeting Techniques Suffer From the Following Limitations.
All the techniques of capital budgeting presume the various investment
proposals under consideration are mutually exclusive which may not practically be
true in some particular circumstances.

The techniques of capital budgeting require estimation of future cash inflows

and outflows. The future is always uncertain and the data collected for future
may not be exact. Obviously the results based upon wrong data may not be
good.

There are certain factors like morale of the employees, goodwill of the firm,
etc., which cannot be correctly quantified but which otherwise substantially
influence the capital decision.

Urgency is another limitation in the evaluation of capital investment decisions.

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Uncertainty and risk pose the biggest limitation to the techniques of capital
budgeting.

STEPS INVOLVED IN THE CAPITAL EXPENDITURE

The various steps involved in the control of capital expenditure.

Preparation of capital expenditure.

Proper authorization of capital expenditure.

Recording and control of expenditure.

Evaluation of performance of the project.

OBJECTIVES OF CONTROL OF CAPITAL EXPENDITURE

In the following all the main objectives are on control of capital expenditure: To
make an estimate of capital expenditure and to see that the total cash outlay is within
the financial resources of the enterprise.

To ensure timely cash inflows for the projects so that non-availability of cash
may not be a problem in the implementation of the project.

To ensure all the capital expenditure is properly sanctioned.

To properly co-ordinate the projects of various departments.

To fix priorities among various projects and ensure their follow up.

To compare periodically actual expenditure with the budgeted ones so as to

avoid any excess expenditure.

To measure the performance of the project.

To ensure that sufficient amount of capital expenditure is incurred to keep

pace with the rapid technological developments.

To prevent over expansion.

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CAPITAL BUDGETING PROCESS

Capital Budgeting is a complex process as it involves decisions relating to the
investment of the current funds for the benefit to the achieved in future and the future
always uncertain. However, the following procedure may be adopted in the process of
capital budgeting.

Capital Budgeting Steps:

1. Identification of Investment Proposals:

The capital budgeting process begins with the identification of investment proposals.
The proposal or idea about potential investment opportunities may originate from the
top management or may come from the rank and file worker of any department are
from any officer of the organization. The departmental head analyses the various
proposals in the light of the corporate strategies and submits the suitable proposals to
the Capital Expenditure Planning Committee in case of large organizations or to the
officers concerned with the process of long-term investment decisions.
2. Screening the Proposals:

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The expenditure Planning Committee Screens the various proposals received from
different departments. The committee views these proposals from various angles to
ensure that these are accordance with the corporate strategies or selection criterion of
the firm and also do not lead to departmental imbalances.
3. Evaluation of Various Proposals:
The next step in the capital budgeting process is to evaluate the profitability of
proposals. There are many methods that may be used for this purpose such as Pay
Back Period methods, Rate of Return method, Net Present Value method, Internal
Rate of Return method etc. All these methods of evaluating profitability of capital
investment proposals have been discussed.
4. Fixing Priorities:
After evaluating various proposals, the unprofitable or uneconomic proposals may be
rejected straight away. But it may not be possible for the firm to invest immediately in
all the acceptable proposals due to limitation of funds. Hence it is very essential to
rank the various proposals and to establish priorities after considering urgency, risk
and profitability involved therein.
5. Final Approval and Preparation of Capital Expenditure Budget:
Proposals meeting the evaluation and other criteria are finally approved to be included
in the capital expenditure budget. However, proposals involving smaller investment
may be decided at the lower levels for expeditious action. The capital expenditure
budget lays down the amount of estimated expenditure to be incurred on fixed assets
during the budget period.
6. Implementing Proposal:
Preparation of capital budgeting expenditure budgeting and incorporation of a
particular proposal in the budget does not itself authorized to go ahead with the
implementation of the project. A request for the authority to spend the amount should
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further to be made to the capital expenditure committee, which may like to revive the
profitability of the project in the changed circumstances.

7. Performance Review.
The last stage in the process of capital budgeting is the evaluation of the performance
of the project. The evaluation is made through post completion audit by way of
comparison of actual expenditure on the project with the budgeted one, and also by
comparing the actual return from the investment with the anticipated return. The
unfavorable variances, if any should be looked into and the causes of the same be
identified so that corrective action may be taken in future.

KINDS OF CAPITAL BUDGETING DECISIONS

The overall objectives of capital budgeting are to maximize the profitability of
a firm or the return on investment. These objectives can be achieved either by
increasing revenues or by reducing costs. This, capital budgeting decisions can be
broadly classified into two categories
.

Increase revenue.

Reduce costs.

The first category of capital budgeting decisions is expected to increase revenue of

the firm through expansion of the production capacity or size of the firm by reducing
a new product line.
The second category increases the earning of the firm by reducing costs and includes
decisions relating to replacement of obsolete, outmoded or worn out assets.
In such cases, a firm has to decide whether to continue the same asset or replace it.
The firm takes such a decision by evaluating the benefit from replacement of the
asset in the form or reduction in operating costs and the cost\ cash needed for
replacement of the asset. Both categories of above decision involve investments in
fixed assets but the basic difference between the two decisions are in the fact that
increasing revenue investment decisions are subject to more uncertainty as compared
to cost reducing investments decisions.
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Further, in view of the investment proposal under consideration, capital budgeting

decisions may be classified as:

1.Accept Reject Decision:

Accept reject decisions relate independent projects do not compute with one another.
Such decisions are generally taken on the basis of minimum return on investment. All
those proposals which yields a rate of return higher than the minimum required rate of
return of capital are accepted and the rest rejected. If the proposal is accepted the firm
makes investment in it, and the rest are rejected. If the proposal is accepted the firm
makes investment in it, and if it is rejected the firm does not invest in the same.
1. .Mutually Exclusive Project Decision:
Such decisions relate to proposals which compete with one another in such a way that
acceptance of one automatically excludes the acceptance of the other. Thus one of the
proposals is selected at the cost of the other. For

ex: A company has the option of

buying a machine. Or a second hand machine, or taking on old machine hire or

selecting a machine out of more than one brand available in the market. In such a
cases the company can select one best alternative out of the various options by
adopting some suitable technique or method of capital budgeting. Once the alternative
is selected the others. are automatically rejected.

2. Capital Rationing Decision:

A firm may have several profitable investment proposals but only limited funds and,
thus, the firm has to rate them. The firm selects the combination of proposals that will
yield the greatest profitability by ranking them in descending order of there
profitability.

METHODS OF CAPITAL BUDGETING AND EVALUATION

TECHNIQUES
Traditional Methods:
i)

Average Rate of Return.

ii)

Pay-Back Period Method

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Time Adjusted Method or Discounted Method:

i)

Net Present Value Method

ii)

Internal Rate of Return

iii)

Net Terminal Value Method

iv)

Profitability Index.

Methods of Capital Budgeting

(1) Traditional methods:

Pay back period
Average rate return method
(2) Discount cash flow method
Net present value method
Initial rate return method
Profitability index method

Data collection:
Primary data: - The primary data is the data which is collected, by interviewing
directly with the organizations concerned executives. This is the direct information
gathered from the organization.

Secondary data: - The secondary data is the data which is gathered from
publications and websites.

PROJECT CLASSIFICATION
Project classification entails time and effort the costs incurred in this exercise must be
justified by the benefits from it. Certain projects, given their complexity and
magnitude, may warrant a detailed analysis; others may call for a relatively simple
23

analysis. Hence firms normally classify projects into different categories. Each
category is then analyzed somewhat differently.
While the system of classification may vary from one firm to another, the following
categories are found in cost classification.

Mandatory investments
These are expenditures required to comply with statutory requirements. Examples of
such investments are pollution control equipment, medical dispensary, fire fitting
equipment, crche in factory premises and so on. These are often non-revenue
producing investments. In analyzing such investments the focus is mainly on finding
the most cost-effective way of fulfilling a given statutory need.

Replacement projects
Firms routinely invest in equipments means meant to obsolete and inefficient
equipment, even though they may be a serviceable condition. The objective of such
investments is to reduce costs (of labor, raw material and power), increase yield and
improve quality. Replacement projects can be evaluated in a fairly straightforward
manner, through at times the analysis may be quite detailed.

Expansion projects
These investments are meant to increase capacity and/or widen the distribution
network. Such investments call for an expansion projects normally warrant more
careful analysis than replacement projects. Decisions relating to such projects are
taken by the top management.

Diversification projects
These investments are aimed at producing new products or services or entering into
entirely new geographical areas. Often diversification projects entail substantial risks,
involve large outlays, and require considerable managerial effort and attention. Given
24

their strategic importance, such projects call for a very through evaluation, both
quantitative and qualitative. Further they require a significant involvement of the
board of directors.

Research and development projects

Traditionally, R&D projects observed a very small proportion of capital budget in
most Indian companies. Things, however, are changing. Companies are now
allocating more funds to R&D projects, more so in knowledge-intensive industries.
R&D projects are characterized by numerous uncertainties and typically involve
sequential decision making.
Hence the standard DCF analysis is not applicable to them. Such projects are decided
on the basis of managerial judgment. Firms which rely more on quantitative methods
use decision tree analysis and option analysis to evaluate R&D projects.

Miscellaneous projects
This is a catch-all category that includes items like interior decoration, recreational
facilities, executive aircrafts, landscaped gardens, and so on. There is no standard
approach for evaluating these projects and decisions regarding them are based on
personal preferences of top management.

Capital Budgeting: eight steps

25

Introduction
Until now, this web site has broken one of the cardinal rules of financial management.
This page corrects for that problem and presents now, the first part of the subject of
Capital Budgeting.
Many books and chapters and web pages purport to discuss capital budgeting when in
reality all they do is discuss CAPITAL INVESTMENT APPRAISAL. There's nothing
wrong with a discussion of the CIA methods except that authors have a duty to point
out that CIA methods are only one part of a multi stage process: the capital budgeting
process.
A discussion of CIA and nothing else means that capital budgeting decisions are being
discussed out of context. That is, by ignoring the earlier and later parts of capital
budgeting, we are never assess where capital budgeting project come from, how
alternatives are found and evaluated, how we really choose which project to choose
and then we never review the projects and how they have been implemented.

Definition:

26

Capital budgeting relates to the investment in assets or an organization that is

relatively large. That is, a new asset or project will amount in value to a significant
proportion of the total assets of the organization.
The International Federation of Accountants, IFAC, defines capital expenditures as
Investments to acquire fixed or long lived assets from which a stream of benefits is
expected. Such expenditures represent an organization's commitment to produce and
sell future products and engage in other activities.
Capital expenditure decisions, therefore, form a foundation for the future profitability
of a company.
STEP 1: Need for a project
Projects don't just fall out of thin air: someone has to have them. The main point here
is that successful, dynamic and growing companies are constantly on the lookout for
new projects to consider.
In the largest organizations there are entire departments looking for alternatives and
opportunities.
STEP 2:- Look for suitable projects
Once someone has had the idea to invest, the next step is to look at suitable projects:
projects that complement current business, projects that are completely different to
current business and so on. Initially, all possibilities will be considered: along the
lines of a brainstorming exercise.
As time goes by, and as corporate objectives allow, the initial list of potential projects
will be whittled down to a more manageable number.

STEP 3:- Identify and consider alternatives

27

Having found a few projects to consider, the organization will investigate any number
of different ways of carrying them out. After all, the first idea probably won't either be
the last or the best. Creativity is the order of the day here, as organizations attempt to
start off on the best footing.
As the diagram suggests, at each of these first three stages, we need to consider
whether what we are proposing fits in with corporate objectives. There is no point in
thinking of a project that conflicts with, say, the growth objective or the profitability
objective or even an environmental objective. A lot of data will be generated in this
stage and this data will be fed into stage four: Capital Investment Appraisal.
STEP 4:- Capital Investment Appraisal
This is the number crunching stage in which we use some or all of the following
methods

Payback (PB)

accounting rate of return (ARR)

Net present value (NPV)

Internal rate of return (IRR)

Profitability Index (PI)

STEP 5:- Analysis of feasibility

Stage four is the number crunching stage. This stage is where the decision is made as
to which project is to be assessed as acceptable. That is, which project is feasible?
In order to choose the project, management needs some hurdles:

What must the payback be

What rate of ARR is acceptable

What is the NPV cut off

What IRR is the least that we can accept

What PI is the least that we can accept and so on.

28

Some projects will be discarded as a result of this stage. For example, if the PB cut off
is, say, 2 years, and a project has a PB of 3 years, it will be rejected. The same is true
of the ARR, NPV, IRR and PI.
Capital Budgeting Policy Manual
Let's pause at this point to make the point that what we have just said about cut off
rates and so on, come from formal procedures and documents. One such formal
document is the Capital Budgeting Policy Manual, in which formal procedures and
rules are established to assure that all proposals are reviewed fairly and consistently.
The manual helps to ensure that managers and supervisors who make proposals need
to know what the organization expects the proposals to contain, and on what basis
their proposed projects will be judged.

In outline, the policy manual should include specifications for:

an annually updated forecast of capital expenditures

the appropriation steps

the appraisal method(s) to be used to evaluate proposals

the minimum acceptable rate(s) of return on projects of various risk

the limits of authority

the control of capital expenditures

the procedure to be followed when accepted projects will be subject to an

actual performance review after implementation

STEP 6:- Choose the project

Once we have determined the feasible/acceptable projects, we then have to make a
decision of which to accept. If we have capital rationing problems, we might be
restricted to one project only. If we have no cash problems, we might choose two or
more.
29

Whatever the cash position, we would like to invest in all projects that have a positive
NPV, whose IRR is greater than our cut off rate and so on.

STEP 7:- Monitor the project

As with any part of the organization, the project must be monitored as it progresses. If
the project can be kept as a separate part of the business, it might be classed as its own
department or division and it might have its own performance reports prepared for it.
If it's to be absorbed within one or more parts of the organization then it could be
difficult to monitor it separately: this is something that management has to decide as
they implement their new projects.

STEP 8:- Post completion audit

The final stage: once the project has been up and running for six months or a year or
so, there must be a post completion audit or a post audit. A post audit looks at the
project from start to finish: stages 1 - 7 and looks at how it was thought of, analyzed,
chosen, implemented, and monitored and so on.
The purpose of the post audit is to test whether capital budgeting procedures have
been fully and fairly applied to the project under review.
Of course, any weaknesses that might be found during the post audit might be specific
to one project or they might relate to capital budgeting systems for the organization as
a whole. In the latter case, the auditor will report back to his superiors and to
management that systems need to be overhauled as a result of what has been found.
TIME ADJUSTED(OR) DISCOUNTED CASH FLOW METHOD
The time adjusted or discounted cash flow methods take into accounts the profitability
time value of money. These methods are also called the modern methods of capital
budgeting.
30

NET PRESENT VALUE METHOD: (NPV)

Net present value method or NPV is one of the discounted cash flows methods. The
method is considered to be one of the best of evaluating the capital investment
proposals. Under this method cash inflows and outflows associated with each project
are first calculated.
ROLE OF DISCOUNTING FACTOR:
The cash inflows and out flows are converted to the present values using discounting
factor which is the actuary discount factor of Regulated display tool kit project of
Kesoram cements limited is 10%.
The rate of return is considered as cut off rate or required rate or rate generally
determined on the basis of cost of capital to allow for the risk element involved in the
project.
STEPS FOR CALCULATION OF NPV:

Calculation of each cash flows after taxes of three years, which is arrived at by
deducting depreciation, interest and tax from earning before tax and interest
(EBIT). This residue is profit after tax to arrive at cash flow after tax.

2) This cash flow after tax are multiplied with the values obtained from the
Table (the present value annuity table against the 8% actuary discount Rate i.e.
in the case of project.

NPV is derived by deducting the sum of present values from the initial
Investment.

Initial investments are the sum of cash flows of three years shown in

31

Capital expenditure table

Let us assume the discount rate be 10%:
YEARS

CFATS

PVIF @ 10%

PVS

2010-2011

4036.94

0.909

3669.578

2011-2012

5657.83

0.826

4673.368

2012-2013

8014.59

0.751

6018.957

2013-2014

7188.91

0.683

4910.026

2014-2015

6959.35

0.620

4314.797

TOTAL:

23586.73

LESS: Initial Investment:

NPV:

6636.97
16949.76

ACCEPT-REJECT CRITERION:
The accept -reject decision of NPV is very simple. If the NPV is positive then the
project should be accepted and if NPV is negative then the project should be rejected
i.e. .If
and

NPV > 0
NPV < 0

(ACCEPT)
(REJECT)

Hence in the case of Kesoram cements Limited project it is visible that the positive
NPV shows the acceptance and importance of the project.

32

INTERNAL RATE OF RETURN METHOD: (IRR)

The internal rate of return method is also a modern technique of capital budgeting that
takes into account the time value of money. It is also known as
ADGUSTED

RATE

OF

RETURN,

DISCOUNTED

CASH

TIME
FLOW,

DISCOUNTED RATE OF RETURN, YIELD METHOD and TRAIL AND

ERROR YIELD METHOD.
IRR is the rate the sum of discounted cash inflows equals the sum of discounted cash
outflows. It equals the present value of cash inflow to present value of cash outflows.
In this method discount rate is not known, but the cash inflows and cash out flows are
known. It is the rate of return, which equates the present value of cash inflows to out
flows or it, is the rate of return, which renders NPV TO ZERO.
STEPS INVOLVED IN THE CALCULATION OF IRR:
1) Calculation of NPV with given discount rate
2) Calculation of NPV with assumed discount rate
3) Select the higher NPV of both
4) Let R be the higher discount rate
5) Let R1 be the difference of discount rates
6) Calculation of difference of P Vs (Always higher NPV-lower NPV)
Higher NP
IRR= R +

---------------------------- XR1
Difference of P V s.

8) Decision making(Accepting- Rejecting the proposal)

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FORMULATION OF STEPS:

STATEMENT OF SHOWING CALCULATION NPV @88%,89%,90% UNDER

IRR METHOD
(R s corers)
YEARS

Annual
CFA Ts

2010-2011

Discount
Discount
Rate-88%
Rate-89%
PVF
PV
PVF
PV
0.531 2143.61514
0.529 2135.5413

Discount
Rate-90%
PVF
PV
0.526
2123.4304

4036.94
5657.83

0.2921 1652.65214

0.2799

1583.6266

0.277

1567.2189

2012-2013 8014.59

0.1579 1265.50376

0.1481

1186.9608

0.145

1162.1156

2013-2014 7188.91

0.0858 616.808478

0.0783

562.89165

0.076

546.35716

2014-2015 6959.35

0.0461 320.826035

0.0414

288.11709

0.04

278.374

2011-2012

5999.40556

5757.1374

From the above calculations the following can be observed.

PV 0f net cash flows at 88% is: 5999.40cr
PV 0f net cash flows at 89% is: 5757.13 cr
DECISION:
Since the initial investment RS.5897.64 cr is lies between 88% and 89% the company
APTDC can determine the IRR as 88.5%
Hence IRR=88.5%
ACCEPT-REJECT CRITERION:
34

5677.4961

IRR is the maximum rate of interest, which an organization can afford to pay on
capital, invested in, is accepted if IRR exceeds the cutoff rates and rejected if it is
below the cutoff rate.

3. PROFITABILITY INDEX: (BCR OR PI)

Profitability index method is also known as time adjusted method of

evaluating the investment proposals. Profitability also called as benefit cost ratio
(B\C) in relationship between present value of cash inflows and the present value of
cash out flows. Thus
Present value of cash inflows
Profitability index =

-------------------------------------Present value of cash outflows.

(OR)
Present value of cash inflows

Profitability index

= - ---------------------------------------Initial cash outlay

CALCULATIONS OF BCR:
STEP1: Calculations of cash flows after taxes
STEP2: Calculations of Present values of cash inflows @10%.
STEP3: Application of the formula.

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Statement for calculating of benefit cost ratio

YEARS

CFATS

PVIF @

PVS

10%
2010-2011

0.909
4036.94
5657.83

2011-2012

3669.578
0.826
4673.368

2012-2013

8014.59

0.751
6018.957

2013-2014

7188.91

0.683
4910.026

2014-2015

6959.35

0.620
4314.797
23586.73

TOTAL:

Present value of cash inflows

Profitability index

-------------------------------------Initial Investment

16505.98
= -----------------6636.97

Hence PI = 3 years.

36

= 2.58

ACCEPT-REJECT CRITERION:

There is a slight difference between present value index method and

profitability index method. Under profitability index method the present value of cash
inflows and cash outflows are taken as accept-reject decision.
I.e. the accept reject criterion is:
If Profitability Index
Profitability Index

> 1 (ACCEPT).
< 1

(REJECT).

The acceptance of by the management is evaluated through Profitability

Index method of as the PI > 1 (i.e.3years)

CHAPTER-3

37

INDUSTRY PROFILE
&
COMPANY PROFILE
3.1 Pharmaceuticals Industry Profile
Pharmaceuticals is a knowledge-based, technology-intensive industry that is uniquely
placed to develop and commercialize the outcomes of Australias long term
investment in medical research.

The Australian pharmaceuticals industry comprises bio-medical research,

biotechnology firms, originator and generic medicines companies and service related
segments including wholesaling and distribution. The industry employed over 40,000
people (one third in manufacturing) in 2007-08 and turned over approximately $22
billion in 2009-10. It spent $1.02 billion on research and development in 2008-09 and
exported $4.12 billion in the 2009-10 financial year. There are over 150 separate firms
listed as suppliers to the Pharmaceuticals Benefits Scheme (PBS).

The Australian market for pharmaceuticals is small in the context of global demand.
While the PBS allows for universal access to prescription products, the size of the
population means that sales are small.

Australia's population represents around 0.3 per cent of the world yet consumes
around one per cent of total global pharmaceuticals sales. Thus in 2009 Australia was
the 12th largest pharmaceuticals market by sales, while being ranked 55th on
population.

The expenditure on the PBS by Government has more than doubled over the last ten
years, from $3.2 billion in 1999-2000 to $8.3 billion (excluding patient contributions)
in 2009-10.

38

In 2009-10, the largest firm by PBS sales was Pfizer. Its sales represent 14.4 per cent
of the value of total sales made to the PBS. The top 10 suppliers by sales contributed
more than 67 per cent of the value of total sales made to the PBS. Alpha harm is the
largest firm by number of prescriptions on the PBS (accounting for 14.3 per cent of all
prescriptions dispensed under the PBS). The top 10 firms by the number of
prescriptions account for a total of just over 70 per cent of total prescriptions written.
These data suggest that the Australian market is serviced by a variety of suppliers
which is consistent with the global industry structure.
Australian industry developments have gained worldwide recognition. They include:
CSL's development of a Swine Flu (N1H1) vaccine
Developments in discovering the Gardasil vaccine for Human Papilloma Virus
through a partnership between Merck Sharp and Dohme and CSL
Australian biotechnology company Cytopia's $274 million deal with Novartis to
develop orally active, small molecule therapeutics targeting JAK3 kinase for the
prevention of transplant rejection and the treatment of multiple indications in
autoimmune diseases such as rheumatoid arthritis
The development by Biota Holdings of the flu drug Relenza.
Acrux's US$335 million deal (plus royalties) with Eli Lilly to market Acrux's US
FDA approved Axiron.
The Department encourages the development of an internationally competitive
pharmaceuticals industry with policies which enhance the operating environment for
the industry by:

Providing policy advice to the Minister for Innovation, Industry, Science and
Research (Innovation) on developments in the global pharmaceuticals industry and
how they might impact on the Australian operating environment
Providing Secretariat support to the joint industry and Ministerial Pharmaceutical
Industry Working Group

39

Assisting in implementing the recommendations of the Pharmaceuticals Industry

Strategy Group, in relation to increasing pharmaceuticals R&D, clinical trials and
manufacturing in Australia
Contributing to the Pharmaceutical Benefits Pricing Authoritys (PBPA) work on the
pricing of pharmaceuticals for the PBS
Working with key industry stakeholders including the Pharmaceuticals Industry
Council.
Global Context
The pharmaceuticals industry spans a spectrum of activity from the technology
intensive R&D segment associated with innovative drugs through to the production of
generic and over-the-counter medicines. The industry is dominated by horizontally
and vertically integrated multinational entities and is more research intensive than
most other industries.
Worldwide industry sales are projected to grow strongly at 7.5 per cent per annum
over the next five years. Espicom Business Intelligence estimate that the annual sales
of pharmaceuticals will reach US$852 billion in 2009 and project it will reach
US$1,158.5 billion in 2014. The markets driving this change will be:
Central/Eastern Europe, with 9.7 per cent growth per annum
The Americas, with 7.3 per cent growth per annum
Middle East and Africa, with 8.6 per cent growth per annum
Asia/Pacific, with 4.9 per cent growth per annum
Western Europe, with 6.8 per cent growth per annum.
These data show that the global market for drugs is large and growing, that
pharmaceuticals industry sales are concentrated in developed countries, that half of all
sales are made by the top 10 global companies, but that there is still a reasonable
degree of international competition at an industry level.

40

Industry R&D activity

Developing a new drug is expensive. Current estimates of the full cost of bringing a
new chemical or biological entity to market are around US$1.3 billion.
Longer development and approval times, larger and more complex clinical trials,
increased expenditures on new technologies, and shifts in product portfolios towards
riskier, more expensive therapeutic categories have contributed to a real increase in
the development costs.
Pharmaceuticals R&D expenditure is rising. Over the past two decades, the
percentage of sales allocated to R&D has increased from 11.9 per cent in 1980 to an
estimated 18 per cent in 2006 (for American owned firms). The number of products in
development and the number of firms doing R&D are both rising; however R&D
productivity continues to fall.
The industry spent $1.02 billion on R&D in Australia in 2008-2009. With 0.3 per cent
of the worlds population, Australia produces three per cent of global medical research
and has a proud history of seven Nobel laureates in medicine:
Howard Florey (1945: development of penicillin)
Frank Macfarlane Burnet (1960: research on organ transplantation)
John Eccles (1963: research on the transmission of nerve impulses)
Peter Doherty (1996: discoveries concerning the specificity of the cell mediated
immune defence)
Barry Marshall and J. Robin Warren (2005: discovery of the bacterium Helicobacter
pylori and its role in gastritis and peptic ulcer disease).
Elizabeth Blackburn (2009: research on telomeres, structures at the end of
chromosomes that protect the chromosome).
A feature of the Australian innovation system is the relatively high proportion of
government expenditure on R&D. In the health and medical area, this funding is
allocated through a variety of R&D providers and there is considerable interaction
between these entities. The bulk of the funding is provided through:

41

3.2 COMPANY PROFILE

Dr.Reddys Laboratories Ltd

Overview
Dr. Reddys began as an API manufacturer in 1984, producing high-quality APIs to
first the Indian, and later, the international markets. In 1987, we started our
formulations operations and, after becoming a force to reckon with in the Indian
formulations market, went international in 1991.
Today, our value proposition to our customers derives from an optimal operating
system in which operations, product development and marketing & sales are fully
integrated. Operations and the supply chain are aligned to ensure high availability,
pull based replenishment of products at the retail level and superior inventory turns to
our customers. This advantage is combined with a highly effective prescription
generation detailing effort.
A field force of over 2700 motivated and knowledgeable representatives supported by
an integrated network of back-end services and armed with handheld devices for
quick information access add value to every customer call and interaction.
Dr. Reddys - India today is more than a 200 million dollar venture with presence in
almost all major therapeutic areas. Our finished dosage business in India started in
1986 with launch of Norilet (norfloxacin). Our market penetration through nearly
3000 sales force who connect to more than 3,00,000 doctors on a regular basis has
yielded us reaching all corners of the country and providing affordable and innovative
medicines in all major therapeutic areas like gastro-intestinal, oncology, pain
management, cardiovascular, dermatology, diabetes, etc. Eight of our brands feature
in the top-300 brands in India that include drugs like Stamlo, Reditux, Omez and
Ketorol.
Alongside the presence of end-to-end pharmaceutical capabilities within the
organization helps us cater customer and patient needs much more effectively.
Medicines like for any other geography, we manufacture at our USFDA approved
finished dosage facility with utmost importance on quality and efficacy of the drugs.
42

Recently we have deepened our focus into the rural markets in India to ensure the
expansion of our reach. In this initiative we have collaborated with our CSR wing, Dr.
Reddys Foundation to help us reach the millions who are still away from effective
treatment and availability of the right medicines. Apart from manufacturing and
distribution of medicines we also provide patient care through our various initiatives
like Sparsh, Life at your Doorstep, etc. (where patients are given free treatment and
medicines), and educate and create awareness among healthcare professionals through
DRFHE to cater to the millions who are in need of proper treatment across the
country.
Dr. Reddy's Laboratories Ltd, is a pharmaceutical company based in Hyderabad,
Andhra Pradesh, India. The company was founded by Anji Reddy, who had
previously worked in the publicly owned Indian Drugs and Pharmaceuticals Limited,
of Hyderabad, India. Dr. Reddy's manufactures and markets a wide range of
pharmaceuticals in India and overseas. The company has over 190 medications, 60
active pharmaceutical ingredients (APIs) for drug manufacture, diagnostic kits,
critical care, and biotechnology products.
Dr. Reddy's began as a supplier to Indian drug manufacturers, but it soon started
exporting to other less-regulated markets that had the advantage of not having to
spend time and money on a manufacturing plant that would gain approval from a drug
licensing body such as the U.S. Food and Drug Administration (FDA). By the early
1990s, the expanded scale and profitability from these unregulated markets enabled
the company to begin focusing on getting approval from drug regulators for their
formulations and bulk drug manufacturing plants in more-developed economies. This
allowed their movement into regulated markets such as the US and Europe.
By 2007, Dr. Reddy's had six FDA plants producing active pharmaceutical ingredients
in India and seven FDA-inspected and ISO 9001 (quality) and ISO 14001
(environmental management) certified plants making patient-ready medications five
of them in India and two in the UK
In 2010, the family-controlled Dr Reddy's denied[ that it was in talks to sell its
generics business in India to US pharmaceutical giant Pfizer, which had been suing
the company for alleged patent infringement after Dr Reddy's announced that it
43

intended to produce a generic version of atorvastatin, marketed by Pfizer as Lipitor,

an anti-cholesterol medication. Reddy's was already linked to UK pharmaceuticals
multinational Glaxo SmithklineDr Reddy's Laboratories Ltd is an integrated global
pharmaceutical company, committed to providing affordable and innovative
medicines for healthier lives. The company offers a portfolio of products and services
including Active Pharmaceutical Ingredients (APIs), Custom Pharmaceutical Services
(CPS), generics, biosimilars, differentiated formulations and News Chemical Entities
(NCEs) through their three businesses - Pharmaceutical Services and Active
Ingredients, Global Generics and Proprietary Products. Their Therapeutic focus is on
gastro-intestinal, cardiovascular, diabetology, oncology, pain management, antiinfective and pediatrics. Their major markets include India, USA, Russia and CIS,
Germany, UK, Venezuela, S. Africa, Romania, and New Zealand.
Dr Reddy's Laboratories was incorporated in the year 1984 in Hyderabad. The
company was established by Dr Anji Reddy with an initial capital outlay of Rs 25
lakh. The company made their beginning with the manufacture of Active
Pharmaceutical Ingredients and Intermediates (API) and commenced operations with
a single drug in a 60-tonne facility near Hyderabad, India. In the year 1986, the
company shares were listed on the Bombay Stock Exchange. Also, they entered
international market with exports of Methyldopa. In the year 1987, the company
obtained first USFDA approval for Ibuprofen API. In the year 1988, they acquired
Benzex Laboratories Pvt Ltd to expand their Bulk Actives business. In the year 1990,
they exported Norfloxacin and Ciprofloxacin to Europe and Far East. In the year
1991, they commenced formulation exports to Russia. In the year 1993, the company
established Dr. Reddy's Research Foundation and initiated drug discovery
programme.
In the year 1994, they finished dosages facility established to cater to highly regulated
markets such as the US. In the year 1995, the company set up joint venture in Russia.
In the year 1997, they filled first ANDA with the United States Food and Drug
Administration for Ranitidine. In the year 1999, the company acquired American
Remedies Ltd, a pharmaceutical company based in India.
In the year 2000, Cheminor Drugs Ltd, a group company merged with the company
and thus the company became India's third largest pharma company. In the year 2001,
44

the company launched Fluoxetine capsules. They became the first Indian company to
win 180-day exclusivity for a generic drug in the US. Also, they launched their first
generic product, Ranitidine, in the US market. In the year 2002, the company made
their first overseas acquisition of BMS Laboratories Limited and Meridian Healthcare
in UK. In the year 2003, they launched Ibuprofen, first generic product to be marketed
under the 'Dr. Reddy's' label in the US. In the year 2005, they acquired Roche's API
Business at its manufacturing site in Mexico. In the year 2006, the company acquired
Betapharm the fourth largest generics company in Germany for a total enterprise
value of Rs 480 million.
In the year 2007, the company launched Reditux - the world's first biosimilar MAb for the treatment of Non Hodgkins Lymphoma. Also, they became India's leading and
most profitable pharmaceutical company.
During the year 2008-09, the company acquired DowPharma's small molecules
business in UK under Chirotech Technology Ltd, BASF Corporation's manufacturing
facility at Shreveport in Louisiana, USA under Dr. Reddy's Laboratories Louisiana
LLC and Jet Generici SRL, a company engaged in the sale of generic finished
dosages in Italy. In addition, Perlecan Pharma Pvt Ltd, Macred India Pvt Ltd and Dr.
Reddy's Laboratories ILAC Ticaret also became subsidiary of the company.
During the year 2009-10, Dr. Reddy's Pharma SEZ Ltd was incorporated as a whollyowned subsidiary of the company for the purpose of formulation manufacturing at
Special Economic Zone and Perlecan Pharma Pvt Ltd was amalgamated with the
company. Further, the company acquired the balance stake of 30% in Dr. Reddy's
(Australia) Pty Ltd. The company filed 12 Abbreviated New Drug Applications
(ANDAs) in US including six Para IV filing during the year.
During the year 2010-11, the company acquired GlaxoSmithKline's (GSK) oral
penicillin manufacturing facility located in Tennessee, USA. This allows the company
to enter the US penicillin-containing antibacterial market segment through brands
such as Augmentin and Amoxil, and serve the needs of customers through
manufacturing and other capabilities that did not previously exist within the company.

45

Also, they increased the stake in the South African joint venture company to 100%
after acquiring the 40% stake of the partner. During the year, the company launched
Cresp in India, the first biosimilar darbepoetin alfa in the world.
In March 2011, they launched Peg-grafeelTM in India in the form of an affordable
pegfilgrastim, which is used to stimulate the bone marrow to produce more
neutrophils to fight infection in patients undergoing chemotherapy. Peg-grafeelTM
During the year, Idea2Enterprises (India) Pvt Ltd, Dr. Reddy's Laboratories Romania
SRL, I-Ven Pharma Capital Ltd, Dr. Reddy's Laboratories Tennessee LLC and Dr.
Reddy's Venezuela C.A.
FINANCIAL HIGHLIGHTS
Table 1 gives the financial highlights of the Company for FY2013 as compared to
previous financial year on Indian GAAP standalone basis.
DIVIDEND
Your Directors are pleased to recommend a dividend of Rs. 15 on every equity share
ofRS.5 each (300%) for FY2013. The dividend, if approved at the 29th Annual
General Meeting, will be paid to those shareholders whose names appear on the
register of members of the Company as on 16 July 2013.
The dividend would be tax-free in the hands of the shareholders.
SHARE CAPITAL
The paid-up share capital of your Company increased by R 1.38 million in FY2013
due to the allotment of 276,129 equity shares on exercise of stock options by the
eligible employees under Dr. Reddy's Employees Stock Option Scheme, 2002 and Dr.
Reddy's Employees ADR Stock Option Scheme, 2007.
UNSECURED, REDEEMABLE, NON-CONVERTIBLE DEBENTURES
The bonus non-convertible debentures (NCDs) issued by the Company in FY2011 are
listed on the Bombay Stock Exchange and the National Stock Exchange and rated
LAA+ by ICRA.
46

During FY2013, the second year's interest on these NCDs was paid on due date.
CORPORATE GOVERNANCE AND ADDITIONAL INFORMATION TO
SHAREHOLDERS
A detailed report on the corporate governance systems and practices of the Company
is given in a separate section of the annual report 2012-13. Detailed information for
the shareholders is given in Additional Shareholders' Information section.
MANAGEMENT DISCUSSION AND ANALYSIS
A detailed report on the Management Discussion and Analysis is provided as a
separate section in the annual report.
BUSINESS RESPONSIBILITY REPORT
A detailed Business Responsibility report is given as a separate section in the annual
report.
SUBSIDIARY COMPANIES
Management Discussions
Established in 1984, we are an integrated global pharmaceutical company committed
to providing affordable and innovative medicines through our three core businesses:
Global Generics, Pharmaceutical Services and Active Ingredients and Proprietary
Products.
Dr. Reddys business segments are described as under:
Global Generics (GG) segment, which includes our branded and unbranded
prescription and over-the-counter (OTC) drug products business. This segment also
includes the operations of our Biologics business;
Pharmaceutical Services and Active Ingredients (PSAI) segment, which consists
of

our Active

Pharmaceutical

Ingredients

Pharmaceutical Services (CPS) business; and

47

(API)

business

and

Customs

 Proprietary Products segment, which consists of our New Chemical Entities

(NCEs), Differentiated Formulations and dermatology focused specialty business
operated through Promius Pharma.
We have a strong presence in highly regulated markets such as the United States, the
United Kingdom and Germany, as well as in other key markets such as India, Russia,
Venezuela, Romania, South Africa and certain countries of the former Soviet Union.
Given below is a brief outline of the businesses. Further details are to be found in
subsequent sections of this chapter.
Global Generics
Revenues from GG for FY2013 increased by 18% and stood at T82.6 billion. If
the beneficial impact of Olanzapine exclusivity in FY2012 was to be excluded, the
year on year growth was 26%. Growth was primarily driven by North America and
the EmergingMarkets
Revenues from North America for FY2013 were T37.8 billion, and recorded a
year-on-year growth of 19%.Excluding the beneficial impact of olanzapine
exclusivity in FY2012, the growth was 38%. Growth is largely driven by key limited
competition products, ramp-up of the Companys antibiotics portfolio and products
from the Formulations Shreveport plant. There was a significant contribution to the
top-line from 14 new product launches. FY2013 also saw 19 product filings in the
region:18 abbreviated new drug applications (ANDAs) and one under the 505(b)(2)
route
Revenues from Emerging Markets for FY2013 were at T22.4billion
representing a year-on-year growth of 31%. Within Emerging Markets:
Revenues from Russia were RS.14.0 billionrecording a growth of 27%
Revenues from other CIS markets for FY2013 wereRS.2.9 billion-a growth of 28%.
Revenues from Rest of World (RoW) territories were RS.5.5 billionand grew by
42%
48

Dr Reddys vice-chairman and chief executive officer G.V. Prasad says corporate
governance is more than just ticking the checkboxes.
Hyderabad: Dr Reddys Laboratories Ltd was founded in 1984 by technocratentrepreneur Kallam Anji Reddy with an initial capital outlay of Rs.25 lakh to
manufacture and supply active pharmaceutical ingredients (APIs), or bulk drugs,
through reverse engineering, taking advantage of a liberal Indian patent regime that
recognized process patents over product patents.
The company commenced commercial operations with API methyldopa, a
hypertension drug, in 1985. The success of methyldopa helped Dr Reddys become a
high-quality supplier and exporter of APIs. The company went public in May 1986,
raising Rs.2.46 crore, and in the same year entered the finished dosage business in
India with the launch of antibiotic norfloxacin under the brand name Norilet.
A key breakthrough came in 1987, when Dr Reddys received approval from the US
Food and Drugs Administration to make the painkiller ibuprofen API, opening up
that countrys market. Dr Reddys also became the first Indian drug maker to export
norfloxacin and ciprofloxacin to Europe and the Far East.
Dr Reddys completed its first overseas acquisition in 2002 when it took over BMS
Laboratories Ltd and Meridian Healthcare (UK) Ltd, a wholly-owned subsidiary of
BMS, for 9.05 million (around Rs.79 crore today). In 2005, Dr Reddys acquired
Roche Holding AGs API business in Cuernavaca, Mexico, for $59 million (around
Rs.319 crore today).
The company acquired Betapharm, the fourth largest generic pharmaceuticals maker
in Germany, for a total enterprise value of 480 million (around Rs.3,384 crore
today) in cash in 2006, the largest acquisition by an Indian company at that point of
time.
In April 2011, Dr Reddys became the first Asia-Pacific pharmaceutical company
outside Japan to list on the New York Stock Exchange.
49

The company has had to cope with adversity on several fronts in recent years. The
Betapharm acquisition hasnt worked out for the company as Germany, the second
largest generics market after the US, shifted to a tender-based system for drug
purchases that saw prices dropping. The prize acquisition soon turned into a liability.
The company has also faced setbacks in its drug discovery programme, which it has
put on the backburner because of funding constraints and commercial risks. Last
year, the US Food and Drug Administration issued an import alert against the
companys plant in Mexico, advising US entities against importing drugs
manufactured in the plant; the import alert was revoked this year.
Despite the challenges it faces, Dr Reddys has stayed independent and improved its
financial performance. In the year ended March, net profit rose 29% to Rs.1,426.2
crore and sales rose 30% to Rs.9,673.7 crore, 80% of which is from exports. The
company has a market capitalization of around Rs.30,000 crore.
The drug makers management philosophy is one of the elements of its success.
Corporate governance is more than just ticking the checkboxes, said G.V. Prasad,
vice-chairman and chief executive officer.
Compliance doesnt build a great company. I am not a fan of best practices or
checkbox kind of governance, he said. We have gone much beyond that.
Once every two years, the board evaluates its performance and deliberates on future
strategy. The board is currently undergoing a performance evaluation, the last such
exercise having been held in 2010.
We had a good reflection of our own contribution to the board and probably a mirror
held to our blind spots as one thing. The second thing is we have actually restructured
the way the board functions, so it becomes more efficient and I think that has helped
us organize ourselves much better, Prasad said.

CHAPTER-4
50

DATA ANALYSIS OF Dr.REDDYS LABOROTORIES LTD

FINACIAL ANALYSIS
TABLE:1
Years

Total

Total

Fixed

Net

Capital

sales

assets

assets

Profit

Employed

Long

Share

term

holders
Funds
45.45
45.45

2011-2012 3002.71 2074.27

865.6
2012-2013 3897.98 3300.52 1719.82
2013-2014 4750.62 4666.45 2461.86

383.35
378.74

2289.36

funds
1,13,161
1,27,090

237.34

3232.23

1,49,415

45.45

2014-2015 5397.88 5299.52 3041.39

2015-2016 5918.20 5020.35 2126.86

-210.21
-379.74

4145.56
2812.99

1,66,719
2,14,254

45.45

1173.21

45.45

TABLE 2
Years

Investment Turn Over

Ratio
Ratio

2011-2012
2012-2013
2013-2014
2014-2015
2015-2016

1.447598
1.18102
1.018037
1.01856
1.178842

Change
0.266578
0.162983
-0.00052
-0.16028

Investment Turn Over Ratio

Formula:
Investment Turn Over Ratio = Total Sales/Total Assets
The effective use of investment is an index of corporate efficiency.
Determining the size and mix of total assets with depend on the nature of the
undertaking, scale of operations, and the resources available. The available assets
should be used to generate maximum productivity. Increasing investment turn over
would indicate the efficient use of assets and a positive contribution to the ROI. The
trends in investment turnover of Dr.Reddys Lab
following.

51

Presented in table-I reveal the

a) The amount of total investment in assets as increased significantly from

4783.65 cr to Rs.6636.57 cr. This increase in the total assets is an account of
the following reasons.
1) Increasing new projects and capital working progresses.
2) Increase in size of current Assets.
3) Increased operations and expansion of existing Units.
b) The amount of sales has increased from 3002.71 Cr to 5918.20 Cr (20142015) this increased sales helped the organization to improve its business turn
over in different sectors. The increase in sales is higher than increases in
investment in fixed assets.
c) In view of the above the (total assets turnover ratio of Dr.Reddys Lab
recorded consistent fluctuation ranging 0.26 (2011-2012) the lowest ratio
recorded as 0.005 (2012-2013). This decline is an account of lower growth
rate sales in those years.

TABLE - 3
Years

2011-2012
2012-2013
2013-2014
2014-2015
2015-2016

Fixed Assets Turn

Over Ratio
Ratio
Change
3.468935
2.266505
1.20243
1.929687
0.336817
1.774807
0.15488
2.7826
-1.00779

52

Fixed Assets Turn Over Ratio:

Formula:
Fixed Assets Turn Over Ratio = Sales/Fixed Assets
The installed capacity of the fixed resources has significantly bearing on the
corporate plans of expansion and growth. At the same time fixed assets should be
utilized optimally to reduce the burden of overheads. On the production and sales.
Similarly idle capacity is regarded as an index of the companys inability in utilizing
the fixed resources. The use of fixed assets will depend on different factors like
market potential for its existing products, new plans for growth and expansion,
availability of other working resources like raw material, power suppliers etc.
increased fixed assets turnover would reduce the fixed costs burden and accelerates
the productivity to the investment in fixed assets. An analysis of fixed assets turnover
in Dr.Reddys Lab presented in table reveals the following.
a) The amount of investment in fixed assets has increased form Rs.865.62 Cr to
Rs.2126.86 Cr. Thus in a period of 5 years fixed assets have increased by early
42.58 %.
b) During the same period I,e., sales have also increased significantly from
Rs.3002.71 Cr to Rs.5918.20 Cr. It appears that the company has utilized the
fixed assets effectively.
c) The fixed assets turnover ratio has showing a fluctuating trend and increase
from 1.04 times to -1.01 times (2014-2015). This fluctuation any be due to
fixed assets investment.

TABLE - 4
Years
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016

Return on Investment
Ratio%
Change%
0.326753
0.165435
0.161318
0.073429
0.092006
-0.05071
0.124136
-0.135
0.084288

53

Return on Investment.
Formula:
Return on Investment =

Net Profit
_____________________ X 100
Capital Employed

Return on investment is an overall measure of business efficiently. ROI is

calculated as a percent of net profit to total investment. Functionally it is 9 product of
profit margin and investment turnover. It is proposed to examine the trends in ROI of
Hero Moto Corp Ltd. This will provide a general idea on the awards profitability of
the concern.

a) The amount of total investment increased from Rs.6636.58 Cr to Rs.4783.67

Cr over a period of 5 years.
b) During the same period profit before tax has decreased form Rs.552.54 to Rs.708.95 Cr.
From the above, it is observed that the decreased in profit is not proportionate
with the increase in investment.

TABLE 5
Years
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016

Fixed Assets Ratio

Ratio
Change
0.764928
1.35323
-0.5883
1.647666
-0.29444
1.824261
-0.1766
0.992682
0.83158

Fixed Assets Ratio.

Formula:
Fixed Assets Ratio = Fixed Assets / Total Long Term Funds.
54

Fixed assets to total long-term funds, this ratio indicates the proportion fixed
assets that financed by long-term funds. In other words it indicates the amount of
external borrowings invested in fixed assets. Generally more of external funds used
for investing in fixed assets is economical and healthy, the table-5 reveals the
following facts.
The ratio of fixed assets to long-term borrowings has not been showing any
consistent trend. It has varied from -0.58 times to 0.83 (2013-2014).
The Dr.Reddys Lab

has depended more on equity portion of funds rather than on

debt portion of funds.

TABLE-6
Years
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016

Fixed Assets Ratio

Ratio
Change
19.0451
37.83982
-18.7947
54.16634
-16.3265
66.91727
-12.7509
46.7956
20.12167

Fixed Assets to Net Worth Ratio:

Formula:
Fixed Assets to Net Worth Ratio = Fixed Assets/ Shareholders Funds.
The ratio of fixed assets to net worth is another measure of solvency of the firm. It
indicates the extent of fixed assets financed by shareholders funds; generally
dependence on shareholders funds for financing of fixed assets is redistricted as
cost of equity is higher than cost external borrowings. The ratio of fixed assets to
net worth of Dr.Reddys Lab reveals the following.
a) The initial ratios of the investment are decreased from 383.75 Cr to -373.94
(2014-2015) constantly increased period of 5 years.
55

b) The amount invested by the shareholders funds in the year 45.74Cr (20122013).
c) The ratio has showing on increasing trend in all the years of observation
except in This shows the Dr.Reddys Lab is depending more on shareholders
funds for financing of fixed assets them external borrowings

TIME ADJUSTED (OR) DISCOUNTED CASH FLOW METHOD:

The time adjusted or discounted cash flow methods take into accounts the profitability
time value of money. These methods are also called the modern methods of capital
budgeting.
NET PRESENT VALUE METHOD: (NPV)
Net present value method or NPV is one of the discounted cash flows methods. The
method is considered to be one of the best of evaluating the capital investment
proposals. Under this method cash inflows and outflows associated with each project
are first calculated.
ROLE OF DISCOUNTING FACTOR:
The cash inflows and out flows are converted to the present values using discounting
factor which is the actuary discount factor of Regulated display tool kit project of
Dr.Reddys Lab is10%.

56

The rate of return is considered as cut off rate or required rate or rate generally
determined on the basis of cost of capital to allow for the risk element involved in the
project.
STEPS FOR CALCULATION OF NPV:
1)

Calculation of each cash flows after taxes of three years, which is arrived
at by deducting depreciation, interest and tax from earning before tax and
interest (EBIT). This residue is profit after tax to arrive at cash flow after
tax.

2) This cash flow after tax are multiplied with the values obtained from the
Table (the present value annuity table against the 8% actuary discount
Rate i.e. in the case of project.
3) NPV is derived by deducting the sum of present values from the initial
Investment.
4) Initial investments are the sum of cash flows of three years shown in
Capital expenditure table
Let us assume the discount rate be 10%:

TABLE:7
YEARS

2011-2012
2012-2013
2013-2014
2014-2015
2015-2016

CFATS

PVIF @ 10%

PVS

0.909
4036.94
5657.83

0.826

3669.578

8014.59

0.751

7188.91

0.683

4673.368
6018.957
4910.026
6959.35

0.620
TOTAL:

57

4314.797
23586.73

LESS: Initial Investment:

NPV:

6636.97
16949.76

ACCEPT-REJECT CRITERION:
The accept -reject decision of NPV is very simple. If the NPV is positive then the
project should be accepted and if NPV is negative then the project should be rejected
i.e .If
and

NPV > 0
NPV < 0

(ACCEPT)
(REJECT)

Hence in the case of Dr.Reddys Lab project it is visible that the positive NPV shows
the acceptance and importance of the project.

INTERNAL RATE OF RETURN METHOD: (IRR)

The internal rate of return method is also a modern technique of capital budgeting
that takes into account the time value of money. It is also known as
ADGUSTED

RATE

OF

RETURN,

DISCOUNTED

CASH

TIME
FLOW,

DISCOUNTED RATE OF RETURN, YIELD METHOD and TRAIL AND

ERROR YIELD METHOD.
IRR is the rate the sum of discounted cash inflows equals the sum of discounted cash
outflows. It equals the present value of cash inflow to present value of cash outflows.
In this method discount rate is not known, but the cash
inflows and cash out flows are known. It is the rate of return, which equates the
present value of cash inflows to out flows or it, is the rate of return, which
renders NPV TO ZERO.
STEPS INVOLVED IN THE CALCULATION OF IRR:
7) Calculation of NPV with given discount rate
8) Calculation of NPV with assumed discount rate
58

9) Select the higher NPV of both

10) Let R be the higher discount rate
11) Let R1 be the difference of discount rates
12) Calculation of difference of P Vs (Always higher NPV-lower NPV)

IRR= R +

Higher NP
---------------------------- XR1
Difference of P V s.

8) Decision making(Accepting- Rejecting the proposal)

FORMULATION OF STEPS:
STATEMENT OF SHOWING CALCULATION NPV @88%,89%,90% UNDER
IRR METHOD
(R s corers)
TABLE:8
YEARS
Annual Discount
Discount
Discount
CFA Ts Rate-88%
Rate-89%
Rate-90%
PVF
PV
PVF
PV
PVF
PV
0.531 2143.61514
0.529 2135.5413
0.526
2123.4304
2011-2012
4036.94
5657.83 0.2921 1652.65214 0.2799 1583.6266
0.277
1567.2189
2012-2013
2013-2014
2014-2015
2015-2016

8014.59

0.1579 1265.50376

0.1481

1186.9608

0.145

1162.1156

7188.91

0.0858 616.808478

0.0783

562.89165

0.076

546.35716

6959.35

0.0461 320.826035

0.0414

288.11709

0.04

278.374

59

5999.40556

5757.1374

From the above calculations the following can be observed.

PV 0f net cash flows at 88% is: 5999.40cr
PV 0f net cash flows at 89% is: 5757.13cr
DECISION:
Since the initial investment RS.5897.64cr is lies between 88% and 89% the company
APTDC can determine the IRR as 88.5%
Hence IRR=88.5%

ACCEPT-REJECT CRITERION:
IRR is the maximum rate of interest, which an organization can afford to pay on
capital, invested in, is accepted if IRR exceeds the cutoff rates and rejected if it is
below the cutoff rate.
The cutoff rate of Dr.Reddys Lab is 10%, which is less than the IRR i.e 88.5%
hence the acceptance of Dr.Reddys Lab is quiet a good investment decision taken by
management.
PROFITABILITY INDEX: (BCR OR PI)
Profitability index method is also known as time adjusted method of
evaluating the investment proposals. Profitability also called as benefit cost ratio
(B\C) in relationship between present value of cash inflows and the present value of
cash out flows. Thus
60

5677.4961

Present value of cash inflows

Profitability index =

-------------------------------------Present value of cash outflows.

(OR)

Profitability index

Present value of cash inflows

= - ---------------------------------------Initial cash outlay

CALCULATIONS OF BCR:
STEP1: Calculations of cash flows after taxes
STEP2: Calculations of Present values of cash inflows @10%.
STEP3: Application of the formula.
Statement for calculating of benefit cost ratio
TABLE:9
YEARS

CFATS

PVIF @

PVS

10%
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016

0.909
4036.94
5657.83

3669.578
0.826
4673.368

8014.59

0.751
6018.957

7188.91

0.683
4910.026

6959.35

0.620
4314.797
23586.73

TOTAL:

TABLE:10
YEARS

CFATS

PVIF @ 10%
61

PVS

2011-2012
2012-2013
2013-2014
2014-2015
2015-2016

0.909

4036.94
5657.83

3669.578

0.826

8014.59

0.751

7188.91

0.683

6959.35

0.620

4673.368
6018.957
4910.026
4314.797
16505.98

TOTAL:

Profitability index

Present value of cash inflows

-------------------------------------Initial Investment

16505.98
= -----------------6636.97

= 2.58

Hence PI = 3years.
ACCEPT-REJECT CRITERION:
There is a slight difference between present value index method and
profitability index method. Under profitability index method the present value of cash
inflows and cash outflows are taken as accept-reject decision.
I.e. the accept reject criterion is:
If Profitability Index
Profitability Index

> 1 (ACCEPT).
< 1

(REJECT).

The acceptance of by the management is evaluated through Profitability

Index method of as the PI > 1 (i.e.3years)

62

CHAPTER-5
FINDINGS,CONCLUSIONS & SUGGESTIONS

5.1 FINDINGS

The budgeting exercise in Dr Reddys Laboratories also covers the long term
capital budgets, including annual planning and provides long term plan for
application of internal resources and debt servicing translated in to the
corporate plan.

63

The scope of capital budgeting also includes expenditure on plant betterment,

and renovation, balancing equipment, capital additions and commissioning
expenses on trial runs generating units.

To establish a close link between physical progress and monitory outlay and to
provide the basis for plan allocation and budgetary support by the government.

The manual recommends the computation of NPV at a cost of capital /

discount rate specified from time to time.

A single discount rate should not be used for all the capacity budgeting
projects.

The analysis of relevant facts and quantifications of anticipated results and

benefits, risk factors if any, must be clearly brought out.

Inducting at least three non -official directors the mechanism of the Search
Committee should restructure the Boards of these PSUs.

Feasibility report of the project is prepared on the cost estimates and the cost
of generation.

5.2 SUGGESTIONS

The capital budgeting decision for Dr Reddys Laboratories is governed by a

manual issued by the planning Commission. It contains the following
important provisions in the regard: (1) It suggest the use of various project
evaluation techniques, such as return on investment (ROD, payback period,
discounted cash flow (DCF) Evaluation and Review Technique (PERT),
Critical path method (CPM), and strengths, weaknesses, opportunities and
Threats (SWOT) Analysis.

The total assets turnover ratio of Dr Reddys Laboratories recorded

consistent fluctuations from 0.41 (2011-2012) to 01.04 (2012-2013). The
lowest recorded as 0.38 (2015-2016).

64

This decline is an account of lower growth rates sales in those years.

The fixed assets turnover ratio of Dr Reddys Laboratories showing a

fluctuating trend and increased from 1.04 times (2011-2012) to 1.25 times
(2015-2016). These fluctuations any be due to fixed assets investment.

The ROI Of Dr Reddys Laboratories did not record any consistent trend. It
varied from 10% (2011-2012) to 12% (2015-2016).

The fixed assets ratio shows the fluctuating trends form 1.56 (2011-2012) to
(2015-2016) as 1.15 and the funds were required then continuously declined.

The fixed assets ratio of Dr Reddys Laboratories as shown continuously

increasing from 2.26 (2011-2012) to (2015-2016) as 2.80.There fluctuations
observed.

V.3 CONCLUSIONS

Every organization has pre-determined set of objective and goals, but reaching
those objectives and goals only by proper planning and executing of the plans
economically.
.

Approved and ongoing schemes

New approved schemes

Unapproved schemes

Capital budgets for plant betterments

Survey and investigation

Research and development budget.

65

BIBLIOGRAPHY
Books:
-Financial Management

- Prasanna Chandra

-Management Accounting

- R.K.Sharma & Shashi K.Gupta

-Management Accounting

-S.N.Maheshwary

-Financial Management

-Khan and Jain

-Research Methodology

-K.R.Kothari

Internet Sites:
http\\:www.google.com
http\\:www. Dr Reddys Laboratories.co.in
http\\:www.googlefinance.com

66