Documente Academic
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Report on
Submitted by
Chitra Shah
Roll Number: 52
T.Y.B.B.A. (Finance)
Submitted to
Surat
2017-18
Acknowledgement
“It is not possible to prepare a project report without the assistance & encouragement of other
people. This one is certainly no exception.”
On the very outset of this report, I would like to extend my sincere & heartfelt obligation
towards all the personages who have helped me in this endeavor. Without their active
guidance, help, cooperation & encouragement, I would not have made headway in the project.
I am extremely thankful and pay my gratitude to my faculty MR. MEHUL MEHTA for his valuable
guidance and support on completion of this project in it’s presently.
I also acknowledge with a deep sense of reverence, my gratitude towards my parents and
member of my family, who has always supported me morally as well as economically.
At last but not least gratitude goes to all of my friends who directly or indirectly helped me to
complete this project report.
Any omission in this brief acknowledgement does not mean lack of gratitude.
Thanking You
CHITRA SHAH
Declaration
Executive Summary
Table of Content
Chapter 1
India’s pharmaceutical sector has seen unwavering growth in the past few years, going up
to 23 billion USD in 2012 from 23 billion USD in 2002. Various industry reports suggest
that the pharmaceutical sector in India has been growing consistently at the rate of 13-14
% every year since the last five years. According to the consulting firm McKinsey &
Company, India’s pharmaceutical sector will touch 55 billion USD by 2020 and generics are
expected to continue to dominate the market while patent-protected products are likely to
constitute 10 per cent of the market till 2015.
There has been a paradigm shift in the attitude of people in India towards healthcare.
Alarming rise in cases of cardiovascular problems, nervous system disorders, diabetes and
many other diseases as well as disorders has created more awareness in the growing
population about the need of improvement in medical sector. Therefore, there is a great
need for pharmaceutical companies to invest their time and resources in research and
development of new, efficient and cost effective drugs.
India has an organized pharmaceutical market of its own, which is being considered as a
potential partner by other countries. The Indian Pharma Market is ranked number 3 in
terms of volume and 10th in terms of market value. Indian pharma companies are also
proving to be global leaders in production of generics and vaccines.
According to a report by the Department of Industrial Policy and Promotion (DIPP), India
has attracted Direct Foreign Investment of US$ 11,391.03 million from April 2000-2013
and will see an upsurge in the years to come. Biopharmaceuticals is also increasingly
becoming an area of interest given the complexity in manufacture and limited competition.
According to a report by IMS Health, the domestic pharmaceutical market has seen a
growth of 13.5% and recorded total sales of Rs 6,883 crore (US$ 1.12 billion) in the month
of July 2013. The major reasons for this growth can be attributed to continual growth in
prolonged therapies, increasing sales of generic medicines and strengthening hold over
rural markets.
New small and medium enterprises (SMEs) are also likely to play a substantial role in the
growth of the India's pharma sector. According to the consulting firm Grant Thornton, the
country will also see the largest number of merger and acquisitions (M&A) in the
pharmaceutical and healthcare sector in the coming years. The domestic market is likely to
contribute 35–40 per cent to the industry in terms of production with a turnover of about
Rs 35,000 crore (US$ 5.70 billion).
B.R.C.M. College of Business Administration |
Altman’s Z-Score: Bankruptcy risk analysis of selected Pharmaceutical 2018
companies listed on NSE
1. With respect to India's huge population it is an excellent center for clinical trials.
2. India has efficient and cost-effective sources for getting a hold of generic drugs,
especially the drugs that are going off their patents in the coming years.
3. India has abundant manpower with strong scientific, technical knowledge.
4. The cost involved for research and development is very low.
5. The production cost of quality drugs in bulk quantities is very low.
6. India houses excellent laboratories with world-class facilities. It has laboratories that
specialize in process development and the development of cost-efficient drug
manufacturing technology.
7. India is self-reliant in terms of the production of bulk drugs. Almost 70% of the
requirements for the formulation of drugs are available within the country itself.
8. Another important factor that is responsible for attracting foreign investments in the
Indian pharmaceutical sector is the increasing balance of trade in the pharma sector.
9. India's fast growing biotech industry, which offers great potential in the international
market, also has contributed in making the pharma sector in India an attractive industry to
make investments.
10. Besides the presence of different systems of medicines, such as Siddha, Naturopathy,
Ayurveda, Homeopathy apart from its strengths in manufacturing makes the Indian
pharmaceutical industry an attractive industry to invest in.
Due to all these advantageous factors, India is recognized as one of the leading players in
pharmaceuticals in the global market.
Chapter 2
BANKRUPTCY:
SOLUTION TO BANKRUPTCY:
Research on corporate distress have always attracted and challenged researchers and
practitioners alike. Extensive literature is available on study of corporate distress. The
earliest study can be traced back to 1930’s. In 1966 Beaver developed a model for
predicting bankruptcy using univariate analysis. Later Altman in 1968 developed the very
popular ‘z’ score bankruptcy prediction model using Multi Variate Discriminant Analysis
(Avenhuis, 2013).Also, there are many other studies made on this field but no one is a real
breakthrough.
These numerous studies conducted on financial distress are done using different statistical
techniques. However most of the studies in Indian context have been done using Altman ‘z’
score model.
Z - SCORE:
One important tool that predicts the volatility and has gained popularity since 1985 is
Edward Altman’s Z – Score Model (Altman, 1968). It is a multivariate formula used for
the measurement of the financial health. It has gained wide acceptance with a variety of
stake holders like investors, financial analysts, consultants, bankers, auditors, management
accountants, courts, and database systems. Further it is also used for evaluation of loans
(Eidleman, 2003), as it offers an excellent measure for evaluating the financial health of a
subject business. It explicitly measure(s) a firm’s relative liquidity, longevity, operating
profitability, leverage, solvency, and productivity—virtually all aspects of corporate
performance, lead to clearer conclusions, avoid judgment bias, reliability.
Where,
X1 = Working Capital / Total Assets. (Measures liquid assets in relation to the size of the
company).
X2 = Retained Earnings / Total Assets. (Measures profitability that reflects the company's
age and earning power).
X3 = Earnings before Interest and Taxes / Total Assets. (Measures operating efficiency
apart from tax and leveraging factors. It recognizes operating earnings as being important
to long-term viability).
X4 = Market Value of Equity / Book Value of Total Liabilities. (Adds market dimension that
can show up security price fluctuation as a possible red flag).
X5 = Sales / Total Assets. Standard measure for total asset turnover (varies greatly from
industry to industry).
Altman found that the ratio profile for the bankrupt group fell at -0.25 averages, and for the
non-bankrupt group at +4.48 avg.
options prices to imply fluctuations in asset values) to predict a market event (default, i.e.,
the decline in asset values below the value of a firm's liabilities)
Zones of Discrimination:
Z > 2.99 -“Safe” Zone
1.81 < Z < 2.99 -“Gray” Zone
Z < 1.81 -“Distress” Zone
Zones of Discrimination:
Z > 2.9 -“Safe” Zone
1.23 < Z < 2.9 -“Grey” Zone
Z < 1.23 -“Distress” Zone
Zones of discriminations:
Z > 2.6 -“Safe” Zone
1.1 < Z < 2.6 -“Grey” Zone
Z < 1.1 -“Distress” Zone
Uses of Z-score
The Z score, according to Altman (2000) provides added value and credibility to the
valuation process, as it helps in evaluating the reliability statistically, in addition to
providing insight into relative performance and financial viability. It also has the
potential of reformulating the problem correctly. Further, the utilization of a
comprehensive list of financial ratios in assessing a firm’s financial viability depends
on the degree of correlation that exists between each requisite variable forming a
significant ratio. It also has the advantage of potentially yielding a model with a
relatively small number of selected measurements which convey a great deal of
information.
The Z-score offers an excellent measure for evaluating the financial health of a
firm—the lower the score the greater chance of failure. The score, which combines
mutually exclusive ratios into a group, helps overcome the shortcomings of
individual financial ratio analysis. The beauty of Z-score is that it provides a
calculated measure based on past experience, rather than personal opinion. Studies
carried out by Altman (2003) using financial ratios predicted 94% correctly for one
year before bankruptcy occurred; and 72% two years before its actual occurrence.
Describing the reasons for corporate failures Altman and Hotchkiss (2006) listed
them as deregulation, competition, and inadequacy in management performance.
Poor decision making combined with unfavorable events are the reasons listed by
Opler and Titman (1994) for financial distress. Shareholders view any distress to be
harmful and costly to them. Distress in the financial front has all the possibility of
leading to bankruptcy and resultant reorganization or liquidation (Altman, 1979).
These aspects may lead to shift in investment preferences and investors would seek
alternative opportunities.
In all these situations, it was found that the respective industries were in distress
financial situation, which was later proved correct. The studies thus proved that
Altman model of Z-score would provide accurate prediction of financial distress.
Ever since its inception, the Z-score has been put to use for diverse purposes. It was
used as a basic research tool in exploring such areas like merger and divestment
activity (Shrieves and Stevens, 1979; Lasfer , 1996; Sudarsanam and Lai, 2001),
asset pricing and market efficiency (e.g. Altman and Brenner, 1981; Katz , 1985;
Dichev, 1998; Griffin and Lemmon, 2002; Ferguson and Shockley, 2003), capital
structure determination (e.g. Wald, 1999; Graham, 2000; Allayannis , 2003; Molina,
2005), pricing of credit risk (Kao, 2000), distressed securities (Altman, 2002;
Marchesini 2004), and bond ratings and portfolios (Altman, 1993; Caouette , 1998).
Further, it is also used extensively as a tool in assessing the firm financial health in
going-concern research (Citron and Taffler, 1992; Carcello , 1995; Mutchler ., 1997;
Louwers, 1998; Citron and Taffler, 2001 and 2004; Taffler et al., 2004). A study by
Permatasari (2006) on public listed companies, used Z-score established the
vulnerability of companies and expected bankruptcy in the case of certain
industries.
The biggest drawback, as is the case with all financial analysis, is that the Z-Score is
reliant on the quality of the underlying financial statement data. If a company is
“cooking the books,” its financial statement data is not a true representation of the
strength (or lack thereof) of the company. Remember that the Z-Score is only as
good as the data that goes into it.
Altman Z was formulated for operating industrial companies; the main problem
with this formulation of solvency risk is that the formula is not suited for many
industries and very much favourable to some industries.
Negative Working Capital Companies; One other limitation of the Z-Score relates to
some negative working capital companies. Negative working capital means that
current liabilities exceed current assets. The reason it's used in the Altman
calculation is that this fact is a strong indicator that the company could be in serious
financial trouble. However, this is ambiguous, as it can also be a sign of managerial
or business efficiency - for example, it might be a business with low inventory and
accounts receivable (which means they operate on effectively a cash basis). We are
not aware of any reliable adjustment factor that has been applied to weed out
"good" negative working capital companies.
Chapter 3
Objectives
Literature Review
Nair, 2013 and Kheradmand & Bahar, 2013 - elsewhere some attention has been
focused on the financial performance of the Pharmaceutical industry to provide much
insight into their annual reports but very little is known about the financial performance of
the industry. The absence of critical financial indicators about the performance firms in the
sector affect attractiveness of investments and trading volumes and value of financial
assets holdings of investors in the sector. Thus the purpose of this study is to examine the
profitability, liquidity and solvency of the publicly traded Pharmaceutical companies on
Ghana stock exchange and also identify financial ratios with significant contribution effects
on return on equity and further test the financial soundness or distress of the firms.
may involve financial restructuring between the firm, its creditors and its equity investors.
Sometimes, financial distress leads to bankruptcy. This paper uses Z-score model (Altman‘s
1968) to predict risk of financial distress of Alembic 6 Pharma, from the year 2004-2010. It
is obvious that the Z-score model of alembic pharma is in the grey zone, indicating poor
financial performance. Manages should take immediate actions to turn around the
company's results.
RoliPradhan (2014) - Z-Score Estimation for Indian Banking Sector‖ From traditional
times the Z-score values have been constantly used for prediction of Bankruptcy. This has
been vital to both the lenders and investors whose returns are based on solvency
estimates. The terms of credit have gone a U-turn from the traditional times to the modern
scenario today. The basic concern of prediction is to evaluate the terms of credit and
ensure repayment safely. Z-score has been used as a tool to evaluate the credibility of the
firms. This paper provides the Z-score value for the public sector banks. This value is useful
when these banks demand loans from the RBI or any other funding agency. The usage of
back propagation neural network is to forecast the internal parameters of Z-score and then
use these internal parameters to forecast the Z-score value up to 2020. Thus the paper
emphasizes the usage of BPNN for prediction of bankruptcy for public sector banks in
India. Dr. Dharmesh S. Raval has been done Ph.D. in 2006 in Analysis of Profitability in
Pharmaceutical Industry, thesis PhD, Saurashtra University. The present research work is a
very modest effort from the side of researcher to add to the current knowledge base in the
area of Pharmaceutical Industry and its financial performance. There are several 7 research
conducted by several researchers in and outside country for the Indian Pharmaceutical
Industry as the industry is on the threshold of a paradigm shift from process patents to
product patents and several such legal international issues.
Investment is the commitment of financial resources which have been saved with the
expectation of some positive rate of return. Investing one’s savings in financial securities to
improve the financial stability using the financial analytical tools and the acceptance of
quantitative techniques by the investment community has changed the investment
scenario. Investment decisions require scientific knowledge, a systematic approach and
professional expertise on the part of the investor. Such a decision would ensure an effective
mix of safety, rate of return and liquidity. Investors make use of research tools provided by
share broking firms and also do comprehensive analysis with available relevant
information. For this they utilize first-hand knowledge about the operations and
management of a subject business; information from the financial statements to
complement the ratios and derive conclusions to determine the financial viability of
investment avenues.
Financial analytical valuation process requires both internal and external comparison of
financial and non financial data to measure financial and operational efficiency, as well as
to determine the strengths and weaknesses of an organization. Kahl (2002) argues that
investment decisions are affected by the degree of uncertainty on a firm’s prospects. He
mentioned that stakeholders, such as creditors may postpone their decision to learn more
B.R.C.M. College of Business Administration |
Altman’s Z-Score: Bankruptcy risk analysis of selected Pharmaceutical 2018
companies listed on NSE
Objectives
1. To know the financial condition of the selected major units of pharmaceutical industry
on NSE.
Chapter 4
Research Methodology
Research Design
Population
Population consists of the Pharmaceutical companies listed on NSE. NSE includes every
sector companies but Pharmaceutical companies are considered as population for the
evaluating the financial distress of the companies and chances of bankruptcy.
Sampling
Frame:
Techniques:
Samples:
The samples selected after conducting Non-probabilistic Judgmental Sampling Method, the
following companies are selected for further research:
Data Collection
Type of Data:
Instrument used:
Method:
Data Analysis
Tools:
B.R.C.M. College of Business Administration |
Altman’s Z-Score: Bankruptcy risk analysis of selected Pharmaceutical 2018
companies listed on NSE
1) Ratio analysis:
The analysis of financial statement many tools are used like common size statement
analysis, comparative analysis, trend analysis, and ratio analysis. The ratio analysis is most
acceptable tools for the analysis of financial statements. Present study also used various
ratios for financial analysis which has used in Edward Altman model. The following ratios
have been used in study:
(2) X2= Retained Earning/Total Assets (Stand for measure of reinvested earning)
(3) X3= Earnings before Interest and taxes/Total Assets (Stand for profitability measure)
2) Mean:
The mean used for comparison of two and more than two units. Average value of variables
is mean. The mean are calculated by total value of variable are divided by number of
variables. Average of all the sample units considered as an industrial standard and to know
how so far individual units work from the industry.
Rather than searching for single best ratio professor Edward Altman has introduced new
model in 1968 called Altman Z-score model. The Z-score formula is used for predicting
liquidity position and financial economist. The Z-score is multivariate formulas that
measures the financial health of the company and predict the bankruptcy within two years.
The model covers both the problems, financial problems and operating problems. The
model uses five ratios symbolically X1, X2, X3 X4 and X5. The ratio X1, X2 and X4 for
financial problems and X3 and X5 for operating problems. The ratios are follows:
(2) X2= Retained Earning/Total Assets (Stand for measure of reinvested earning)
(3) X3= Earnings before Interest and taxes/Total Assets (Stand for profitability measure)
The Z-score is composite credit score for manufactures involving measures of firm‘s
performance including measures of corporate liquidity, cumulative and current
profitability, leverage and sales productivity. Each measure is assigned a compute
determined weighting such, that when an analyst multiplies the weights lines the financial
performance and sums up of this five factors, the result is the overall Z-score.
The Z-score have gained acceptance by auditor‘s management accountants, courts and data
base system for evaluation. It has been used in variety of context and countries but was
designed originally for publicly held manufacturing companies with assets of more than$01
million. The latter published Altman modification model called Z1-score which can be
applied to privately hold manufacturing companies and Z2-soore for nonmanufacturing
companies. The various Altman model with applicable firm are as follow:
The latter two equations are often referred to as Altman model for privately Manufacturing
Companies and non-manufacturing company‘s zones of discrimination are as follows:
Zones Z Z1 Z2
Safe Zones Z > 2.99 Z > 2.9 Z > 2.6
Grey Zones 1.81<Z<2.99 1.23<Z<2.9 1.1<Z<2.6
Distress Zones Z<1.81 Z<1.23 Z<1.1
Techniques:
Professor R. A. fisher man to use that term variance and in fact it was he who developed a
very elaborate theory concerning ANOVA explaining its usefulness in practical field. Later
on Professor Snedecor and many other contributed to the development of this technique.
ANOVA is essentially a procedure for testing the difference among different groups of data
for homogeneity. The essence of ANOVA is that total amount of variation in a set of data is
broken down into two types, that amount which can be attributed to chance and that
amount which can be attributed to specified causes. There may be variation between
samples and also within sample items. ANOVA consists in splitting the variance for
analytical purposes. Hence, it is a method of analyzing the variance to which a response is
subject into its various components corresponding to various source of variation. Thus in
general through ANOVA technique one can, investigate any number f factors which are
hypothesizes or said to influence the dependent variable. One may as we investigate the
differences amongst various categories within each of these factors which may have a large
number of possible values. If we take only one factor and investigate the differences
amongst its various categories having numerous possible values, we are said to use one-
way ANOVA and in case we investigate two factors at the same time, then we use two-way
ANOVA. In two-way ANOVA, the interaction of inter-relationship of two factors affecting
the value of a variable can as well be studied for better decision.
The mode of relation and degree of relationship are measure through Correlations. The
matrix Correlation is used for measuring interrelationship between more than two
variables. Matrix Correlation used for measuring interrelationship between five key
financial variable of Edward Altman model.
In the present study Standard deviation has used as a one statistical techniques for
deciding how the variable are far from the mean and Coefficient of Variance are used for
measuring consistency or uniformity of variables. The standard deviation concept was
introduced by “Karl Pearson” in 1823. Standard deviation is most widely used measure of
dispersion of a series and is commonly denoted by the symbol “α”. Standard deviation is
retired as the square–root of the average of squares of deviations, when such deviations for
the values of individual items in series are obtained from the arithmetic average. Co-
efficient of variation is defining as the percentage of the standard deviation to the mean. It
should be noted that higher the variability the greater would be the co-efficient of
variation. Therefore, it may be pointed out that for the stability of results, Co-efficient of
variation must be low. Co-efficient of variation (C.V.) may be calculated with the help of
standard deviation and mean.
4) Factor Analysis:
Centroid method of factor analysis, developed by L.L. Thurstone, was quite frequently used
until about 1950 before the advent of large capacity high speed computers. The centroid
method tends to maximize the sum of loadings, disregarding signs; it is the method which
extracts the largest sum of absolute loadings for each factor in turn. It is defined by linear
combinations in which all weights are either + 1.0 or – 1.0. The main merit of this method is
that it is relatively simple, can be easily understood and involves simpler computations. If
one understands this method, it becomes easy to understand the mechanics involved in
other methods of factor analysis. The study used centroid method of factors analysis for
determination of prominent factors which is highly affected to financial health of the units.
Limitations of Work:
Every living and Non- living on this world is its own limitation which restricts the usability
of that thing. The same rule applies to this research work. The main limitation of the study
as under:
1. The study will base on secondary data taken from published annual report and website.
The reliability and findings are contingent upon the data published in the annual report.
4. The studies is restricted to only limited units as compare to population, the sample size
is small. Hence, on the basis of conclusion of this study, generalization cannot be made.
5. Inflation plays a vital role in Indian economy. If we do not concluded inflation when
analysis of financial condition is studied, evaluation may not be truly representative.
7. It is a new and developing concept, so it is not possible for all new and developing
companies.
Most important of the study has only relying solvency on the Altman Z-score model as only
means of analysis. So other financial measures of distress will have strengthened for
further study.
The study has totally based on financial data used in Altman model, but certain
nonfinancial aspect mainly customer satisfaction, relationship with stakeholder and
workers efficiency are open field for future study.
predicting not only bankruptcy, but financial distress in a variety of firms in a variety of
contexts.
More accounting data and variables could produce better predictor models than the Altman
model which is used in this study.
Chapter 5
Chapter 6
References
Annexure
List of Abbreviations