Common-size Analysis

By

Himanshu Ahire 13
Semester 3

Executive Full Time PGDM  ( 2009-2010 )

Symbiosis Institute of Management Studies

1
 Table of Contents

1. Company Background 3

- CIPLA 3

‣ Products 3

‣ Global Presence 3

- Dr Reddys Laboratories 4

‣ Products 4

‣ Global Presence 4

- Common Features 5

2. Financial Analysis 6

- Common size Balance sheets 6

- Common Size Income Statement 7

3. Analysis of Common Size Statements 8

- Capital Structure 8

‣ Analysis : 8

- Asset Allocation 8

‣ Analysis : 9

- Contingent Liability 10

- Operating Efficiency 10

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Dr. Reddys vs Cipla

Company Background

CIPLA

The Chemical, Industrial & Pharmaceutical Laboratories (CIPLA) established in 1935. CIPLA
was registered as a public li mited company with an authorized capital of Rs 6 lakhs.
Officially it became functional in 1937 with its first product.

Products
CIPLA is one of the leading pharmaceutical company in India having range of products for
domestic as well as global markets. Cipla manufactures an extensive range of
pharmaceutical & personal care products

Cipla's product range includes

‣Pharmaceuticals

‣Animal Health Care Products

‣OTC

‣Bulk Drugs

‣Flavours & Fragrances

‣Cipla also provides a host of Technology services which includes consulting, Project
appraisal, Engineering, Plant supply, training & support etc.

Global Presence

Cipla products are bought by over 180 countries. Its exports for the financial year ended
March 31, 2009 amounted more than Rs. 27,500 million. Cipla exports raw materials,
intermediates, prescription drugs, OTC products and veterinary products. Cipla also offers
technology for products and processes. Technical know-how/fees received during the year
2008-09 amounted to about Rs. 2200 million

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Dr. Reddys vs Cipla

Dr Reddys Laboratories

Dr. Reddy’s Laboratories Ltd is quite a young company compare to CIPLA. It was established
by Dr Anji Reddy in 1984 with an initial capital outlay of Rs.25 lakhs. In 1986 Dr. Reddy’s
became Public by listing on Bombay Stock Exchange (BSE).

Products
The company has more than 190 medications ready for patients to take, 60 active
pharmaceutical ingredients for drug manufacture, diagnostic kits, critical care and
biotechnology products.

It manufactures branded and unbranded generic pharmaceuticals and bulk pharmaceutical

ingredients. Its stable of products includes ulcer medicines (branded product Omez is a
leading seller), antibiotics, antidepressants (generic version of Eli Lilly's Prozac), pain relievers,
diabetes treatments, and cardiovascular drugs.

Dr. Reddy's Laboratories also makes generic biotech products. Its custom pharmaceutical
services unit provides contract discovery, development, and manufacturing services to other
drugmakers. Dr. Reddy’s also conducts NCE research in the areas of metabolic disorders,
cardiovascular indications, anti-infectives and inflammation.

Global Presence

Reddy's manufactures and markets a wide range of pharmaceuticals in India and overseas.
Dr. Reddy's Laboratories sells its products in more than 100 countries through direct sales
entities and third-party distribution partners. Its products are marketed globally, with a focus
on India, US, Europe and Russia.

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Dr. Reddys vs Cipla

Common Features

CIPLA & Dr. Reddy Laboratory are closed rivals. They have similarities in many aspects.
Understanding these similarity can build base for common size analysis of these two
companies.

Similar Industry :

Both companies are working in Pharmaceuticals Industry.

Market Capitalization :

Market Capitalization of CIPLA is around 27,198.96 Cr. & Dr. Reddy’s around 21,353.83 Cr.

Sales Turnover :

CIPLA has turnover of 5,270.54 Cr & Dr. Reddy’s has Turnover of 4,197.53 Cr.

Asset Size :

CIPLA has Total Asset size of 5,290.99 Cr. Dr. Reddy’s has asset size around 5,899.40

Product Portfolio :

Both companies deal in bulk drugs & prescription Medicines.

Employee Strength :

Total employee strength of Dr. Reddy is 8683 in India. CIPLA has employee strength around
7000 in India

All above similarities make these two companies close competitors. Hence Financial
Analysis of these two companies will be very interesting. It can display us how differently
companies functions instead of having similar external environment.

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Dr. Reddys vs Cipla

Financial Analysis

Common size Balance sheets

Common size Balance sheets for Year Ended March 2009

Dr Reddys Laboratories Cipla

Sources Of Funds Rs. Crore Percentage Rs. Crore Percentage

Equity Share Capital 84.20 1.43% 155.46 2.94%

Reserves 5,174.90 87.72% 4,186.32 79.12%
Revaluation Reserves 0.00 0.00% 8.97 0.17%
Networth 5,259.10 89.15% 4,350.75 82.23%
Secured Loans 2.60 0.04% 2.79 0.05%
Unsecured Loans 637.70 10.81% 937.45 17.72%
Total Debt 640.30 10.85% 940.24 17.77%
Total Liabilities 5,899.40 100.00% 5,290.99 100.00%

Application Of Funds Rs. Crore Percentage Rs. Crore Percentage

Gross Block 2,157.30 36.57% 2,693.29 50.90%
Less: Accum. Depreciation 946.50 16.04% 700.80 13.25%
Net Block 1,210.80 20.52% 1,992.49 37.66%
Capital Work in Progress 411.20 6.97% 366.32 6.92%
Investments 1,865.10 31.62% 81.32 1.54%
Inventories 735.10 12.46% 1,398.32 26.43%
Sundry Debtors 1,419.70 24.07% 1,837.15 34.72%
Cash and Bank Balance 84.30 1.43% 52.84 1.00%
Total Current Assets 2,239.10 37.95% 3,288.31 62.15%
Loans and Advances 1,331.20 22.57% 1,131.10 21.38%
Fixed Deposits 300.10 5.09% 0.16 0.00%
Total CA, Loans & Ad- 3,870.40 65.61% 4,419.57 83.53%
vances
Current Liabilities 1,163.30 19.72% 1,177.00 22.25%
Provisions 294.80 5.00% 391.71 7.40%
Total CL & Provisions 1,458.10 24.72% 1,568.71 29.65%
Net Current Assets 2,412.30 40.89% 2,850.86 53.88%
Total Assets 5,899.40 100.00% 5,290.99 100.00%

Contingent Liabilities 1,934.80 730.75

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Dr. Reddys vs Cipla

Common Size Income Statement

Common size Profit & Loss Accounts for Year Ended March 2009

CIPLA Dr Reddys Laboratories

Profit & Loss account Amount Percentage Amount Percentage

Total Income 5,208.33 100.00% 4,275.80 100.00%

Expenditure
Raw Materials 2,513.11 48.25% 1,534.00 35.88%
Power & Fuel Cost 91.71 1.76% 90 2.10%
Employee Cost 271.33 5.21% 412.5 9.65%
Other Manufacturing 262.65 5.04% 105.9 2.48%
Expenses
Selling and Admin Expenses 887.28 17.04% 1,117.90 26.14%
Miscellaneous Expenses 76.92 1.48% 45.3 1.06%
Total Expenses 4,103.00 78.78% 3,305.60 77.31%

Operating Profit 1,244.84 23.90% 758 17.73%

PBDIT 1,105.33 21.22% 970.2 22.69%
Interest 52.23 1.00% 27.4 0.64%
PBDT 1,053.10 20.22% 942.8 22.05%
Depreciation 151.79 2.91% 193.6 4.53%
Other Written Off 0 0.00% 19.7 0.46%
Profit Before Tax 901.31 17.31% 729.5 17.06%
Extraordinary items 0 0.00% -0.1 0.00%
PBT (Post Extra-ord Items) 901.31 17.31% 729.4 17.06%
Tax 124.5 2.39% 168.6 3.94%
Reported Net Profit 776.81 14.91% 560.9 13.12%
Equity Dividend 155.46 2.98% 105.3 2.46%
Corporate Dividend Tax 26.42 0.51% 17.8 0.42%

Shares in issue (lakhs) 7,772.91 1,684.69

Earning Per Share (Rs.) 9.99 33.29
Equity Dividend (%) 100 125

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Dr. Reddys vs Cipla

Analysis of Common Size Statements

By Analyzing above common size statements we can conclude following points

Capital Structure

Looking at capital structure of both companies one can figure out that these companies have
huge general reserves & retain earnings. Equity Share capital constitute only 1.43% of Total
Asset Size in case of Reddy’s & 2.94% for CIPLA. Total Net worth is 89% in case of Dr.
Reddy’s & 82 % in case of CIPLA. Total deb form around 11% for Dr. Reddy’s & 18% for
CIPLA.

Analysis :
Dr. Reddy’s & CIPLA both have very high proprietary ratio ( 89% / 82% ). Suggesting they
both are over capitalized. But if we look at Total net worth & share capital we can see that
total share capital is very less compare to retained earnings.

Third Party view:

For Banks / creditors / bond holder its very safe companies to invest, as both of these
companies have huge surplus which can be used to pay debt.

Investors

Low risk apatite investors may want to invest in both the companies as they have lesser risk.
Risk adverse investor might choose Dr Reddy’s compare to CIPLA as it has high net worth &
low Debt compare to CIPLA. Low capital gearing mean lesser risk & lesser Returns as well.

Asset Allocation
Dr. Reddy’s Net Fixed Assets are 20.5 % compare to CIPLA’s 37.7%. Dr.Reddy’s has Net
Current Asset of arround 40% compare to CIPLAS 53%. Dr Reddy has investments of
arround 31% compare to CIPLA’s 1.5%

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Dr. Reddys vs Cipla

Dr. Reddy’s CIPLA

0.6
53.88%

0.45 40.89%
37.66%
31.62%
29.52%
0.3

0.15
6.97%6.92%
1.54%
0
Fixed Asset Capital Progress Investment Net Current Assets

Analysis :

Looking At pattern we can conclude that Dr. Reddy’s has used lot of Inorganic Growth
compare to CIPLA. as 30% of total assets are invested in Subsidiary companies. CIPLA has
as low as 1.5% investments only.

Dr Reddy’s has blocked overall less money in Current Assets. Both companies have almost
similar Current Ratio

Company Current Ratio Quick Ratio Debt/ Equity

Dr. Reddy’s 1.85 2.13 0.12

CIPLA 1.81 1.93 0.22

Investors View

Dr. Reddy’s management has done considerably good job in keeping overall low investment
in current asset. Both Companies have good current Ratio as well as Quick Ratio. Its show s

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Dr. Reddys vs Cipla

that both companies have good short term & Long term solvency. Quick Ratio suggest Dr.
Reddy has less investment in inventory compare to CIPLA which is good sign for investor.

Suppliers/ Banks :

Suppliers will be happy to provide credit as short term solvency of both companies good.
Banks will be happy to lend money since company have good Current Ratio & debt/ Equity
ratio is low.

Contingent Liability

Dr. Reddy has considerable amount reserved as Contingent Liability 33% compare to CIPLA
14%. Most of these liabilities are arrises due to guarantees issued by the Company on behalf
of subsidiaries, associates and joint venture. Its hidden risk associated with Dr. Reddy’s as in
case of default by subsidiary companies parent companies will be liable.

Investors View

Any hidden liability or uncertainty is risk for investors. Hence although Dr. Reddy’s Show good
Asset allocation compare to CIPLA. Investors should aware about risk associated with
Investments in subsidiary companies. Any negative impact on business of subsidairy
companies can have impact on parent company.

Operating Efficiency
CIPLA’s Total income was 5208.33 Cr. for year ended March 2009 compare to Dr. Reddy’s
4275.80 Cr. which is quite good. But we need to analyzed further to find out if its get
converted into good profit after tax.

Both the companies has around same percentage of operating expenses 77.3% for Dr.
Reddy’s & 78% for CIPLA. CIPLA is slightly on higher side but still not much of a difference.

CIPLA has higher Operating Profit 23% compare to Dr Reddy’s 17%. But Dr. Reddy has
higher PBDIT 22% compare to CIPLA’s 21.2%. This also suggest that Reddy receives
considerable non operating income from investment (loan) in subsidiary companies.

Its looks like Dr. Reddys follow aggressive Depreciation policy on fixed asset compare to
CIPLA Total depreciation for Dr. Reddy’s is 4.53% compare to 2.91%. Although Dr. Reddy

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Dr. Reddys vs Cipla

has invested less amount in fixed asset it has charged higher depreciation ( May be to get Tax
benefits )

PBT for both companies stands for around 17% but reported net profit for CIPLA was
14.91% compare to Dr. Reddy’s 13.12% due to high Tax Rates. Thanks to higher debt 17%
by CIPLA compare to 10% by Dr. Reddy’s.

Return On Share Holder Investment Return On capital Employed

Dr. Reddy’s 10.67% 16.45%

CIPLA 17.85% 20.89%

Invester View

Although CIPLA has higher PAT compare to Dr. Reddy’s total earning per share stand as
low as 9.99 compare to Reddy’s 33.29 due to higher issued share capital of CIPLA
( 2.94% ) compare to Reddy’s ( 1.43%). But if we consider Return on Share holder
Investment CIPLA has outperformed Dr. Reddy’s . Dr Reddy’s lose on this front only because
it has huge Retain earnings & general reserve which makes share holder funds much larger
(Over capitalization).

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