Working Capital and Profitability: In Indian Pharmaceutical Industry
Introduction:
The working capital management plays an important role, for success or failure of
Firm in business because of its effect on firms’ profitability as well on liquidity. Working capital management is about the management of current assets and current liabilities, in such a way that a satisfactory level of working capital which maximizes the profits of the firm is maintained. The basic theme of working capital management is to provide adequate support for smooth and efficient functioning of normal day-to-day business operations, by striking a trade-off between the three proportions of working capital they are liquidity, profitability and risk. In the present environment of cut throat competition business does not have any other alternative, than cutting the cost of its operations in order to be competitive, as well as financially strong; it is in this connection that effective management of working capital plays a vital role.
Order custom essay Working Capital and Profitability: In Indian Pharmaceutical Industry with free plagiarism report
450+ experts on 30 subjects
Starting from 3 hours delivery
According to Mallik et al.,( 2005 , p. 51) “a great deal of controversy exists, over the issue as to whether the working capital of a firm as determined by its financing and investment decisions affects its profitability or not”. On this issue, academicians are sharply divided into two schools of thought, according to one school of thought “working capital is not a factor of improving profitability and there may be a negative relationship between them”. Where as the other school of thought argues that investment in working capital, plays a vital role to improve “corporate profitability” and unless there is a minimum level of investment of working capital “output and sales” cannot be maintained, they argue that inadequacy of working capital keeps fixed asset inoperative.
Apparently a large number of considerations, play a vital role in the development of arguments and counter arguments in this regard: against the backdrop of this academic debate an attempt has been made in this study to” evaluate the interrelationship between working capital management and profitability of 10 selected pharmaceutical companies in the Indian pharmaceutical industry during the period from 2000 to 2010”.
There are a lot of reasons for the importance of working capital management, for a typical manufacturing firm. The current assets account for over half of its total asset and for a distribution company they account for even more. Excessive levels of current assets can easily result in firms realizing a substandard return on investment.
However Van Horne and Wachowicz (2004) points out that “excessive level of current assets, may have a negative effect of a firm’s profitability where as a low level of current assets may lead to lowers of liquidity ,and stock-outs resulting in difficulties in maintaining smooth operations”.
The Indian pharmaceutical industry
The Indian pharmaceutical industry is a successful high technology industry with
Consistent growth over three decades. It has developed the capability to ensure
National, self sufficiency in addressing health care requirements and its export ability makes it a planned trade sector, the industry exports generic drugsincluding those into the highly regulated US and European markets. The industry is characterized by a low degree of concentration, a low level of research and development (R&D) intensity with a high level of brand abundance. Incentives for innovation have been damaged by, the low purchasing capability of the domestic market along with the ease of, simulation and horizontal product differentiation features representative of industries behind the technological boundary.
Presently, the Indian pharmaceutical market ranks 4th in volume and 13th in value
In the world, production value is estimated at around $4.5 billion with about 5 million direct and 24 million indirect workers. There are two types of firm operate. One is organized sector firms and informal sector firms, the number of pharmaceutical firms are estimated, to be between 20000 and 23000 of which about 3000 are in the organized sector. Of the latter about 90 percent are small scale firms that are with a capital of less than $1.25 million (Kale et al., 2008). On the whole the industry represents a successful case of indigenous, self contingent development aided by weak regulatory framework.
Purpose of the Study
The earlier segment shows that, the studies carried out in the area of relationship between “working capital and profitability” are conflicting in nature. In fact the Interrelationship between working capital and profitability is still a debatable Issue, furthermore only a few studies (Mallik et al., 2005 and Parasuraman, 2004) on pharmaceutical industry in connection with examining, the relationship between working capital and profitability have been, carried out in India in the recent past. Whereas the Indian pharmaceutical industry is playing a vital role in improving average life expectancy; The signing of GATT (known as WTO) has injected a series of changes in the industry. Against this backdrop the Indian Pharmaceutical industry has been chosen in the present study.
Objectives
This study has the following objectives;
1) To assess the significance of working capital on profitability by computing coefficient of correlation and also test the significance of such a correlation.
2) To Study the impact of working capital and profitability by important parameters like Profit before Interest and Tax Margin (PBITM) and Return on Capital Employed (ROCE).
3) To evaluate the joint effect of the selected ratios relating to working capital management on the profitability.
4) To study the working capital and profitability position in selected sample companies
5) Conclusions and suggestions for the better utilization of resources related to working capital and profitability.
REVIEW OF LITERATURE:
Since, the literature related to the relationship between working capital management and profitability is wide in nature and scope. The most important
literature found in the form of, popular write ups published or unpublished research studies (both empirical and conceptual) and articles of researchers are reviewed in this section. A deeper look into the assessment indicates that there are only, a few studies available abroad and plentiful of studies in India.
An Empirical Analysis of “Working Capital and Profitability” and their Relationship with Reference to Selected Companies in the Indian Pharmaceutical Industry. (Janakiramudu and Rao, 2008, p. 163) has identified a positive relationship Evaluating the association between working capital turnover and profitability in the Indian cement, sugar and fertilizer industries. Another identical study on this issue conducted by Mukherjee (1988) concluded that as a whole, the liquidity and profitability were adversely correlated. Jain (1988) in his study among 10 manufacturing, trading and service industries of Rajasthan recommended, that the companies should avoid under investment in working capital if they wanted higher profit margins. Panda and Satapathy (1988) conducted a research work regarding the effects of working capital on profitability
and revealed that the positive influence of working capital on profitability of the
selected companies was highly important. Vijayakumar and Venkatachalam (1995) carried out an empirical study on the interrelationship between working Capital management and profitability. The study conducted on 31 sugar companies in Tamil Nadu concluded that liquidity was negatively associated with profitability, whereas the inventory turnover and debtors’ turnover had a positive influence on profitability.
Smith and Beaumont (1997) who conducted their work on the industrial firms listed, on the Johannesburg Stock Exchange (JSE) indicated that a decrease in the total current liabilities, divided by gross funds flow led to an improvement in return on investment and vice versa. Mallik and Sur (1998) made an attempt to analyze the influence of working capital management on profitability in the Indian tea industry. The study on the inter-relation among the nine selected ratios in the area of working capital management and the selected profitability measure disclosed both negative and positive associations. Rao and Rao (1999) also undertook a similar type of study in which 10 ratios relating to working capital management were selected; out of the 10 indicators only in three a positive association with profitability was observed. Mallik and Sur (1999) undertook another study on working capital management of a well-known fast-moving consumer goods company and noticed a very high degree of positive relationship between liquidity and profitability. Another work carried out by Sivarama (1999) on working capital management in the Indian paper industry ,disclosed a close relationship between profitability and working capital efficiency.
Dutta (2000) in his work on working capital management of horti-culture industry in Himachal Pradesh found out that, despite suffering huge losses the firm was holding huge idle inventories and hence miserably failed to trade off between liquidity and profitability. Harinath (personal communication) in his study on working capital management, in small-scale industries of Cuddapah district of Andhra Pradesh suggested that in order to enhance the profitability industries should adopt effective working capital management. An article published in Treasury and Risk Management (2001) revealed that establishment of proper relationship between safety and liquidity in asset management would yield high return. Sur et al. (2001) conducted a study on the Indian primary aluminum producing industry in the private sector, and observed a very significant positive association between liquidity and profitability. Ghosh and Maji (2003) made an empirical study on the relationship between utilization of current assets and operating profitability in the Indian cement and tea industry. The study concluded that “The degree of utilization of current assets was positively associated with the operating profitability of all the companies under study”. The study carried out by Parasuraman (2004) inferred that top pharmacy companies strategies, on their working capital policy to relax the credit policy to achieve greater sales and greater profits. Besides this he also observed, that leading companies have employed greater working capital for improving profitability. Narware (2004) in his study noticed that out of nine indicators representing ,working capital management selected for his study three variables were negatively associated with the selected profitability measure. Whereas the remaining six indicators of working capital management were positively associated with profitability. A study by Bardia (2004) in a Navaratna steel manufacturing public sector enterprise, reported a favorable influence of the liquidity of the company on its profitability. Mallik et al. (2005) carried out a study on the relationship between working capital and profitability with reference to selected companies in the Indian pharmaceutical industry and noticed, that the joint influence of the liquidity inventory management and credit management on the profitability were statistically very significant in nine out of 17 pharmaceutical companies selected for the study.
Deloof (2003) investigated the relationship between working capital management and corporate profitability, for a sample of 1009 large Belgian non-financial firms for the 1992-1996 periods. The result from analysis showed that there was a negative between profitability that was measured by gross operating income and cash conversion cycle as well number of days accounts receivable and inventories. He recommended that, managers can increase corporate profitability by reducing the number of days accounts receivable and inventories, less profitable firms waited longer to pay their bills.
Singh and Pandey (2008) had an attempt to study the working capital components and the impact of, working capital management on profitability of Hindalco Industries Limited for period from1990 to 2007. Results of the study showed that current ratio, liquid ratio, receivables turnover ratio and working capital to total assets ratio had statistically, significant impact on the profitability of Hindalco
Industries Limited.
Growth of Indian Pharmaceutical Industry:
Pharmaceutical companies in India are growing at a very fast pace and this has made the Indian pharmaceutical industry as the second largest growing industry. Also the pharmaceutical industry in India is the third largest in the world, which will be of US$20 billion by 2015. Mergers and acquisitions are the part of this growth. The compounded annual growth rate of pharma in India is 12-15% and the global figures are 4-7% for the period of 2008-2013. With such a profound growth of pharmaceutical companies in India numerous pharmaceutical jobs can be seen. This in turn is helping biotechnology industry and booming the biotechnology jobs in India.
Angel Broking has done a research on the growth of pharmaceutical industry and found that by 2015 the pharmaceutical industry in India will be in the top 10 markets. Yet another finding of FICCI-Ernst & Young study reveals that the population of high income group in India is rising which will give rise to more influx of MNCs and expensive drugs. (Source: Ezine Articles.com 2nd jan 2011).
Pharmaceutical companies along with native companies are also competing with the top MNCs. Such a profound growth is because of the heavy population figures and with the increasing number of middle class people and their income the access to drugs and medicines is also increasing. But still the low-priced generics are popular in Indian pharmaceutical industry.
From India in year 2007-08 total of US$ 8.25 billion were exported and there was seen 29% rise in this figure in 2009. MR Anand Sharma, Union Minister of Commerce said that pharmaceutical sector in India has grown and it is the major contributor to exports from India. In 1990 the amount was meager as compare to today’s massive figures.
Vital Information on Pharmaceutical Companies in India
In terms of volume – India’s pharmaceutical industry is the third largest in the entire world.
In terms of value – India’s pharmaceutical industry ranks fourteenth
By 2015 – It will be in the list of top 10 global pharmaceutical markets and it will touch US $ 20 billion.
2008-2009 – Saw 29% growth in exports of pharmaceutical drugs as compared to 2007
2013 – Indian formulation market is expected to touch US$ 13.7 billion
India has a strong pharmaceutical market, which results in the existence of a number of top bracket pharma companies. Despite the great recession, the sales in the Indian pharma industry went up by 18.4% in March 2009. According to the recent McKinsey report (November 30, 2009), the industry will touch $40 billion mark by 2015. Following are the top pharma companies in India:
Indian top 10 pharamaceutical companies
SL.NO
NAMEYEAR
CRORE
BILLION
1
RANBAXY2009
4.198.96
41.989
2
DR.REDDY LABORATIOES LTD2009
4.162.25
41.622
3
CIPLA2009
3.763.72
37.637
4
SUN PHARMA INDUSTRIES2009
2.463.59
24.635
5
LUPINS LABS2009
2.215.52
22.155
6
AUROBINDO PHARMA2009
2.080.19
20.801
7
GLAXO SMITHKLINE PHARMA2009
1.773.41
17.734
8
CADILA HEALTH CARE2009
1.61.300
16.13
9
AVENTIES PHARMA2009
983.8
9.838
10
IPCA LABORATIES2009
980.44
9.804
Source:( docstoc.com “working capital management practiced in pharmaceutical companies” 4th jan 2011).
Research Methodology
This element describes the research designs and methods of data collection. The issue surrounding which methods to choose while conducting research has been debated among researchers.
Introduction
The method in which a research is conducted may be determined in terms of research instruments utilised to achieve the research objectives and the quest for the solution of the research question. Therefore, Research methodology can be better understood with the help of the model known as ‘The Research Onion Model’ – (Saunders et al., 2009). The model was named after onion because the model had six layers , from one to six, which represents the philosophies , research approaches, the research strategies, choice of methods, time horizons, techniques and procedures respectively.
The term research philosophy relates to the development of knowledge and the nature of that knowledge (Saunders et al, 2003. p 107). The research philosophy adopted should contain important assumptions, these assumptions then underpins research strategy and the methods chosen as part of the strategy. Types of research philosophies those are available to choose from, when one comes to the question of choosing the best research philosophy for a research. Positivism, pragmatism, realism and interpretive (Saunders, 2003).
Quantitative and Qualitative
Quantitative techniques provide quick and clear result since they can be analysed using statistical procedure. This method is appropriate where variables can be measured quantitatively and hypotheses can be tested (Brannen, 1992). In quantitative method participants usually response to the identical closed-ended questions and the relationship between participant and researcher is often formal than in qualitative, as a result, respondents can not provide their own opinion, ideas and views. Where as qualitative method allows greater spontaneity and adaptation of the interaction between researcher and participants (Ghauri and Gronhaug, 2002). The great strength of qualitative research is validity of the data obtained. Participants are interviewed and they may give responses which are true, correct and complete, and believable based on their views and experiences (Goldman and Mc Donald, 1987).
Positivism and Interpretivism:
If the research philosophy reflects positivism then it will probably adopt the philosophical stance of natural scientist. The basis for this philosophy is to collect the data which are likely to use existing theory to develop hypotheses; then these hypotheses will be tested and confirmed. It is often advocated that the positivist researcher will use a highly structured methodology in order to facilitate replication. (Saunders et al., 2006), Interpretive entails that it is very important for the researcher to understand the role of human as social actors. The heritage of this strand of interpretivism comes from two intellectual traditions: phenomenology and symbolic interactions. Phenomenology means the way how humans make sense of the world; and symbolic interactions means a process of interpreting the social world around us in the sense that we interpret others’ action with whom we interact and this interpretation leads to adjustment of our own meaning (Saunders et al., 2006).
Deductive and Inductive
Deduction is a dominant research approach in natural sciences, where laws are the basis of explanation, allow the anticipation of phenomena, predict their occurrence and then permit them to be controlled (Collis and Hursey, 2003 cited by Saunders et al., 2006). It is a highly structured approach which is based on the collection of quantitative data. Induction on the other hand is based on the collection of qualitative data and is a more flexible structure to permit changes. Inductive approach is a close understanding of the research context and also understanding of the meanings how humans are attached to the events (Saunders et al., 2006).
Tools available for conducting a research
Triangulation and Mixed method
Triangulation is the mixing of data or method so that divers view point or stand points cast light upon a topic. The logic behind the application of triangulation method is that, it is a combination of both qualitative methods and quantitative methods which examine the same research problem by using different approaches and cross-checking the same problems which would result in consistent and integrated data (Greene et al, 1989). The most efficient use of both quantitative and qualitative paradigms is to combine them in a single study (Brewer, 1989). Multi-method research requires more and different kind of information to solve research problems than any single method, and therefore is likely to provide better solution (Greene et al., 1989).Mixing the use of survey data and interview is more profound form of triangulation. Mixed method is when both quantitative and qualitative methods are used in a research because it is believe that it provides more perspectives on the phenomena being investigated. However, sometimes the data
gotten from the different methods about the same phenomena are in direct opposition. (Easterby -Smith et al., 2002).
Longitudinal and Cross-selecion
Cross- sectional designs usually involve selecting different organisations or units in different context, and investigating how other factors vary across these units. A key problem here is in deciding how large the sample of organisation needs to be in order to be adequately representative. Cross-sectional designs particularly where there are questionnaires and survey techniques; it has the ability to describe economically features of large number of people or organisations (Easterby-Smith et al 2002). Longitudinal designs focuses on small number of organisations over a long period of time. It is recommended that research should focus on change processes within the broader social, economic and political context surrounding each organisation, and should gather ‘time series data’ over a period of time significantly longer than the immediate focus. In this way explanation should emerge from examining pattern in the process of change (Pettigrew, 1985 cited by Easterby-Smith et al., 2002)
Selection of the research approach
Due to the nature of research, which deals with people, technology and the society, Analytical surveys and experimental research design methods will be employed to carry out the research. According to Saunders et al., (2003) deductive research (emphasised) scientific principles; moving from the theory to data; the need to explain casual relationship between variables; the collection of quantitative data; a highly structure approach and the necessity to select samples of sufficient size in order to generate conclusions among others.
This research targets selected companies in Indian pharmaceutical industry. A combination of both qualitative and quantitative methods will be followed for the study. This study needs a close contact with the respondents to understand their experience, ideas and insight, and for that reason qualitative research is more appropriate and for the economical and social aspect quantitative aspect is more helpful. The techniques of qualitative methods such as: observations, and in-depth interviewing helps to understand the nature of participants’ and behaviour.
Selection of the study area
The study will follow two stage sampling method; the Pharmaceutical institutions in the first stage and beneficiaries the next stage.
Selection of the organizations
Inside this study 10 recognized companies belonging to the private sector have been selected. It is considered that these institutions with acceptable coverage would be most suitable for the purpose of the study. The amount of relationship between working capital management and profitability has been assessed through correlation coefficients between the selected measures of working capital management and profitability. However, because of time and fund constraints some pharma institutions may be purposively selected for the study. Which will help in for studying the joint influence of the selected procedures relating to the indicators of working capital management on the profitability multiple correlation and multiple regression techniques, have been applied. Taking into account their magnitudes (by Pearson’s simple correlation coefficient), ranking of their magnitudes ( by Spearman’s rank correlation coefficient), and the nature of their associated changes ( by Kendall’s correlation coefficient).
Sources of Data
The data for the study will be collected both from primary and secondary data.
Secondary sources
The data will be collected from secondary sources consulting various documents such as annual reports, booklets, journals, periodicals and so on. Furthermore, various government reports, such as Capitaline Corporate Database and the Official Database of Capital Market Publishers (India) Ltd. Mumbai.
Primary sources
For the remaining objectives, data will be collected from a carefully designed sample survey. At least two sets of questionnaires will be prepared for the survey – one for the pharma institutions and another for the beneficiaries.
Method of Data Analysis
Simple tabulation technique will be used in the study to classify the data into meaningful categories. Simple simple correlation coefficient,, ratios and percentages in the study will be used. Moreover, multiple regression analysis will be done. In order to make an effective impact and examine whether the computed values of correlation coefficients and partial regression coefficients are, statistically significant or not t-test has been used, and the multiple correlation coefficients have been tested by F-test as well as before-after comparison will be employed in the study
Vital Information on Pharmaceutical Companies in India
In terms of volume – India’s pharmaceutical industry is the third largest in the entire world.
In terms of value – India’s pharmaceutical industry ranks fourteenth
By 2015 – It will be in the list of top 10 global pharmaceutical markets and it will touch US $ 20 billion.
2009-2010 – Saw 29% growth in exports of pharmaceutical drugs as compared to 2008
2013 – Indian formulation market is expected to touch US$ 13.7 billion
India has a strong pharmaceutical market, which results in the existence of a number of top bracket pharma companies. Despite the great recession, the sales in the Indian pharma industry went up by 18.4% in March 2009. According to the recent McKinsey report (November 30, 2009), the industry will touch $40 billion mark by 2015. Following are the top pharma companies in India:
Research Objectives
This study has the following objectives;
6)To assess the significance of working capital on profitability by computing coefficient of correlation and also test the significance of such a correlation.
7)To Study the impact of working capital and profitability by important parameters like Profit before Interest and Tax Margin (PBITM) and Return on Capital Employed (ROCE).
8)To evaluate the joint effect of the selected ratios relating to working capital management on the profitability.
9)To study the working capital and profitability position in selected sample companies
10) Conclusions and suggestions for the better utilization of resources related to working capital and profitability.
Conclusion
Pharmaceutical industry in INDIA is a profitable sector. It is due to the reason that the firms in the industry are very competitive and has gained efficiency in managing its resources competently. The impact of overall working capital policy on profitability in this industry is proved to be significant and the ratios related to working capital can explain the differerences between the firms. A positive correlation has been found in the mathematical model, between current assent management and financial performance of pharmaceutical firms. Thus it is evident that for the overall performance of this industry, working capital plays a vital role.
Cite this Page
Working Capital and Profitability: In Indian Pharmaceutical Industry. (2019, Apr 03). Retrieved from https://phdessay.com/working-capital-and-profitability-in-indian-pharmaceutical-industry/
Run a free check or have your essay done for you
