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INTRODUCTION
Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure (debt, equity or retained earnings). It is the process of allocating resources for major capital, or investment, expenditures. One of the primary goals of capital budgeting investments is to increase the value of the firm to the shareholders.
These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period.
Capital budgeting is the planning of long-term corporate financial projects relating to investments funded through and affecting the firm's capital structure. Management must allocate the firm's limited resources between competing opportunities (projects), which is one of the main focuses of capital budgeting. Capital budgeting is also concerned with the setting of criteria about which projects should receive investment funding to increase the value of the firm, and whether to finance that investment with equity or debt capital. Investments should be made on the basis of value-added to the future of the corporation. Capital budgeting projects may include a wide variety of different types of investments, including but not limited to, expansion policies, or mergers and acquisitions. When no such value can be added through the capital budgeting process and excess cash surplus exists and is not needed, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program.
Choosing between capital budgeting projects may be based upon several inter-related criteria.
Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk. These projects must also be financed appropriately.
OBJECTIVES OF THE STUDY
1. The primary objective of my study is to study the CAPITAL BUDGETING process in Dr.REDDY’S LABORATORIES.
2. The secondary objective is to analyze the projects which are going to be implemented by using the traditional and modern techniques.
3. Document the policies and practices of company.
4. Understand the linkage between corporate strategy and investment decision.
5. Another major objective of my study is giving the conclusions and advising whether to invest the funds in the project.
SCOPE OF THE STUDY
The period of my study is limited to 2 month(Jan-Mar) ;I have analyzed the capital budgeting decision of DR.REDDY’S LABORATORIES by analyzing four projects which I have included in my study.
Capital planning should take into account all appropriations for expenditures related to:
• Construction or acquisition of capital facilities, including land purchase, preparation and easements
• Acquisition, construction, demolition or replacement of a capital asset
• The major repair or renovation of a capital asset which materially extends its useful life or improves or increases its capacity
• Equipment
• The planning or design of any of the above
• Construction management, legal fees, and supervision costs
• Financing charges.
METHODOLOGY OF THE STUDY
The following techniques are used to evaluate the projects of DR.REDDY’S LABORATORIES.
1) Non-Discounted Techniques
PAY BACK PERIOD
AVERAGE RATE OF RETURN
2) Discounted Techniques
DISCOUNTED PAY BACK PERIOD
INTERNAL RATE OF RETURN
NET PRESENT VALUE
PROFITABILITY INDEX
SOURCES OF DATA:
PRIMARY DATA:
It is that data which have been conducted for the first time through personal discussion with the management and through questioner.
SECONDARY DATA:
It is the data which has been already conducted and stored.
For my present study I have used both the data that is primary as well as secondary.
I have collected the primary data like the process of budgeting through personal discussion with the managers of capital budgeting department
The secondary data have been collected through Internet, Manuals, and Broachers
LIMITATIONS OF THE STUDY
Most of the data is collected from secondary sources as such the accuracy of the data may not be to the fullest extent.
The study was conducted with the data available and analysis was made accordingly due to which I have taken many assumptions for my study.
Due to the confidential financial records the data is not exposed so my study may not be detail and fully fledged.
Since the study is based on the financial data that are obtained from the company’s financial statements, the limitations of financial statements shall be equally applicable.
About Dr. Reddy’s Laboratories Ltd.
Dr. Reddy’s Laboratories was founded by Dr Anji Reddy, an entrepreneur-scientist, in 1984. The DNA of the company is drawn from its founder and his vision to establish India’s first discovery led global pharmaceutical company. In fact, it is this spirit of entrepreneurship that has shaped the company to become what it is today.
Dr Anji Reddy, having moved out of Standard Organics Limited, a company he had successfully co-founded, started Dr. Reddy’s Laboratories with $ 40,000 in cash and $120,000 in bank loan! Today, the company with revenues of Rs.1, 947 crore (US $446 million), as of fiscal year 2012, is India’s second largest pharmaceutical company and the youngest among its peer group.
The company has several distinctions to its credit. Being the first pharmaceutical company from Asia Pacific (outside Japan) to be listed on the New York Stock Exchange (on April 11, 2001) is only one among them. And as always, Dr. Reddy’s chose to do it in the most difficult of circumstances against widespread skepticism. Dr. Reddy’s came up trumps not only having its stock oversubscribed but also becoming the best performing IPO that year.
Dr. Anji Reddy is well known for his passion for research and drug discovery. Dr. Reddy’s started its drug discovery programme in 1993 and within three years it achieved its first breakthrough b out licensing an anti-diabetes molecule to Novo Nordisk in March 1997. With this very small but significant step, the Indian industry went through a paradigm shift in its image from being known as just ‘copycats’ to ‘innovators’! Through its success, Dr. Reddy’s pioneered drug discovery in India. There are several such inflection points in the company’s evolution from a bulk drug (API) manufacturer into a vertically integrated global pharmaceutical company today.
Today, the company manufactures and markets API (Bulk Actives), Finished Dosages and Biologics in over 100 countries worldwide, in addition to having a very promising Drug Discovery Pipeline. When Dr. Reddy’s started its first big move in 1986 from manufacturing and marketing bulk actives to the domestic (Indian) market to manufacturing and exporting difficult-to-manufacture bulk actives such as Methyldopa to highly regulated overseas markets, it had to not only overcome regulatory and legal hurdles but also battle deeply entrenched mind-set issues of Indian Pharma being seen as producers of 'cheap' and therefore ‘low quality’ pharmaceuticals. Today, the Indian Pharma industry, in stark contrast, is known globally for its proven high quality-low cost advantage in delivering safe and effective pharmaceuticals. This transition, a tough and often-perilous one, was made possible thanks to the pioneering efforts of companies such as Dr. Reddy’s Laboratories.
Today, Dr. Reddy’s continues its journey. Leveraging on its ‘Low Cost, High Intellect’ advantage. Foraying into new markets and new businesses. Taking on new challenges and growing stronger and more capable. Each failure and each success renewing the sense of purpose and helping the company evolve.
With over 950 scientists working across the globe, around the clock, the company continues its relentless march forward to discover and deliver a breakthrough medicine to address an unmet medical need and make a difference to people’s lives worldwide. And when it does that, it would only be the beginning and yet it would be the most important step. As Lao Tzu wrote a long time ago, ‘Even a 1000 mile journey starts with a single step.’
ALLIANCING
Dr. Reddy's is a global pharmaceutical company operating in over 100 countries worldwide. The company's operations span across the entire pharmaceutical value chain - from API to Formulations to Discovery Research as well as service areas such as Custom Pharmaceutical Services (CPS).
Dr Reddy's Business-Geography Matrix, given below, should give a comprehensive idea of the company's spectrum of operations.
BUSINESS
Dr. Reddy's is a vertically integrated, global pharmaceutical company with proven research capabilities and presence across the pharmaceutical value chain. We manufacture Active Pharmaceutical Ingredients and Finished Dosage forms and market them globally, with a focus on United States, Europe, India and Russia. In addition, the drug discovery arm of the company conducts basic research in the areas of diabetes, cardiovascular, inflammation and bacterial infection.
OUR CORE AREAS
Our core businesses of Active Pharmaceutical Ingredients (API) and Branded Formulations are well established with an impressive track record of growth and profitability. Our Generics business started operations in 2001 and focuses primarily on the North America and EU markets. We have built a robust pipeline of generic products, which will help us drive growth in the medium and long term. In addition, the company is investing in creating businesses of the future - the innovation led businesses - of Specialty and Drug Discovery.
Our revenues for fiscal 2011 were U.S. $446 million.
OPPORTUNITIES WITH US
Generics R&D we are working on the largest pipeline that is directed towards the US, Europe, Australia, New Zealand, South America & Russian markets. We are looking for talented people at middle- senior level who can play a path breaking role in the R&D efforts and augment the Generics R&D team, which is dedicatedly working for the Generics market. Our Generics R&D team is part of Integrated Product Development Organization (IPDO), a core group that selects a large number of ideas that can be converted into commercially viable products in an increasingly non-infringing environment.
BOARD OF DIRECTORS
Dr. Reddy's has a board comprising of eminent individuals from diverse fields. The board acts with autonomy and independence in exercising strategic supervision, discharging its fiduciary responsibilities, and in ensuring that the management observes the highest standards of ethics, transparency and disclosure.
Our Directors are experts in the diversified fields of medicine, chemistry and medical research, human resource development, business strategy, finance and economics. They review all information relating to significant business decisions, including strategic and regulatory matters. Every member of the board, including the non-executive directors, has full access to any information related to the company.
Committees appointed by the board focus on specific areas, and take decisions within the authority delegated to them by the board. The committees also make specific recommendations to the board on various matters from time-to-time.
CODE OF ETHICS AND OMBUDSMAN PROCEDURE
We at Dr. Reddy’s have a long-standing commitment to the lofty principles of corporate governance and ethical business practices. This is a value, which is shared by our Board of Directors, senior management and employees at all levels across the world.
To reflect our continued commitment to the highest standards of truth, integrity and transparency, the Board of Directors of our Company has adopted a Code of Business Conduct and Ethics (Code). This Code applies to each one of us in Dr. Reddy’s.
The Code at Dr. Reddy’s has been designed to comply with the provisions of the Sarbanes-Oxley Act of 2002 and its implementing regulations. It is a general statement of goals and expectations for individual and business conduct. The Code and an Ombudsman Procedure have been chalked out to provide information, education and resources to help out employees make good, informed business decisions and to act on them with integrity.
CORPORATE GOVERNANCE
Dr. Reddy's long-standing commitment to high standards of corporate governance and ethical business practices is a fundamental shared value of its Board of Directors, management and employees. The Company's philosophy of corporate governance stems from its belief that timely disclosures, transparent accounting policies, and a strong and independent Board go a long way in preserving shareholders trust while maximizing long-term shareholder value.
Good corporate governance flows out of the commitment of the Management and the Board of Directors. When the commitment is backed by the fundamental beliefs of maximizing value for stakeholders; transparent actions in the business; values of a corporate; and mutual trust amongst all constituents of the business, the organization transforms itself into a higher plane of leadership.
The forward-looking approach of Dr. Reddy's has always helped it, in achieving the desired results. This approach has transformed the company's culture to one that is relentlessly focused on the speedy translation of scientific discoveries into innovative products. Dr. Reddy's commitment towards Corporate Governance started well before law mandated such practices.
The company has identified and established its core purpose, mission and core values for achieving corporate excellence. Dr. Reddy's believes in crafting an environment where the parameters of conduct and behavior of the company and its management is constantly aligned with the business environment.
The highlights of Dr. Reddy's Corporate Governance systems are an independent Board of Directors following international practices, committed management team, internal control systems and dissemination of information to various stakeholders
DSCOVER STRATEGIES
Our Discovery Research programs span a combination of 'Focus Therapeutic Areas' with known unmet medical needs and significant commercial potential. We have developed approaches that leverage the knowledge currently available on validated drug targets for efficient disease modulation by developing best-in-class molecules.
The usage of focused synthesis approaches helps us in enhancing the probability of success with significant reduction in financial risk.
Additional approaches include developing 'first-in-class' molecules for drug candidates that hold potential for therapy against diseases such as Atherosclerosis and bacterial infections.
EMPLOYEE DEVELOPMENT
At Dr Reddy's we foster a culture which has the following tenets ..
Customer Focused and High Performance Driven Both external and internal customers are accorded highest priority with sensitivity and commitment to target, time & cost and focus on delivering innovative affordable medicines globally.
Entrepreneurial and Innovative Genuine mistakes are tolerated, intelligent risk-taking is encouraged and people are empowered
Egalitarian and Trusting Rank and status consciousness is low; leadership walks the talk, enjoys credibility & trust; access to people, resources and information is unrestricted.
Flexible and Adaptive Change is welcome and initiatives are implemented with sincerity and commitment, diversity is understood and accepted. There is mutual respect for various ethnic cultures.
KEY MILESTONES
2004
• Acquires access to Drug Delivery Technology Platforms in the Dermatology segment through the acquisition of Trigenesis.
2003
• Announces a 15-year exclusive product development and marketing agreement for OTC drugs with Leiner Health Products in the US.
• Launches Ibuprofen, first generic product to be marketed under the “Dr. Reddy’s” label in the US.
2002
• Conducts its first overseas acquisition – BMS Laboratories Limited and Meridian Healthcare in UK.
2001
• Becomes the first Asia Pacific pharmaceutical company, outside Japan, to list on the New York Stock Exchange. Listed with the symbol ‘RDY’ on April 11, 2001.
• Out-licenses DRF 4158 to Novartis for up to US $55 million upfront payment.
• Launches its first generic product, Ranitidine, in the US market.
• Becomes the first Indian pharmaceutical company to obtain an 180-day exclusive marketing rights for a generic drug in the US market with the launch of Fluoxetine 40 mg capsules on August 3, 2001.
2000
• Dr. Reddy’s Laboratories becomes India's third largest pharmaceutical company with the merger of Cheminor Drugs Limited, a group company.
• Reddy US Therapeutics, a wholly-owned subsidiary, is established at Atlanta, US to conduct target based drug discovery.
1999
• Acquisition of American Remedies Limited, a pharmaceutical company based in India.
1998
• Licenses anti-diabetic molecule, DRF 2725 (Ragaglitazar), to Novo Nordisk.
1997
• Licenses anti-diabetic molecule, DRF 2593 (Balaglitazone), to Novo Nordisk. Becomes the first Indian pharmaceutical company to out-license an original molecule.
• First ANDA filed with the United States Food and Drug Administration for Ranitidine.
1995
• Sets up of a Joint Venture in Russia.
1994
• Makes a GDR issue of USD 48 million.
• Foundation stone laid for a finished dosages facility to cater to the highly regulated markets such as the US.
1993
• Dr. Reddy's Research Foundation established. The company drug discovery programme starts.
1991
• First formulation exports to Russia commence.
VALUES
We strive for excellence in everything we think, say and do.
Quality: We are dedicated to achieving the highest levels of quality in everything we do to delight customers, internal & external, every time.
Respect for the Individual: We uphold the self esteem and dignity of each other by creating an open culture conducive for expression of views and ideas irrespective of hierarchy
Innovation & Continuous Learning: We create an environment of innovation and learning that fosters, in each one of us, a desire to excel and willingness to experiment
Collaboration & Teamwork: We seek opportunities to build relationships and leverage knowledge, expertise and resources to create greater value across functions, businesses and locations
Harmony & Social Initiatives: We take utmost care to protect our natural environment and serve the communities in which we live and work.
Our business practices are guided by the highest ethical standards of truth, integrity and transparency.
TALENT AQUSITION
Dr. Reddy’s recruits talent from across the world through lateral hiring as well as by visiting premier campuses.
Campus hiring is done through either:
Business Schools
Technical Universities – we hire graduates and postgraduates
in the areas of Chemistry, Biologics, Pharmaceutics,
Pharmacology and Microbiology among others.
AWARD AND RECOGNITION
Dr. Reddy's has been awarded the National Award for Excellence in Corporate Governance 2002 instituted by ICSI. A fifteen member Jury headed by Mr. M. N. Venkatachaliah, Former Chief Justice of India, selected the company for this award.
His Excellency Mr. Bhairon Singh Shekhawat, Hon'ble Vice-President of India presented the award to our CFO, Mr. V S Vasudevan at a function held on December 31, 2002 at Vigyan Bhavan, New Delhi.