Paul I. Louangrath
Appendix 1: ASEAN Corporate Governance Scorecard Items – Part D. The Disclosure and Transparency
C) Important Theories
4. CASE STUDY: DR. REDDY'S LABORATORIES
4.2 Key Financial highlights, FY2015
Revenue Rs. 148.19 bn ↑12% (US$ 2.38 bn)
Gross Profit Margin: 57.6% (2015) vs 57.4% (2014)
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)
Rs. 36.17 bn ↑9%: 24% of revenue (US$ 580 mn)
Profit Before Tax (PBT): Rs. 28.16 bn ↑6% 19% of revenue (US$ 452 mn)
Profits After Tax (PAT): Rs. 22.18 bn ↑3% 15% of revenue (US$ 356 mn)
Cash and Cash Equivalents (including other investments): Rs. 39.65 bn ↑18% (US$
636 mn)
All US dollar amounts based on the convenience translation rate of US$ 1 = ` 62.31
182 4.3 Consolidated financials
The abridged IFRS consolidated financial performance of Dr. Reddy’s for FY2015 compared to FY2014 is as follows:
Revenues: Revenues increased by 12% to Rs. 148,189 million in FY2015. Revenue growth was largely driven by Global Generics segment’s operations in North America, Venezuela and India. Adverse exchange rates movement resulted in lower reported revenues, because of the decrease in Indian rupee realization from sales in euro and Russian rouble.
Gross Profit: Gross profit rose by 13% to Rs. 85,403 million in FY2015. This translates to agross profit margin of 57.6% in FY2015 versus 57.4% in FY2014. The gross profit margin for G.G. was 65.2%; and for the PSAI business, 22.4%. After taking into account the impact of the exchange rate fluctuations of the Indian rupee against multiple currencies in the markets in which the Company operates, gross profits from the Global Generics segment decreased due to impact of changes in the existing business mix (i.e., a fall in the share of sales of higher gross margin products and an increase in the share of relatively lower gross margin products). Factors that positively affected gross profit margins for the PSAI segment include an increase in sales of products with higher gross profit margins during the year.
Selling, General And Administrative Expenses (SG&A): SG&A expenses including amortization that increased by 10% to Rs. 42,585 million in FY2015 was primarily due to manpower expenses, sales and marketing costs and the impact of exchange rate fluctuations of the Indian rupee against multiple currencies in the markets of operation. SG&A accounted for 28.7% of sales in FY2015, which was 60 basis points lower than the previous year.
R&D Expenses: R&D expenses increased by 41% to Rs. 17,449 million in FY2015 and accounted for 11.8% of sales, against 9.4% in FY2014. This growth is in line with the Company’s efforts to focus on the development of a specialized pipeline consisting of niche and differentiated products.
Net Finance Income: Net finance income was Rs. 1,682 million in FY2015 against Rs. 400 million in FY2014.
Income Tax: For FY2015, income tax expense was Rs. 5,984 million, with an effective tax rate of 21.2% against Rs. 5,094 million in FY2014 with an effective tax rate of 19.1%.
Net Profit: Net profit increased by 3% to Rs. 22,179 million in FY2015. This represents a profit after tax (PAT) margin of 15% of revenues against 16.3% in FY2014.
Liquidity And Capital Resources: Cash generated from operating activities in FY2015 was Rs. 25,033 million. Investing activities amounting to Rs. 22,904 million includes net investment in property, plant, equipment and intangibles to build capacity and capabilities for future business growth. Cash outflow from financing activities was Rs. 4,118 million.
Debt-Equity: In FY2015, long term borrowings (the current plus non-current portion) decreased by Rs. 2,866 million. Short-term borrowing rose by Rs. 1,250 million. As on 31 March 2015, the Company’s debt to equity position was at 0.39 compared to 0.49 last year.
The net debt to equity position was at 0.03 versus 0.12 last year.
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Enterprise-wide Risk Management (ERM): Objectives of Dr. Reddy’s ERM function:
Proactively identify and highlight risks to the right stakeholders
Facilitate discussions around risk prioritization and mitigation
Provide a framework to assess risk capacity and appetite; develop systems to warn when the appetite is getting breached
Provide an analysis of residual risk
The Company’s business units and functions are the primary source for risk identification. The ERM team also regularly monitors external trends on liabilities as well as risks reported by peers.
Risk Identification and Mitigation at the Business Unit or Function Level: The ERM team focuses on identification of key business, operational and strategic risks, through structured interviews, surveys, on-call discussions or incidents. The ERM team collaborates with the Compliance, SOX (Sarbanes Oxley Act, 2002) and Internal Audit teams on compliance, financial reporting and process aspects for identifying and mitigating risks.
Mitigation is periodically reviewed and the progress on key risks are discussed at the Company’s management-level and Board-level Risk Committees.
Risk Aggregation, Prioritization And Mitigation at the Organizational Level: Risks are aggregated at the unit/function and organization level and categorized by risk groups into (i) Preventable, (ii) Strategic and (iii) External risks. The Finance, Investment and Risk Management Council (or FIRM Council) is the Company’s management committee that helps the ERM function to prioritize organization-wide risks, review and steer mitigation efforts in line with the Company’s risk capacity and appetite. It also oversees financial risk management and capital allocation decisions.
Reviewing the Status of Mitigation and Residual Risks: The Head of ERM team provides periodic updates to the FIRM Council and the Risk Committee of the Board of Directors, like (i) quarterly updates on the progress of mitigation of key risks, and (ii) specific initiatives carried out on risks during the year. During FY2015, the ERM team facilitated mitigation for certain geo-political and country risks, on forex and devaluation of currencies, on transfer risk and on people security. The team enhanced its key risk indicator tracking capabilities, developed a loss-data tracker and constructed a key learning’s summary for the year. On financial risk management, the team helped in developing a framework to enable making capital allocation decisions. It also assisted management in documentation and review of internal financial controls, as required by the Companies Act, 2013.
Outlook: The Company is focused on profitable growth and a leadership position in GG and PSAI for a significant value in the near term. In GG, through portfolio expansion, cost leadership, consistent delivery of limited competition products and supply chain excellence and in PSAI, through creating compelling value information. In Proprietary Products, the aim is to create a viable business by calibrating investments to produce a self-sustainable model.
In a dynamic environment, Dr. Reddy’s base business model is exposed to volatility, both upwards and downwards. While the upsides create non-linear value for the organization, there is a conscious attempt to protect it against the downsides.
184 Five year at a glance
Table 2: Income Statement over 5 years
RR(Rs. in million)Rs Year Ending March 31
Income Statement Data
2015 2014 2013 2012 2011
Revenues 148,189 132,170 116,266 96,737 74,693
Cost of revenues 62,786 56,369 55,687 43,432 34,430
Gross profit 85,403 75,801 60,579 53,305 40,263
as a % of revenues 57.6 57.4 52.1 55.1 53.9
Operating Expenses Selling, general and administrative expenses*
42,585 38,783 34,272 29,907 23,689 Research and development
expenses
17,449 12,402 7,674 5,911 5,060 Other Operating
(income)/expenses, net
(917) (1,416) (2,479) (765) (1,115) Total operating expenses 59,117 49,769 39,467 35,053 27,634 Operating income 26,286 26,032 21,112 18,252 12,629
as a % of revenues 18 20 18 19 17
FINANCE COSTS, NET
Finance income 2,774 1,674 1,478 1,227 173
Finance expenses (1,092) (1,274) (1,018) (1,067) (362) Finance (expense)/income, net 1,682 400 460 160 (189) Share of profit of equity
accounted investees, net of income tax
195 174 104 54 3
Profit before income tax 28,163 26,606 21,676 18,466 12,443 Income tax benefit/(expense) (5,984) (5,094) (4,900) (4,204) (1,403) Profit for the year 22,179 21,512 16,776 14,262 11,040
as a % of revenues 15 16 14 15 15
Earnings per Share
– Basic 130.2 126.5 98.8 84.2 65.3
– Diluted 129.7 126.0 98.4 83.8 65.0
Dividend declared per share (Rs.)
20.0 18.0 15.0 13.8 11.3
Balance Sheet Data
Cash and cash equivalents; net of bank overdraft
5.394 8, 451 5, 054 7, 379 5,660 Operating working capital** 55,624 46,526 41,710 35,189 25,194
Total assets 194,762 170,223 142,369 119,477 95,005
Total long-term debt excluding current portion
14,307 20,740 12,625 16,335 5,271 Total stockholders' equity 111,302 90,801 72,805 57,287 45,803 Additional Data
Net Cash Provided By/(Used In)
Operating activities 25,033 19,463 13,317 16,150 8,009 Investing activities (22,904) (16,620) (13,944) (18,665) (8,658) Financing activities (4,118) (217) (1,792) 3,735 (377)
185 Effect of exchange rate changes
on cash
(1,068) 771 94 499 141
Expenditure on property, plant and equipment & Intangibles
(15,327) (10,627) (7,336) (8,585) (11,606) Notes:*Includes impairment of goodwill and other intangibles and reversal of impairment.
Figures are regrouped for previous years
** Operating working capital = Trade receivables + Inventories - Trade payables All figures are based on IFRS consolidated financial statements
(` MILLION)
Key financial ratio
Table 3: Financial Performance over 5 Years
Year Ending March 31 2015 2014 2013 2012 2011 Profitability Ratios
EBITDA margin % 24% 25% 24% 26% 22%
Gross Margin % 58% 57% 52% 55% 54%
– Global Generics 65% 66% 59% 63% 65%
– PSAI 22% 20% 32% 32% 26%
Adjusted PAT* margin % 15% 16% 15% 16% 14%
Asset Productivity Ratios PRODUCTIVITY RATIOS
Fixed Asset Turnover 3.2 3.2 3.3 3.1 2.9
Total Assets Turnover 0.8 0.8 0.9 0.9 0.9
Working Capital Ratios PRODUCTIVITY RATIOS
Working Capital Days SETTIOS 173 165 154 154 134
Inventory Days 144 148 134 149 156
Debtors Days 91 90 90 81 72
Creditor Days ABILITYRATIOS 62 72 70 76 94
Gearing Ratios
Net Debt/Equity 0.03 0.12 0.20 VA0.24 0.39
Valuation Ratios
Earnings per share (Rs.) 129.7 126.0 98.4 83.8 65.0
Book Value per share (Rs.) 651 532 427 337 269
Dividend Payout (%) 15.4% 1414% !5% 1616% 17%
Trailing Price/Earnings Ratio 26.9 20.3 17.9 19.6 28.7
Notes:(1) Fixed Asset Turnover: Net Sales/Avg Net Fixed Assets (Property, plant and equipment)
(2) Total Asset Turnover: Net Sales/Avg Total Assets
(3) Working Capital Days: Inventory Days +Receivable Days –Payable Days (4) Inventory Days: Average Inventory/Cost of Revenue* 365
(5) Receivable Day: Average Trade Receivables/Turnover* 365 (6) Payable Days: Average Trade Payables/Cost of Revenue* 365 (7) Book Value per share: Equity/Outstanding equity shares (diluted)
(8) Dividend Payout: DPS/EPS (9) Trailing price: Closing share price on the last working day of March
* PAT (Profit After Tax) adjusted for major non-cash impairment charge and other non- recurring costs
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Source: All figures in Tables 2 & 3 are based on IFRS consolidated financial statements of Dr. Reddy's Labs..
Capital structure and Financial performance
Key Financial Performance Indicators of Dr. Reddy's Labs. from 2011 o 2015:
Revenues grew by 12.1% y-o-y primarily on account of DRL's Global Generics segment’s operations in the North America, India and “Rest of the World” markets, primarily Venezuela. A 5-year 'Compounded Annual Growth Rate' (CAGR) of 19% was achieved.
Gross Profit (as a percentage to sales) improved primarily due to an increase in sales of products with higher gross profit margins during the year.
EBITDA increased by 9% (a 5-year CAGR) to Rs. 36,168 million or 24.4% of revenues.
Profit Before Tax (PBT) grew by 6% y-o-y. or by a 5-year CAGR of 11%.
Earnings per share also has shown a significant rise over the 5 years.
Dr. Reddy's has a good dividend paying track record and has consistently declared dividends for the last 15 years. Though the average dividend yield is not quite high compared to the prevailing yields of the pharmaceutical industry, investors still value its shares because of increasing market price of its shares.
Capital Structure Decisions & Impact on Financial Performance
The company's initial financial growth was more from borrowers' money, as their assets and equity were not sufficient to fund the total liabilities.
This situation of over-dependence on debt was not safe in the long run, because of the risks of financial distress and bankruptcy.
The company has increased its share capital through various policy decisions, like Dr.
Reddy's Employees Stock Option Plan.
The company has also paid out its long-term borrowings, as its market position got strengthened.
Lesser dependence on debt has been brought out by the company's decreasing debt- equity and debt-asset ratios.
Dr. Reddy's is an established, mature global pharmaceutical company. Its capital structure decisions is in keeping with the established financial wisdom of less dependence on debt than on equity to safeguard the financial health in long-term from risks of distress and bankruptcy, while improving liquidity, solvency and market leadership. Its good financial performance in the highly competitive and dynamic pharmaceutical industry over the last 5 years has been consistent with its capital structure decisions, as brought out by the annual financial reports.
5. CONCLUSION
The present study strengthens the conventional wisdom of appropriate capital structure decisions, which are consistent with the industry and the financial and maturity status of a business entity in the industry. The present case study has involved the financial performance of a mature pharmaceutical company and the relevance of its capital structure
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decisions to its business environment. There are no fit-for-all rules in terms of capital structure for all business entities. The capital structure decisions should be appropriate to the determinants in the business environment and the financial base and the development stage of an entity. A well thought-out capital structure is one of the determinants of successful financial performance, but other factors, like improving productivity and seeking out higher return products also count.
188 REFERENCES
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MORAL MANAGER AND CORPORATE SUSTAINABILITY Duangporn Arbhasil
Rangsit University
52/347 Phaholyothin Rd., Lakhok, Pathumthani 12000 E-mail: [email protected]
ABSTRACT
The central thesis of this conceptual paper is that moral manager is a driver of corporate sustainability. The moral manager possesses moral value and virtue that support corporate sustainability. The key moral value of altruism is a guiding principle for the moral manager to think of others first. The four cardinal virtues, consisting of prudence (or wisdom), fortitude (or courage), temperance, and justice, of the moral manager, are practiced at all times by the moral manager who has great concern for others while being aware of his/her deficiencies. The value of altruism and the cardinal virtues of the moral manager can support corporate sustainability, which is mainly involved with the stakeholders of the corporate situated in the society. These stakeholders are “the others” that the manager would respond to their short-term needs without compromising the ability to meet future needs. Out of his/ her concern for the others, the moral manager employs prudence or wisdom in making his/her decisions that may affect the others and he/she proceeds with fortitude or courage to act with justice or fairness for the others. The moral manager practices temperance, which is involved with controlling his/ her emotions and be aware of his/her deficiencies, in dealing with the others. In sum, the paper attempts to point out that “corporate sustainability”, and not just corporate responsibility, is grounded in morality since the moral manager who is the implementer for achieving the corporate sustainability has the attributes that support corporate sustainability.
Keywords: moral value, virtue, sustainability, altruism, prudence
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MORAL MANAGER AND CORPORATE SUSTAINABILITY
1. INTRODUCTION
Corporate sustainability, which is generally described as the balance of resources for present or future stakeholders, is one subject that has received growing interest from both academicians and practitioners in the last few decades. This may be due to the growing recognition of prevalent depletion of resources, vast deteriorating environments, and a trend to shift corporate focus from short-term benefits to long-term sustenance.
To address the issue of corporate sustainability, organizations have commonly employed the approach of Corporate Social Responsibility (CSR). Many organizations seem to believe that by showing their responsibility to societies and to environments, stakeholders of their organizations should prolong their sustenance in business. In other words, they seem to believe that responsibility can assure sustainability of their organizations. Some academicians (e.g., Metcalf & Benn, 2013) also held similar views and treat corporate responsibility as interchangeable with corporate sustainability. However, there is also a contrasting idea to this belief. For example, Bansal and Des Jardine (2015) indicate that many supposedly responsible firms borrow resources and capital from the future at the risk of long-term survival and in this regard, the firms are responsible but are not sustainable. In connection with this idea, Bansal and Des Jardine (2015) ground corporate social responsibility in ethics, morality and norms but indicate that the only moral imperative that grounds sustainability is the need to balance the short- and long- term supply and demand of resources.
The role of the balancer of resources typically pertains to managers or leaders.
Previous studies have called for leaders with superior abilities to handle corporate sustainability. For example, Metcalf and Benn (2013) have called for leaders who can read and predict through complexity, think through complex problems, engage groups in dynamic adaptive organizational change and have the emotional intelligence to adaptively engage with their own emotions associated with complex problem solving. Few previous empirical studies have also found that specific types of individual or leaders’ values are related to sustainability aspects such as propensity for sustainability actions or sustainability strategies.
Although corporate sustainability has received growing interest, the study on the attributes of human resource that can lead to sustainability has been scant. This study thus focuses on the attributes of managers/ leaders that can support corporate sustainability. The virtue theory framework has been brought in to coincide with the notion of “value” to prescribe the attributes of managers or leaders who can be a driver of corporate sustainability.
My proposition is that corporate sustainability is not driven mainly by the moral imperative to balance resources over time (as suggested by Bansal & Des Jardine, 2015); rather corporate sustainability is driven mainly by managers’ value and virtue with regard to others.
Only when managers hold the value of altruism which guides their virtues with concern for others first, they will then attempt to balance resources in such a way to keep resources for the future others. On the contrary, managers who are not altruistic will think of themselves first and tend to maximize the use of resources in the short-term and this will jeopardize long- term sustenance of organizations.
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Based on this proposition, the study will first describe the concept of moral manager and corporate sustainability. Then the relation between moral manager and corporate sustainability will be addressed and the discussion be raised. The concepts of the study should contribute to the academic and practical field. The concepts prescribe managers’
moral value and moral virtue necessary for corporate sustainability with the rationale behind.
The propositions are also made to provide a basis for further empirical analysis.
2. LITERATURE REVIEW