The reduction in the financing cost resulting from better working capital management and financial leveraging had partly helped pharma companies to show improved profit margin during the first half of current fiscal. Despite large dependence of external funds to finance their projects, domestic sector had painted impressive performance compared to multinational subsidiaries.

Anuh Pharma, Cipla, Dr.Reddy's Lab, Elder Healthcare, Femcare, Hikal Ltd, JB Chemicals, Kilitch Drugs, Makers Lab, Nicholas Piramal, Themis Medicare, Unichem, Wockhardt Ltd and Zandu Pharma had shown rapid improvement in their performance during the period under review partly on account of reduction in their interest burden or maintaining the same. This had been made possible either by liquidating the borrowings or effective working capital management.

A study of the half yearly performances of 48 large and medium pharmaceutical companies revealed that the interest outgo has come down to one-sixth of their gross profit during the first half of 2001-02 as against one-fifth during the corresponding period of previous year. In absolute terms, the interest outgo of 48 companies was Rs 159 crore as against Rs 148 crore during the corresponding period of previous year.

Such interest charges formed 16.6 per cent of the gross profit of Rs 959 crore during the first half of the current year as against 20.6 per cent of the gross profit of Rs 718 crore during the corresponding period of previous year. The lower ratio during the period under review compared to previous year indicated that at one stage there was an easing of interest burden by these companies while on the other hand, they have been leveraging their strength by way of better working capital management, loan liquidation and cost reduction.

In the case of 48 companies, the interest outgo on sales had fallen during the first half as compared to previous year. The interest outgo formed only 2.6 per cent of the sales as compared to 3.3 per cent in the corresponding half of previous year. The operating margin represented by the ratio of operating profit to sales of the 48 companies improved to 24.7 per cent from 23.6 per cent indicating an improvement in operating ratio which is an index of overall efficiency.

The improvement in operating margin enabled 48 companies to meet the interest obligation. This is also indicated in the coverage of interest payment as determined by the ratio of earning before interest and taxes to interest on borrowings. For the 48 companies, such ratio showed an improvement from 7.25 to 8.73 during the first half.

The large dependence on external funds for meeting new investment as well as for working capital had resulted heavy outgo by way of interest charges from corporate pockets during the last two or three years. This had affected not only the operating results but also stunted the corporate expansion in the post reform period. The pharmaceutical is one segment whose profitability was under siege due partially to heavy interest outgo.

During the recent period, RBI has reduced the prime-lending rate to corporate which has been undergoing recessionary tendency. This provided a cushion to cash starved India Inc to come out of recession and improve margin.

Among the 48 companies, 39 are domestic companies while 9 are subsidiaries of multinationals. In the case of domestic companies, the interest outgo has been very substantial as they depend heavily on borrowing for fund generation. Even then, the interest outgo as percentage of gross profit for 39 companies was estimated lower at 19.9 per cent during first half of 2001-02 as compared to 25.8 per cent during the corresponding period of previous year. In the case of subsidiaries of multinational companies, the ratio of interest to gross profit worked out lower at 8.0 per cent as compared to 10.4 per cent during previous year.

Among the 39 domestic companies, Avon Organics, Aarti Drugs, Citurgia Biochemicals, Elder Pharma, Glenmark, Ipca Labs, Kopran Ltd, Morepen Lab and Orchid Chemicals continued to incur heavy interest charges on borrowings. In these, barring Avon Organics and Orchid, the remaining companies presented better performance partially through product innovation and increased exports. The multinational subsidiaries, except Strides Arcolab had reduced their interest by liquidating borrowings and better working capital management.

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