DETERMINANTS OF DIVIDEND POLICIES IN PHARMACEUTICAL INDUSTRY
Introduction of the study:
The profits of a company when made available for the distribution among its shareholders are
called dividend. The dividend may be as a fixed annual percentage of paid up capital as in the
case of preference shares or it may vary according to the prosperity of the company as in the case
of ordinary shares.
The decision for distributing or paying a dividend is taken in the meeting of Board of Directors
and in confirmed generally by the annual general meeting of the shareholders. The dividend can
be declared only out of divisible profits, remained after setting of all the expenses, transferring
the reasonable amount of profit to reserve fund and providing for depreciation and taxation for
the year. It means if in any year, there are not profits; no dividend shall be distributed that year.
The shareholders cannot insist upon the company to declare the dividend. It is solely the
discretion of the directors. Aunt hinted that the dividend was an income of the owners of the
corporation which they received in the capacity of the owner. Distribution of dividend involves
reduction of current assets (cash) but not always. Stock dividend or bonus shares are an
exception to it.
Dividend definition
Dividend refers to the corporate net profits distributed among shareholders. Dividends can be
both preference dividends and equity dividends. Preference dividends are fixed dividends paid as
a percentage every year to the preference shareholders if net earnings are positive. After the
payment of preference dividends, the remaining net profits are paid or retained or both
depending upon the decision taken by the management.
Dividend Policy
What happens to the value of the firm as dividend is increased, holding everything else (capital
budgets, borrowing) constant. Thus, it is a trade-off between retained earnings on one hand, and
distributing cash or securities on the other.
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Companies Act and Payment of Dividend
In fact, the declaration and payment of dividend is an internal matter of the company and is
governed by its Articles.
The power regarding appropriation of profits is given to the Board of directors; however, they
are governed by the provisions of Act. The directors are to follow table.And the provisions of
Articles at the provisions of the Companies Act 1950 in the regard. The following are the rules
regarding declaration and payment of dividend:-
(1) Dividend on Paid up Capital. A company may, if so authorized by its Articles, pay
dividend on the paid up value of shares under section 93 of the companies Act.
(2) Provisions of Articles of Association. Rules 85 to 94 of Table A provide that-
a. A company may declare dividend its general meeting provided it does not exceed the
amount recommenced by the board of directors.
b. The board of directors may from the time pay to t members such interim dividends, as
appears to it to be justified by the profits of the company.
c. Notice of any dividend should be given to those who are entitled to receive it.
d. The directors my transfer an amount they think p[roper to the reserve fund which may
be utilised for any contingencies.
e. When a dividend has been declared, it becomes a liability of the company to the
shareholders from the date of its declaration but no interest can be claimed on it.
(3) Dividends only of Profits.
a. Dividends can only be declared or paid out of (i) the current profits of the company,
(ii) the past accumulated profits and (iii) moneys provided by the government for the
payment of dividends in pursuance of a guarantee given by that government. No
dividend can be paid out of capital. (Sec. 205 (i)). Director who is responsible for
payment of dividend out of capital shall be personally liable to take good such
amount to the company.
b. Companies are not entitled to pay any dividend unless present or arrears of
depreciation have been provided for out of the profits and an amount of 10 % or
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reports has been transferred to reserve. However, central government may allow any
company to declare or pay dividends out of profits before providing for any
depreciation.
c. Capital Profits may also be utilised for the declarations of dividend provided
(i) There is nothing in the Article prohibiting the distribution of dividend out
of capital profits;
(ii) They have been rallied in cash and
(iii) They remain as profits after revaluation of all assets and liabilities.
d. Dividend cannot be paid out of accumulated profits unless current losses are made
good.
(4) Payment of dividend only in Cash [Sec. 205 (iii)]. Dividends are to be paid in cash only
except in the following circumstances-
a. By capitalizing the profits by issue of fully paid bonus shares, if Articles so permit,
provided all legal formalities have been satisfied in respect of issue of bonus shares.
b. By paying up any unpaid amount on partly paid up shares.
(5) Payment of Dividend to Specified Persons (Sec. 206). Dividend shall be paid only to those
whose names appear on the Register of members on the date of declaration of dividend or to
the holders of dividend warrant, if issued by the company.
(6) Payment of Dividend within 42 days (Sec. 207) Dividend must be paid within 42 days of
its declarations except in the following circumstance:-
1. by operation of law of insolvency;
2. in compliance of the directions of the shareholders;
3. where right to receive dividend is pending decision;
4. Where it is not due to the default of the company.
5. If company lawfully adjusts the amount against any debt due from the
shareholder.
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(7) Payment of Interim dividend. The directors of a company can pay interim dividend subject
to the provisions of Articles. Interim dividend can be paid at any time between the two
annual general meetings taking into full year depreciation on fixed assets.
(8) Transfer of Unpaid dividend to a Special Bank Account (Sec. 205 A) According to
section 205 A, newly inserted by the Companies (Amendment) Act 1974, where a company
has declared a dividend but has not posted the dividend warrant in respect therefor within 42
days to the shareholders entitled to it, such unpaid dividends shall be transferred to a special
account to be opened by the company in that behalf in any Scheduled Bank to be called
Unpaid Dividend Account of ......Co. Ltd/Co. (Pvt) Ltd.' If the unpaid dividend are not so
transferred, the company shall pay an interest at 12 % p.a. Any unpaid amount of dividend
declared before the commencement of this Amendment Act shall also be transferred to such
special account within 6 months from the date of commencement of the Act.
(9) Transfer Unclaimed Dividend to Central Government. Any amount transferred to the
unpaid dividend account remains unpaid or unclaimed for 3 years from the date of such
transfer shall be transfered to the 'General Revenue Account' by the company along with a
statement giving full particulars in respect of the sums so transferred and the last known
addresses of the persons entitled to receive it and such other particulars as may be prescribed.
The company is entitled so a receipt for such transfer from the Reserve Bank of India.
If a company fails to comply the above said provisions (given in para 8 and 9 above), the
company and every officer of the company who is in default shall be punishable with a fine
which may extend to Rs. 500 for every day during which default continues.
Stability of Dividend
There may be three types of dividend policy
Strict or Conservative dividend Policy which envisages the retention of profits on the cost of
dividend pay-out.It helps in strengthening the financial position of the company; (2) Lenient
Dividend Policy which views the payment of dividend at the maximum rate possible taking in
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view the current earing of the company. Under such policy company retains the minimum
possible earnings; (3) Stable Dividend Policy suggests a mid-way of the above two views. Under
this policy, stable or almost stable rate of dividend is maintained. Company maintains reserves in
the years of prosperity and uses them in paying dividend in lean year. If company follows stable
dividend policy, the market price of tis shares shall be higher. There are reasons why investors
prefer stable dividend policy. Main reasons are:-
1. Confidence among Shareholders. A regular and stable dividend payment may serve to
resolve uncertainty in the minds of shareholders. The company resorts not to cut the dividend
rate even if its profits are lower. It maintains the rate of dividends by appropriating the funds
from its reserves. Stable dividend presents a bright future of the company and thus gains the
confidence of the shareholders an the goodwill of the company increases in the eyes of the
general investors.
2. Income Conscious Investors. The second factor favoring stable dividend policy is that some
investors are income conscious and favor a stable rate of dividend. They too, never favour an
unstable rte of dividend. A Stable dividend policy may also satisfy such investors.
3. Stability in Market Price of Shares. Other things beings equal, the market price very with
the rate of dividend the company declares on its equity shares. The value of shares of a company
having a stable dividend policy fluctuates not widely even if the earnings of the company turn
down. Thus, this policy buffers the market price of the stock.
4. Encouragement to Institutional Investors. A stable dividend policy attracts investments
from institutional investors such institutional investors generally prepare a list of securities,
mainly incorporating the securities of the companies having stable dividend policy in which they
invest their surpluses or their long term funds such as pensions or provident funds etc.
In this way, stability and regularity of dividends not only affects the market price of shares but
also increases the general credit of the company that pays the company in the long run.
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Basic Issues Involved in Dividend Policy
There are certain basic questions which are involved in determining the sound dividend policy.
1. Cost of Capital. Cost of capital is one of the considerations for taking a decision whether to
distribute dividend or not. As decision making tool, the Board calculates the ratio of rupee profits
that the business expects to earn (Ra) to the rupee, profits that the shareholders can expect to earn
outside (Rc) i.e., Rs./Rc. If the ratio is less than one, it is a signal to distribute dividend and if it
is more than one, the distribution of dividend will be discontinued.
2. Realization of Objectives. The main objectives of the firm i.e., maximization of wealth for
shareholders including their current rate of dividend-should also be aimed at in formulating the
dividend policy.
3. Shareholders' Group. Dividend policy affects the shareholders group. It means a company
with low pay-out an heavy reinvestment attracts shareholders interested in capital gains rather
than n current income whereas a company with high dividend pay-out attracts those who are
interested in current income.
4. Release of Corporate earnings. Dividend distribution is taking as a men’s of distributing
unused funds. Dividend policy affects the shareholders wealth by varying its dividend pay = out
ratio. In Dividend policy, the financial manager decides whether to release Corporate earnings or
not.
These are certain basic issues Involved in formulating a Dividend policy. Dividend policy to a
large extent affects the financial structure, the flow of funds, liquidity, stock prices and in the last
shareholders' satisfaction. That is why management exercises a high degree of judgment
establishing a sound dividend pattern.
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Factors Affecting Dividend Policy
A number of considerations affect the dividend policy of company. The major factors are
1. Stability of Earnings. The nature of business has an important bearing on the dividend policy.
Industrial units having stability of earnings may formulate a more consistent dividend policy
than those having an uneven flow of incomes because they can predict easily their savings and
earnings. Usually, enterprises dealing in necessities suffer less from oscillating earnings than
those dealing in luxuries or fancy goods.
2. Age of corporation. Age of the corporation counts much in deciding the dividend policy. A
newly established company may require much of its earnings for expansion and plant
improvement and may adopt a rigid dividend policy while, on the other hand, an older company
can formulate a clear cut and more consistent policy regarding dividend.
3. Liquidity of Funds. Availability of cash and sound financial position is also an important
factor in dividend decisions. A dividend represents a cash outflow, the greater the funds and the
liquidity of the firm the better the ability to pay dividend. The liquidity of a firm depends very
much on the investment and financial decisions of the firm which in turn determines the rate of
expansion and the manner of financing. If cash position is weak, stock dividend will be
distributed and if cash position is good, company can distribute the cash dividend.
4. Extent of share Distribution. Nature of ownership also affects the dividend decisions. A
closely held company is likely to get the assent of the shareholders for the suspension of
dividend or for following a conservative dividend policy. On the other hand, a company having a
good number of shareholders widely distributed and forming low or medium income group,
would face a great difficulty in securing such assent because they will emphasise to distribute
higher dividend.
5. Needs for Additional Capital. Companies retain a part of their profits for strengthening their
financial position. The income may be conserved for meeting the increased requirements of
working capital or of future expansion. Small companies usually find difficulties in raising
finance for their needs of increased working capital for expansion programmes. They having no
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other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at
low rates and retain a big part of profits.
6. Trade Cycles. Business cycles also exercise influence upon dividend Policy. Dividend policy
is adjusted according to the business oscillations. During the boom, prudent management creates
food reserves for contingencies which follow the inflationary period. Higher rates of dividend
can be used as a tool for marketing the securities in an otherwise depressed market. The financial
solvency can be proved and maintained by the companies in dull years if the adequate reserves
have been built up.
7. Government Policies. The earnings capacity of the enterprise is widely affected by the
change in fiscal, industrial, labour, control and other government policies. Sometimes
government restricts the distribution of dividend beyond a certain percentage in a particular
industry or in all spheres of business activity as was done in emergency. The dividend policy has
to be modified or formulated accordingly in those enterprises.
8. Taxation Policy. High taxation reduces the earnings of he companies and consequently the
rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of
dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond
10 % of paid-up capital are subject to dividend tax at 7.5 %.
9. Legal Requirements. In deciding on the dividend, the directors take the legal requirements
too into consideration. In order to protect the interests of creditors an outsiders, the companies
Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend.
Moreover, a company is required to provide for depreciation on its fixed and tangible assets
before declaring dividend on shares. It proposes that Dividend should not be distributed out of
capita, in any case. Likewise, contractual obligation should also be fulfilled, for example,
payment of dividend on preference shares in priority over ordinary dividend.
10. Past dividend Rates. While formulating the Dividend Policy, the directors must keep in
mind the dividend paid in past years. The current rate should be around the average past rat. If it
has been abnormally increased the shares will be subjected to speculation. In a new concern, the
company should consider the dividend policy of the rival organisation.
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11. Ability to Borrow. Well established and large firms have better access to the capital market
than the new Companies and may borrow funds from the external sources if there arises any
need. Such Companies may have a better dividend pay-out ratio. Whereas smaller firms have to
depend on their internal sources and therefore they will have to built up good reserves by
reducing the dividend payout ratio for meeting any obligation requiring heavy funds.
12. Policy of Control. Policy of control is another determining factor is so far as dividends are
concerned. If the directors want to have control on company, they would not like to add new
shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders
they fear dilution of control and diversion of policies and programmes of the existing
management. So they prefer to meet the needs through retained earing. If the directors do not
bother about the control of affairs they will follow a liberal dividend policy. Thus control is an
influencing factor in framing the dividend policy.
13. Repayments of Loan. A company having loan indebtedness are vowed to a high rate of
retention earnings, unless one other arrangements are made for the redemption of debt on
maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly
institutional lenders) put restrictions on the dividend distribution still such time their loan is
outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency
to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend
payout.
14. Time for Payment of Dividend. When should the dividend be paid is another consideration.
Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a
time when is least needed by the company because there are peak times as well as lean periods of
expenditure. Wise management should plan the payment of dividend in such a manner that there
is no cash outflow at a time when the undertaking is already in need of urgent finances.
15. Regularity and stability in Dividend Payment. Dividends should be paid regularly because
each investor is interested in the regular payment of dividend. The management should, inspite
of regular payment of dividend, consider that the rate of dividend should be all the most constant.
For this purpose sometimes companies maintain dividend equalization Fund.
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Determinants of Dividend Policy
The main determinants of dividend policy of a firm can be classified into:
1. Dividend payout ratio
2. Stability of dividends
3. Legal, contractual and internal constraints and restrictions
4. Owner's considerations
5. Capital market considerations and
6. Inflation.
Dividend Payout Ratio: The percentage of earnings paid to shareholders in dividends. Calculated as:
Or equivalently
Interest Coverage Ratio: A ratio used to determine how easily a company can pay interest on
outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings
before interest and taxes (EBIT) of one period by the company's interest expenses of the same
period:
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Dividend Yield: A financial ratio that shows how much a company pays out in dividends each
year relative to its share price. In the absence of any capital gains, the dividend yield is the return
on investment for a stock. Dividend yield is calculated as follows:
PE Ratio: A valuation ratio of a company's current share price compared to its per-share
earnings.
Calculated as:
In general, a high P/E suggests that investors are expecting higher earnings growth in the future
compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story
by itself. It's usually more useful to compare the P/E ratios of one company to other companies
in the same industry, to the market in general or against the company's own historical P/E. It
would not be useful for investors using the P/E ratio as a basis for their investment to compare
the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has
much different growth prospects
1. Dividend payout ratio: Dividend payout ratio refers to the percentage share of the net
earnings distributed to the shareholders as dividends. Dividend policy involves the decision to
pay out earnings or to retain them for reinvestment in the firm. The retained earnings constitute a
source of finance. The optimum dividend policy should strike a balance between current
dividends and future growth which maximizes the price of the firm's shares. The dividend payout
ratio of a firm should be determined with reference to two basic objectives – maximizing the
wealth of the firm’s owners and providing sufficient funds to finance growth. These objectives
are interrelated.
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2. Stability of dividends: Dividend stability refers to the payment of a certain minimum amount
of dividend regularly. The stability of dividends can take any of the following three forms:
a. constant dividend per share
b. constant dividend payout ratio or
c. constant dividend per share plus extra dividend
3. Legal, contractual and internal constraints and restrictions: Legal stipulations do not
require a dividend declaration but they specify the conditions under which dividends must be
paid. Such conditions pertain to capital impairment, net profits and insolvency. Important
contractual restrictions may be accepted by the company regarding payment of dividends when
the company obtains external funds. These restrictions may cause the firm to restrict the payment
of cash dividends until a certain level of earnings has been achieved or limit the amount of
dividends paid to a certain amount or percentage of earnings. Internal constraints are unique to a
firm and include liquid assets, growth prospects, and financial requirements, availability of
funds, earnings stability and control.
4. Owner's considerations: The dividend policy is also likely to be affected by the owner's
considerations of the tax status of the shareholders, their opportunities of investment and the
dilution of ownership.
5. Capital market considerations; The extent to which the firm has access to the capital
markets, also affects the dividend policy. In case the firm has easy access to the capital market, it
can follow a liberal dividend policy. If the firm has only limited access to capital markets, it is
likely to adopt a low dividend payout ratio. Such companies rely on retained earnings as a major
source of financing for future growth.
6. Inflation: With rising prices due to inflation, the funds generated from depreciation may not
be sufficient to replace obsolete equipments and machinery. So, they may have to rely upon
retained earnings as a source of fund to replace those assets. Thus, inflation affects dividend
payout ratio in the negative side.
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Other factors include:
1. Company policy
2. Stability in earnings
3. Liquidity of the companies
4. Past dividend rates
5. Projects under consideration
6. Market expectation
7. Taxation
8. Legal restriction
9. Independent opportunities
10. Restriction of FIs
11. Nature of business
12. Cost of capital
13. Phase of Trade Cycle
14. Accumulated reserves
15. Company’s growth needs
16. Bonus issues
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INDIAN PHARMACEUTICAL INDUSTRY
The pharmaceutical industry in India is among the most highly organized sectors. This industry
plays an important role in promoting and sustaining development in the field of global medicine.
Due to the presence of low cost manufacturing facilities, educated and skilled manpower and
cheap labor force among others, the industry is set to scale new heights in the fields of
production, development, manufacturing and research. In 2008, the domestic pharma market in
India was expected to be US$ 10.76 billion and this is likely to increase at a compound annual
growth rate of 9.9 per cent until 2010 and subsequently at 9.5 per cent till the year 2015.
Industry Trends
The pharma industry generally grows at about 1.5-1.6 times the Gross Domestic Product
growth
Globally, India ranks third in terms of manufacturing pharma products by volume
The Indian pharmaceutical industry is expected to grow at a rate of 9.9 % till 2010 and
after that 9.5 % till 2015
In 2007-08, India exported drugs worth US$7.2 billion in to the US and Europe followed
by Central and Eastern Europe, Africa and Latin America
The Indian vaccine market which was worth US$665 million in 2007-08 is growing at a
rate of more than 20%
The retail pharmaceutical market in India is expected to cross US$ 12-13 billion by 2012
The Indian drug and pharmaceuticals segment received foreign direct investment to the
tune of US$ 1.43 billion from April 2000 to December 2008
Challenges
Every industry has its own sets of advantages and disadvantages under which they have to work;
the pharmaceutical industry is no exception to this. Some of the challenges the industry faces are:
Regulatory obstacles
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Lack of proper infrastructure
Lack of qualified professionals
Expensive research equipments
Lack of academic collaboration
Underdeveloped molecular discovery program
Divide between the industry and study curriculum
Government Initiatives
The government of India has undertaken several including policy initiatives and tax breaks for
the growth of the pharmaceutical business in India. Some of the measures adopted are:
Pharmaceutical units are eligible for weighted tax reduction at 150% for the research and
development expenditure obtained.
Two new schemes namely, New Millennium Indian Technology Leadership Initiative
and the Drugs and Pharmaceuticals Research Program have been launched by the
Government.
The Government is contemplating the creation of SRV or special purpose vehicles with
an insurance cover to be used for funding new drug research
The Department of Pharmaceuticals is mulling the creation of drug research facilities
which can be used by private companies for research work on rent
Pharma Export
In the recent years, despite the slowdown witnessed in the global economy, exports from the
pharmaceutical industry in India have shown good buoyancy in growth. Export has become an
important driving force for growth in this industry with more than 50 % revenue coming from
the overseas markets. For the financial year 2008-09 the export of drugs is estimated to be $8.25
billion as per the Pharmaceutical Export Council of India, which is an organization, set up by the
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Government of India. A survey undertaken by FICCI, the oldest industry chamber in India has
predicted 16% growth in the export of India's pharmaceutical growth during 2009-2010.
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Key players in Indian Pharmaceutical Industry
There are several national and international pharmaceutical companies that operate in India.
Most of the country's requirements for pharmaceutical products are met by these companies.
Some of them are briefly described below:
Ranbaxy Laboratories
Ranbaxy Laboratories is the biggest pharmaceutical manufacturing company in India.
The company is ranked at the 8th position among the global generic pharmaceutical
companies and has presence in 48 countries including world class manufacturing
facilities in 10 countries and serves to customers from over 125 countries. Ranbaxy
Laboratories 2009-2010 Q3 Net Profit Results showed a profit of Rs 116.6 crore as
compared to Rs 394.5 crore deficit, recorded during the corresponding period last fiscal.
Dr. Reddy's Laboratories
Dr. Reddy's Laboratories manufactures and markets a wide range of pharmaceuticals both
in India and abroad. The company has 60 active pharmaceutical ingredients to
manufacture drugs, critical care products, diagnostic kits and biotechnology products.
The company has 6 FDA plants that produce active pharma ingredients and 7 FDA
inspected and ISO 9001 and ISO 14001 certified plants. Dr. Reddy's Q1 FY10 result
shows the revenues of the company at ` 18,189 million which is up by 21%. During this
quarter the company introduced 24 new generic products, applied for 22 new generic
product registrations and filed 4 DMFs.
Cipla
Cipla is an Indian pharmaceutical company renowned for the manufacture of low cost
anti AIDS drugs. The company's product range comprises of anthelmintics, oncology,
anti-bacterials, cardiovascular drugs, antibiotics, nutritional supplements, anti-ulcerants,
anti-asthmatics and corticosteroids. Cipla also offers other services like quality control,
engineering, project appraisal, plant supply, consulting, commissioning and know-how
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transfer, support. For the financial year 2008-09 the company registered an increase of
22% in sales and other income over the previous year.
Nicholas Piramal
Nicholas Piramal is the second largest pharmaceutical healthcare company in India. The
brands manufactured by the company include Gardenal, Ismo, Stemetil, Rejoint,
Supradyn, Phensedyl and Haemaccel. Nicholas Piramal has entered into join ventures and
alliances with several international corporations like Cheissi, Italy; IVAX Corp; UK, F.
Hoffmann-La Roche Ltd., Allergan Inc., USA etc.
Glaxo Smithkline (GSK)
Glaxo Smithkline is a United Kingdom based pharma company; it is the world's second
largest pharmaceutical company. The company's portfolio of pharma products consist of
central nervous system, respiratory, oncology, vaccines, anti-infectives and gastro-
intestinal/metabolic products among others. On November 2009, the FDA had announced
that the H1N1 vaccine manufactured by GSK would join the list of the four vaccines
approved.
Zydus Cadila
Zydus Cadila also known as Cadila Healthcare is an Indian pharmaceutical company
located in Gujarat. The company's 1QFY2010 results show the net sales at Rs880.3cr
which is higher than the estimated Rs773cr. The net profit was Rs124.8cr which was
increase of 39%; the increase was on account of higher sales and improvement in the
OPM.
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India's Domestic Pharmaceutical Market (12 Months Ended January 2009)
Company Size ($ Billion) Market Share (%) Growth Rate (%)
Total Pharma Market 6.9 100.0 9.9
Cipla 0.36 5.3 13.4
Ranbaxy 0.34 5.0 11.5
Glaxo Smithkline 0.29 4.3 -1.2
Piramal Healthcare 0.27 3.9 11.7
Zydus Cadila 0.24 3.6 6.8
Source: ORG IMS
Future Scenario
With several companies slated to make investments in India, the future scenario of the
pharmaceutical industry in looks pretty promising. The country's pharmaceutical industry has
tremendous potential of growth considering all the projects that are in the pipeline. Some of the
future initiatives are:
According to a study by FICCI-Ernst & Young India will open a probable US$ 8 billion
market for MNCs selling expensive drugs by 2015
The study also says that the domestic pharma market is likely to reach US$ 20 billion by
2015
The Minister of Commerce estimates that US$ 6.31 billion will be invested in the
domestic pharmaceutical sector
Public spending on healthcare is likely to raise from 7 per cent of GDP in 2007 to 13 per
cent of GDP by 2015
Dr Reddy's Laboratories has tied up with GlaxoSmithKline to develop and market
generics and formulations in upcoming markets overseas
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Lupin, a Mumbai based pharmaceutical company is looking to tap opportunities of about
US$ 200 million in the US oral contraceptives market
Due to the low cost of R&D, the Indian pharmaceutical off-shoring industry is designated
to turn out to be a US$ 2.5 billion opportunity by 2012
India's pharmaceutical industry has been growing at record levels in recent years but now has
unprecedented opportunities to expand in a number of fields. The domestic industry's long-
established position as a world leader in the production of high-quality generic medicines is set
to reap significant new benefits as the patents on a number of blockbuster drugs are scheduled to
expire over the next few years. In addition, more and more governments worldwide are seeking
to curb their soaring prescription drug costs through greater use of generics. These opportunities
are presenting themselves not only in India's traditional wealthy client markets such as the U.S.
and European Union nations but also in emerging economies with vast populations such as
Africa, South America, Asia, and Eastern and Central Europe.
In addition, India's long-established position as a preferred manufacturing location for
multinational drug manufacturers is quickly spreading into other areas of outsourcing activities.
Soaring costs of R&D and administration are persuading drug manufacturers to move more and
more of their discovery research and clinical trials activities to the subcontinent or to establish
administrative centers there, capitalizing on India's high levels of scientific expertise as well as
low wages.
Both multinational and local drug manufacturers could eventually benefit from the market
potential of India's population of over one billion. A large market will likely open up as the result
of a projected boom in health insurance, an area in which the country is currently woefully
underdeveloped. New government initiatives seek to enable the majority of the population to
access the life-saving drugs they need, while even greater opportunities may be presented by the
rise of the new Indian consumer. This group-urban, middle class and wealthy-live fast-paced,
Western-style lives and, as a result, they are beginning to suffer from Western, lifestyle-related
illnesses, for which they want, and can afford, innovative drug treatments. This untapped
domestic market is also highly attractive to the pharmaceutical MNCs, which recently have
returned to India in large numbers (many had left when the regime allowing process patents only
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was introduced in the early 1970s). Now, MNCs and domestic companies are starting to work
together, utilizing each other's strengths for their mutual benefit. For the foreign firms, this
includes not only the Indian companies' research and manufacturing capabilities and their much
lower operational cost levels, but also comprehensive marketing and distribution networks
operating throughout India's vast territories.
There are, however, a number of uncertainties, particularly the effects of India's new product
patent system, which was introduced on January 1, 2005. Previously, only process patents were
granted, a situation that led to India's current role as a world leader in the production of high
quality, affordable generics. The new regime may spell the end for the domestic sector's smaller
players, while for others it could represent unprecedented opportunities. Nevertheless, the
domestic industry is still spending far too little on R&D, which must change quickly if it is even
to begin to address these new opportunities and challenges.
On the international front, the industry still has some catching up to do in terms of quality
assurance while, on the local market, pricing remains a problem. There is a need for regulatory
reform in India to encourage leading global players to continue and accelerate the outsourcing of
their R&D activities-beginning with discovery research-to the subcontinent. This is particularly
urgent in the face of the strong competition from China, where the government has been
particularly proactive in encouraging foreign investments in pharmaceuticals and biotechnology.
In India, the industry is now awaiting developments following the January draft publication of
the government's National Pharmaceuticals Policy for 2006. The document contains proposals
for far-reaching initiatives aimed at boosting the domestic industry's global competitiveness, as
well as improving the population's access to medicines. Indian government ministers have also
promised MNCs concrete action soon on speeding the patent approval process and other crucial
issues, such as the definition of patentability and compulsory licensing. Action is required soon,
if India wants to be a significant player in the global pharmaceutical arena.
India currently represents just U.S. $6 billion of the $550 billion global pharmaceutical industry
but its share is increasing at 10 percent a year, compared to 7 percent annual growth for the
world market overall.1 Also, while the Indian sector represents just 8 percent of the global
industry total by volume, putting it in fourth place worldwide, it accounts for 13 percent by
value,2 and its drug exports have been growing 30 percent annually. The “organized” sector of
21
India's pharmaceutical industry consists of 250 to 300 companies, which account for 70 percent
of products on the market, with the top 10 firms representing 30 percent. However, the total
sector is estimated at nearly 20,000 businesses, some of which are extremely small.
Approximately 75 percent of India's demand for medicines is met by local manufacturing.
According to the German Chemicals Association, in 2005, India's top 10 pharmaceutical
companies were Ranbaxy, Cipla, Dr. Reddy's Laboratories, Lupin, Nicolas Piramal, Aurobindo
Pharma, Cadila Pharmaceuticals, Sun Pharma, Wockhardt Ltd. and Aventis Pharma.5 Indian-
owned firms currently account for 70 percent of the domestic market, up from less than 20
percent in 1970. In 2005, nine of the top 10 companies in India were domestically owned,
compared with just four in 1994. India's potential to further boost its already-leading role in
global generics production, as well as an offshore location of choice for multinational drug
manufacturers seeking to curb the increasing costs of their manufacturing, R&D and other
support services, presents an opportunity worth an estimated $48 billion in 2007.
Over-the-Counter Medicines
The Indian market for over-the-counter medicines (OTCs) is worth about $940 million and is
growing 20 percent a year, or double the rate for prescription medicines. The government is keen
to widen the availability of OTCs to outlets other than pharmacies, and the Organisation of
Pharmaceutical Producers of India (OPPI) has called for them to be sold in post offices.
Developing an innovative new drug, from discovery to worldwide marketing, now involves
investments of around $1 billion, and the global industry's profitability is under constant attack
as costs continue to rise and prices come under pressure. Pharmaceutical production costs are
almost 50 percent lower in India than in Western nations, while overall R&D costs are about
one-eighth and clinical trial expenses around one-tenth of Western levels. India's long-
established manufacturing base also offers a large, well-educated, English-speaking workforce,
with 700,000 scientists and engineers graduating every year, including 122,000 chemists and
chemical engineers, with 1,500 PhDs. The industry provides the highest intellectual capital per
dollar worldwide, says OPPI.
22
Company Profile
About Dr. Reddy's
Established in 1984, Dr. Reddy's Laboratories Ltd. (NYSE: RDY) is an integrated global
pharmaceutical company, committed to providing affordable and innovative medicines for
healthier lives. Through its three businesses - Pharmaceutical Services and Active Ingredients,
Global Generics and Proprietary Products – Dr. Reddy’s offers a portfolio of products and
services including Active Pharmaceutical Ingredients (APIs), Custom Pharmaceutical Services
(CPS), generics, biosimilars, differentiated formulations and News Chemical Entities (NCEs).
Providing Affordable Medicines
Our Global Generics business helps reduce drug costs for individuals and governments by
bringing generic drugs to market as early as possible, and making them available to as many
patients as possible. We market both generic small-molecule drugs and generic
biopharmaceuticals. In markets with guidelines for approval, our Biologics business offers more
affordable and equally effective generic biopharmaceuticals or biosimilars.
We supply pharmaceutical ingredients to other generic companies through the API arm of our
PSAI business, which contributes to our goal of providing affordable medicine.
We will continue to promote affordability in significant ways and work to expand our product
offering of generics, focusing on increasing access to products with significant barriers to entry.
We will continue to look for new opportunities to take generics to more patients, in collaboration
with other companies.
Developing Innovative Medicines
Despite the great advances of medical science, there are still many unmet medical needs.
Our Proprietary Products businesses address some of these unmet medical needs, by developing
and bringing to market new drugs.
Through innovation in science and technology, combined with a deep understanding of
underlying disease pathways, we develop and commercialize new formulations of approved
23
products. We also develop new chemical entities with improved and well-characterized safety
and efficacy profiles.
We focus our research on the therapeutic areas of pain, anti-bacterials and metabolic disorders.
Our Custom Pharmaceutical Services arm of our PSAI business helps innovator companies get
their proprietary medicines to patients faster, by providing a range of technology platforms and
services.
The healthcare needs of people worldwide cannot be met by one company alone. Collectively
however we can bring new drugs to the market in a fast and efficient manner and provide the
building blocks of affordable medicines. Through our PSAI business, which comprises the
Active Pharmaceutical Ingredients (API) and Custom Pharmaceutical Services (CPS) businesses,
we offer IP advantaged, speedy product development and cost-effective manufacturing services
to our customers – generic companies and innovators. This allows us to help make good
medicines available to more people around the world. The core strengths of our PSAI business
are the state-of-the-art infrastructure, resources and skills we are able to offer to our customers:
Large and diverse product portfolio
Eight FDA-inspected plants and three technology centers
World class chemistry expertise
Robust, large-scale manufacturing capabilities
Intellectual Property (IP) driven product development for freedom to operate
Total, seamless supply chain management
Sustainability: At Dr. Reddy’s, sustainability is a multi-dimensional aspiration, which has its
roots in the very purpose of our existence – providing affordable medicines to people around the
24
world and meeting unmet medical needs through innovation. Our business, by its very nature,
serves a social good, so we have a far deeper reason than profits alone to drive our performance.
For us, building a sustainable organization is not a trend we blindly follow; it is intrinsic to how
we have operated for decades. To us, a commitment to sustainability means a commitment to
fulfilling our obligations to all of our stakeholders -- our customers & partners, employees,
shareholders and society. Thus, while optimizing profitability may be one measurement of our
performance, we also judge our success by our performance with regard to the communities in
which we live and work, the environment and our employees. We understand that it is only by
increasing value to all of these stakeholders that we can build an ever flourishing and lasting
organization.
While sustainability thinking was always woven into the fabric of our organization, we formally
declared our intent to institutionalize it in 2004, when we first began to publicly report on our
sustainability practices. We annually publish our Sustainability Report with direction from the
guidelines recommended by Global Report Initiative G3, covering social, ethical, economic,
safety and environmental aspects of our business.
Product and services:
Active Pharma Ingredients (API): Dr. Reddy's offers an unparalleled portfolio to our customers
comprising of innovators and generic formulators worldwide. With a strong product portfolio of
products, including niches like oncology and hormones, and our “first in, last out” approach, it is
little wonder that we are today among the leading generic API players globally. Our goal is to
enable customers to be the first-to-launch a generic product as well as provide value-added
services that help them remain competitive and profitable for the entire life cycle of the product.
We have built the capabilities to consistently deliver on this promise in scale and across the
largest product range.
Our expertise in organic synthesis and process development complemented by a controlled
supply chain enables us to provide our customers with high quality Bulk Actives at competitive
prices. We are aggressively building our product portfolio to cater to generic players in the
emerging markets and generic and patent challenge formulators in regulated markets.
25
Our API business is supported by our technologically advanced Product Development
infrastructure, which identifies new products and is engaged every step of the way, from the
conceptual stage to delivery of drugs to the market place. The Product Delivery Teams, the
Centres of Excellence and IP teams help create value through Intellectual Property and proactive
patenting; early development work on certain promising molecules; breakthrough product
delivery; and by delivering cost leadership in API.
A highly skilled global team focuses on timely delivery of products, product development,
technology leadership, cost competitiveness, the highest levels of customer service, and full
compliance with regulatory and quality requirements.
PRODUCT DEVELOPMENT
Regulatory: Dr. Reddy's is committed to the manufacture of premium quality products in
compliance with all regulatory requirements and customer expectations. We operate in
accordance with cGMP requirements and the USFDA and ICH guidelines & regulations. All our
manufacturing facilities are successfully inspected for several products by the USFDA and
various other Agencies.
We are aided by a Best-in-Class Regulatory Affairs Team and we support our customers with
DMFs for their dosage form approvals / ANDA filings. We have filed several DMFs in US,
Canada (PMFs), Europe, Turkey, Korea, CIS and many more in other parts of the world. Some
of our products have also received the Certificate of Suitability (COS) from European
Pharmacopoeia
Our Customer support on Technical and Regulatory queries with constant focus on
responsiveness, reliability, customization, and confidentiality set us apart from others.
Continuous adaptation to the latest developments in global regulatory procedures and active
partnership with Pharmacopoeia bodies give us cutting edge in this area.
Intellectual Property: Competent and well equipped Intellectual Property Management Cell of
Dr. Reddy’s facilitates the creation of intellectual wealth by navigating the Research and
Development work and honoring others intellectual property. A team of well qualified IP experts
comprising specialists from diverse fields of science are involved in evaluating techno-legal and
26
techno-commercial aspects of the products, strategic product development, competitive IP
generation and patenting, leveraging the intellectual property across the globe. This is a
continuous process aimed at providing generic medicines at affordable prices to the mankind.
IPM cell in Dr Reddy's also facilitates P-IV challenges leading to early generic launch of the
products in the US market.
Differentiated Formulations
Our emerging Differentiated Formulations portfolio consists of developing novel formulations of
currently marketed drugs or combinations thereof to enhance patient comfort.
We develop synergistic combinations as well as technologies that enhance the drug’s safety
and/or efficacy profile by modifying its pharmacokinetics.
Our most advanced Differentiated Formulations efforts are in dermatology, where we have
launched several effective and innovative products through our wholly owned subsidiary
Promius Pharma.
Promius Pharma:
Our wholly-owned subsidiary, headquartered at Bridgewater, New Jersey (US) develops and
markets differentiated formulations for important dermatological indications.
Our portfolio includes in-licensed and co-developed dermatological products and an internal
pipeline of topical products under development that will provide better answers to the skin care
needs of today and tomorrow.
Promius Pharma has entered into successful partnerships with companies such as Ceragenix,
Foamix, Sinclair and Antares for in-licensing of products.
27
RESEARCH METHODOLOGY
Need for the study:
The Dividend policy is used by a company to decide how much it will pay out to shareholders in
dividends. A wrong dividend policy may put the company into financial troubles and the capital
structure of the company may get unbalanced. The finance manager has to formulate the
dividend policy in such a way, which coincides with the ultimate object of maximizing the
wealth of shareholders and the value of the firm. The present study “Determinants of Dividend
policies in Pharmaceutical Industry in India” analyzes the current dividend policies in the
pharma industry and the determinants of the same.
Objectives of the study:
To study the determinants of dividends policy in general.
To investigate the consistence of the dividend policy determinants.
To analyze the influence of firms’ characteristics like profitability, growth, risk, cash
flows, agency cost and on dividend payment pattern. i.e. to identify various determinants
of dividend payout.
Scope of the study:
The study on the determinants of dividend policy in the pharmaceutical industry focuses on the
dividend policies of the pharma companies like Dr. Reddy’s, Cipla etc.
The study is confined to the following determinants:
1. Dividend payout ratio
2. Profitability
3. Operating activities
4. Taxation
5. Turn over
6. Capital market activities
7. Liquidity
28
Data collection:
Nature of Data
The study is based on secondary data.
Source of data
Secondary data have been collected from the respective unit though manuals and annual reports
of the company. The sources of the data are budgeted fixed and actual attained by the concern
under the period of the study
Limitations of the study:
The time period being just 8 weeks, it formed an important limiting factor.
The study takes into consideration the financial data of past 4 years only.
Further, the study is based completely on the secondary data only.
The study is limited to 4 pharma companies and not all the players in the industry are
taken into account.
29
DATA INTERPRETATION AND ANALYSIS
DIVIDEND PAYOUT RATIO
Dividend payout ratio is calculated to find the extent to which earnings per share have been
used for paying dividend and to know what portion of earnings has been retained in the business.
It is an important ratio because ploughing back of profits enables a company to grow and pay
more dividends in future.
Formula:
Dividend Payout Ratio = Dividend per Equity Share / Earnings per Share
Year 2011 2010 20009 2008 2007
Dividend Payout Ratio 34.2 26.19 21.94 15.52 6.25
Interpretation: The dividend payout ratio of the company shows the earnings used by the
companies to pay the dividends. The ratio has increased from 6.25 in 2007 to 34.2 in 2011 which
is almost 6times. This shows the company’s dividend is more compared to its earnings.
30
EARNINGS PER SHARE RATIO:
Earnings per share ratio (EPS Ratio) is a small variation of return on equity capital ratio and is
calculated by dividing the net profit after taxes and preference dividend by the total number of
equity shares.
The formula of earnings per share is:
Earnings per share (EPS) Ratio = (Net profit after tax − Preference dividend) / No. of equity
shares (common shares)
Year 2011 2010 20009 2008 2007
Earnings Per Share 52.78 50.11 33.29 28.26 70.09
Interpretation:
The earnings per share is a good measure of profitability and when compared with EPS of
similar companies, it gives a view of the comparative earnings or earnings power of the firm.
From the graph, it can be seen that the EPS of the company was 70.09 in 2007 and fell to 28.26
in 2008. It increased to 52.78 in 2011 which shows the earning power of the company has
increased but not to that in the year 2007.
31
CAPITAL GEARING RATIO
Capital gearing ratio is mainly used to analyze the capital structure of a company.
The term capital structure refers to the relationship between the various long-term form of
financing such as debentures, preference and equity share capital including reserves and
surpluses. Leverage of capital structure ratios are calculated to test the long-term financial
position of a firm.
Capital Gearing Ratio = Equity Share Capital / Fixed Interest Bearing Funds
Year 2011 2010 20009 2008 2007
capital structure ratio 17.07801 6.672986 7.604513 5.4978 3.929252
Interpretation:
The capital gearing ratio is just 3.9 in the year 2007. It increased to 7.6 in 2009 and decreased to
6.67 in 2010. It increased greatly to 17.07 in 2011 again. The capital gearing ratio It reveals the
suitability of company's capitalization.
32
DIVIDEND PER SHARE:
Dividend per share (DPS) is a simple and intuitive number. It is the amount of the dividend that
shareholders have (or will) receive for each share they own.
DPS = dividends paid ÷ number of shares in issue
Year 2011 2010 20009 2008 2007
Dividend Per Share 11.25 11.25 6.25 3.75 3.75
Interpretation:
From the graph, it is clear that the dividend per share in the year 2007 is 3.75 and it increased to
11.25 in 2010 and continued the same in 2011. The graph shows a increase in the amount of
dividend received by the shareholders for their shares.
33
DIVIDEND YIELD RATIO
Dividend yield ratio is the relationship between dividends per share and the market value of the
shares.
Share holders are real owners of a company and they are interested in real sense in the earnings
distributed and paid to them as dividend. Therefore, dividend yield ratio is calculated to evaluate
the relationship between dividends per share paid and the market value of the shares.
Formula:
Dividend Yield Ratio = Dividend per Share / Market Value per Share
Year 2011 2010 20009 2008 2007
Dividend yield ratio 0.176757 0.199186 0.123076 0.086749 0.077925
Interpretation:
The dividend yield ratio is 0.07 in 2007, it increased in the further years and reached to a
maximum of 0.19 in 2010 which shows that the dividend paid to the shareholders is higher than
the market price compared to the previous years. The ratio again decreased slightly in 2011 to
0.17.
34
P/E RATIO:
The price-to-earnings ratio (P/E) is a valuation method used to compare a company’s current
share price to its per-share earnings.
Market Value per Share
Earnings per Share (EPS)
Year 2011 2010 20009 2008 2007
PE ratio 1.2 1.1 1.5 1.5 0.6
Interpretation:
The Price earnings ratio is 0.6 in 2007 and increased to 1.5 in 2008. It decreased to 1.1 in 2010
and slightly increased to 1.2 in 2011. This shows that that the investors are not much attracted to
invest in the company.
35
DEBT TO EQUITY RATIO:
Debt to Equity Ratio (D/E) is a financial ratio used to measure the relationship between the
capital contributed by creditors and the capital contributed by shareholders. The ratio is also
known as Risk, Gearing or Leverage.
Formula:
D/E = Total Debt (liabilities)/ Total Equity
Year 2011 2010 20009 2008 2007
Debt equity ratio 0.24 0.10 0.12 0.10 0.08
Interpretation:
The ideal debt-equity ratio is just 0.08 in 2007 and slightly increased to 0.12 in 2009. It again
decreased to 0.10 in 2010 and increased greatly to 0.24 in 2011. However, the debt equity ratio
of this company is not much favourable.
36
EQUITY DIVIDEND:
The equity dividend rate (we will refer to it in abbreviated terms as EDR) is a return measure that
states the before-tax equity cash flow as a percentage of the equity investment. It is also referred
to as cash-on-cash return.
This measure is often used in the case of real estate investments because the financing of
property acquisitions involves in most cases the use of both equity and debt (borrowed funds).
The formula for calculating the EDR is:
EDR = BTECF / Equity investment
Where, BTECF = Before-Tax Equity Cash Flow
Equity Investment = Total Investment Cost - Loan Amount
Year 2011 2010 20009 2008 2007
Equity Dividend 190.4 190 105.3 63.06 62.97
Interpretation:
Equity dividend rate refers to the cash on cash return. It shows the before tax equity cash flows
as a percentage of investment. It is seen from the graph that, the EDR is 62.97 in 2007 and
increased to 105.3 in 2009. It further increased to 190 in 2010. This shows that the cash on cash
return increased which is favourable.
37
OPERATING PROFIT MARGIN (%):
The operating profit margin is a type of profitability ratio known as a margin ratio. The
information with which to calculate the operating profit margin comes from a company's income
statement.
Operating Profit Margin = Operating Income/Sales Revenue = _______%
Operating income is often called earnings before income and taxes or EBIT. EBIT is the income
that is left, on the income statement, after all operating costs and overhead, such as selling costs
and administration expenses, along with cost of goods sold, are subtracted out.
Operating Profit Margin = EBIT/Sales Revenue = ________%
Year 2011 2010 2009 2008 2007Operating Profit Margin (%)
23.5 24.76 18.95 17.42 35.08
Interpretation:
Operating profit margin is decreasing in 2008 and it was increased next two years finally it was decreased in present year the ratio was highest in the year 2007 is 35.08% it reveals that company operating efficiency is highest in the year.
38
NET PROFIT MARGIN (%):
Net profit margin is one of the profitability ratios and an important tool for financial analysis. It
is the final output; any business is looking out for. Net profit ratio is a ratio of net profits after
taxes to the net sales of a firm. All the efforts and decision making in the business is to achieve a
higher net profit margin with increase in net profits.
Net profit margin shows the margin left for the equity and preference shareholders i.e. the
owners. Unlike the gross profit which measures the operating efficiency of the business, net
profit margin measures the overall efficiency of the business. An adequate margin of net profits
will be generated only when most of all the activities are being done efficiently. The activities
may be production, administration, selling, financing, pricing or tax management.
Net Profit Margin or Ratio=
Year 2011 2010 2009 2008 21007Net Profit Margin (%) 16.84 18.48 13.2 13.57 29.01
39
Interpretation:
Net profit margin ratio is highest in the year 2007 it was decreased in next two years again it was
slightly increased in 2010 finally it was decreased to 16.84% in 2011 it indicates company
efficiency is also decreased.
40
FINDINGS
1. The Dividend payout ratio has increased from 6.25 in 2007 to 34.2 in 2011 which is
almost 6times which shows the company’s dividend is more compared to its earnings.
2. The EPS of the company was 70.09 in 2007 and fell to 28.26 in 2008. It increased to
52.78 in 2011 which shows the earning power of the company has increased but not to
that in the year 2007.
3. The capital gearing ratio is just 3.9 in the year 2007. It increased to 7.6 in 2009 and
decreased to 6.67 in 2010. It increased greatly to 17.07 in 2011 again.
4. The dividend per share in the year 2007 is 3.75 and it increased to 11.25 in 2010 and
continued the same in 2011. There was an increase in the amount of dividend received by
the shareholders for their shares.
5. The dividend yield ratio is 0.07 in 2007; it increased in the further years and reached to a
maximum of 0.19 in 2010 which shows that the dividend paid to the shareholders is
higher than the market price compared to the previous years. The ratio again decreased
slightly in 2011 to 0.17.
6. The Price earnings ratio is 0.6 in 2007 and increased to 1.5 in 2008. It decreased to 1.1 in
2010 and slightly increased to 1.2 in 2011. This shows that that the investors are not
much attracted to invest in the company.
7. The ideal debt-equity ratio is just 0.08 in 2007 and slightly increased to 0.12 in 2009. It
again decreased to 0.10 in 2010 and increased greatly to 0.24 in 2011. However, the debt
equity ratio of this company is not much favourable.
8. The Equity Dividend Rate is 62.97 in 2007 and increased to 105.3 in 2009. It further
increased to 190 in 2010. This shows that the cash on cash return increased which is
favourable.
41
SUGGESTIONS
1. The dividend payout ratio is not very high. However it is good and the investors receive a
considerable portion of earnings per share in the form of dividends.
2. The earning power of the company decreased around 2008 and it began to increase after
that. In 2011, the earning power of the company is better.
3. It is found that the capital gearing ratio increased greatly in the current year showing the
suitability of the company’s capitalization.
4. The dividend given to the shareholders almost doubled these two years compared to the
previous years and is higher than the market price compared to the previous years.
5. The P/E ratio increased a lot in the recent years though it decreased slightly in the last
two years. The company should see that the investors are attracted to invest in it.
6. The debt equity ratio of the company is too low which is not favourable. The company
should therefore increase the debt while reducing the other sources of capital.
7. The cash on cash return increased by 80% in these two years which is favourable.
42
CONCLUSION
The study on the determinants of dividend policies in Pharmaceutical industry at Dr. Reddy’s
Laboratories was undertaken with an objective of getting an insight into the dividend policies of
the industry in general and the payment of the dividends. The study attempts to investigate the
consistence of the dividend policy determinants. Further, the study focuses on analyzing the
influence of firms’ characteristics like profitability, growth, risk, cash flows, agency cost and on
dividend payment pattern. i.e. to identify various determinants of dividend payout.
The study is done using the Balance sheet, Profit and Loss account and other financial
information of Dr. Reddy’s. The entire study is based on the secondary data only. The analytical
tools used for the study are ratio analysis. The study is done at Hyderabad for a period of 60days.
The study had few limitations which were taken care of.
The financial information obtained was analyzed using the appropriate techniques and it was
found that the dividend payout ratio of the company has increased a lot which is almost 6 times
of that in 2007. The company also showed a high capital gearing ratio and dividend per share.
Further, it was found that the price earnings ratio is low.
The company is paying out good amount of the dividends to the shareholders which are
increased in the recent years. It is also higher compared to the market. So, the company is
suggested to maintain the same in the future in order to attract the investors. The company
should also improve its debt equity ratio which is currently unfavourable. The company is
enjoying the high cash on return which increased by 80% in 2011. This should be continued in
the future.
43
BIBLIOGRAPHY
1. I.M. Pandey , Financial Management Ninth Edition, Vikas Publishing House Pvt Ltd, 10th
edition, 2009
2. Prasanna chandhra, Financial Management, Tata McGraw-Hill Education, 7th edition,
2008.
3. Dr.R.K. Mittal ,Management Accounting and Financial Management,V.K(india)
Enterprises-2010.
WEBILIOGRAPHY
1. www.morevalue.com/i-reader/ftp/Ch17.PDF
2. www.freemba.in/articles.php?stcode=10&substcode=30
3. www.wikipedia.org
44
Annexure
Balance Sheet of Dr Reddys Laboratories(in Rs. Cr)
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07Sources Of FundsTotal Share Capital 84.6 84.4 84.2 84.09 83.96Equity Share Capital 84.60 84.40 84.20 84.09 83.96Share Application Money 0.00 0.00 0.00 0.00 0.00Preference Share Capital 0.00 0.00 0.00 0.00 0.00Reserves 5,935.60 5,830.20 5,174.90 4,727.72 4,289.40Revaluation Reserves 0.00 0.00 0.00 0.00 0.00Networth 6,020.20 5,914.60 5,259.10 4,811.81 4,373.36Secured Loans 0.70 0.80 2.60 3.40 1.92Unsecured Loans 1,444.10 562.40 637.70 458.91 327.98Total Debt 1,444.80 563.20 640.30 462.31 329.90Total Liabilities 7,465.00 6,477.80 5,899.40 5,274.12 4,703.26
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07Application Of FundsGross Block 3,025.00 2,425.70 2,157.30 1,750.21 1,291.19Less: Accum. Depreciation
1,334.00 1,110.10 946.5 762.8 609.15
Net Block 1,691.00 1,315.60 1,210.80 987.41 682.04Capital Work in Progress 570.40 745.40 411.20 245.71 280.61Investments 2,462.00 2,652.70 1,865.10 2,080.71 966.99Inventories 1,063.20 897.4 735.1 640.93 487.58Sundry Debtors 1,770.50 1,060.50 1,419.70 897.71 1,055.70Cash and Bank Balance 66.2 47.9 84.3 67.19 148.6Total Current Assets 2,899.90 2,005.80 2,239.10 1,605.83 1,691.88Loans and Advances 1,663.80 1,321.40 1,331.20 1,272.02 1,028.56Fixed Deposits 0 320.1 300.1 470.15 1,308.11Total CA, Loans & Advances
4,563.70 3,647.30 3,870.40 3,348.00 4,028.55
Deffered Credit 0 0 0 0 0Current Liabilities 1,565.20 1,543.80 1,163.30 786.36 731.96Provisions 256.9 339.4 294.8 601.38 522.97Total CL & Provisions 1,822.10 1,883.20 1,458.10 1,387.74 1,254.93Net Current Assets 2,741.60 1,764.10 2,412.30 1,960.26 2,773.62Miscellaneous Expenses 0 0 0 0 0Total Assets 7,465.00 6,477.80 5,899.40 5,274.09 4,703.26
45
Profit & Loss account of Dr Reddys Laboratories (in Rs. Cr).
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07IncomeSales Turnover 5,285.80 4,469.60 4,080.40 3,428.40 3,872.92Excise Duty 97.30 74.00 80.90 84.51 89.66Net Sales 5,188.50 4,395.60 3,999.50 3,343.89 3,783.26Other Income 117.00 254.00 212.20 197.29 233.95Stock Adjustments 79.00 117.30 64.10 93.87 23.23Total Income 5,384.50 4,766.90 4,275.80 3,635.05 4,040.44ExpenditureRaw Materials 1,749.50 1,599.40 1,534.00 1,347.33 1,144.82Power & Fuel Cost 144.6 104.1 90 77.12 57.83Employee Cost 702.70 516.40 412.50 366.28 299.04Other Manufacturing Expenses
129.50 117.30 105.9 130.35 155.63
Selling and Admin Expenses 1,256.70 1,036.60 1,117.90 896.54 777.06Miscellaneous Expenses 65.00 50.60 45.30 37.44 44.76Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0Total Expenses 4,048.00 3,424.40 3,305.60 2,855.06 2,479.14
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07Operating Profit 1,219.50 1,088.50 758 582.7 1,327.35PBDIT 1,336.50 1,342.50 970.20 779.99 1,561.30Interest 9.9 16 27.4 14.69 51.96PBDT 1,326.60 1,326.50 942.80 765.3 1,509.34Depreciation 247.9 222.4 193.6 161.99 133.5Other Written Off 26.80 19.30 19.70 20.71 18.16Profit Before Tax 1,051.90 1,084.80 729.50 582.60 1,357.68Extra-ordinary items -0.4 -0.1 -0.1 -0.06 -0.02PBT (Post Extra-ord Items) 1,051.50 1,084.70 729.40 582.54 1,357.66Tax 158.5 238.7 168.6 108.88 188.99Reported Net Profit 893.4 846.1 560.9 475.22 1,176.86Total Value Addition 2,298.50 1,825.00 1,771.60 1,507.73 1,334.32Preference Dividend 0 0 0 0 0Equity Dividend 190.4 190 105.3 63.06 62.97Corporate Dividend Tax 115.2 31.6 17.8 10.72 10.7Per share data (annualised)Shares in issue (lakhs) 1,692.53 1,688.45 1,684.69 1,681.73 1,679.12Earning Per Share (Rs) 52.78 50.11 33.29 28.26 70.09
Cash Flow of Dr Reddys Laboratories (in Rs. Cr).
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Mar '11 Mar '10 Mar '09 Mar '08 Mar '07
Net Profit Before Tax 1,051.90 1,084.80 729.50 584.10 1365.85
Net Cash From Operating Activities 246.30 1,253.20 481.30 555.87 893.79
Net Cash (used in)/from -613.00 -1,111.10 -743.60 -1,515.93 -397.32
Investing Activities
Net Cash (used in)/from Financing
Activities
61.00 -152.20 105.60 46.15 316.59
Net (decrease)/increase In Cash and Cash
Equivalents
-305.7 -10.1 -156.7 -913.91 805.77
Opening Cash & Cash Equivalents 371.90 378.10 541.10 1,451.25 650.94
Closing Cash & Cash Equivalents 66.20 368.00 384.4 537.34 1456.71
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