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).

46

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

47