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 1
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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,
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.
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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.