FM(25-31)

DIVIDEND DECISIONSGlaxoSmithKline vs. LUPIN

GROUP MEMBERS:HARSH JAIN (25)MOHIT JAIN (26)

KANTA JAGANNATHAN (27)PRATIK KAMANI (28)

SIMRAN KAUR (30)APARNA KAUSHAL (31)

OVERVIEW

• GSK AT A GLANCE• LUPIN AT A GLANCE• FINANCIAL RATIOS ANALYSES• DIVIDEND POLICIES• DIVIDEND DECISIONS• OBSERVATIONS• CONCLUSIONS• RECOMMENDATIONS

GlaxoSmithKline AT A GLANCE

• Established in India in the year 1924

• Globally - USD 45 billion, leading research based healthcare and pharmaceutical company

• In India – turnover of Rs. 1859 crore; market share of 5.3%

• Therapeutic segments

• Top 5 products - Augmentin, Calpol, Ceftum, Phexin, and Betnesol

FINANCIAL MILESTONES OF GSK

1960’s •Indian shareholders acquired 25 % of the company's equity (1969)

1980’s•Glaxo Group equity reduced from 75 % to 40 % (1983)•Joint venture projects with Vegepro Foods & Feeds Ltd. and K G Gluco Biols were

launched with equity participation of 24% (1986)•Joint venture with Hindustan Foods Ltd. with equity participation of 20% (1988)

1990’s •Sold its trade investment in Vegepro Foods & Feeds Ltd. and Hindustan Foods Ltd. (1992-93)

•Raised its equity from 40% to 51% (1993)

FINANCIAL MILESTONES OF GSK

1990’s •Sold its Family Products Division to H J Heinz for a sum of Rs 210 crores (1994)•Declared a Bonus in the ratio of 1:1 (1995)•Acquired Biddle Sawyer Group of Companies (1997)

2000+ •SmithKline Beecham Pharmaceuticals (India) Limited merged into Glaxo India Limited to form GlaxoSmithKline Pharmaceuticals Limited in India (2001)

•Acquired Stiefel Laboratories, Inc. (July 09)

2000+ •Acquired Pfizer Inc.’s HIV business and formed ViiV Healthcare Ltd.(October 09)•Acquired Laboratoire Pharmaceutique Algerien (November 09)•Acquired NovaMin Technology Inc. (December 09)

COMPANY PROFILE

Ranks 2nd in the world & 7th in India

Chairman: Sir Christopher Gent

Chief Executive Officer: Andrew Witty

Chief Financial Officer: Julian Heslop

Chairman (GSK India Ltd.): D. S. Parekh

Employees: 103,000 across 117 countries

Headquarter: Brentford, UK

LUPIN LIMITED AT A GLANCE

• Produces wide range of quality, affordable generic and branded formulations and APIs

• Started by Dr. Desh Bandhu Gupta in the year 1968

• One of the world’s largest manufacturers of Tuberculosis drugs

• Market share in therapeutic segments

FINANCIAL MILESTONES OF LUPIN

1970-90’S •Lupin Laboratories Pvt Ltd was incorporated in 1972•Joint venture in Thailand to form Lupin Chemicals in 1989•Raised money through IPO’s

2000+•Lupin Labs amalgamated with Lupin Chemicals to form Lupin Ltd. in

2001•Exports to the Advanced Markets crossed Rs.1000 mn in 2003•Maiden Employees Stock Option Plan was implemented in 2005

2006 •Maiden Bonus share were issued in the ratio of 1:1 •Maiden issue of Foreign Currency Convertible Bonds (FCCB)

aggregating US $100 mn

FINANCIAL MILESTONES OF LUPIN

2007 •Acquired Vadodara based Rubamin Laboratories Ltd. •Acquired Kyowa Pharmaceutical Industry Company Limited

2008•Acquired Hormosan Pharma GmbH – A German generic company•Acquired Pharma Dynamics in South Africa•Also acquired stake in Generic Health Pty Ltd., in Australia

2009 •Acquired majority stake in Multicare Pharmaceuticals Philippines Inc.

FINANCIAL PROGRESS THROUGH 2008-09

• Growth of 32% in revenue and 50% in profits

FACTS & FIGURES

• Revenues for FY 2008-09 - Rs. 39,145 Mn (Rs. 29,583 Mn FY 2007-08)• Consolidated net profit increased by 23% to Rs. 5,015 Mn (Rs. 4,082 Mn

FY 2007-08) • Consolidated top line recorded a growth of 38%, while bottom line grew

sharply by 50%

COMPANY PROFILE

Ranks 5th among the top 10 Indian pharma companies.

Chairman: Dr. Desh Bandhu Gupta

Managing director: Dr Kamal K Sharma

Chief Executive Officer: Mrs Vinita Gupta 

Chief Financial Officer: Mr Ramesh Swaminathan

Employees: 9000

Headquarter: Mumbai, India

FINANCIAL RATIOS ANALYSES

Financial Ratios GSK LUPINCurrent ratio 3.02 1.55

Quick ratio 2.66 0.99

Debt equity ratio 0.06 .85

Interest coverage 2072 12.45

Inventory turnover 7.39 3.94

Inventory turnover in days 49 93

Earning retention 50.39 75.85

Receivables turnover 34.81 3.69

Receivables turnover in days 11 99

Payables turnover 1.7 2.2

Payable turnover in days 214 165

Operating cycle 60 192

Cash cycle -154 27

Return on equity 29.12 35.2

Return on assets 21.08 12.31

Total Asset turnover 0.77 1.01

Gross profit margin 40.54 19.7

Net profit margin 27.38 13.28

CURRENT RATIO

CONCLUSION: Lupin is properly utilizing the available resources while GSK is not using its assets efficiently.

GSK Lupin0

0.51

1.52

2.53

3.5

Current ratio

QUICK RATIO

CONCLUSION: GSK has a better ratio than Lupin, indicating that even on liquid money it is able to weigh out the liabilities better.

GSK Lupin0

0.5

1

1.5

2

2.5

3

Quick ratio

DEBT TO EQUITY RATIO

CONCLUSION: GSK has taken very less debt on its available equity than Lupin and so the shareholder’s equity investment is at a lesser risk with GSK as compared to Lupin.

GSK Lupin0

0.10.20.30.40.50.60.70.80.9

Debt to equity ratio

NET PROFIT MARGIN

CONCLUSION: Since the net profit margin for GSK is higher than Lupin, we can conclude that GSK marks up its products more as compared to Lupin.

GSK Lupin0

5

10

15

20

25

30

Net Profit Margin

RETURN ON ASSETS (ROA)

CONCLUSION: GSK has a much greater ROA than Lupin. This shows good investment decisions and good use of the generated assets by GSK compared to Lupin.

GSK Lupin0

5

10

15

20

25

ROA

RETURN ON EQUITY (ROE)

CONCLUSION: Lupin has been able to produce phenomenal ROE for its Equity holders.

GSK Lupin05

10152025303540

ROE

GROSS PROFIT MARGIN

CONCLUSION: It excludes depreciation and taxes and thus solely deals with operational efficiencies in a company. GSK has better operational efficiency and thus shows greater Gross Profit Margin than Lupin.

GSK Lupin0

10

20

30

40Gross profit margin

TOTAL ASSET TURNOVER RATIO

CONCLUSION: Lupin has been able to get more revenues on the total number of its assets than GSK.

GSK Lupin0

0.2

0.4

0.6

0.8

1

1.2

Total asset turnover ratio

INTEREST COVERAGE RATIO

CONCLUSION: GSK has a phenomenal interest coverage ratio as it is nearly a debt free company. Thus, GSK can cover its finance expenses better than Lupin.

GSK Lupin0

500

1000

1500

2000

2500

Interest coverage

INVENTORY TURNOVER RATIO

CONCLUSION: Greater Inventory turnover ratio means more sales on the given inventory. GSK shows almost double inventory turnover ratio than Lupin, thus showing its capacity to generate more sales on the carrying inventory.

GSK Lupin0

102030405060708090

100

Inventory turnover

DEBTORS TURNOVER RATIO

CONCLUSION: Debtors turnover ratio tells us how much revenue the company has been able to generate on the accounts receivable, i.e. sales happening on credit. Since GSK has a higher value for the ratio, it receives money much faster than Lupin.

GSK Lupin0

20

40

60

80

100

120

Receivables turnover

PAYABLE TURNOVER RATIO

CONCLUSION: GSK has better market credit terms than Lupin.

GSK Lupin0

0.5

1

1.5

2

2.5

Payable turnover ratio

PAYOUT POLICY

Introduction• Payout policy of a company defines the means through which

they share their prosperity with shareholders. • They can either pay dividend or can buy back some of the

outstanding shares. • Payout policy is the optimal balance a company has to decide

between cash dividend (higher or lower) and the issue or repurchase of common stock.

• A firm’s decision about how much cash to distribute is often mixed up with other financing and investment decisions.

• Payout policy implies a trade-off between higher or lower cash dividends and the issue or repurchase of common stocks.

Dividend Payments• Dividends are the portion of corporate profits paid out to

stockholders in the form of cash.

• May not always be in the form of cash, frequently companies also declare stock dividends.

• Decisions about when and how much of earnings should be paid as dividends are part of the firm’s dividend policy.

• The dividend policy that maximizes the value of the firm is said to be the optimal dividend policy.

INVESTORS AND DIVIDEND POLICY

Investors’ reactions to changes in dividend policies can be summarized as follows:

Information content, or signaling : Changes in a firm’s dividend policy provide information to investors, who will react accordingly.

For example, investors would consider an increase in dividends to be good news, while a decrease in dividends would indicate that the firm is facing financial difficulties.

Clientele Effect : Investors might choose a particular stock due to the firm’s dividend policy i.e. Some investors prefer dividends and others do not. If such a clientele effect does exist, then we would expect that a firm’s stock price will change when its dividend policy is changed.

Investors and Dividend Policy Free cash flow hypothesis : It states that if investors truly

want managers to maximize the value of the firm, then dividends should be paid only when the firm has no investments with positive net present values.

• In other words, a firm should pay dividends only when it has funds that are not needed to invest in positive NPV projects—that is, only free cash flows should be paid as dividends.

• If this theory is correct, then we might expect a firm’s stock price to increase when it decreases dividends to invest in positive NPV projects, and we might expect the stock price to decrease when the firm increases dividends.

Dividend Policy: Indian Context• The argument that cash reinvested in the business can earn

higher returns than what the investor can manage on his own no longer holds water. Practically, it does not work that way. Cash in the balance sheet often pulls down returns. Managements, therefore, cannot afford to retain cash in the balance sheet that they do not need, though many of them still do.

• Barring a few public sector banks, none of them even has a stated dividend policy. The number of companies in which dividend growth has lagged profit growth is overwhelming.

Formulating a Dividend Policy

1. Constant dividend Model:Under this approach fixed rate of dividend is paid each

year. However if company in unsure about the earnings then

it can split the dividend to cash dividend and special dividend.

e.g. Suppose TVS Ltd can declare Rs.6 dividend in the current year but is unsure about the earnings then in this case it would declare Rs.4 as regular dividend and Rs.2 as special dividend.

Constant Payout Approach:

• Under this model the company adopts a fixed payout ratio year after year. This means that ratio of dividends per share and earnings per share is constant.

Example:• Let the payout ratio be 40%, if in the current year the

company has an EPS of Rs. 8 it would declare a dividend Rs. 3.2 per share. Next year if it goes up to Rs. 10 then it would declare dividend of Rs. 4 per share. Next year if it falls to Rs.6 the DPS will be dropped to Rs. 2.4.

Constant Dividend plus approach

• Under this approach a fixed low dividend per share is always payable.

• An additional dividend per share in the form of either interim dividend or special dividend is then paid in years of good profits.

• In years of not so good profits the extra or special dividend is not paid.

• This is assumed to be the best approach.

Formulating a Dividend Policy Residual dividend policy : As an investor, you should want the

firm to retain any earnings it can invest at a rate of return that is at least as high as your opportunity cost.

• Firms that agree with this concept might follow a residual dividend policy where dividends are paid only if earnings are greater than what is needed to finance the equity portion of the firm’s optimal capital

• Under residual approach, dividends are paid out of profits after making provision for money required to meet upcoming capital expenditure commitments. There are 2 options under residual approach: -

Approach How Computed Advantages Disadvantages

Constant Dividend Model A fixed dividend rate maintained each year

• No uncertainty about amount of dividend

• Increase in dividends sends positive signals about the company

• Ideal for those seeking steady income

• Gives impression of a strong and healthy company

• Could put pressure on firm’s liquidity

• Once established difficult to go back on the policy

Constant Payout Approach

Ratio of dividend per share to earnings per share is constant

• No strain on company’s liquidity since dividends linked to profits

• Market speculation due to anticipation of profits and dividends

Constant Dividend Plus Approach

Fixed low dividend always paid plus additional dividend in years of good profit

• Minimum return is guaranteed

• Dividends are also linked to profits. Hence best of both plans

Residual Approach

Dividends are paid out of profits after providing for upcoming capital expenditure

• Firms with more investment opportunities have a lower payout than other firms having low investment opportunities

• Strict application could lead to an unstable dividend policy

Lupin – Observations & Analysis Rapid growth phase – Walter Model- Dividend payout ratio – nil.

moderate DPS compared to EPS

•

Lupin

0

20

40

60

DPS 6.5 6.5 5 10 12.5

EPS 21.02 45.52 37.6 54.02 50.35

Payout ratio 30.92 14.28 13.29 18.51 24.83

P/E 13.32 10.96 15.69 9.13 13.22

2005 2006 2007 2008 2009

CMP - 1645. Projected EPS – 73

P/E Ratio – 22.1.

GSK – Observations & Analysis.

Structured growth – curb risk exposure No debt – important to lower risk premium.

Regular dividend + special dividend.

• Constant dividend plus approach.

• Pass on the earnings to shareholders.

GSK

0

10

20

30

40

50

60

70

80

DPS 28 31 36 40 30

EPS 59.28 64.4 63.48 68.07 60.48

Payout ratio 47.23 48.13 56.71 58.76 49.6

P/E ratio 18.81 18.1 16.3 16.34 27.2

2005 2006 2007 2008 2009

Recommendations

• Lupin: improve operational efficiency formalize dividend policy

Lupin managers need to have following five goals in mind while declaring dividends.

Goal 1: Projects with positive NPV are not to be cut to pay dividends.Goal 2: Avoid dividend cuts.Goal 3: Avoid the need to raise fresh equity.Goal 4: Maintain a long-term target debt equity ratio.Goal 5: Maintain a long-term target dividend payout ratio.

Recommendations

• GSK• move towards optimal capital structure. • take debt (reduce cost of capital). • better equity (cash) management and investing- look for positive NPV

projects. • Better asset utilization• Continue constant dividend plus approach.

Thank You