Strides Arcolab Limited

’s Dividend Pay-out De
cision
Introduction: Strides

• Three business divisions: Pharmaceuticals, Specialties, biotechnology.(Before sold

Aglia)
• No revenue from biologics business and low revenue from oral protect. （ 201
3）
• Focus on export, forging partnerships and concentrating on building scale-to-sell.
• In the mid-2000s started investing in R&D
• Most of revenue from Aglia.(Before sold Aglia)
Background:

• Pharmaceutical industry worth 34 billion USD in 2013-14

• Agila was acquired by Mylan Inc. for 1.725 billion USD
• Deal was valued at 18.7x Agila’s EBIDTA(cash flow increase)
• Proposed dividend payout of $650-700 million – 5,050 % dividend rate and divide
nd payout ratio of 85%
Sale of Agila (Reason):

• Deal was valued 18.7x EBIDTA

• Deal size more than the market value of Strides and also higher than Mylan’s 1.3
billion dollars revenue from Asia-Pacific region.
• The CEO of the company wanted to focus on Biotech company and legacy busines
s of strides.
• Stride wanted to reduce its leverage and use proceeds of sale to resolve its debts.
• Comparable deals:
 Novartis acquired Ebewe Pharma $1.2 B, 4.7 times sales
 Mylan acquired Bioniche Pharma, $550 M, 4.2 times revenue
 Abbott Laboratories acquired Piramal Healthcare- $3.72 B, 8.7 times sales
Three dividend options

(1) Zero dividend pay-out:

(2) 15-20 percent dividend pay-out

(3) Residual dividend pay-out

First option: zero dividend pay-out
The reason why zero dividend pay-out should be done

 Non-conducive equity markets made funding more difficult

 International credit rating agencies, S&P and Fitch, downgrading India sovereign

ratings to a negative in 2012

 Tightening monetary policy in 2013 to prevent rupee from depreciating

 These make company hard to raise funds, in this payout decision Strides can hold

certain amount of capital in case of future increasing financing cost

The opportunity for Strides

 Huge opportunities that the biologics space posed

Global Biologics Sale: 2013 – 2018 (In $ Billion)

2013 2018
Patented sales 124 116
Global
Off parent US 4 31
Biologics Sale Off patent European 15 43
Union/Other
Influence of zero dividend pay-out

Pros Cons
 If new business will success, stock
 Agency problems
price will appreciate
 Payout ratio will change
 More flexible to use their earnings
History of zero dividend pay-out

 In the past, Strides had did three times zero dividend pay-out, we can see that Stride’s stock price change
Second option: 15-20 percent dividend p
ay-out
Conservative option: 15-20 percent dividend pay-out

• Conservative policy: consistent with Strides’ past dividend payout

Less than 22
percent over
the past decade

• The goal is to align the dividend policy with the long-term growth of the company rather than with q
uarterly earnings volatility
• The Clientele effect: investors can have a direct impact on the price of a security when a drastic chan
ge in dividend policy that affects their investment objectives
Conservative option: 15-20 percent dividend pay-out

Strides shareholding pattern, 2012

• Advantage Banks,
Finanical
Instutional
For investors: Others Investors,
23% Insurance
 The amount of dividend will still increase as long as earnings increase companies
4% Foreign
 It meets the requirement of institutional investors who Institional
Investors
Mutual Funds 37%
prefer companies with stable dividends 8%
Indian
Promoters
28%

For Strides:
 It will not raise the expectation of investors for high dividend pay-out in the future
 Relative to residual dividend pay-out policy, investors are less skeptical of the future growth of Strides
 It makes it easier for management to decide how much of earnings should be retained
 The firm can hold certain amount of capital in case of future increasing financing cost
Conservative option: 15-20 percent dividend pay-out

• Disadvantage

 The additional cash holdings could cause agency problem

 It cannot be changed without seriously affecting investors’ attitude toward financial sta
nding of the company

 If the company pays stable dividends in spite of its incapacity, it will be suicidal in the lo
ng-run.
Third option: residual dividend pay-out
The Influence of residual dividend pay-out

Pros Cons
• Minimizes new stock issues. • Can only appeal shareholders who

• More flexible for the need of firm do not have a preference whether

has. their returns are in the form of

immediate dividends or long-term
Uncertain capital gain.
• Signals associated with great dividend. • More suitable for firm in early stage.
The trend of ROA

10
ROA trend
6
The use of residual dividend policy: 6 4 4
3 4
2
2 0

-2

-6 -7

-10

➢ The performance of ROA isn’t strong

enough to persuade shareholder to
execute residual dividend policy.
Dividend Pay-out

Announcement
Dividend
Dividend
Pay-out Trend of Strides
Dividend
Effective Date (%) Remarks
Date Type
Rs.500.0000 per
10/12/2013 19/12/2013 Special 5000%
share(5000%)Special Dividend

28/02/2013 30/05/2013 Final 20%

Rs.2.0000 per  Special type of dividend
share(20%)Dividend

27/02/2012 14/05/2012 Final 20% would be a drastic

24/02/2011 18/05/2011 Final 15%
change from Stride’s
24/02/2010 21/05/2010 Final 15%

31/01/2007 12/06/2007 Final 20% AGM

previous pay-out policy.
09/02/2006 06/06/2006 Final 20% AGM

28/03/2005 13/06/2005 Final 15% AGM (Revised)

10/02/2000 Interim 20%

Source:https://economictimes.indiatimes.com/strides-pharma-science-ltd/infocompanydividends/companyid-2118.cms
The use of residual dividend policy

•
The use
Employee pay-out
of residual dividend
Unit: million policy:
Amount Percentage

→ 1. Employee Stock Option Scheme Employee pay-out 50~55 0.04

2. Employee Stock Purchase Scheme Minority pay-out 100 0.07

• Minority pay-out Transaction cost 275~300 0.21

→ To minority partners in Brazil, Canada and Debt retirement 250 0.18

Australia. Cash dividends 650~700 0.49
• Transaction costs Total 1365 1
→ Tax of deal. The proceeds 1725
• Debt retirement Biotech capital 100 0.07
• Cash dividends
• Capital expenditure
“Stay the course” might be a best policy

• If 15-20 percent dividend pay-out policy is proposed by Kumar:

 The market value of shares tend to be stable since the clientele effect can be avoided

 It might receive less opposition from the Board

 Compared to residual dividend pay-out policy, Strides could invest more money in th
e new biologics market

 Strides could rely on internal financing in the next few years

Ending

Thanks for your attention!