Total Shareholder Return and Excess Return: An Analysis of NIFTY Pharma Index Companies

Total Shareholder Return and Excess Return: An Analysis of NIFTY Pharma Index Companies Bhargav Pandya Assistant Professor Faculty of Management Studies The Maharaja Sayajirao University of Baroda Opp. The M S University Head Office, Fatehgunj, Vadodara-390002 bhargav.pandya-mgmt@msubaroda.ac.in Abstract Purpose- The paper seeks to investigate the total shareholder and excess of Pharmaceutical companies that are included in NIFTY pharma index. An attempt has been made to assess the association of total shareholder and excess with accounting measures. Design/Methodology- For the purpose of the study, a sample of 10 companies that are included in NIFTY pharma index was drawn. The study covered a seven-year period ranging from 2010 to 2016. Financial data relating to the sample companies were taken from Centre for Monitoring Indian Economy (CMIE) PROWESS database. Data relating to the riskfree rates were taken from the Reserve Bank of India website. Findings- The results of the study highlight that pharmaceutical companies as a whole have generated statistically significant positive TSR and Excess, which means, these companies have created wealth for their shareholders. The study reveals a positive association of RONW with TSR and with Excess Implications- The results of the study imply that by increasing the magnitude of RONW, managers can increase TSR and Excess as RONW was found to have statistically positively significant relationship with TSR and Excess. Keywords: TSR, Excess, ROA, RONW, NPM Introduction pharmaceutical companies have performed in terms of It is commonly accepted notion that generated by a wealth creation for their shareholders. stock is a primary determinant for the equity investment Review of Literature made in that stock. Equity investors primarily invest in Basu (2009) conducted an empirical testing of CAPM in the stock for earning the in two forms- dividend the Indian stock market, covering 50 stocks, for a period income and capital appreciation, the latter reflecting the of 5 years, from January 1, 2003, to February 1, 2008. rise in the price of equity stock of a company. Accounting The author found a negative relationship between beta measures of performance like ROA and ROE do not and excess. On the contrary, residual variance was reflect market expectations and hence, fail in measuring found significant in certain cases. the true worth of company s total assets and equity, respectively. Moreover, they also ignore the opportunity Akolly (2010) investigated the determinants of excess cost of investment. To overcome such problems, using dividend yields as a proxy in a cross- alternative measures were developed to reflect the sectional setting. He found a positive relationship market expectations of investors that take into account an between dividend yield and risk in the case of utility and opportunity cost of capital involved in the investment financial sectors. He further found that all predictors of decision. dividend yield were also found to be significant predictors of excess s. In this study, the Total shareholder (TSR) and the Excess have been used as measures of value Moradi-motlagh et al (2012) examined the relationship creation to gauge the stock performance of between TSR and performance of Australian banks pharmaceutical companies that have been covered in during the period 2001-2010. The results of their study NIFTY Pharma index. The principal motivation to showed that changes in performance were reflected in conduct this study is to investigate how well the listed TSR. BVIMSR s Journal of Management Research 148

Sharma (2013) analyzed the total shareholder of between TSR and set of financial metrics over a three- 450 Indian companies for the period 2001 to 2005. She year, four year and five-year period at the general reported that total shareholder for the most of the industry level and sector level. They found a low companies ranged between -2 to 9 In terms of growth in correlation between TSR and financial metrics at the total shareholder, few companies were found to be general industry level and sector level. They also found a wealth creators. relatively high correlation between TSR and financial Gan et al (2013) applied Capital Asset Pricing Model and metrics at the sub-industry level. Their study suggests Fama-French three- factor model in the A-shares in that TSR may work as a reasonable proxy for certain Chinese equity market. They found that the book-tomarket financial metrics over a longer time horizon. ratio and stock excess were positively Research Gaps related. Whereas, there was a negative relationship As far as our knowledge goes there are not many studies between size and stock excess. available in Indian context that empirically analyzed the Matthiessen et al (2013) in their analysis of the TSR and an Excess. In this backdrop, this study performance of nonfinancial companies in the S&P 500 aims at empirically investigating the TSR and the Excess from the period 2007 through 2012 did not find any in case of pharmaceutical companies. The study correlation between TSR and on net assets will also examine the relationship between accounting (RONA). Similarly, they also did not find any correlation measures of financial performance and the TSR and the between TSR and ROE. Excess respectively. Pamane and Vikpossi (2014) conducted a study of 17 Objectives of the study companies listed on BRVM stock exchange for the To analyze the Total Shareholder Return (TSR) and period of January 2000 to December 2008. They found the Excess of select pharmaceutical that residual risk had no impact on the expected s of companies during the study period. the stock for the entire period and its sub- period, except for the last period of 2003-2008, whereas, they found To identify the companies that have generated operating activities having an impact on their stock positive mean TSR and Excess during the s. study period Stewart (2014) theoretically explained that TSR is To examine the relationship between TSR and ultimately a function of increasing Economic value accounting measures like ROA, RONW, and NPM Added (EVA). Through regression analysis, he in respect of sample companies. established that company s Total Investor Return (TIR) To examine the relationship between Excess and TSR are both strongly positively correlated with its and accounting measures like ROA, RONW, and EVA performance, plus the change in its aggregate Net NPM in respect of sample companies Present Value (NPV). Research Methodology Vijayalakshmi (2014) analyzed the shareholder value An empirical research design was used to measure the creation of 100 companies listed on Bombay Stock TSR and an Excess of the sample companies. The Exchange. The results of her study revealed that sample covered ten companies which were included in traditional measures demonstrated greater ability to NIFTY Pharma Index. The study covered a seven-year explain the market value than the EVA. period ranging from 2010 to 2016. Financial data relating Bora and Adhikary (2015) conducted an empirical study to the sample companies were taken from Centre for of risk and relationship in the context of BSE Monitoring Indian Economy (CMIE) PROWESS Sensex companies. Their study revealed a positive database. Data relating to the risk-free rates were taken relationship between s of securities and market from the Reserve Bank of India website. s. Variables of the study Jovic and Holmen (2016) examined the correlation (a) Total Shareholder Return (TSR) BVIMSR s Journal of Management Research 149

TSR signified the earned by an equity shareholder during a given period. It is a sum total of dividend income and capital gain realized by an equity shareholder at the end of a particular period. It can be calculated using following equation. TSRt = DPSt + Pt Pt-1 Where, Pt-1 DPSt = dividend per share in period t Pt = price per share in period t Pt-1 = price per share in period t-1 (b) Excess The excess shows the extra earned by an equity investor over and above the expected. The actual earned by an investor is simply the realized comprising the dividend income and capital gain, alternatively called TSR. The Excess was computed as per the following equation. Excess = Actual Return (TSR)- Expected Return The expected is the minimum an equity investor expects to earn considering the degree of risk involved in the equity investment. As per the muchcelebrated Capital Asset Pricing Model (CAPM), in the conditions of market equilibrium, the expected becomes equal to the required. As per CAPM, the expected on the equity share can be calculated as per the following equation. Expected Return = Risk free rate + Equity Beta * Market Risk Premium Hypotheses of the study In order to accomplish research objectives, following hypotheses were tested. H1 : TSR of individual company is not significantly different from zero H2 : Excess of individual company is not significantly different from zero H3 : The mean TSR of the entire sample is not significantly different from zero. H4 : The mean Excess of the entire sample is not significantly different from zero. H5 : There is no significant association between TSR and accounting measures like Return on Total Assets (ROA), Return on Net worth (RONW) and Net Profit Margin (NPM.) H6 : There is no significant association between Excess and accounting measures like ROA, RONW, and NPM Results and Discussion Descriptive Statistics- TSR and Excess Table 1 shows up company wise descriptive statistics of TSR and Excess. Aurobindo Pharma Ltd was the largest wealth creator in terms of highest mean values of TSR (M= 97.64) and Excess (M= 81.22) during the study period. The second and third positions were occupied by Glaxosmithkline Pharmaceuticals Ltd (TSR: M = 67.85, Excess : M= 57.05) and Dr. Reddy'S Laboratories (TSR: M= 53.41, Excess : M= 41.70) (see table 1). Risk-free rate is the an investor expects to earn on a risk-free asset. Usually, the government securities are Table 1: Company wise descriptive statistics of Excess considered to be risk-free. For the purpose of this study, and TSR (%) weighted average annual s on Central Government Dated Securities have been taken as risk-free rates corresponding to each year covered in the study. Beta measures the sensitivity of a stock vis-à-vis on market portfolio. Beta values for the sample companies were taken from the PROWESS database for the study period. Following Fernandez (2016), market risk premium was uniformly taken as 8.1% throughout the study period. BVIMSR s Journal of Management Research 150

Table 1: Company wise descriptive statistics of Excess and TSR (%) Company Name N Mean Std. Deviation Std. Error Mean Aurobindo Pharma Excess 7 81.2176 182.44292 68.95694 TSR 7 97.6400 182.39272 68.93797 Cadila Healthcare Excess 7 27.6439 90.18537 34.08687 TSR 7 38.6972 90.16095 34.07764 Cipla Excess 7 8.4986 39.59133 14.96411 TSR 7 20.2462 39.60319 14.96860 Divi'S Laboratories Excess 7 3.9724 36.25192 13.70194 TSR 7 18.8674 36.28067 13.71280 Dr. Reddy'S Laboratories Glaxosmithkline Pharmaceuticals Glenmark Pharmaceuticals Lupin Piramal Enterprises Sun Pharmaceutical Inds. Excess 7 41.6980 56.35179 21.29897 TSR 7 53.4108 56.03389 21.17882 Excess 7 57.0499 19.25708 7.27849 TSR 7 67.8486 19.14755 7.23709 Excess 7 15.7377 25.87447 9.77963 TSR 7 29.7995 25.84103 9.76699 Excess 7 29.4420 77.31106 29.22083 TSR 7 41.5945 77.10604 29.14334 Excess 7 40.1594 37.09042 14.01886 TSR 7 52.5203 37.00599 13.98695 Excess 7 5.4609 57.49113 21.72961 TSR 7 16.6184 57.46808 21.72089 BVIMSR s Journal of Management Research 151

Lowest TSRs were reported by Sun Pharmaceutical Inds. Glaxosmithkline Pharmaceuticals and Piramal (M=16.62), Divi'S Laboratories (M= 18.87) Enterprises recorded statistically significantly and Cipla (M= 20.25) amongst the sample positive mean TSR ( t= 9.375, p<0.05, t= 3.755, P<0.05) companies. This same three companies also reported and mean Excess ( t=9.375, p<0.05, t= 2.865, lowest Excess, with a slight change in order. p<0.05) respectively during the study period. Whereas, Divi'S Laboratories reported lowest Excess (M = Glenmark Pharmaceuticals recorded statistically 3.97). Sun Pharmaceutical Inds. (M= 5.46) and significant positive mean TSR (t= 3.051, p<0.05) during Cipla Ltd (M=8.50) were at the second-last and third last the study period. Other companies did not record position in terms of mean Excess statistically significant positive mean TSR and mean In order to test hypothesis 1 and 2, one sample t-test was Excess during the study period applied to the sample companies. As shown in table 2, Table 2: Company wise t test for Excess and TSR One-Sample Test Test Value = 0 95% Confidence Sig. (2- Mean Interval of the Difference Company Name t df tailed) Difference Lower Upper Aurobindo Pharma Excess 1.178 6.283 81.21761-87.5140 249.9492 TSR 1.416 6.206 97.64003-71.0451 266.3252 Cadila Healthcare Excess.811 6.448 27.64392-55.7636 111.0515 TSR 1.136 6.299 38.69720-44.6878 122.0822 Cipla Excess.568 6.591 8.49859-28.1173 45.1145 TSR 1.353 6.225 20.24616-16.3807 56.8730 Divi'S Laboratories Excess.290 6.782 3.97237-29.5551 37.4998 TSR 1.376 6.218 18.86737-14.6866 52.4214 Dr. Reddy'S Excess 1.958 6.098 41.69796-10.4188 93.8147 Laboratories TSR 2.522 6.045 53.41081 1.5881 105.2335 Glaxosmithkline Pharmaceuticals Glenmark Pharmaceuticals Excess 7.838 6.000 57.04986 39.2400 74.8597 TSR 9.375 6.000 67.84857 50.1400 85.5571 Excess 1.609 6.159 15.73767-8.1922 39.6676 TSR 3.051 6.022 29.79952 5.9006 53.6985 Lupin Excess 1.008 6.353 29.44197-42.0588 100.9428 TSR 1.427 6.203 41.59454-29.7167 112.9057 Piramal Enterprises Sun Pharmaceutical Inds. Excess 2.865 6.029 40.15945 5.8565 74.4624 TSR 3.755 6.009 52.52030 18.2955 86.7451 Excess.251 6.810 5.46093-47.7095 58.6314 TSR.765 6.473 16.61836-36.5308 69.7675 BVIMSR s Journal of Management Research 152

In order to test the third and fourth hypothesis, one with a standard deviation of 75.54%. On the other hand, sample t-test was applied for the overall sample. Table 3 the mean TSR for the entire sample was 43.72% with a and 4 depicts the results of this test. As reported in table 3, standard deviation of 75.66%. the mean excess for the entire sample was 31.08% Table 3: Descriptive Statistics N Mean Std. Deviation Std. Error Mean Excess 70 31.0880 75.54498 9.02935 TSR 70 43.7243 75.65630 9.04266 As shown in table 4, excess and TSR for the entire sample were found to be statistically significantly positive ( t= 3.443, p<0.05, t= 4.835, p<0.05) with the mean differences of 31.09% and 43.72% respectively. This implies that pharmaceutical companies as a whole did report positive mean excess and TSR during the study period. Table 4 One-Sample Test Test Value = 0 95% Confidence Interval of the Difference t df Sig. (2- tailed) Mean Difference Lower Upper Excess 3.443 69.001 31.08803 13.0750 49.1011 TSR 4.835 69.000 43.72429 25.6847 61.7639 Regression Analysis To test fifth and sixth hypotheses, following multiple regression models were run. NRRONWit = Normalized RONW for firm i in period t NRNPMit = Normalized NPM for firm i in period t εit = error term Model #1: NRTSRit = α + β1 NRROAit + β2 NRRONWit + β3nrnpmit +εit All variable were normalized as per the two step method Model #2: NREXRit = α + β1 NRROAit + β2 suggested by Templeton (2011). NRRONWit + β3nrnpmit +εit Table 5 represents the model summary of first regression Where, model. As reported in the table, the multiple correlation NRTSRit = Normalized TSR for firm i in period t coefficient between the variables was found to be 0.390. NREXRit = Normalized excess for firm i in period The results indicate that approximately 15.2% variance t in NRTSR is explained by independent variables (R square = 0.152). The model did not seem to have problem NRROAit = Normalized ROA for firm i in period t of autocorrelation (D-W = 2.369). Table 5: Model Summary b Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson 1.390 a.152.111 71.05057 2.369 a. Predictors: (Constant), NRROA, NRRONW, NRNPM b. Dependent Variable: NR TSR BVIMSR s Journal of Management Research 153

To test the individual independent variable's relationship with the dependent variable, t-test was applied. The results are summarized in table 7. Table 6:ANOVA a Model Sum of Squares df Mean Square F Sig. 1 Regression 56888.987 3.000 18962.996 3.756.015 b Residual 318035.528 63.000 5048.183 Total 374924.515 66.000 a. Dependent Variable: NR TSR b. Predictors: (Constant), NRROA, NRRONW, NRNPM Table 7:Coefficients a Standardiz ed Unstandardize d Coefficients Coefficient s Std. Model B Error Beta t Sig. 1 (Constant 6.975 27.404 0.255 0.80 ) 0 NRNPM 1.660 2.116 0.164 0.785 0.43 6 NRRON 6.077 1.826 0.688 3.329 0.00 W 1 NRROA - 3.816-0.747-0.01 9.894 2.593 2 a. Dependent Variable: NR TSR Collinearity Statistics Toleranc e VIF 0.307 3.25 7 0.315 3.17 5 0.162 6.16 4 As shown in table 7, NRRONW was found to be statistically significantly positively related to NRTSR (t= 3.329, p<0.05). On the other hand, NRROA showed statistically significant negative relationship with NRTSR (t= -2.593, p<0.05). Table 8 shows up the results of regression model 2. As reported in the table, the multiple correlation coefficient was 0.394 indicating that approximately 15.5% variance in NREXR was explained by NRROA, NRRONW, and NRNPM. The model did not seem to have any problem with autocorrelation among the error terms (D-W =2.315). Table 8: Model Summary b Model R R Square Adjusted R Square Std. Error of the Estimate Durbin- Watson 1.394 a.155.115 39.79247 2.315 a. Predictors: (Constant), NRROA, NRRONW, NRNPM b. Dependent Variable: NREXR The results of ANOVA test are presented in table 9. As demonstrated in the table, the regression model was considered to statistically significant and well fitted (F= 3.862, p<0.05). BVIMSR s Journal of Management Research 154

Table 9: ANOVA a Model Sum of Squares df Mean Square F 1 Regression 18344.878 3.000 6114.959 3.862 Residual 99756.753 63.000 1583.441 Total 118101.631 66.000 a. Dependent Variable: NREXR b. Predictors: (Constant), NRROA, NRRONW, NRNPM Sig..013 b The results of t test are presented in table 10. As reported in the table, NRRONW demonstrated significantly positive relationship with NREXR ( t= 3.380, p<0.05). Whereas, NRROA reported statistically negative relationship with NREXR (t= -2.613, p<0.05). Table 10: Coefficients a Unstandardized Coefficients Standardized Coefficients Collinearity Statistics Model B Std. Error Beta t Sig. Tolerance VIF 1 (Constant) 9.322 15.348 0.607 0.546 NRNPM 0.935 1.185 0.165 0.789 0.433 0.307 3.257 NRRONW 3.456 1.023 0.697 3.380 0.001 0.315 3.175 NRROA -5.584 2.137-0.751-2.613 0.011 0.162 6.164 a. Dependent Variable: NREXR Managerial Implications between TSR and financial metrics at the sub-industry The results of the study imply that by increasing the level. The results of this study also contradict the magnitude of RONW, managers can increase TSR and findings of Matthiessen et al (2013) who found no Excess as RONW was found to have statistically correlation between TSR and on net assets as well positively significant relationship with TSR and Excess as between TSR and ROE.. The results of the study are confined to the Conclusion pharmaceutical companies only. In order to arrive at the deeper understanding of the drivers of TSR and excess The study was aimed at empirically measuring the TSR, a board based study, encompassing all the sectors and the Excess in the context of select of the economy is warranted. pharmaceutical companies of India. The results of the study highlight that pharmaceutical companies as a whole have generated statistically significant positive References TSR and Excess, which means, these companies Templeton, G. (2011), A Two-Step Approach for have created wealth for their shareholders. The study Transforming Continuous Variables to Normal: reveals a positive association of RONW with TSR and Implications and Recommendations for IS with Excess. This is consistent with Jovic and Research, Communications of the AIS, 28, Article Holmen (2016) who found relatively high correlation 4. BVIMSR s Journal of Management Research 155

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