Dividend Policy and Share Market Price

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FM ASSIGNMENT

A PROJECT REPORT ON

Share price- A function of Dividend Policy or not

SUBMITTED BY:
RAHUL ARORA (96) RAIZA SIDEQUEE (97) RAJMOHAN (98) MOZZAM RANGWALA (99) RASHI JAIN (100)

About HPCL
HPCL is a Fortune 500 company, with an annual turnover of Rs. 1,08,599 Crores and sales/income from operations of Rs 1,14,889 Crores (US$ 25,306 Millions) during FY 200910, having about 20% Marketing share in India and a strong market infrastructure.

HPCL operates 2 major refineries producing a wide variety of petroleum fuels & specialties, one in Mumbai (West Coast) of 6.5 Million Metric Tonnes Per Annum (MMTPA) capacity and the other in Vishakhapatnam, (East Coast) with a capacity of8.3 MMTPA. HPCL holds an equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited, a state-of-theart refinery at Mangalore with a capacity of 9 MMTPA. In addition, HPCL is constructing a refinery at Bhatinda, in the state of Punjab, as a Joint venture with Mittal Energy Investments Pte.Ltd.

HPCL also owns and operates the largest Lube Refinery in the country producing Lube Base Oils of international standards, with a capacity of 335 TMT. This Lube Refinery accounts for over 40% of the India's total Lube Base Oil production.

HPCL's vast marketing network consists of 13 Zonal offices in major cities and 101 Regional Offices facilitated by a Supply & Distribution infrastructure comprising Terminals, Pipeline networks, Aviation Service Stations, LPG Bottling Plants, Inland Relay Depots & Retail

Outlets, Lube and LPG Distributorships. HPCL, over the years, has moved from strength to strength on all fronts. The refining capacity steadily increased from 5.5 MMTPA in 1984/85 to 14.8 MMTPA presently. On the financial front, the turnover grew from Rs. 2687 Crores in 1984-85 to an impressive Rs 1,16,428 Crores in FY 2008-09.

Why HPCL?
We were asked to study a PSU company which has a varying Dividend Policy and whether the Dividend Policy has an impact on the share price of that company. After carrying out an intensive research we found that HPCL is a PSU company meeting our requirements. It has been giving higher dividends every year but they are not the same. Hence we were been capable of finding a correlation between the dividends declared or dividend payout ratio with respect to the market share price.

DIVIDEND PAYOUT RATIO V/S MARKET PRICE PER SHARE

400 350 300 250 200
Dividend Payout Ratio

150 100 50 0 2005-06 2006-07 2007-08 2008-09 2009-10
Market Price per share

Year

Dividend Ratio

Payout

Market price per share

2005-06 2006-07 2007-08 2008-09 2009-10

28.62% 45.1% 10.47% 36.17% 36.44%

316 284 312 238 334

DIVIDEND PAYOUT RATIO V/S PROFIT AFTER TAX

2500

PAT (in cr)

2000

Dividend Payout Ratio Scale 0f 10=1

1500

1000

500

0 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

PAT(in cr.)

Dividend Payout Ratio

2005-06 2006-07 2007-08 2008-09 2009-10

405.63 1571.17 1134.88 574.98 1301

28.62% 45.1% 10.47% 36.17% 36.44%

Both the graphs depict that there is no positive relationship between PAT and Market Price per share. Even if the PAT increases for a particular year than the previous year, the share prices decreases. The same is the case with the PAT and the Dividend Payout Ratio. Hence we conclude that PAT and Dividend Payout Ratio are not directly related. It is not necessary that with the increase in PAT the company will pay higher Dividends.

REASONS FOR INDIFFERENCE OF MARKET SHARE PRICE OF HPCL TO IT’S DIVIDEND POLICY SHARE HOLDER PATTERN Market share price of a company is primarily determined by the demand for its stocks .Once the demand for the shares increases, its market share price also would increase .Dividend is just one among the many factors that would stimulate the demand for a particular stock. But the extend to which dividend policy would influence the market share price depends upon the investor preferences for either...
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