beximco

1.PREFACE

It is great pleasure to work on our own chosen topic “Investment and Security Analysis” at work on our chosen company “Beximco Synthetic Company.”During the preparation of this report we had great support from the company’s financial manager. Without his help it would be difficult to prepare our report. In this report we have taken the judgment of the persons regarding our topic. Here we have tried to compare the behavior of the other companies lying in the same categories. We have taken certain consideration into our minds, of course from the book, and gathered information regarding those considerations. All of the information in the size of a report is described in the following part. Here before beginning the report we would like to thank our honorable course teacher Lubna Rahman for giving us the chance to exercise our bookish knowledge in the practical field.

When we were working on this report we faced some advantages, disadvantages, limitations, and used some methodologies which are shown below:

1.1 ORIGIN OF THE REPORT

This report, entitled ‘Investment &Security Analysis: Beximco Synthetic Company ’ , is prepared for Lubna Rahman, lecturer, Department of Finance, University of Dhaka. The report is being submitted to fulfill the partial requirements of the course ‘Investment & Security Analysis’, F-307. It will provide a brief perception about the effective finance concept.

1.2 OBJECTIVES

We have prepared the report for some definite purposes. Those purposes are photographed beneath as,

To find out the required rate of return for the investment To gather some knowledge about environment for investment whether it is favorable or not. To identify the threat and opportunities of the company through industry analysis To identify the financial strength of the company through ratio analysis To be acquainted with various valuation techniques To decide whether we should invest our selected company or not.

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1.3 LIMITATIONS

Lack of information due to the policy of the authors not to publish information Inadequate knowledge on contemporary terms of the company’s business representatives. Insufficient time due to the final examination, Financial problems due to the inability of the group members, Insufficient published information

1.4 METHODOLOGY

This report consists of several references from the book, journal and article. Tables are used to express the information Reference is used at the end of the main body as endnotes.

For diagram we have taken help of other software other than MS Word.

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2. INTRODUCTION

Investment is a commitment of funds for a period of time to derive a rate of return that would compensate the investor for the time during which the funds are invested, for the expected rate of inflation during the investment horizon and for the uncertainty involved.

2.1 DETERMINANTS OF RATE OF RETURN

Real Risk-Free Rate Nominal Risk Free Rate Risk premium

Real Risk-Free Rate: The real risk-free rate is the basic interest rate assuming no inflation and no uncertainty about future flows. An investor in an inflation free economy who knew with certainty what cash flows he or she would receive at what time would demand the RRFR on an investment. RRFR depends on time preference and investment opportunities available in the economy. The investment opportunities in turn are determined by the long-run real growth rate of the economy. RRFR is also referred to as “pure time value of money”.

Nominal Risk-Free Rate: Nominal rates of interest that prevail in the market are determined by real rates of interest, plus factors that will affect the nominal rate of interest such as the expected rate of inflation and the monetary environment.

NRFR = (1+ RRFR)(1+ IR) – 1

Risk Premium: Most investors require higher rates of return on investments if they perceive that there is any uncertainty about the expected rate of return. This increase in the required rate of return over the NRFR is the risk premium (RP). Although the required risk premium represents a composite of all uncertainty, it is possible to consider several fundamental sources of uncertainty including: 1) Business risk, 2) Financial risk, 3) Liquidity risk, 4) Exchange rate risk, 5) Political or Country risk.

Risk Premium = f(Business Risk; Financial Risk; Liquidity Risk; Exchange Rate Risk; Country Risk)

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2.2 COMPANY PROFILE

Beximco Synthetics Limited (the "Company") a member of the BEXIMCO Group, was incorporated in Bangladesh as a public limited company. It went for public issue of shares and debentures in 1993 and commenced commercial operation in July 1994.

The shares of the Company are listed in the Dhaka and Chittagong stock exchanges of Bangladesh and the debentures of the Company are listed in the Dhaka Stock Exchange of Bangladesh. The registered office of the Company is located at House No.17, Road No.2, Dhanmondi Residential Area, Dhaka-1205. The industrial unit is located at Kabirpur, Savar, Dhaka.

The principal activities of the Company are manufacturing of Polyester Filament Yarn namely, Partially Oriented Yarn (POY) and Draw Texturized Filament Yarn (DTFY) and sales thereof. The Company employed 408 employees as of 31 December 2008.

Other information

Listing Year

1993  

 Market Category 

A

   Electronic Share 

Y

   Share Percentage: 

Sponsor/Director 35.67

Govt.0

Institute 8.84

Foreign 0.02

Public 55.47

Remark 1. The Face Value of the securities has been changed into TK 10. The No. of Shares, Market Lot, EPS, NAV and DPS have been changed accordingly. 2. TK 1,329,335,883 Revaluation Surplus has been added to Reserve and Surplus.  

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2.3 COST OF CAPITAL CALCULATION

Beximco Synthetic CompanyCost of Capital Calculation

Month General Index

%-Change (Index)

Security Price

%- Change (Price)

January(2006)

1,643.34 69.00

February 1,531.43 (0.07) 68.00 -0.014492754March 1,491.77 (0.03) 70 0.029411765April 1,361.27 (0.09) 68.75 -0.017857143May 1,355.04 (0.00) 79.5 0.156363636June 1,339.52 (0.01) 62.75 -0.210691824July 1,406.81 0.05 62.5 -0.003984064August 1,587.08 0.13 79 0.264September 1,562.53 (0.02) 79 0October 1,541.65 (0.01) 77.75 -0.015822785November 1,527.29 (0.01) 74.25 -0.045016077December 1,609.51 0.05 76.75 0.033670034January(2007)

1,805.12 0.12 96.5 0.25732899

February 1,791.54 (0.01) 85.25 -0.116580311March 1,760.88 (0.02) 83.75 -0.017595308April 1,743.33 (0.01) 79.75 -0.047761194May 2,003.58 0.15 75.5 -0.053291536June 2,149.32 0.07 93.5 0.238410596July 2,384.18 0.11 101.75 0.088235294August 2,455.08 0.03 78.25 -0.230958231

September 2,548.49 0.04 75 -0.041533546October 2,850.81 0.12 107.75 0.436666667November 2,971.11 0.04 108.25 0.004640371December 3,017.21 0.02 96.75 -0.106235566January(2008)

2,907.17 (0.04) 97.25 0.005167959

February 2,931.38 0.01 96 -0.01285347March 3,016.49 0.03 130.5 0.359375April 3,072.85 0.02 156 0.195402299May 3,167.99 0.03 143.5 -0.080128205June 3,000.49 (0.05) 137.75 -0.040069686July 2,761.05 (0.08) 130.25 -0.054446461

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August 2,791.20 0.01 120.25 -0.076775432September 2,966.82 0.06 138.75 0.153846154

October 2,748.60 (0.07) 164.25 0.183783784

November 2,468.92 (0.10) 115.5 -0.296803653

December 2,795.34 0.13 164.5 0.424242424

January(2009)

2,649.49 (0.05) 248.5 0.510638298

February 2,570.96 (0.03) 228.5 -0.080482897March 2,446.92 (0.05) 453.5 0.984682713April 2,554.36 0.04 370 -0.184123484May 2,572.18 0.01 480.5 0.298648649June 3,010.26 0.17 475 -0.01144641July 2,914.53 (0.03) 422.75 -0.11August 2,941.28 0.01 460.25 0.088704908September 3,083.89 0.05 472.75 0.027159153October 3,364.26 0.09 481.25 0.017979905November 4,380.95 0.30 447 -0.071168831December 4,535.53 0.04 373 -0.165548098January(2010)

5,367.11 0.18 396.5 0.063002681

February 5,560.56 0.04 355.5 -0.103404792

March 5,582.33 0.00 415.5 0.168776371April 5,654.88 0.01 394.25 -0.051143201May 6,107.81 0.08 325 -0.175649968June 6,153.68 0.01 285.5 -0.121538462July 6,342.76 0.03 314.75 0.102451839August 6,657.97 0.05 413.5 0.313741064September 7,097.38 0.07 408 -0.013301088October 7,957.12 0.12 426.5 0.045343137November 8,602.44 0.08 474.5 0.112543962December 8,290.41 (0.04) 514.75 0.084826133Total 196,465.26 1.79 13,181.00 3.078339308

CAPM (Capital Asset Pricing Model): We calculate the cost of capital of Beximco Synthetic Company under the CAPM method assuming the risk free return 7.5% of the 90 days T-bill.

Beta = Cov(Rm ,Rs)

Var (Rm)

= 0.001049.005474 = .19

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K = Risk-Free Return + ᵦ(Market Return – Risk-Free Return)

= .075 + 0.1916 (0.36 - .075) = 13%

2.4 VALUATION PROCESS

Psychologists suggest that the success or failure of an individual can be caused as much by his or her social, economic and family environment as by genetic gifts. Extending this idea to the valuation of securities means we should consider a firm’s economic and industry environment during the valuation process. Regardless of the qualities or capabilities of a firm and its management, the economic and industry environment will have a major influence on the success of a firm and the realized rate of return on its stock.

Types: There are two valuation process- “top-down” or three-step approach or the “bottom-up”, stock valuation, stock picking approach. Both of these approaches can be implemented by either fundamentalists or technicians. The difference between the two approaches is the perceived importance of the economy and a firm’s industry on the valuation of a firm and its stock. But we use top-down approach for security valuation as most of the specialists use it.

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Analysis

of

Alternative

Economies

and

Security

MarketsObjectives:

Decide

how

to

allocate

investment

funds

among

countries

and

within

countries

to

bonds, stocks

and

cash

Analysis

of

Atlernative

IndustriesObjectives:

Based

upon

the

economic

and

market

analysis, determine

which

industries

will

prosper

and

which

indusries

will

suffer

on

a

global

basis

and

within

countries

Analysis

of

Individual Companis

&

Stock

3. ECONOMIC ANALYSIS

Fluctuations in security markets are related to changes in expectations for the aggregate economy. The prices of government and investment grade corporate bonds are determined by the level of interest rates, which is influenced by overall economic activity and govt. policy. Aggregate stock prices reflect investor expectations about corporate performance in terms of earnings, cash flows and the required rate of return by investors. All of these expectations are heavily impacted by the economic outlook.

3.1 SECTORS

Given the significant expected relationship between security markets and the economy, this section has four subsections:

Documentation of the relationship between the economy and stock prices Presentation of several economic series that provide specific insights related to the stock

market Specific discussion of the macroeconomic impact of inflation and interest rate on

security prices Brief considerations of what additional factors should be analyzed when dealing with

world security markets.

3.2 GENERAL ECONOMIC INFLUENCES

Monetary and fiscal policy measures enacted by various agencies of national governments influence the aggregate economies of those countries. The resulting economic conditions influence all industries and companies within the economies.

Gross Domestic Product (GDP): The term GDP means Gross Domestic Product. GDP is arguably the most important of all economic statistics as it attempts to capture the state of the economy in one number. GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

GDP = C + G + I + NX

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where:"C" is equal to all private consumption, or consumer spending, in a nation's economy"G" is the sum of government spending"I" is the sum of all the country's businesses spending on capital"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports).

GDP (Last Five Years)

Year GDP2006 6.5252007 6.3052008 6.0322009 5.4292010 6.023

Conclusion: From the graph we have shown that GDP is consistent over the period. Although it is decreasing pattern from the year 2007 to 2009 it again shows increasing pattern in the year 2010 which is a positive sign for the country.

2006 2007 2008 2009 2010

6.52499999999998 6.304999999999996.032

5.4296.02299999999999

GDPGDP

Tax-GDP Ratio: From the graph we have shown that the tax-GDP ratio and tax-revenue ratio increasing over the period. This increasing condition indicates an economic expansion of the country. This is also consistent with GDP condition in the country. As GDP increases, the income of the individuals as well as corporate earnings also increases. As the earning increases the amount of tax paid also increases. Again it is also consistent with unemployment rate which

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is shown in the preceding sections. As the GDP increases, the unemployment rate decreases over the period.

Current Account Balance: In economics, the current account is one of the two primary components of the balance of payments, the other being the capital. The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). One may refer to the list of countries by current account balance.

It can also be said “A record of a country's earnings from the sale of visible and invisible items minus its expenditure on visible and invisible items from abroad”.

Current Account Balance

Year Current Account Balance2005 0.0122006 1.1722007 1.1212008 1.9152009 2.86

Conclusion: From the graph we have shown that current account balance of the country is gradually increasing over the period. This also indicates positive aspects of the economy. This is due to increase in exports, dividend and interest earnings and net transfer payments.

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2005 2006 2007 2008 20090

0.5

1

1.5

2

2.5

3

3.5

0.012

1.171999999999991.121

1.915

2.86

Current Account Balance

Current Account Balance

Exchange Rate: Rate at which one currency may be converted into another is known as Exchange Rate. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country also called rate of exchange or foreign exchange rate or currency exchange rate.

Exchange Rate

Year Taka per US$

2005 61.39

2006 67.08

2007 69.03

2008 68.60

2009 68.80

2010 69.18

Conclusion: From the chart we have found that the value of taka is decreasing over the period. That means the US $ becomes stronger in terms of taka. For the devaluation of taka the exports becomes attractive to the potential exporters to make profit which is consistent with current account balance chart. On the other hand, it is very expensive for the importers to import the goods or services. So the imported goods is also decreasing which is also consistent with current account balance.

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2005 2006 2007 2008 2009 201056

58

60

62

64

66

68

70

61.39

67.08

69.03 68.6 68.8 69.18

Taka Per US$

Taka Per US$

Gross National Income (GNI): Gross National Income comprises the total value of goods and services produced within a country (i.e. its Gross Domestic Product), together with its income received from other countries (notably interest and dividends), and less similar payments made to other countries.

Gross National Income

Year GNI($Billions)

2005 172.088

2006 192.058

2007 213.235

2008 234.399

2009 250.648

Conclusion: From the bar-chart we have seen that the gross national income increases over the period. In the current period the GNI is highest than any other periods. This increasing indicates that the domestic production of goods or services and the income from abroad (remittance) are increasing successively.

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2005 2006 2007 2008 2009

172.088000000001192.058000000001

213.235234.399

250.648

GNI ($Billions)GNI ($Billions)

Inflation: Inflation means a sustained increase in the aggregate or general price level in an economy. Inflation means there is an increase in the cost of living. In another word “Inflation means that your money won’t buy as much today as you could  yesterday”.

Inflation Rate

Year Inflation Rate(Consumer

Price)

2005 6.0

2006 7.0

2007 7.2

2008 9.1

2009 8.9

2010 5.4

Conclusion: From the graph we have shown that the inflation rate is increasing from the year 2005 to 2009 which is consistent with economic growth. We know that inflation is positively related to economic growth and money supply. Money supply decreases the interest rate which in turn increasing the price of the consumable good which is termed as inflation.

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Remittance: In general Remittance means a payment of money sent to a person in another place. In another sense Money (or its representative, as a bill of exchange or draft or other order for money) forwarded from one place to another is known as remittance; also, the act of forwarding it is remittance. It can also be said as Funds forwarded from one person to another.

Remittance

Year Remittance(US$ million)

2005 4178.82

2006 5425.98

2007 6570.96

2008 9258.6

2009 10104.96

Conclusion: From the graph we have shown that the remittance amount is increasing over the period and it is high in the period of 2009. This amount also furnishes our economic environment as more money is in hand to people to invest in the money market or capital market securities.

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2005 2006 2007 2008 2009 2010

6

7 7.2

9.1 8.9

5.4

Inflation Rate (Consumer Price)

Inflation Rate (Consumer Price)

2005 2006 2007 2008 20090

2000

4000

6000

8000

10000

12000

Remittance (US $million)

Unemployment Rate: The percentage of the work force that is unemployed at any given date is known as unemployment rate. An economic condition marked by the fact that individuals actively seeking jobs remain unfired. Unemployment is expressed as a percentage of the total available work force. The level of unemployment varies with economic conditions and other circumstances. Unemployment is a serious social evil & the rate of unemployment is an indicator of the health of an economy"

Unemployment Rate

Year Unemployment Rate (%)

2005 40.00

2006 2.50

2007 2.50

2008 2.50

2009 2.50

2010 5.10

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Conclusion: From the graph we have shown that the unemployment rate remains constant from the period 2006 to 2009 and then jumps to 5.1% in the year 2010. We have known from the “phillip curve” that unemployment rate is inversely related to inflation rate. We have seen that the inflation rate increases from the period 2006 to 2009 which is consistent with phillip curve. Again in the period 2010 the inflation rate falls which increases the unemployment rate.

Findings: Finally, we have said that the economic environment is favorable for the country as GDP, GNI, remittance, current-account balance, tax-GDP ratio increases over the period. Again the unemployment rate is increased in the period in 2010, is quite satisfactory for the country which indicates economic booming condition of the country.

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2006 2007 2008 2009 2010

2.5 2.5 2.5 2.5

5.1

Unemployment RateUnemployment Rate

4. INDUSTRY ANALYSIS

Investment practitioners perform industry analysis because they believe it helps them isolate investment opportunities that have favorable return-risk characteristics. We likewise have recommended it as part of our three-step, top-down approach.

4.1 IMPORTANCE OF INDUSTRY ANALYSIS

The conclusions of the studies dealing with industry analysis are-

During any time period, the returns for different industries vary within a wide range, which means that industry analysis is an important part of the investment process.

The rates of return for individual industries vary over time so we cannot simply extrapolate past industry performance into the future.

The rates of return of firms within industries also vary, so analysis of individual companies in an industry is a necessary follow-up to industry analysis.

During any time period, different industries risk levels vary within wide range so we must examine and estimate the risk factors for different industries.

Risk measures for different industries remain fairly constant over time, so the historical risk analysis is useful when estimating future risk.

4.2 INDUSTRY ANALYSIS PROCESS

The industry analysis is similar – first is a macro analysis of the industry to determine how this industry relates to the business cycle and what economic variables drive this industry. This part of the process will make the second component easier and better. The second component is a micro valuation of the industry using the several valuation techniques. The specific macro-analysis topics are-

Business cycle and industry sectors Structural economic changes and alternative industries Evaluating an industry’s life cycle Analysis of the competitive environment in an industry

Business Cycle & Industry Sector: Economic trend can take two basic forms: cyclical changes that arise from the ups and downs of the business cycle and structural changes occur when the economy is undergoing a major change in how it functions.

Normally toward the end of the recession, financial stock rise in value because investors anticipate that banks earnings will rise as both the economy and loan demand recover. Once the economy begins its recovery, consumer durable firms that produce expensive consumer items, such as cars, personal computer, refrigerators, lawn tractors, and snow blowers become attractive investments because a reviving economy will increase consumer confidence and personal income. Once businesses recognize the economy is recovering, they begin to think about modernizing, renovating, or purchasing new equipment to satisfy rising demand and reduce costs. Thus, capital goods industries, such as heavy equipment manufacturer, machine tool makers, and airplane manufactures become attractive.

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Cyclical industries whose sales rise and fall along with general economic activity are attractive investments during the early stages of an economic recovery because of their high degree of operating leverage, which means that they benefit greatly from the sales increases during an economic expansion. Industries with high financial leverage likewise benefit from rising sales volume.

Traditionally toward the business cycle peak, the rate of inflation increases as demand starts to outstrip supply. Basic materials industries such as oil, metals and timber, which transform raw materials into finished products, become investor favorites. Because inflation has little influence on the cost of extracting these products and they can increase prices, these industries experience higher profit margins.

During a recession, some industries do better others. Consumer staples, such as pharmaceuticals, food, and beverages, outperform other sectors during a recession because, although overall spending may decline, people still spend money on necessities so these “defensive stock” industries generally maintain their values.

Decision: As our selected company (Beximco Synthetic Company) belongs to Pharmaceuticals Company and the earnings variability and sales variability are low which is measured by beta (systematic risk or market risk) and the stock is defensive stock, according to definition we can say it falls in consumer staples industry.

Structural Economic Changes: Influences other than the economy are part of the business environment. Demographics, life styles, changes in technology, and political and regulatory environment such as economic reasoning, fairness, regulatory changes, regulation in international business also can have a significant effect on the cash flow and risk prospects of different industries.

Evaluating Industry Life Cycle: An insightful analysis when predicting industry sales and trends in profitability is to view the industry over time and divide its development into stages similar to those that human progress through: birth, adolescence, adulthood, middle age, old age. A five stage model would include-

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Net Sales

Beximco Synthetic Company

Beximco Synthetic

Pioneering Development: During this start-up stage, the industry experiences modest sales growth and very small or negative profit margins and profits. The market for the industry’s product or service during this time periods is small, and the firms involved incur major development costs.

Rapid Acceleration Growth: During this rapid growth stage, a market develops for the product or service and demand becomes substantial. The limited number of firms in the industry face little competition, and individual firms can experience substantial backlogs. The profit margins are very high. The industry builds its productive capacity as sales grow at an increasing rate as the industry attempts to meet excess demand.

Mature Growth: The success in stage 2 has satisfied most of he demand for the industry goods or service. Thus future sales growth may be above normal but it no longer accelerates. Also, the rapid growth of sales and the high profit margins attract competitors to the industry, which causes an increase in supply and lower prices, which means that the profit margins begin to decline levels.

Stabilization and Market Maturity: During this stage, this is probably the longest phase, the industry growth rate declines to the growth rate of the aggregate economy or its industry segment. During this stage, sales correlate with an economic series. Although sales growth in line with the economy, profit growth varies by industry because the competitive structure varies by industry and by individual firms within the industry because the ability to control costs differs among companies. Competition produces tight profit margin.

Deceleration of Growth and Decline: At this stage of maturity, the industry’s sales growth declines because of shifts in demand or growth of subsidies. Profit margins continue to be squeezed and some firms experience low profits or even losses. Firms that remain profitable may show very low rates of return on capital.

Decision: As our selected company’s (Beximco Synthetic Company) sales and earnings on the line of the economic activity that is as the GDP increases the company’s profit earnings are also increasing in the same line. So our selected company belongs to mature growth.

Analysis of Industry Competition:

Porter’s five forces….

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Stage 1 Pioneering Development

Stage 3Mature Growth

Stage 2Rapid

Acceleration Growth

Stage 4Stabilization & market maturity

Stage 5Deceleration of Growth & decline

Time

1. The intensity of competitive rivalry

2. The threat of the entry of new competitors

3. The bargaining power of suppliers

4. The bargaining power of customers (buyers)

5. The threat of substitute products or services

Usages of Porter's five forces model

Porter's five forces framework is used when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or "checklist" they might use “Value Chain “afterward. Like all general frameworks, an analysis that uses it to the exclusion of specifics about a particular situation is considered naive.

According to Porter, the five forces model should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers. A firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis

Implication for Beximco Synthetic Ltd.

1. Potential Competitors: Medium pressure

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o Bengal Synthetic Fivers Ltd. could potentially enter into the retail side.

o Entry barriers are relatively high, as Beximco Synthetic Ltd. has an outstanding distribution systems, locations, brand name, and financial capital to fend off competitors.

o Beximco Synthetic Ltd. often has an absolute cost advantage over other competitors.

2. Rivalry Among Established Companies: Low Pressure

o Currently, there is no synthetic company that exists in the same market as Beximco Synthetic Ltd.

o Mature industry life cycle.

3. The Bargaining Power of Buyers: Low pressure

o The individual buyer has little to no pressure on Beximco Synthetic Ltd.

o Consumer advocate groups have complained about Beximco Synthetic Ltd.’s pricing techniques.

o Consumer could shop at a competitor who offers comparable products at comparable prices, but the convenience is lost.

4. Bargaining Power of Suppliers: Low to Medium pressure

o Since Beximco Synthetic Ltd. holds so much of the market share, they offer a lot of business to manufacturers and wholesalers. This gives Beximco Synthetic Ltd. a lot of power because by Beximco Synthetic Ltd. threatening to switch to a different supplier would create a scare tactic to the suppliers.

o Beximco Synthetic Ltd. could vertically integrate.

5. Substitute Products: Low pressure

o When it comes to this market, there are not many substitutes that offer convenience and low pricing.

o The customer has the choice of going to many specialty stores to get their desired products but is not going to find Beximco Synthetic Ltd.’s low pricing.

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5. COMPANY ANALYSIS

5.1 TYPES OF COMPANY

The stock of a wonderful firm with superior management and strong performance measured by sales and earnings growth can be priced so high that the intrinsic value of the stock is below its current market price and should not be acquired. In contrast, the stock of a company with less success based on its sales and earnings growth may have a stock market price that is below its intrinsic value. In this case, although the company is not as good, its stock market could be the better investment.

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Growth Companies and Growth Stock: Growth companies are those that consistently experience above-average increases in sales and earnings. This definition has some limitations because many firms could qualify due to certain accounting procedures, mergers or other external events. Again, a growth company is defined as a company who has management ability and the opportunities to make investments that yield rates of return greater than the firm’s rate of return.

In contrast, a growth stock is a stock with a higher rate of return than other stocks in the market with similar risk characteristics. The stock achieves this superior risk-adjusted rate of return because at some point in time the market undervalued it compared to other stocks. If the stock is undervalued, its price should eventually increase to reflect its true fundamental value when the correct information becomes available. During this period of price adjustment, the stock’s realized rate of return will exceed the required rate of return for a stock with its risk, and during this period of adjustment it will be considered a growth stock. So the stocks of growth companies have generally not been growth stocks.

Defensive Companies and Defensive Stock: Defensive companies are those whose future earnings are likely to withstand an economic rate of return. Business risk and financial risk are relatively low for these companies. Typical examples are grocery chain and public utilities.

In contrast, defensive stock’s rate of return is not expected to decline during an overall market decline or decline less than the overall market. Again it also has a low systematic risk (market risk).

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Types of Company &

Stocks

Growth Company &

Growth Stock

Defensive Company & Defensinve

Stock

Cyclical Company &

Cyclical Stock

Speculative Company & Speculative

Stock

Beximco Synthetic

Cyclical Companies and Cyclical Stock: A cyclical company’s sales and earnings are heavily influenced by aggregate business activity. This volatile earnings pattern is typically a function of the firm’s business risk (both sales volatility and operating leverage) and can be compounded by financial risk. Typical examples are auto, steel or heavy machinery equipments etc.

In contrast, a cyclical stock experiences changes in its return greater than changes in overall market rate of return. A cyclical stock is the stock of any company that has returns that are more volatile than the overall market- that is high beta stocks that have high correlation with the aggregate market and greater volatility.

Speculative Companies and Speculative Stock: A speculative company is one whose assets involve great risk but that also has a possibility of great gain. A good example of a speculative firm is one involved in oil exploration.

A speculative stock possesses a high probability of low or negative rates of return and a low probability of normal or high rates of return. Specifically, a speculative stock is one that is overpriced, leading to a high probability during the future period when the market adjusts the stock price to its true value, it experiences either low or possibly negative rates of return. Such an expectation might be the case for an excellent growth company whose stock is selling a an extremely high price/earnings ratio- that is typically it is subsequently overvalued.

Conclusion: From the calculation of cost of capital we have seen that the market risk of “Beximco Synthetic Company” is very low (Beta = 0.19). Again the financial risk measured by debt-equity ratio, debt ratio and interest coverage ratio are favorable for the company which indicates lower financial risk. Based on these market risk and financial risk we can conclude that our selected company falls in a “defensive company and defensive stock”.

5.2 INCOME STATEMENT & BALANCE SHEET

Beximco Synthetic CompanyIncome Statement (Historical)

Particulars FY- 2006 FY- 2007 FY - 2008 FY- 2009 FY - 2010 Revenue 1,054,244,889 790,103,124 932,831,738 792,781,515 1,009,552,13

8 Cost of Revenue (871,747,066 - -796,850,257 -665,395,623 -875,855,449

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) 706,422,975 Gross Profit 182,497,82

3 83,680,149 135,981,481 127,385,892 133,696,689

Operating Expenses

Administrative Expenses (8,456,961)

-8,907,493 -9,561,255 -9,664,784 -11,907,223

Selling Expenses (4,286,508)

-3,437,973 -3,764,239 -3,527,286 -3,947,721

(12,743,469)

-12,345,466 -13,325,494 -13,192,070 -15,854,944

Profit from Operations 169,754,354

71,334,683 122,655,987 114,193,822 117,841,745

Finance Cost (102,273,294)

-104,897,261

-99,327,085 -94,865,888 -85,649,980

Profit before contribution to WPPF

67,481,060

-33,562,578 23,328,902 19,327,934 32,191,765

Contribution to workers Profit participation

(3,213,384)

_ -1,110,900 -920,378 -1,532,942

Net profit before Tax 64,267,676

-33,562,578 22,218,002 18,407,556 30,658,823

Income Tax Expense 8,501,085

-2,004,826 -3,332,700 -6,751,608 -3,184,700

Profit After Tax for the year 72,768,761

-35,567,404 18,885,302 11,655,948 27,474,123

Beximco Synthetic CompanyBalance Sheet (Historical)

ASSETS FY- 2006 FY-2007 FY- 2008 FY - 2009 FY- 2010Property, Plant and Equipment 411078030 361,073,094 1,504,423,768 1,484,425,873 1,460,317,096Cost 1130656477 1,130,776,637 2,297,244,043 _Accumulated Depreciation 719578447 769,703,543 792,820,275 _Long Term Security Deposits 3934971 3,934,971 3,934,971 5,107,298 5,107,298Total Non-current Assets 415013001 365,008,065 1,508,358,739 1,489,533,171 1,465,424,394Current Assets 1677381386 1,959,146,335 1,480,234,662 1,429,542,275 1,394,274,544 Inventories 754,145,894.00 757,336,700 789,637,475.00 767,296,947.00 837,904,260

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Accounts & Other Receivables 692267490 1,005,929,079 514,401,229 527,839,772 483,382,252Advances, Deposits & Prepayments

185558034 188,281,007 174,427,665 130,528,834 67,756,450

Cash & Cash Equivalents 45409968 7,599,549 1,768,293 3,876,722 5,231,582Total Assets 2092394387 2,324,154,400 2,988,593,401 2,919,075,446 2,859,698,938EQUITY AND LIABILITIESShareholders Equity 885509898 850,800,333 2,017,766,294 2,029,422,242 2,015,310,518Issued Share Capital 381150000 438,322,500 482,154,750 554,477,963 596,063,810Revaluation Surplus _ 173,718,295 1,329,335,883 1,329,335,883 1,329,335,883Capital Reserve 173718295 _ _ _ _Tax Holiday Reserve 152338837 152,338,837 _ _ _Retained Earnings 178302766 86,420,701 206,275,661 145,608,396 89,910,825Current Liabilities 851709680 1,164,458,597 707,239,254 710,661,585 726,097,679Debentures-Current Maturity (Secured)

33321718 33,305,500 38,428,644 33,305,500 50,298,789

Interest Free Block- Account Current Maturity

29423093 19,350,054 19,184,102 19,184,102 28,776,153

Short Term Loan from Banks (Secured)

697297344 979,880,195 523,967,488 518,709,213 502,915,003

Accounts & Other Payables 45841962 48,762,106 54,984,784 73,826,489 83,324,900Accrued Expenses 45825563 83,160,742 70,674,236 65,636,281 60,782,834Non Current Liabilities 355174809 308,895,470 263,587,853 178,991,619 118,290,741Debentures-Net of Current Maturity (Secured)

168461717 149,874,764 116,569,265 78,919,738 45,160,186

Defferd Tax Liability 857839 _ _ _ _Interest Free Block- Account Net of Current Maturity

116220524 89,664,983 81,982,184 45,130,637 31,208,043

Lease Obligation for Finance Lease

69634729 69,355,723 65,036,404 54,941,244 41,922,512

Total Liabilities and Shareholders Equity

2092394387 2,324,154,400 2,988,593,401 2,919,075,446 2,859,698,938

5.3 ANALYSIS OF FINANCIAL RATIOS

Analysts use financial ratios because numbers in isolation typically convey little meaning. Thus, ratios are intended to provide meaningful relationships between individual values in the financial statements. Because the major financial statements report numerous individual items, it is possible to produce a vast number of potential ratios, many of which will have little value. Therefore we limit our examination to the most relevant ratios and group them into categories that will provide information on important economic characteristics of the firm.

5.4 IMPORTANCE OF RELATIVE FINANCIAL RATIOS

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Just as a single number from a financial statement is of little use, an individual financial ratio has little value except in relation to comparable ratios for other entities. That is only relative financial ratios are relevant. Therefore it is important to compare a firm’s performance relative to

The aggregate economy Its industry or industries Its major competitors within the industry Its past performance (time-series analysis)

5.5 LIMITATION OF FINANCIAL RATIOS

Although financial ratios are used to determine the strength and weakness of the company there exist some limitations. These are

Accounting treatment principle: There are several generally accepted methods for treating various accounting items, and the alternatives can cause a difference in results for the same event.

Heterogeneity: Many companies have divisions that operate in different industries, which can make it difficult to derive comparable industry ratios.

Consistency: It is important to develop a total profile of the firm and not depend on only one set of ratios (internal liquidity ratios). As an example, a firm may be having short-term liquidity problems but be very profitable- the profitability will eventually alleviate the short-term liquidity problems.

Range: One should consider a range of appropriate values for the ratio because a value that is either too high or too low for the industry can be a problem.

5.6 COMPUTATION OF FINANCIAL RATIOS

In the following discussion we divide the financial ratios into five major categories that underscore the important economic characteristics of a firm. The five categories are-

I. Common size statementsII. Internal liquidity (solvency)

III. Operating performancea) Operating efficiencyb) Operating profitability

IV. Risk analysisa) Business Riskb) Financial risk

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c) External liquidity riskV. Growth analysis

EVALUATING INTERNAL LIQUIDITY

Internal liquidity (solvency) ratios are intended to indicate the ability of the firm to meet future short-term financial obligations. They compare near-term financial obligations such as account payable or notes payable, to current assets or cash flows that will be available to meet these obligations.

Current Ratio: Clearly the best known liquidity measure is the current ratio, which examines the relationship between current assets and current liabilities. These current ratios experienced a consistent decrease during the years of 2008 to 2010 which indicates not a good position in this ratio. This situation occurs due to increase in the payment of account payable or notes payable.

Quick Ratio: Some observers question using total current assets to gauge the ability of a firm to meet its current obligations because inventories and some other current assets might not be very liquid. They prefer the quick ratio, which relates current liabilities to only relatively liquid current assets (cash items and account receivable). From the graph we have seen that the quick ratios of Beximco Synthetic Co. are consistently declining which is not a good sign for the company. This is due to deduct inventories from the calculation which is increased consistently.

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Financial

Stocks Excel

trough

peak

Consumer

Durables Exce

l

Capital

Goods

Excel

Basic Industries

ExcelConsumer Stapl

es Excel

2006 2007 2008 2009 2010

1.081.03

0.980.93

0.770000000000005

Quick Ratio

Cash Ratio: The most conservative liquidity ratio is the cash ratio, which relates the firm’s cash and short-term marketable securities to its current liabilities. From the graph we have seen that the cash ratio shows declining trend during the period of 2006 to 2008 and again shows upward trend because the firm has strong line of credit at various banks.

2006 2007 2008 2009 2010

0.05

0.01

0.00200000000000001

0.00500000000000001

0.00700000000000001

Cash Ratio

Receivable Turnover: In addition to examining total liquid assets, it is useful to analyze the quality (liquidity) of the accounts receivable by calculating how often the firm’s receivable turn-over, which implies an average collection period. The faster these accounts are paid the sooner the firm gets the funds to pay off its own current liabilities. The results of accounts receivable turnover are mixing. In the recent period, the turnover is high which indicates less collection period (compared 243 days to 174 days) leading to higher liquidity.

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2006 2007 2008 2009 2010

1.52

0.78

1.81

1.5

2.09

Account Receiveable Turnover

Inventory Turnover: We also examine the liquidity of inventory based on the firm’s inventory turnover (i.e, how many times it is sold during a year) and the implied processing time. Inventory turnover can be calculated relative to sales or cost of goods sold. The preferred turnover ratio is relative to cost of goods sold, which does not include the profit implied in sales. This graph shows the mixing condition. But in the recent period, the inventory turnover increases indicating less processing period (compared 419 days to 347 days) leads to higher liquidity.

2006 2007 2008 2009 2010

1.15999999999999

0.931.01

0.870000000000004

1.05

Inventory Turnover

As with receivables, a firm does not want an extremely low inventory turnover value and long processing time, because this implies that capital is being tied up in inventory and could signal obsolete inventory (especially for firms in the technology sector). Alternatively, an abnormally high inventory turnover and a short processing time could mean inadequate inventory that could lead to outages, backorders and slow delivery to customers, which would eventually have an adverse effect on sales.

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Payable Turnover: Payable turnover is also used to examine the liquidity based on the firm’s payable turnover and the implied paid period. Payable turnover can be calculated relative to cost of goods sold. The more the time period, the more liquidity of the ratio. From the graph we have seen that the payable turnover result is mixing. From the period of 2006 to 2009 the turnover is decreasing but after that the turnover is quite high which indicates less payable period (compared 40 days to 34 days) leading to less liquidity.

2006 2007 2008 2009 2010

19.01

14.49 14.49

9.0110.51

Payable Turnover

Cash Conversion Cycle: A very useful measure of overall internal liquidity is the cash conversion cycle, which combines information from the receivables turnover, the inventory turnover, and the accounts payable turnover. Cash is tied up in assets for a certain number of days. Specifically, cash is committed to receivables for the collection period and in inventory for a number of days- the inventory processing period. At the same time the firm receives an offset to this capital commitment from its own suppliers who provide interest-free loans to the firm by carrying the firm’s payables. From the graph we have seen that the cash conversion period shows declining trend which indicated the more liquidity. Overall we can say the overall result is a very small decline in its cash conversion cycle. Although the overall cash conversion cycle appears to be quite good as always we should examine the firm’s long-term trend and compare it to other drugstore chains.

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2006 2007 2008 2009 2010

534.8

834

537

622

487

Cash Conversion CycleCash Conversion Cycle

EVALUATING OPERATING PERFORMANCE

The operating performance can be divided into two subcategories: 1) operating efficiency ratios and 2) operating profitability ratios. Efficiency ratios examine how the management uses its assets and capital, measured by taka of sales generated by various asset or capital categories. Profitability ratios analyze the profits as a percentage of sales and as a percentage of the assets and capital employed.

OPERATING EFFICIENCY RATIOS

Total Asset Turnover: The total asset turnover ratio indicates the effectiveness of the firm’s use of its total asset base (net assets equal gross assets minus depreciation on fixed assets). Total asset turnover ratios range from less than 1 for large, capital-intensive industries (steel, autos, and heavy manufacturing companies) to over 10 for some retailing or service operations. It also can be affected by the use of leased facilities. it is poor management to have an exceedingly high asset turnover relative to the industry because this might imply too few assets for the potential business (sales) or it could be due to the use of outdated, fully depreciated assets. It is equally poor management to have an extremely low asset turnover because this implies that the firm is tying up capital in excess assets relative to the needs of the firm and its competitors. From the graph we have seen that there is a declining trend during the period of 2006 to 2009 and then increase which indicates the increase in the sales volume leading to higher profit.

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2006 2007 2008 2009 2010

0.5

0.34 0.310000000000002

0.27

0.35

Total-Asset Turnover

Net Fixed Asset Turnover: The net fixed asset turnover ratio reflects the firm’s utilization of fixed assets. Again an abnormally low turnover implies capital tied up in excessive fixed assets. An abnormally high asset turnover ratio can indicate a lack of productive capacity to meet sales demand, or it might imply the use of old, fully depreciated plant and equipment that may be obsolete. From the graph we have seen that the fixed asset turnover declines during the period of 2006 to 2008, remain constant during the period 2008 to 2009 and then increasing at a slight rate.

2006 2007 2008 2009 2010

2.54

2.16

0.610000000000001 0.53

0.690000000000001

Fixed Asset Turnover

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OPERATING PROFITABILITY RATIOS

There are two facets of profitability: 1) the rate of profit on sales (profit margin) and 2) the percentage return on capital employed. The analysis of profitability of sales actually entails several component profit margins that consider various expense categories. These component margins provide important information relative to the final net profit margin. Thus, if we determine that a firm has experienced a significant increase or decrease in its net profit margin, the analysis of the component profit margins will help us to determine the specific causes of the change.

Gross Profit Margin: This ratio indicates the basic cost structure of the firm. This margin can also be impacted by a change in the firm’s product mix toward higher or lower profit margin items. From the graph we have seen that the gross profit margin increases in the period of 2007 to 2009 and then declines due to increase in the cost of revenue.

2006 2007 2008 2009 2010

0.17

0.11

0.150.16

0.13

Gross Profit Margin

Net Profit Margin: This margin relates after-tax net income to sales. This ratio should be computed using sales and earnings from continuing operations, because our analysis seeks to derive insights about future expectations. From the graph we have seen that net profit margin shows declining trend from the period of 2006 to 2009 and shows upward trend due to decrease in selling expenses.

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2006 2007 2008 2009 2010

0.07

0.04

0.02

0.01

0.03

Net Profit Margin

Return on Equity: The return on owner’s equity (ROE) ratio is extremely important to the owner of the enterprise (the common stockholder) because it indicates the rate of return that management has earned on the capital provided by stockholders after accounting for payments to all other capital suppliers. This ratio reflects the rate of return on the stockholder’s capital. It should be consistent with the firm’s overall business risk, but it also should reflect the financial risk assumed by the common stockholder because of the prior claims of the firm’s bondholders. From the graph we have seen that the ROE is declining from the period of 2006 to 2008 and remain constant from the period of 2008 to 2010.

2006 2007 2008 2009 2010

0.08

0.04

0.01 0.01 0.01

Return On Equity

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RISK ANALYSIS

Risk analysis examines the uncertainty of income flows for the total firm and for the individual sources of capital (that is debt, preferred stock and common stock). The typical approach examines the major factors that cause a firm’s income flows to vary. More volatile income flows mean greater risk (uncertainty) facing the investor.

Business Risk: Business risk is the uncertainty of operating income caused by the firm’s industry. In turn, this uncertainty is due to the firm’s variability of sales caused by its products, customers and the way it produces its products. Specifically, a firm’s operating earnings vary over time and is measured by the volatility of the firm’s operating income over time, which is due to two factors: 1) the volatility of the firm’s sales over time and 2) how the firm produces its products and its mix of fixed and variable costs- that is operating leverage. Specifically, a firm’s operating earnings vary over time because its sales and production costs vary. Again business risk depends on

Sales variability Adjusting volatility measure for growth Operating leverage

Financial Risk: Financial risk is the additional uncertainty of returns to equity holders due to a firm’s use of fixed financial obligation securities. This financial uncertainty is in addition to the firm’s business risk. As with operating leverage, during an economic expansion, the net earnings available for common stock after the fixed interest payments will experience a larger percentage increase than operating earnings. In contrast, during a business decline, the earnings available to stockholders will decline by a larger percentage than operating earnings because of these fixed financial costs (i.e, interest payments). Notably as a firm increases its relative debt financing with fixed contractual obligations, it increases its financial risk and the possibility of default and bankruptcy.

Debt- Equity Ratio: The debt figure includes all long-term fixed obligations, including subordinated convertible bonds. The equity typically is the book value of equity and includes preferred stock, common stock and retained earnings. From the graph we have seen that the debt-equity ratio declines over the periods which indicate the higher ownership position to the borrowed capitals. This is a good sign for the investors to retain the confidence of the stakeholders. Again it also indicates a bad sign because as the borrowed capital reduces the company losses its investments in the profitable projects.

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2006 2007 2008 2009 2010

0.4

0.36

0.13

0.090.06

Debt-Equity Ratio

Debt Ratio: This ratio measures the percentage of funds provided by creditors. From the graph we have seen that the debt ratio declines from the period of 2007 to 2010 which indicates lower financial risk. As the borrowed capital reduces the commitment of the company to pay interest reduces.

2006 2007 2008 2009 2010

0.58

0.630000000000004

0.320000000000002 0.3 0.29

Debt Ratio

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Interest Coverage Ratio: This ratio indicates how many times the fixed interest charges are earned, based on the earnings available to pay these expenses. Alternatively, one minus the reciprocal of the interest coverage ratio indicates how far earnings could decline before it would be impossible to pay the interest charges from current earnings. From the graph we have seen that the interest coverage ratio increases from the period of 2007 to 2010 due to decrease in debt interest payment. As the interest payment decreases the earnings before interest and expense increases which also indicate the higher interest coverage ratio and lower financial risk.

2006 2007 2008 2009 2010

1.66

0.68

1.23 1.2

1.37

Interest Coverage Ratio

Growth Ratio: From the graph we have seen that growth rate decline in the period of 2006 and 2007 and then remain constant in the period from 2008 to 2010. This scenario is due to constant dividend payout ratio and return on equity. Normally the company retains huge amount for the prospect profitable investment.

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2006 2007 2008 2009 20100

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.068

0.034

0.0085 0.009 0.0085

Growth Rate

Growth Rate

Conclusion: From the ratio analysis we have said that the company financial condition is moderately strong as their financial risk decreases and cash conversion cycle decreases in the recent period. Although quick ratio declines in the recent period, the other liquidity ratios (current ratio, cash ratio, accounts payable turnover etc.) show a positive sign of the company. So from the ratio perspective we can select the company as an investment opportunity.

5.7 VALUATION TECHNIQUES

DIVIDEND DISCOUNT MODEL (DDM) APPROACH

Assumptions of DDM approach are-

1. Dividends grow at a constant rate

2. The constant growth rate will continue for an infinite period

3. The required rate of return (k) is greater than the infinite growth rate (g)

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I. Infinite Growth Model: Here, we assume that the security’s growth rate will be increased infinitively. In our security, the constant growth rate is 2.56% and cost of equity or required rate of return is 7% and cash dividend per share for the base period (2010) is TK 15.

= 15(1+.0256).13−.0256

= TK. 148

Decision: From this model we have seen that the share is overvalued as Tk. 148 is less than TK. 574 in period December 2010 and the average price in 2010 is Tk 394. So the decision is not to purchase the share.

II. Multiple Dividend Growth Model: In this model we assume that the dividend growth rate 6% for the first 4 years and then the dividend growth rate is 2.56% for infinitively. Now the value becomes

P = D0(1+g)(1+k)

+ D0(1+g)2

(1+k)2 + D0(1+g)3

(1+k)3 + D0(1+g)4

(1+k)4 + D0(1+g)4 (1+g)❑

k−g(1+k)4

= 15(1+.06)(1+.13) + 15(1+.06)2

(1+.13)2 + 15(1+.06)3

(1+.13)3 + 15(1+.06)4

(1+.13)4 + 15 (1+.06 ) 4(1+.0256)❑

.13−.0256

(1+.13)4

= 14.07 + 13.20+12.38 + 11.62 + 114 = Tk.166

Decision: As the share price under this method is less than historical price in December 2010 we should not buy this security. Also on the basis of average price in the year 2010 we are deciding not to invest in it.

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Pi=D1

k−g

5.8 PROJECTED INCOME STATEMENT & BALANCE SHEET

Beximco Synthetic CompanyIncome Statement (Projected)

Particulars FY - 2011 FY - 2012 FY- 2013 FY - 2014 FY - 2015 Revenue 1023027351 103668242

7105051976

7106454180

31.079E+09

Cost of Revenue 876140117.9 887834585 899685147 911693886.4

923862915

Gross Profit 146887232.8 148847841 150834620 152847917.1

154888087

Operating Expenses

Administrative Expenses

Selling Expenses

15210995.99 15414028 15619770 15828258.26

16039529

Profit from Operations 131676236.8 133433813 135214850 137019658.8

138848558

Finance Cost 61,959,985 60,403,178 58,885,487 57,405,930 55,963,548

Profit before contribution to WPPF Contribution to workers Profit participation Net profit before Tax 69,716,252 73,030,635 76,329,363 79,613,729 82,885,01

0 Income Tax Expense 10,457,437.

73 10954595.

311449404.

411942059.3

512432752

Profit After Tax for the year 59,258,813.79

62,076,040 64,879,958 67,671,670 70,452,259

III. Operating Free Cash Flow: This is also referred to as free cash flow to the firm (FCFF) and the entity DCF model. The object is to determine a value for the total firm and subtract the value of the firm’s debt obligations to arrive at a value for the firm’s equity. Under this approach, the OCF is discounted by WACC.

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Weighted Average Cost of Capital = W e K e +W d (1 – tax)Kd

=.60* .13 +.40* (1 - .15).13

= 12.22%

FY-2010 FY-2011 FY-2012 FY-2013 FY-2014 FY-2015Net Income 59,258,814 62,076,040 64,879,958 67,671,670 70,452,259Depreciation 33,486,107 33,486,107 33,486,107 33,486,107 33,486,107Operating Cash Flow 92,744,921 95,562,147 98,366,065 101,157,777 103,938,366Working Capital 668,176,865 3,216,198,421 3,242,756,47

43,269,314,526

2,699,808,769

2,726,366,822

Change in NWC 2,548,021,556 26,558,053 26,558,053 -569,505,757 26,558,053Capital Expenditure 1,460,317,09

62,640,766,477 122,120,200 124,924,118 -468,347,981 130,496,418

Total Present Value 792,140,231 2353204845 96972140 88393587 -295316420 73324189Net Present Value 1524438110Number of Shares 5,960,637Price Per Share 255.75

Decision: From the OCF technique we can see the intrinsic value of the share is Tk. 256 which is lower than the market price TK. 574. So the share is overvalued at this approach. So we have to decide not to buy the security.

IV. Free Cash Flow to Equity: FCFE measures the owner position after meeting the liabilities to the lenders or the lending parties. It is almost similar to FOCF method, but only difference in the discounting factor. Under this approach, the FCFE is discounted by cost of equity.

FY-2011 FY-2012 FY-2013 FY-2014 FY-2015Net Income 59,258,814 62,076,040 64,879,958 67,671,670 70,452,259Depreciation 33,486,107 33,486,107 33,486,107 33,486,107 33,486,107Operating Cash Flow 92,744,921 95,562,147 98,366,065 101,157,777 103,938,366Working Capital 3,216,198,42

13,242,756,474

3,269,314,526

2,699,808,769

2,726,366,822

Change in NWC 2,548,021,556

26,558,053 26,558,053 -569,505,757 26,558,053

Capital Expenditure 1,483,389,658

1,503,189,519

1,523,253,662

1,543,585,615

1,564,188,954

Change in Capital 19,799,860 20,064,143 20,331,953 20,603,339

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ExpenditureFree Cash Flow To Equity

1,157,376,818

102,320,340 104,859,975 -488,679,934 109,893,080

Total Present Value 1024227273 80131835 72673223 -299716555 59645561Net Present Value 936961337Number of Shares 5,960,637Price Per Share 157.19147

Decision: From this approach we see that the intrinsic value of the share is Tk 157 which is lower than the market price Tk. 574. As the share is overvalued we have to decide not to invest in it

Beximco Synthetic CompanyBalance Sheet (Projected)

ASSETS FY - 2011 FY - 2012 FY- 2013 FY - 2014 FY - 2015Property, Plant and Equipment 1,426,830,989 1,393,344,882 1,359,858,77

51,326,372,66

81,292,886,56

1CostAccumulated DepreciationLong Term Security Deposits 5,107,298 5,107,298 5,107,298 5,107,298 5,107,298Total Non-current Assets 1,431,938,287 1,398,452,180 1,364,966,07

31,331,479,96

61,297,993,85

9Current Assets Inventories 858,843,852 879,783,443.0

0 900,723,034.50

921,662,626.00

942,602,217.50

Accounts & Other Receivables 741872010.3 751774305.3 761808773.4 771977178.6 937566675.5Advances, Deposits & Prepayments

67,756,450 67,756,450 67,756,450 67,756,450 67,756,450

Cash & Cash Equivalents 2,251,115,348 2,289,478,716 2,227,434,240

1,619,805,099

1,453,125,556

Total Assets 5,351,525,946.35 5,387,245,095 5,322,688,571

4,712,681,320

4,699,044,758

EQUITY AND LIABILITIESShareholders Equity 2,015,310,518 2,015,310,518 2,015,310,51

82,015,310,51

82,015,310,51

8Issued Share Capital 596,063,810 596,063,810 596,063,810 596,063,810 596,063,810Revaluation Surplus 1,329,335,883 1,329,335,883 1,329,335,88

31,329,335,88

31,329,335,88

3Capital Reserve _ _ _ _ _Tax Holiday ReserveRetained Earnings 596,063,810.00 596,063,810 596,063,810 596,063,810 596,063,810Current Liabilities 703,389,239 746,036,441 688,407,971 681,392,585 674,684,078

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Debentures-Current Maturity (Secured)

50,298,789 50,298,789 50,298,789 50,298,789 50,298,789

Interest Free Block- Account Current Maturity

28,776,153 28,776,153 28,776,153 28,776,153 28,776,153

Short Term Loan from Banks (Secured)

490278755.6 477960006.7 465950778.8 454243294.9 442829973.3

Accounts & Other Payables 69513389.25 70441234.05 71381463.46 72334242.78 73299739.53Accrued Expenses 64,522,152 68,261,470 72,000,787 75,740,105 79,479,423Non Current Liabilities 111,362,687 104,434,633 97,506,578 90,578,524 83,650,470Debentures-Net of Current Maturity (Secured)

45,160,186 45,160,186 45,160,186 45,160,186 45,160,186

Defferd Tax Liability _ _ _ _ _Interest Free Block- Account Net of Current Maturity

31,208,043 31,208,043 31,208,043 31,208,043 31,208,043

Lease Obligation for Finance Lease

34,994,458 28,066,404 21,138,349 14,210,295 7,282,241

Total Liabilities and Shareholders Equity

5,351,525,946.35 5,387,245,095 5,322,688,571

4,712,681,320

4,699,044,758

6. TECHNICAL ANALYSIS

Technical analysts or technicians develop technical trading rules from observations of past price movements of the stock market and individual stocks. The philosophy behind technical analysis is in sharp contrast to the efficient market hypothesis which contends that past performance has no influence on future performance or market values. It also differs from fundamental analysis which involves making investment decisions based on the examination of the economy, an industry and company variables that lead to an estimate of intrinsic value for an investment which is then compared to its prevailing market price. In contrast to the efficient market hypothesis or fundamental analysis, technical analysis involves the examination of past market data such as prices, and the volume of trading, which leads to an estimate of future price trends and therefore, an investment decision. Whereas fundamental analysts use economic data that are usually separate from the stock or bond market, the technical analysts use economic data from the market itself because the market is its own best predictor.

Technical analysts see no need to study the multitude of economic, industry and company variables to arrive at an estimate of future value because they believe that past price movements will signal future price movements. Technicians also believe that a change in the price trend may predict a forthcoming change in the fundamental variables such as earnings and risk before the change is perceived by most fundamental analysis.

6.1 ASSUMPTIONS OF TECHNICAL ANALYSIS

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Technical analysts base trading decisions on examinations of prior price and volume data to determine past market trends from which they predict future behavior for the market as a whole and for individual securities. The underlying assumptions are-

The market value of any good or service is determined solely by the interaction of supply and demand.

Supply and demand are governed by numerous rational and irrational factors. Included in these factors are those economic variables relied on by the fundamental analyst as well as opinions, moods, and guesses. The market weighs all these factors continually and automatically.

Disregarding minor fluctuations the prices for individual securities and the overall value of the market tend to move in trends, which persist for appreciable lengths of time.

Prevailing trends change in reaction to shifts in supply and demand relationships. These shifts, no matter why they occur, can be detected sooner or later in the action of the market itself.

6.2 ADVANTAGES OF TECHNICAL ANALYSIS

Although technicians understand the logic of fundamental analysis, they see several benefits in their approach. Most technical analysts admit that fundamental analysts with good information, good analytical ability, and a keen sense of information’s impact on the market should achieve above-average returns. According to the technical analysts, it is important to recognize that the

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Old equilibrium price

New information begins to enter market

New equilibrium price

Technical analysts identifies the new trend and takes appropriate action

Price

Time

fundamental analysts can experience superior returns only if they obtain new information before other investors and process it correctly and quickly.

It is not heavily dependent on financial accounting statements- the major source of information about the past performance of a firm or industry. Problems with accounting statements are-

1. Lack information needed by security analysts such as information related to sales, earnings and capital utilized by product line and customers. 2. GAAP allows firms to select reporting procedures for reporting expenses, assets or liabilities, resulting in difficulty comparing statements from two firms whether it is aggressive or conservative. 3. Non-quantifiable factors such as employee training and loyalty, customer goodwill and general investor attitude toward an industry; do not show up in financial statements.

Fundamental analyst must process new information and quickly determine a new intrinsic value, but technical analyst merely has to recognize a movement to a new equilibrium.

Technicians trade when a move to a new equilibrium is underway but a fundamental analyst finds undervalued securities that may not adjust their prices as quickly.

6.3 CHALLENGES TO TECHNICAL ANALYSIS

Those who doubt the value of technical analysis for investment decisions question the usefulness of this technique in two areas. First, they challenge some of its basic assumptions. Second, they challenge some specific technical trading rules and their long-run usefulness.

Assumptions of Technical Analysis: The major challenge to technical analysis is based on the results of empirical tests of the efficient market hypothesis. Almost all the studies testing the weak form of EMH using statistical analysis have found that prices do not move in trends based on statistical tests of auto-correlation and runs.

Technical Trading rules: An obvious challenge to technical analysis is that the past price patterns or relationships between specific market variables and stick prices may not be repeated. Other challenges are-

Patterns may become self-fulfilling prophecies A successful rule will gain followers and become less successful. It is contended

that this popularity and the resulting competition will eventually neutralize the technique. If numerous investors focus on a specific technical trading rule, some of them will attempt to anticipate the price pattern and either run the expected historical price pattern or eliminate profits for most traders by causing the price to change faster than expected.

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Rules require a great deal of subjective judgments. Two technical analysts looking at he same price pattern may arrive at widely different interpretations of what has happened and therefore, will come to different investment decisions. This implies that the use of various techniques is neither completely technical nor obvious.

6.4 SECURITY PRICE TREND

Beximco Synthetic CompanySecurity Price

Month Security Price Month Security PriceJanuary(2006) 69.00 January(2009) 248.5February 68.00 February 228.5March 70 March 453.5April 68.75 April 370May 79.5 May 480.5June 62.75 June 475July 62.5 July 422.75August 79 August 460.25September 79 September 472.75October 77.75 October 481.25November 74.25 November 447December 76.75 December 373January(2007) 96.5 January(2010) 396.5February 85.25 February 355.5March 83.75 March 415.5April 79.75 April 394.25May 75.5 May 325June 93.5 June 285.5July 101.75 July 314.75August 78.25 August 413.5September 75 September 408October 107.75 October 426.5November 108.25 November 474.5December 96.75 December 514.75January(2008) 97.25February 96March 130.5April 156May 143.5

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June 137.75July 130.25August 120.25September 138.75October 164.25November 115.5December 164.5

From the figure we have seen that the security remain constant over the period of January(2006) to February(2008). Then the figure shows the upward trend of the security price from November (2008) to March (2009) which indicates to buy or invest in the security. Again in the period of April (2009) to March (2010) shows the stable price trend between Tk350 to Tk. 400 which indicates the selling point. After the period of March (2010) the security shows declining trend till June (2010). Again after the period of June (2010) the security price begins to increase which indicates to buy the security.

6.5 FORECASTING SECURITY PRICE

MOVING& DOUBLE MOVING AVERAGE

Often technical analysts use moving average method to forecast the future trend of the security price. Under this method, equal weights are assigned to each observation. Each new data point is included in the average as it becomes available and the earliest data point is discarded. Again another approach used by technicians is double moving average method to show the linear trend of the security price. Here we use both the moving average and double moving method to forecast the trend of the security price.

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Beximco Synthetic CompanySecurity Price

(Moving Average & Double-Moving Average)

Month Security Price Sum MA Sum DMAJanuary(2006) 69.00February 68.00March 70April 68.75May 79.5June 62.75July 62.5August 79 480.50 80.0833September 79 490.50 81.75October 77.75 501.50 83.5833November 74.25 509.25 84.875December 76.75 514.75 85.7917January(2007) 96.5 512.00 85.3333February 85.25 545.75 90.9583 501.42 83.569March 83.75 568.50 94.75 512.29 85.382April 79.75 573.25 95.5417 525.29 87.549May 75.5 574.00 95.6667 537.25 89.542June 93.5 571.75 95.2917 548.04 91.34July 101.75 591.00 98.5 557.54 92.924August 78.25 616.00 102.667 570.71 95.118September 75 597.75 99.625 582.42 97.069October 107.75 587.50 97.9167 587.29 97.882November 108.25 611.50 101.917 589.67 98.278December 96.75 640.00 106.667 595.92 99.319January(2008) 97.25 661.25 110.208 607.29 101.22February 96 665.00 110.833 619 103.17March 130.5 659.25 109.875 627.17 104.53April 156 711.50 118.583 637.42 106.24May 143.5 792.50 132.083 658.08 109.68June 137.75 828.25 138.042 688.25 114.71July 130.25 857.75 142.958 719.63 119.94August 120.25 891.25 148.542 752.38 125.4September 138.75 914.25 152.375 790.08 131.68October 164.25 957.00 159.5 832.58 138.76November 115.5 990.75 165.125 873.5 145.58December 164.5 950.25 158.375 906.54 151.09

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January(2009) 248.5 971.25 161.875 926.88 154.48February 228.5 1,082.00 180.333 945.79 157.63March 453.5 1,180.25 196.708 977.58 162.93April 370 1,513.50 252.25 1021.9 170.32May 480.5 1,744.75 290.792 1114.7 185.78June 475 2,061.00 343.5 1240.3 206.72July 422.75 2,420.50 403.417 1425.5 237.58August 460.25 2,678.75 446.458 1667 277.83September 472.75 2,890.50 481.75 1933.1 322.19October 481.25 3,134.75 522.458 2218.2 369.69November 447 3,162.50 527.083 2488.4 414.73December 373 3,239.50 539.917 2724.7 454.11January(2010) 396.5 3,132.00 522 2921.1 486.85February 355.5 3,053.50 508.917 3039.7 506.61March 415.5 2,986.25 497.708 3102.1 517.02April 394.25 2,941.50 490.25 3118.1 519.68May 325 2,863.00 477.167 3085.9 514.31June 285.5 2,706.75 451.125 3036 505.99July 314.75 2,545.25 424.208 2947.2 491.19August 413.5 2,487.00 414.5 2849.4 474.9September 408 2,504.00 417.333 2755 459.16October 426.5 2,556.50 426.083 2674.6 445.76November 474.5 2,567.50 427.917 2610.4 435.07December 514.75 2,647.75 441.292 2561.2 426.86January(2011) 2,837.50 472.917 2551.3 425.22

Implications

After using the 6 month moving average method we find that the security price in the beginning of the period January (2011) is Tk. 472.917 and again using the double moving average method we also find the security price is Tk. 425.22. Both of these indicators tell us the security is showing upward trend in the price again indicating to buy the security as we have shown in the absolute trend in the security price.

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20072008

20092010

2011

106.667 158.375

539.917

441.291999999998472.91699999999899.31944 151.0903

454.111099999999426.861099999999

425.222199999998

Chart TitleMoving Average Double Moving Average

Conclusion: Using moving-average and double moving-average method, we find that the security price shows an upward trend under the technical viewpoint. From this sense we can say that it is wise to take decision to invest (buy security) in Beximco Synthetic Company’s stock.

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7. CONCLUSION & FINDINGS

Thorough our report we have tried to show various techniques or approaches to evaluate our selected company’s performance and its intrinsic value. For this, we have applied top-down approach and found some inclusion regarding the environment, industry and company’s insights. The major findings are-

The cost of capital is low as its market risk or systematic risk is low The environment for investing in the security market is favorable for the potential investors

which is analyzed by environmental analysis. From the industry analysis it is seen that threat of new entrants is medium; rivalry among

established companies, bargaining power of the buyers and threat of substitute product are low; and bargaining power of suppliers is low to medium.

The internal liquidity, operating performance, risk of the company is apparently favorable which is found in analyzing company’s financial statement

The intrinsic value of the stock is undervalued which is determined by applying various techniques (DDM, FCFE, FOCF).

Based on the historical income statement & balance sheet and historical analysis the projected income statement & balance sheet are forecasted.

As the price of the stock shows upward trend, the technical analysis shows the intrinsic value of the price which is undervalued.

From the above findings, we can say both environmental analysis and industrial analysis are favorable for the investment climate. The financial statement analysis also provides favorable outlook. But in the company analysis it is found that the intrinsic value of the stock is overvalued. Although environmental and industrial analysis are favorable, we have to decide not to invest in the securities (Beximco Synthetic Company) as it is an overvalued share.

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BIBLIOGRAPHY

www.bangladeshbankbd.com www.beximco.org Investment Analysis & Portfolio Management By Reilly & Brown www.dse.com

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